—A N N UA L R EP O R T 2 01 8 Shaping a leader focused in digital industries — ABB at a glance — ABB is a pioneering technology leader with a comprehensive offering for digital industries. With a history of innovation spanning more than 130 years, ABB is today a leader in digital industries with four customer-focused, glob- ally leading businesses: Electrification, Indus- trial Automation, Motion, and Robotics & Discrete Automation, supported by its com- mon ABB Ability™ digital platform. ABB’s market-leading Power Grids business will be divested to Hitachi in 2020. ABB operates in more than 100 countries with about 147,000 employees. — abb.com Contents — Annual Report 2018 01 02 03 04 05 06 Introduction — 6 – 29 Corporate governance report — 32 – 53 Compensation Report — 56 – 79 Financial review of ABB Group — 82 – 215 ABB Ltd statutory financial statements — 218 – 235 Supplemental information — 238 – 242 01 Introduction — 6 – 29 Chairman and CEO letter — 8 – 11 New ABB — 12 – 15 Highlights 2018 — 16 – 17 ABB Ability ™ — 18 – 19 Integration of GE Industrial Solutions — 20 – 21 Shareholder returns and capital allocation — 22 – 23 People — 24 – 25 Sustainability — 26 – 27 Executive Committee — 28 – 29 8 — C H A I R M A N A N D C EO L E T T E R Dear Shareholders, Customers, Partners and Employees, Our world is changing – faster than ever. Digital technologies have already revolutionized the way we communicate, shop and bank. Now they are starting to transform industries and the entire “B2B” space. In the years ahead, new technologies will influence the way we power our societies, pro- duce our goods and services, and how we work, live and move. Over the past few years, with the execution of ABB’s strategy, we have laid the foundation for our businesses to compete in fast-changing digital in- dustries and deliver profitable growth. In 2018, we posted solid order and revenue growth: total or- ders were up 8 percent (comparable), having risen in all divisions and regions, and revenues in- creased 4 percent for the full year. Our Net Pro- moter Score measure of customer satisfaction in- creased to 57, having tripled since 2010. Our operational EBITA margin, our main measure of profitability, was slightly lower (−0.3 percent), im- pacted by stranded costs due to the announced divestment of our Power Grids business, charges for legacy non-core projects and the expected di- lution effect of our acquisition of GE Industrial Solutions in 2018. In 2019, we are embarking on a new chapter at ABB, in which we will build on our technology and talented global employee base to further strengthen our focus in digital industries. Our am- bition: to deliver attractive returns to our share- holders; to support our customers with innovative solutions that drive their productivity and com- petitiveness while helping them digitalize their businesses; and to provide our employees and partners with new opportunities to grow, develop and realize their full potential. To focus our portfolio on digital industries and de- liver on these ambitions, we have agreed to divest our Power Grids business to Hitachi, simplify our business model and structure, and shape four leading businesses in line with the way our cus- tomers operate. Our businesses will be designed to tap the opportunities of emerging technolo- gies such as artificial intelligence and will be given the maximum amount of entrepreneurial freedom to compete in fast-changing markets. Our decision to divest the Power Grids business reflects the growing difference in customer needs between the large-scale infrastructure, utility and industry sectors. The utility customer base is con- solidating, and we see a re-convergence of power generation and power grids. Increasing project sizes for and changes in the commercial pattern of utility customers also often require suppliers like ABB to provide access to project financing. Having turned around Power Grids over the past few years and increased its value significantly, we decided that the future development of the busi- ness would be best served under Hitachi’s owner- ship, given its leading position in energy infra- structure and its long-term perspective for the power business. Hitachi’s commitment to retain Power Grids’ employees and to keep its headquar- ters in Switzerland also played a part in our deci- sion. Initially, ABB will retain a minority sharehold- ing in a joint venture to ensure the smooth transition to Hitachi for customers, employees and partners alike. We intend that our sharehold- ers will directly benefit through the return of the net proceeds of the divestment. As we focus our portfolio on digital industries, we will simplify our organization by discontinuing our legacy matrix structure to achieve zero-distance to customers, increased agility in decision-making, and a stronger entrepreneurial culture within our businesses. Our new ABB Our new ABB will span a comprehensive offering covering electrification, automation, robotics and digitalization, positioning us to write the future as a customer-focused technology leader in digital industries. With our four leading businesses, we will address a market worth more than $410 billion and growing by 3.5–4 percent per annum. By 2025, that market is expected to expand by $140 billion to $550 billion. Our Electrification business offers a portfolio of products, digital solutions and services, from substation to socket. In 2018, we strengthened the business’ #2 market position through the ac- quisition of GE Industrial Solutions, GE’s global electrification solutions business, which will con- tribute to our growth and competitiveness in key ABB ANNUAL REPORT 2018 01 INTRODUCTION 9 P E T E R V O 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 ABB ANNUAL REPORT 2018 01 INTRODUCTION 10 markets, particularly North America. Our Electrifi- cation business has strong exposure to rapidly growing customer segments, including e-mobility, data centers and smart buildings. Our Industrial Automation business offers a range of solutions for process and hybrid industries, in- cluding our industry-specific integrated automa- tion, electrification and digital solutions, control technologies, software and advanced services, as well as measurement & analytics, marine and tur- bocharging offerings. Industrial Automation is #2 in the market globally. Our Motion business provides customers with a range of electrical motors, generators, drives and services, as well as integrated digital power- train solutions. Motion is the #1 player in the market globally. Our Robotics & Discrete Automation business combines our machine and factory automation solutions, mainly from B&R, which we acquired in 2017, with a comprehensive robotics solutions and applications suite. The business is #2 globally, with a #1 position in robotics in the important, high-growth Chinese market, where we are ex- panding our innovation and production capacity by investing in a new robotics factory in Shanghai. Sound financial profile Our new ABB has a sound financial profile with significant long-term growth possibilities. It would have generated revenues of approximately $29 billion in 2018. Going forward, we will pursue a growth strategy based on the following medium-term financial framework: • 3–6 percent annual comparable revenue growth • operational EBITA margin of 13–16 percent • return on capital employed (ROCE) of 15–20 per- cent • cash conversion to net income of approximately 100 percent • basic EPS growth above revenue growth Our company’s capital allocation priorities are to fund organic growth, R&D, capex and value-creating acquisitions. We remain commit- ted to delivering a rising, sustainable dividend – the Board of Directors will propose a dividend of CHF 0.80 per share to shareholders at the Annual General Meeting on May 2 – and to returning addi- tional cash to shareholders. Following the divest- ment of 80.1 percent of Power Grids, ABB intends to return the net cash proceeds of $7.6–7.8 billion to shareholders in an expeditious and efficient manner. Investing in technology… Including amounts in our Power Grids business, ABB invests approximately $1.4 billion in research and development every year, corresponding to around 4 percent of our revenues. In 2018, thanks to our focus on innovation, we launched several new solutions and technologies that strengthened our ABB Ability™ digital offering and contributed to further improving the efficiency, productivity and security of our customers’ operations. We advanced our leading position in the charging technology for electric vehicles (EVs) with the launch of our Terra High Power charger, which at full power, 350 kilowatts, can add up to 200 kilo- meters of range to an EV in just eight minutes, making it ideally suited for use at highway rest stops and filling stations. We continued to extend our global network of ABB Ability™ Collaborative Operations Centers with a new center for mining customers in Västerås, Sweden, which monitors the health, per- formance and location of equipment in mines, al- lowing engineers to quickly diagnose potential is- sues, advise on preventive maintenance, and recommend measures to improve performance. In December we achieved a breakthrough in au- tonomous shipping when our new intelligent au- topilot, ABB Ability™ Marine Pilot Control, allowed a ferry captain to remotely pilot a passenger ferry through a test area in Helsinki harbor. — With the execution of ABB’s strategy, we have laid the founda- tion for our business to deliver profitable growth. The new ABB is positioned to write the future as a custo- mer-focused techno- logy leader in digital industries. ABB ANNUAL REPORT 2018 01 INTRODUCTION 11 In robotics, we launched several new solutions, including a single-arm YuMi® robot and a new modular product platform design, allowing us to offer customers more types of robots which we can combine into an almost infinite number of tailored solutions. Our focus on our people has made ABB a pre- ferred employer in key markets. For the past two years, we have been ranked in key countries as one of the most attractive employers among engineering students, ahead of many other tech- nology companies. In January 2018, we became title sponsor of For- mula E, the world’s first fully electric international FIA motorsport series, further strengthening ABB’s brand recognition as leader in electrification and e-mobility. The ABB FIA Formula E Champion- ship, as it is now known, provides a competitive platform to develop and test e-mobility-relevant electrification and digitalization technologies un- der secure conditions. Together, we are helping to push the boundaries of e-mobility, while rais- ing awareness of e-mobility as an alternative to fossil fuels. In 2018, we strengthened our Board of Directors with three new members, who bring a wealth of experience from their respective fields: Jennifer Xin-Zhe Li is a founder and general partner of Changcheng Investment Partners; Geraldine Matchett is Global CFO of Royal DSM; and Gunnar Brock is the former President and CEO of Atlas Copco Group. Today, the ABB Board of Directors has a broad combination of expertise in the fields of digitalization, finance, software, marketing and research, and development and manufacturing as well as in markets around the world. …and in people ABB’s two key strengths have always been our technologies and our people, and in 2018 we con- tinued to build a values-driven culture to attract and retain the best talent. In the new ABB, we will further develop our efforts to put safety, integrity and the customer at the center of our attention, while strengthening our performance-driven entre- preneurial culture. To help our employees hone their skills and to sup- port better collaboration between digital natives and experienced engineers, we continued to pro- vide training and development opportunities to thousands of employees through various courses and our ABB University, which provides up-to-date expertise in new technologies and solutions. Our Global Trainee Program continued to give recent graduates opportunities to develop leadership skills, deepen their understanding of their chosen disciplines, and gain insights into business strategy. Additionally, we launched a partnership with the Nobel Foundation to cele- brate science and innovation and inspire the next generation of pioneers. Looking ahead The journey to our new ABB has only been possible with the support of all our stakeholders, and es- pecially our employees, whose commitment and dedication have made our businesses what they are today. We would like to extend a special thank-you to all our employees for their significant contributions. In ABB’s next stage, we will con- tinue to build on our technologies and our tal- ented global employee base to better serve our customers, provide greater opportunities for our employees, and deliver for shareholders, while se- curing the best long-term future for our company and its stakeholders. Let’s write the future. Together. Peter Voser Chairman of the Board of Directors Ulrich Spiesshofer Chief Executive Officer ABB ANNUAL REPORT 2018 01 INTRODUCTION 12 — New ABB Focused in digital industries In times of rapid and unprecedented technological change, ABB is shaping itself to be even more agile and innovative in order to seize on new opportunities and remain competitive. The combined impact of the Energy and Fourth In- dustrial Revolutions is profoundly influencing how we power the world, produce goods, work, live in cities and move in a sustainable way. ABB is tak- ing action to focus, simplify and lead from a posi- tion of strength to drive leadership in digital industries. Next Level strategy achievements When ABB launched its Next Level strategy in 2014, it established the goal to be #1 or #2 in all its global businesses. By actively shaping and trans- forming itself, ABB built up its four market-leading divisions. In addition to shifting ABB’s center of gravity to- ward leading positions in industry through active portfolio management, the company drove profit- able growth momentum, made a quantum leap in digital with the introduction of ABB Ability™ digi- tal solutions, achieved cost savings through its 1,000-day programs, and brought profitability and growth back to its Power Grids business. The Next Level strategy helped make ABB a leaner, more market-focused organization, with better performance management and an improved com- pensation system. While making this transforma- tion, ABB strengthened itself as a global brand that stands for writing the future as a pioneering technology leader, and delivered attractive cash re- turns of more than $12 billion to its shareholders. The changing world ABB achieved those milestones in a very challeng- ing environment. Change is accelerating at an un- precedented rate. In the power sector, it is esti- mated that the implementation of global climate pledges will result in over $4 trillion of investment in new renewable energy generating capacity globally by 2030. In production, the world’s indus- trial value chains are undergoing transformation through digitalization – with connected devices set to soar, growing by 30 percent per annum be- tween now and 2030. Rapid advances in automation and robotics, as well as massive demographic shifts, are leading the world toward an era of autonomous opera- tions, where factories, buildings, mines and ships are increasingly running themselves. Furthermore, the world’s population, particularly in Asia, con- tinues to urbanize. Over 5 billion people are ex- pected to be living in cities by 2030, a massive in- crease of more than 1 billion in just over 10 years. Meanwhile, advances in technology, changing eco- nomics and climate concerns are driving electric mobility to fuel growth in the transport sector. It is estimated that 30 million electric vehicles could be sold in 2030, compared to 1.1 million in 2017 – representing compound annual growth of 30 percent. Hand-in-hand with these strong secular growth drivers, the patterns of ABB’s customers have been diverging. In Power Grids, the rise of distrib- uted generation of electricity has created a re-convergence between generation, transmis- sion and distribution, while the division’s cus- tomer base, predominately utilities, is going through consolidation. Power Grids’ business success is increasingly influenced by access to large-scale financing capabilities, while the share of investment from state-owned enterprises is rising again, with major decisions being driven by government planning. Meanwhile, ABB’s Electrification Products, Indus- trial Automation, and Robotics and Motion divi- sions have been experiencing a major increase in demand for digital solutions and services that add value to more traditional product and service of- ferings. Their industrial customer bases are in- creasingly diverse and expanding rapidly. ABB ANNUAL REPORT 2018 01 INTRODUCTION 13 These global changes have necessitated the re- shaping of ABB to drive attractive value creation. First action: Focus of portfolio on digital industries In its first action to stay competitive as a pioneer- ing technology leader in this fast-changing world, ABB is focusing on digital industries and divesting its Power Grids business to Hitachi. The agree- ment to divest this market-leading global busi- ness, signed with Hitachi on December 17, 2018, positions ABB to focus on capturing exciting op- portunities in digital industries and to create value for all stakeholders, while strengthening Power Grids under new ownership. Hitachi is a trusted and known partner for ABB, with a work- ing relationship that has expanded successfully under the joint venture they formed in 2014. businesses, in a continuation of the journey that formed an integral part of the Next Level strategy. Before 2014, ABB’s business structure included eight regions and five divisions, all with their own P&Ls. With Next Level, the Group streamlined itself to four global P&Ls and three customer- and growth-oriented regions. Now, ABB is fully eliminating the legacy matrix structure of regions and divisions. The Group is fully empowering its businesses with a simplified operating model, ensuring zero distance to cus- tomers and faster decision-making. Under the new structure, ABB businesses are directly re- sponsible for all customer-facing activities – unlike the present model, where regions and global functions still create multiple interfaces for ABB with its customers. ABB shareholders will benefit from the crystalliza- tion of the value created by the turnaround of the Power Grids division, with the transaction repre- senting an enterprise value of $11 billion for 100 percent of the division, an implied 11.2 times EV to operational EBITA multiple before share of corporate cost. At closing, expected in the first half of 2020, Hitachi will acquire 80.1 percent of Power Grids. ABB will hold a 19.9 percent equity share in the new joint venture. With the divestment of Power Grids, ABB finalizes its move away from large-scale infrastructure businesses and strengthens its focus on digital industries. Second action: Simplification of business model and structure ABB’s second action is to simplify its business model and structure and to empower its While functional activities managed at the corpo- rate or country level, including R&D and shared business services, are being devolved to the busi- nesses, ABB’s corporate center itself is being streamlined and focused on Group strategy, port- folio and performance management, capital allo- cation, key common technologies, and the ABB Ability™ platform. In this simplified, decentralized setup, ABB’s country and regional structure, including related Executive Committee roles, are being discon- tinued. Experienced, country-level resources will strengthen the teams of our businesses. The implementation of these simplification ac- tions on Group and business level is expected to deliver net cost reductions of $500 million annu- ally in the medium term. The scale of this change is extraordinary for ABB, changing its — Shifting the center of gravity Power & Infrastructure - Rail EPC(1) Power & Infrastructure High Voltage cables GEIS-Electrification Steel structures EV fast charging B&R-Factory automation Fossil power generation ABB Ability™ YuMi® Thomas & Betts-Electrification EV Charging Baldor-Motors Industries Robotics turnaround Past (1) Engineering, Procurement and Construction. Industries + Today ABB ANNUAL REPORT 2018 01 INTRODUCTION 14 A B B A N N U A L R E P O R T 2 0 1 8 0 1 I N T R O D U C T I O N fundamental operating pattern to rely on fully em- powered, staffed and responsible businesses. The result will be a simplified business that can go to market with greater speed and agility, thereby strengthening growth and margins. each ranked #1 or #2 in the markets they serve and each creating value for customers through tailored ABB Ability™ solutions that benefit from the synergy of a common ABB Ability™ digital platform. Third action: Shape four leading businesses aligned with customer patterns ABB will continue to have a strong presence glob- ally, well balanced across major geographies, and will continue to benefit from significant scale ad- vantages and global reach, with approximately $29 billion in annualized revenues and around 110,000 employees. The company’s markets are large and attractive, at $410 billion today, and expected to grow at an average of 3.5 to 4 percent per annum. By 2025, they will be one-third larger, at $550 billion. ABB will continue to focus on fast-growth segments, including software and digital solutions, EV char- ging, robotics, data centers, machine and factory automation. ABB’s leading offering for digital industries com- bines electrification, automation and robotics, and digitalization solutions in a unique and truly differentiating way. Equipped with the Group’s established domain know-how, world-class engi- neering and technology, and the leading digital offering ABB Ability™, the new ABB will be the only company able to provide a platform as well as a complete set of solutions to digital industries. From fulfilling electrification needs at any con- sumption point, to providing for all the automa- tion and robotization needs of industry, including integrating leading-edge products and software solutions, ABB’s unique portfolio serves as a solid foundation for the Group’s competitive differenti- ation in already attractive markets. To drive growth, ABB is shaping four customer-focused, entrepreneurial businesses, Electrification – writing the future of safe, smart and sustainable electrification The Electrification business will provide a com- plete portfolio of innovative products, digital solutions and services from substation to socket, pointing the way to a future of safe, smart and sustainable electrification. Leveraging its clear #2 market position, the business’ port- folio generates $13 billion in revenue, including the acquisition of GE Industrial Solutions. It sells to an addressable market of $160 billion, which is expected to grow at 3 percent per year. Industrial Automation – writing the future of safe and smart operations The Industrial Automation business serves cus- tomers in process and hybrid industries with its integrated automation solutions across process, electrical and motion, measurement and analytics as well as marine and turbocharging solutions that leverage its leading technologies including its #1 DCS (distributed control systems), broad digital portfolio, deep industry expertise, largest installed base and vast global footprint. With $7 billion in revenues, Industrial Automation is the global #2 in a $90 billion market that is projected to grow by 3 to 4 percent per year. Motion – writing the future of smart motion ABB’s newly created Motion business will provide customers with a comprehensive range of innova- tive, energy-efficient electrical motors, genera- tors, drives and services, as well as integrated digital powertrain solutions. It will leverage econ- omies of scale as the global #1 in its market, writ- ing the future of smart motion. With revenues of $6 billion, Motion sells to an $80 billion market, which is growing at 3 percent per year. — Shaping four leading businesses Effective April 1, 2019(1) Electrification #2 Industrial Automation #2 (1) Power Grids moved to discontinued operations starting in Q4 2018 until closing. A B B A N N U A L R E P O R T 2 0 1 8 0 1 I N T R O D U C T I O N 15 robotics and factory automation, in turn driving growth for ABB. The reliability of earnings will im- prove as ABB’s offering to customers is marked by more digital solutions and is less impacted by vol- atility induced by large orders exposures. More- over, ABB will capture more recurring revenue as it leverages its large installed base to provide more digital and service offerings. While ABB initiated the shift in this direction through its Next Level strategy, the sweeping ac- tions announced in 2018 will put the Group in a strong position to deliver profitable growth. ABB’s new business model and simplified struc- ture will provide sustainable efficiencies that sup- port strong margins, delivering run-rate cost re- ductions of $500 million over the medium term. ABB will further optimize capital allocation, driv- ing shareholder value through the right balance of organic investment, active portfolio management and attractive returns. The Group has signaled its confidence in this strategy with its intention to maintain its divi- dend policy following the closing of the Power Grids transaction and aims to maintain its “sin- gle A” credit rating over the long term. Through these fundamental actions, the new ABB will be well positioned as a pioneering technology leader in digital industries. The management and the board strongly believes that this path posi- tions ABB well for the future and will materially enhance value for all stakeholders over the short, medium and long term. Together. Robotics & Discrete Automation – writing the future of flexible manufacturing and smart machines Lastly, the Robotics & Discrete Automation busi- ness will combine ABB’s machine and factory au- tomation business, mainly B&R, with the Group’s leading robotics platform. It will be uniquely posi- tioned to capture the opportunities associated with the “Factory of the Future” by writing the fu- ture of flexible manufacturing and smart machin- ery. With $4 billion in revenue Robotics & Discrete Automation will be the second-largest player in an $80 billion market that will experience estimated annual growth of 6 to 7 percent. ABB’s four new businesses are designed to enable the Group to write the future of digital industries. They have been shaped based on careful evalua- tion of changing customer patterns and on how ABB expects digital technologies and emerging innovations such as industrial artificial intelli- gence to play a major role in its markets in the future. The Group’s aim is to continuously improve its customer offerings and its customer interfaces, in turn securing enhanced growth for ABB. Each of the Group’s businesses offers a tailored suite of ABB Ability™ solutions that create value for customers and build on our common ABB Ability™ digital platform across all businesses. ABB will in- creasingly leverage emerging technologies, includ- ing industrial artificial intelligence, to satisfy growing demand for smart and connected devices and software solutions. Delivering attractive growth In simplifying ABB, the Group’s ambition is to be a leader focused in digital industries. At the same time, these actions will result in our business hav- ing a stronger commercial impact. A greater pro- portion of the Group’s portfolio will benefit from strong, secular growth drivers in attractive mar- kets such as data centers, EV charging and Motion #1 Robotics & Discrete Automation #2 16 — Highlights 2018 — Fundamental changes to busi- ness model and organizational structure announced: • Focus of portfolio on digital industries through divestment of Power Grids to Hitachi • Simplification of business model and structure • Shape four leading businesses aligned with customer pat- terns — ABB Ability™ recognized by in- dustry analysts as #1 globally in Distributed Control Systems and Enterprise Asset Management software — Key Figures: • Total orders +8%(1), up in all divisions and regions • Revenues +4%(1), strong growth in Robotics and Motion • Order backlog +6%(1) at end of year, book-to-bill ratio(2) at 1.03x • Operational EBITA margin 10.9%(2), impacted by a com- bined 250 basis points due to stranded costs, charges for legacy non-core projects and GEIS dilution • Reported net income at $2.173 billion, -2% • Cash flow from operating ac- tivities at approx. $3 billion — ABB named #8 in Fortune magazine’s “Change the World” rankings — Board proposes 10th consecutive dividend increase to CHF 0.80 per share (1) On a comparable basis, see the “Supplemental information” section of this annual report. (2) For non-GAAP measures, see the “Supplemental information” section of this annual report. ABB ANNUAL REPORT 2018 01 INTRODUCTION 17 Key Figures $ in millions, unless otherwise indicated FY 2018 FY 2017 Recast Orders Revenues Income from operations Operational EBITA(1) as % of operational revenues Income from continuing operations, net of tax Net income attributable to ABB Basic EPS ($) Operational EPS ($)(1) Cash flow from operating activities 28,590 27,662 2,226 3,005 10.9% 1,575 2,173 1.02 1.33 2,924 25,034 25,196 2,230 2,817 11.2% 1,519 2,213 1.04 1.25 3,799 Europe, 37% AMEA(2), 34% Americas, 29% — 2018 Orders by region 81% Product revenues 19% Services and other revenues Services and other revenues as % of total revenues 2018 2010–2018 Dividends (CHF per share) 1.00 0.75 0.50 0.25 0.00 2010 2011 2012 2013 2014 2015 2016 2017 2018(3) (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. (2) Asia, Middle East and Africa (3) Proposed ABB ANNUAL REPORT 2018 01 INTRODUCTION 18 — ABB Ability ™ ABB Ability™ solutions unlock the power of digitalization for customers via a common platform to deliver deep domain expertise in a connected way. Since its launch in 2017, growing customer de- mand for ABB Ability™ has driven order growth, particularly in software and services, and this is expected to continue as new digital solutions are introduced. The more than 210 market-leading ABB Ability™ solutions are enabling us to write the future as digital technologies profoundly in- fluence how we power the world, produce goods, work efficiently, live in cities and move in a sus- tainable way. ABB Ability™ enables high-power electric vehicle charging networks in US and Iceland As countries begin to implement ambitious plans to speed the adoption of renewable energy and promote electric vehicles, ABB Ability™ is en- abling the infrastructure that will be crucial to their success. ABB’s Terra HP charging stations, which can recharge even the largest electric vehi- cle battery in under 15 minutes, have been in- stalled along Iceland’s 1,300 km main highway, Route 1, and have been selected for Electrify America, the biggest electric vehicle infrastruc- ture project to date in the United States. In both of these projects, the chargers will be exposed to a range of extreme weather condi- tions, including moisture, very high and low tem- peratures, and violent storms. Amid these condi- tions, ABB Ability™ technology ensures that the EV chargers remain operational 24/7. Remote digital connectivity enables continuous monitor- ing of the device from any location, providing operators access to data in real time for the re- mote monitoring and proactive control of the operational and technical status of the charging stations. Indeed, ABB Ability™ provides a fully flexible overview of the entire charging network to make sure the system is fully functional right down to temperatures of −35 °C. It allows technicians to diagnose over 90 percent of all errors in EV char- gers and solve over 60 percent of them remotely, without having to visit the charging station, and at the same time, makes it possible for station operators to support their customers in the best possible way. ABB Ability™ to enable world’s most advanced robotics factory in Shanghai In October 2018, we reached an agreement with the Shanghai municipal government to build an all-new robotics factory that will deploy ABB Ability™ solutions to create a true digital fac- tory of the future. The facility will feature a num- ber of machine-learning, digital and collaborative solutions to make it the most advanced, auto- mated and flexible factory in the robotics indus- try, and an onsite R&D center will help ABB accel- erate innovations in artificial intelligence. Using ABB’s new global design approach, the fac- tory will be able to dramatically increase both the breadth (types of robots) and depth (variants of each type) of robots that can be made onsite, al- lowing greater and faster customization to meet the needs of customers. The entire facility will be modeled as a digital twin, providing intuitively tailored dashboards that enable management, en- gineers, operators and maintenance experts to make the best decisions. This includes gathering and analyzing intelligence through ABB Ability™ Connected Services on the health and perfor- mance of ABB robots in the factory to ensure early identification of potential anomalies. In addition to avoiding costly downtime, ABB Ability™ offers advanced digital solutions that can improve per- formance, reliability and energy usage. The new Shanghai factory – with a comprehensive R&D center onsite – will become a key part of ABB’s global robotics supply chain. ABB Ability™ enables Sweden’s fifth-largest city to prepare for a smart future This year, a pilot project with Swedish energy company Mälarenergi is bringing holistic smart city solutions to Västerås through ABB Ability™ Collaborative Operations, our digital services platform for customer collaboration. Mälarenergi provides a broad range of essential services to Västerås’ 150,000 residents and its many businesses. It operates hydropower plants, the local power grid, a waste-to-energy plant, heating and cooling networks, water and waste ABB ANNUAL REPORT 2018 01 INTRODUCTION 19 treatment plants, water distribution and a fiber-optic network. ABB Ability™ is using Micro- soft Azure cloud technology to integrate the con- trol rooms of these services into a unified operat- ing network, empowering the utility and the city to become smarter by generating new insights and enabling better decision-making. Other ele- ments in this pilot include traffic control and a smart coordination system connecting emer- gency workers to make the city safer. ABB Ability™ Collaborative Operations™ connects people in production facilities, headquarters, and at ABB by giving them the right information, so Mälarenergi and ABB can know more, do more and do better, together. For example, when applied to the district heating network, which serves 98 per- cent of the city’s buildings, Collaborative Opera- tions will optimize operational performance and reduce energy consumption. Data analytics will make it easier for operators to identify, catego- rize and prioritize potential issues with assets, processes and risk areas, so they can increase ef- ficiency and reduce costs. This project shows the benefit of setting up intelli- gent, collaborative partnerships with governments and companies, combining local expertise and in- sights with global experience, standards and per- spectives. We believe this model of consultative and collaborative implementation will accelerate the global smart city market, helping to create op- portunities at national and municipal levels. ABB Ability™ enables groundbreaking trial of remote ferry in Helsinki In a historic step toward autonomous shipping, Helsinki City Transport used an ABB Ability™ solu- tion in December to remotely pilot a ferry in the waters near Helsinki harbor. Ice-class passenger ferry Suomenlinna II was retrofitted with ABB’s new dynamic positioning system, ABB Ability™ Marine Pilot Control, and wirelessly steered from a control center in Helsinki by Captain Lasse Heinonen. The ferry, originally built in 2004, is fitted with ABB’s icebreaking Azipod® electric propulsion system and was additionally retrofitted with the ABB Ability™ Marine Pilot Vision situational awareness solution in 2017. Autonomous solutions such as this are expected to transform the maritime industry in the coming decades, helping to safely and efficiently trans- port the more than 10 billion tons of cargo that now travel by sea every year. The test serves as a potent proof that human oversight of vessels is achievable from anywhere, and ABB is positioned to be a key player in a future of autonomous con- tainer ships. ABB ANNUAL REPORT 2018 01 INTRODUCTION 20 — Integration of GE Industrial Solutions On June 30, 2018, ABB completed its acquisition of GE Industrial Solutions, GE’s global electrification solutions business. offering to customers globally. Pairing ABB’s inno- vative technologies with Industrial Solutions’ complementary solutions and market access sub- stantially expands ABB’s global footprint and strengthens its sales force and distribution network. As part of the transaction, ABB has established a long-term strategic supply relationship to provide General Electric with products and solutions not just from Industrial Solutions, but also from across ABB’s portfolio. The acquisition includes a long-term right to retain use of the GE brand on the business unit’s products. Today, ABB’s Electrification business has strong exposure to a range of rapidly growing customer segments, including renewables, e-mobility, data centers and smart buildings. Its total addressable market is worth $160 billion and is forecast to grow on average by 3 percent per annum over the long term. With this $2.6 billion acquisition, ABB reinforced its #2 global market position in electrification, paving the way for accelerated growth and com- petitiveness in key markets, particularly in North America. Industrial Solutions is now part of ABB’s Electrification business. Its rapid integra- tion is enhancing customer value and expanding the business’ extensive portfolio of low- and medium-voltage products, solutions and ser- vices from substation to socket. Industrial Solutions has a long and impressive his- tory, dating back to the time when Thomas Edison patented the world’s first circuit breaker. Head- quartered today in Atlanta, Georgia, the business unit has brought approximately 14,000 new em- ployees to ABB, along with their strong customer relationships in more than 100 countries. Indus- trial Solutions’ large installed base and extensive distribution networks, especially in the U.S.A. – ABB’s largest market – are significantly expanding the reach and impact of ABB’s electrification offering. The ongoing integration efforts are well on the way to aligning teams and operations with the ac- tivities of the Electrification business. ABB ex- pects to realize approximately $200 million in annual cost synergies by 2022, bringing the per- formance of the unit into line with its global peers. The Industrial Solutions acquisition offers sub- stantial value creation potential within ABB, in- cluding growth opportunities that can be lever- aged by coupling ABB’s digital offering, ABB Ability™, with Industrial Solutions’ extensive installed base. By bringing together the best parts of two outstanding electrification portfo- lios, the integration will deliver a comprehensive, technologically advanced, digitally connected ABB ANNUAL REPORT 2018 01 INTRODUCTION 21 ABB ANNUAL REPORT 2018 01 INTRODUCTION 22 — Shareholder returns and capital allocation return 100 percent of the net cash proceeds to shareholders in an expeditious and efficient man- ner. ABB intends to maintain the level of dividend per share after the closing and aims to maintain its “single A” credit rating in the long term. — ABB’s disciplined capital allocation policies have delivered $12.1 billion to shareholders in the form of dividend distributions and share buybacks from 2014 to 2018. — The Board of Directors is proposing a 10th con- secutive increase in the dividend to CHF 0.80 per share at the 2019 Annual General Meeting. — ABB’s sustained capital allocation priorities are unchanged: • funding organic growth at attractive cash re- turns; • paying a rising, sustainable dividend; • investing in value-creating acquisitions; and • returning additional cash to shareholders. — ABB’s solid cash generation continued in 2018. Cash flow from operating activities was $2.924 bil- lion for the full year. Free cash flow(1) in 2018 amounted to $2.024 billion. The company’s cash return on invested capital(1) was 9.1 percent, impacted by the acquisitions of GEIS and B&R. — Following the expected completion of the sale of 80.1 percent of our Power Grids business to Hitachi in the first half of 2020, ABB intends to Dividends to Shareholders 0.82 0.80 0.78 0.76 0.74 0.72 0.70 0.68 0.66 0.64 0.62 0.60 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 2014 2015 2016 2017 2018 2019(2) Dividend per share CHF Dividend payout ratio(3) % (1) For non-GAAP measures, see the “Supplemental information” section of this Annual Report. (2) Proposed (3) Dividend per share (converted to U.S. dollars at year-end exchange rates) divided by basic earnings per share. ABB ANNUAL REPORT 2018 01 INTRODUCTION Total Cash Returned to Shareholders U S D B N 4 3 2 1 0 2014 2015 2016 2017 2018 Dividend (year paid) Share buyback Total Cash Return on Invested Capital Capital Allocation % 14 13 12 11 10 9 2 0 1 4 – 2 0 1 8 U S D B N 12 10 8 6 4 2 0 2014 2015 2016 2017(1) 2018(2) (1) (2) Includes impact of B&R acquisition. Includes impact of GEIS acquisition. Capex(1) Dividend paid Acquisitions Share buyback (1) 2018 capex in continuing and discontinued operations. Adjusted free cash flow and conversion rate 175% 150% 125% 100% 75% 2014 2015 2016 2017 2018(1) Adjusted free cash flow (USD) % of net income (1) Reflecting less favorable timing of tax payments and a lower contribution from discontinued operations. 23 4 bn 3 bn 2 bn 1 bn 0 bn ABB ANNUAL REPORT 2018 01 INTRODUCTION 24 — People Employer of choice Our people are our most important strategic asset. As a company that is writing the future of work, we are very conscious that our people make the differ- ence. With this in mind, we invest continuously in their personal and professional development. ABB is a truly global company, and its strength lies in its diversity – with 147,000 colleagues across more than 100 countries, and 45 nationalities rep- resented on our 200-member senior leadership team. In our constant effort to build a diverse and inclusive workforce, we have set ourselves the goal of increasing women’s representation on our se- nior leadership team by 30 percent by the year 2020. We are also aiming to make at least 30 per- cent of our recent university graduates hires women. We are proud to be ranked the No. 1 employer of choice in the field of engineering studies in Swit- zerland and in the top 10 in Sweden. By offering hundreds of apprenticeships and engaging in partnerships with leading academic institutions in our field, we maintain a healthy pipeline of early talent for our future needs. We have continued to increase our appeal as an employer, receiving close to a million applications in 2018 and filling over 10,000 vacancies. At ABB, we believe that the “how” of our business is as important as the “what.” Our values drive our actions and serve as guiding beacons in our everyday conduct as leaders and managers. Our Values in Action leadership competencies have been embedded in all our HR processes – the way we recruit our people, the way we assess their ABB ANNUAL REPORT 2018 01 INTRODUCTION 25 Employee health and well-being At ABB, we are conscious of our mandate as a responsible employer. Our health, safety and well-being programs were further strengthened, and at the end of 2018 more than 70 percent of our employees were covered by ABB’s well-being programs, up from 58 percent in 2017. We achieved these results through a combination of ongoing and newly introduced initiatives. Our resilience-building program, which aims to bolster our people’s coping skills when they face challenges, forms a major pillar of ABB’s health and well-being initiatives. The program helps our people manage difficult situations and take up challenges in a healthier and more relaxed manner. We believe the program has contributed to a cul- ture of flexible thinking within ABB, in which peo- ple are ready to welcome new challenges with open arms. In 2018, we provided resilience training to more than 25,000 employees in 60 countries. Learning new skills in a changing work environment Advances in automation and robotics, connectiv- ity, the industrial internet, artificial intelligence and machine learning are leading the world into an era of autonomous operations, where systems of production will increasingly be able to run themselves. This new paradigm is transforming the nature of work. Jobs in the future will increas- ingly require the ability to understand, conceive, plan and develop new organizations, processes and technologies. While the changing career landscape will likely re- quire people at ABB to acquire new skills and en- gage in periodic retraining, we are helping to guide our people through these changes. In 2018, we im- plemented a global learning management system that now covers a majority of our employees; this ensures that all ABB employees have opportunities to improve their skills. Our ABB University, a global network of more than 120 learning centers across the world, offers courses focused on ABB prod- ucts, technologies and solutions, business pro- cesses and tools, in multiple languages. By the end of 2018, the global learning management system had more than 126,000 registered users and had facilitated more than 167,000 training interactions. Through all of these employee initiatives, ABB seeks to inspire its people with a sense of pur- pose in their work: To write the future. Together. performance, the way we develop their careers, the way we train them. This ensures that we main- tain a consistent and coherent leadership culture across the company. Driving high performance is at the heart of our management philosophy. We have further refined our reward and recognition policies to ensure that they promote the delivery of winning results. As part of our efforts to develop our leadership bench, we have significantly strengthened our fo- cus on workforce planning, people reviews and succession planning. This has resulted in a healthy increase in our successor pipeline for all key roles in the company. A new values-based assessment framework was launched in 2018, serving both to assess our leaders and managers and to support them on their career development journeys. We continued to roll out our cultural transforma- tion program, “Come to the Edge,” to cover a broader population beyond top leadership. Over the next three years, we plan to cover the majority of our middle and frontline managers, equipping them with the additional competencies needed to win in the future. The “Come to the Edge” program complements a comprehensive portfolio of development programs already in place, offering lifelong learning opportu- nities to our people. These include the Senior Lead- ership Development Program, the Emerging Lead- ers Program, the Middle Management Program and ABB Life, among others. We are actively working to shape ABB’s future cul- ture in the context of digitalization. To better un- derstand this change, our Human Resources func- tion published a white paper at the end of 2017, titled “The Impact of Digitization on Work, the Workforce, and the Workplace.” The paper identi- fies the key competencies that our people will need in order to adapt successfully to disruptions from technology and automation, as well as the developmental, organizational and cultural actions ABB must take to support them. Several of the ac- tions identified were already implemented, laying the foundations for the ABB of the future. Additional actions were rolled out under our gen- der diversity framework, which ABB implemented and reported on in 2017. Creating new options for flexible work, signing the European Round Table inclusiveness pledge, launching a special mentor- ing program for women in our Global Supply Chain function – these are just a few examples of what was done in 2018. ABB ANNUAL REPORT 2018 01 INTRODUCTION 26 — Sustainability For ABB, sustainability is about balancing economic success, environmental stewardship and social progress to benefit all our stakeholders. Sustainability is part of ABB’s corporate strategy and business success. Sustainability, like innovation, is in the DNA of ABB. In part, this is because our business has al- ways been rooted in the efficient transmission and distribution of electricity, and in improving the uptime, speed and yield of our customers’ op- erations in utilities, industry and transport & infra- structure. Our current sustainability framework, adopted in 2013, prioritizes pioneering technol- ogy, responsible operations and responsible rela- tionships. It clearly articulates how ABB creates value across a wide range of stakeholder issues. Enabling the Sustainable Development Goals ABB is helping to address the important eco- nomic, social, environmental and governance challenges enshrined in the United Nations Sus- tainable Development Goals (SDGs). We recognize that achieving these goals requires businesses to contribute their fair share, and our structured analysis identified seven SDGs where we can have the most impact. Our products, services and solu- tions not only enable SDG 7 (affordable and clean energy), which is one of our core business areas, but also SDGs 6 (clean water and sanitation), 9 (in- dustry innovation and infrastructure), and 11 (sus- tainable cities and infrastructure). The remaining three reflect our long-standing commitment to responsible operations and responsible relation- ships: namely SDG 12 (responsible production and consumption), 8 (decent work and economic growth) and 17 (partnership for the goals). ABB’s contribution to climate action ABB contributes to climate action by encouraging the early and rapid adoption of clean technologies and by helping its customers improve energy effi- ciency and productivity while extending the life- cycles of their equipment and reducing waste. More than half of ABB’s global revenues are de- rived from technologies that directly address the causes of climate change, and it aims to increase that contribution to 60 percent by 2020. The com- pany’s commitment to combatting climate change includes limiting the environmental impact of its own operations. It has set itself the target to re- duce its GHG emissions by 40 percent by 2020 from a 2013 baseline. ABB actively engages with civil society to encour- age bold action on climate change. We are a mem- ber of the Alliance of CEO Climate Leaders, an in- formal group facilitated by the World Economic Forum. Together we signed an open letter ahead of COP24 to confirm our commitment to fast-track solutions to help deliver on an en- hanced and more ambitious global action plan to tackle climate change and meet the goals set out in the 2015 Paris Climate Agreement. ABB is also an active contributor to the Low Carbon Technol- ogy Partnerships Initiative of the World Business Council for Sustainable Development. External recognition ABB’s contributions to climate action are widely acknowledged and were most recently recog- nized in August 2018 by “Fortune” magazine, which named ABB as one of the top 10 compa- nies that are changing the world. We also report to a sustainability platform called EcoVadis, which a large number of customers use to access sustainability information on environment, fair labor & human rights, ethics and sustainable pro- curement. In 2018 EcoVadis scored our response as “Gold” and among the top 1 percent of compa- nies rated in our sector. Embedding human rights into its business processes and activities Everyone who works for us, either as a direct ABB employee or indirectly through our supply chain, is expected to behave with respect for the dignity and human rights of every individual. We fully acknowledge our Group’s responsibility to re- spect the International Bill of Human Rights, and are committed to implementing the UN Guiding Principles on Business and Human Rights. Since our first formal Human Rights Policy was published in 2007, we have worked to integrate these principles into our decision-making pro- cesses and included them in relevant due dili- gence activities. In addition, the ABB Supplier Code of Conduct, the ABB Policy Combating Traf- ficking in Persons, and our Human Rights Policy all make clear that ABB does not tolerate modern ABB ANNUAL REPORT 2018 01 INTRODUCTION 27 slavery or human trafficking. Furthermore, we are keenly focused on human rights issues of interest to our external stakeholders, such as conflict min- erals, human trafficking and child labor, and we work to ensure our policies and principles are im- plemented and observed along our value chain. 2018 progress against targets ABB’s structure of nine sustainability objectives with 11 targets to achieve by 2020 demonstrates how we are addressing our material issues (see ta- ble). In 2018 we continued to make good progress. Our eco-efficiency portfolio of products, solutions and services continues to grow in line with our tar- get to account for 60 percent of ABB’s total revenue by 2020. This portfolio delivers positive use-phase impacts in three areas: energy efficiency, renew- able energy and resource efficiency. In responsible operations all reported measures are on track to achieve the 2020 targets. The health and safety of those affected by our activities – particularly our employees, contractors and customers – are a top priority for ABB, and we have worked for many years to manage and reduce the environmental im- pacts of our own operations. Our responsible rela- tionships measures are also on track thanks to the roll-out of new training courses on the ABB Code of Conduct and Human Rights, the implementation of a gender diversity framework and our commitment to delivering well-being programs covering differ- ent aspects of health, including non-smoking, health nutrition, physical fitness, mental health, vaccinations, voluntary medical checks, promotion of good ergonomics and addiction prevention. Valued insights from stakeholders Since 2015, ABB has sought input and advice from an external stakeholder panel, which reviews our material issues, our approach to sustainable devel- opment and our sustainability report. Panel mem- bers represent the key market and non-market stakeholders of the company and are selected for their level of knowledge and skills regarding sus- tainable development issues relevant to the com- pany. The panel’s statement can be found here. Following the announcement of a new business strategy focusing the portfolio on digital indus- tries, the divestment of Power Grids and the con- clusion of our 2020 sustainability targets, ABB has initiated a process to formally engage with a large number of key stakeholders and embark on a comprehensive materiality review to provide a foundation for the development of ABB’s post-2020 sustainability objectives. → Read more at abb.com/sustainability Pioneering technology Objective Measure Products, solutions & services Increase share of ABB eco-efficiency portfolio Responsible operations Objective Safe operations Climate action Resource efficiency Measure Reduction in total incident frequency rate Reduce greenhouse gas emissions (GHG) Reduce water consumption in water-stressed areas Reduce waste sent for disposal Right materials Reduce emissions from VOCs Responsible sourcing Closure of identified risks from supplier assessments Responsible relationships 2020 Target 2018 Performance 60% of revenue 57% 2020 Target 2018 Performance <0.7 by 40% (vs 2013) by 25% (vs 2013) by 20% (vs 2013) by 25% (vs 2013) >65% 0.58 36% 12% 18% 27% 76% Objective Integrity Human rights Our people Measure 2020 Target 2018 Performance Employees trained on integrity Training for specific job roles exposed to human rights risks Increase women in senior management Employees covered by the ABB well-being program >96% 2 campaigns per year by 30% (vs 2017) 70% 98% 2 10.5% 67% Achieved On track In progress ABB ANNUAL REPORT 2018 01 INTRODUCTION 28 — Executive Committee Starting April 1, 2019 F R A N K D U G G A N C L A U D I O FA C C H I N T I M O I H A M U O T I L A J E A N - C H R I S T O P H E D E S L A R Z E S D I A N E D E S A I N T V I C T O R C H U N Y U A N G U ABB ANNUAL REPORT 2018 01 INTRODUCTION 29 M O R T E N W I E R O D P E T E R T E R W I E S C H S A M I AT I YA U L R I C H S P I E S S H O F E R G R E G S C H E U TA R A K M E H TA ABB ANNUAL REPORT 2018 01 INTRODUCTION — Writing the future of safe, smart and sustainable electrification. 02 Corporate governance report — 32 – 53 Chairman’s letter — 34 – 35 Summary of corporate governance approach — 36 – 36 Board of Directors — 36 – 41 Executive Committee — 41 – 43 Shares — 43 – 46 Shareholders — 47 – 49 Independent external auditors — 49 – 49 Other governance information — 50 – 53 34 — Chairman’s letter Dear Shareholders, Last year was an eventful one for our company and for the Board of Directors: we laid the foundation to shift the focus of our business to digital indus- tries; we “on-boarded” three new Board members, elected at last year’s AGM; and we strengthened our focus on environmental, social and gover- nance matters. All of these initiatives, as well as the others undertaken in 2018, are aimed at ensur- ing that ABB delivers long-term, sustainable value creation in line with our mandate from you, our shareholders. New strategic direction In December 2018, we announced a new strategic direction for our company, in which we will focus on digital industries by divesting our Power Grids business. This decision reflects the growing differ- ence in customer needs between the large-scale infrastructure utility and industry sectors. We be- lieve that the future development of the Power Grids business will be best served under Hitachi’s ownership, given its leading position in energy in- frastructure and its long-term perspective for the power business. The new ABB with its four businesses will be well-positioned as a provider of digitally enabled technologies to industries, especially in the B2B space, which are now beginning to digitalize in earnest. You can read more about our new strat- egy and the market opportunities we are target- ing in the Chairman and CEO letter on pages 8–11, and in the “New ABB” chapter on pages 12–15. Diverse, rejuvenated Board of Directors In 2018, we welcomed three new members to the ABB Board of Directors, further broadening the diversity of our Board. With the integration of our new colleagues, we have further rejuvenated our Board, which has an average tenure of four-and-a-half years and is closely aligned with our strategic needs, business portfolio, geo- graphic reach and culture. To help highlight the breadth and complementary nature of our Board members’ skills, experience and backgrounds, we are including for the first time a diversity and skills matrix (see page 38) in our corporate gov- ernance report. Executive compensation One of our key Board priorities has been to ad- dress your concerns about compensation policy and reporting. In 2018, we adjusted the long-term incentive program (LTIP) for our Executive Com- mittee (EC) and certain other senior managers, linking it even more clearly to our performance and the interests of our shareholders. We also im- posed more stringent shareholding requirements on our EC members. Further details can be found in our Compensation Report on pages 56–79. Environmental, social and governance matters For ABB, being a good corporate citizen has long been important. We maintain the highest stan- dards concerning integrity and ethical business practices and we have a zero-tolerance approach to unethical behavior. In 2018, in line with good governance practices, the Board proposed a change of auditor, which was subsequently approved by the shareholders at our AGM. In addition, we seek to minimize ABB’s environ- mental footprint and to conduct our business in a socially responsible manner. More than half of our revenue is related to energy efficiency, renewable energy and resource conservation, and our tech- nologies contribute directly or indirectly to all 17 of the United Nations’ Sustainable Development Goals. On the operations side, we have further improved our safety performance by lowering the lost-time injuries’ cases compared with 2017. Sadly, we still experienced four fatalities among employees and contractors in 2018. In 2017, we also had four fatal- ities. The learnings from all safety incidents are continuously disseminated throughout the orga- nization, further improving our safety results. Re- garding environmental performance, since 2013 we have reduced greenhouse gas emissions by 37 percent. ABB does not tolerate any modern slavery, human trafficking or child labor. Board mandate In line with the mandate that you approved last year, the Board of Directors is focused on secur- ing long-term, sustainable value creation for the ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 35 benefit of all of our stakeholders. To that end, we continue to collaborate closely with the CEO and the members of the EC to ensure that ABB’s strat- egy is implemented effectively, and that we live up to our commitments in terms of performance and our high ethical, environmental and social standards. from you has been extremely valuable in helping us to set priorities. Equally, your support has al- lowed the Board, CEO and the EC to run our busi- ness for the long-term. On behalf of the Board of Directors, I would like to thank you for your trust as we embark on the next phase of our company’s growth and development journey. Thank you Since my appointment as Chairman of the Board of Directors in 2015, I have sought to maintain an open dialogue between the Board and the share- holders in order to represent your interests in the best way possible. The feedback we have received Peter Voser Chairman of the Board of Directors Zurich, March 27, 2019 ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 36 — Summary of corporate governance approach Corporate governance – general principles ABB is committed to the highest international standards of corporate governance and this is re- inforced in its structure, processes and rules as outlined in this section of the Annual Report. In line with this, ABB complies with the general prin- ciples as set forth in the Swiss Code of Best Prac- tice for Corporate Governance, as well as those of the capital markets where its shares are listed and traded. In addition to the provisions of the Swiss Code of Obligations, ABB’s key principles and rules on corporate governance are laid down in ABB’s Articles of Incorporation, the ABB Ltd Board Regulations & Corporate Governance Guidelines (which includes the regulations of ABB’s Board Committees and the ABB Ltd Related Party Transaction Policy, which was prepared based on the Swiss Code of Best Practice for Cor- porate Governance and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange), and the ABB Code of Conduct and the Addendum to the ABB Code of Conduct for Members of the Board of Directors and the Executive Committee (EC) (together, the “Code of Conduct”). These documents are avail- able on ABB’s website at www.abb.com. It is the duty of ABB’s Board of Directors (the Board) to review and amend or propose amendments to those documents from time to time to reflect the most recent developments and practices, as well as to ensure compliance with applicable laws and regulations. Shareholders and other interested parties may communicate with the Chairman of the Board by writing to ABB Ltd (Attn: Chairman of the Board), at Affolternstrasse 44, CH-8050 Zurich, Switzerland. Compensation governance and Board and EC compensation Information about ABB’s compensation gover- nance and Board and EC compensation and share- holdings can be found in the Compensation Report contained in this Annual Report. — Board of Directors Board and Board Committees (2018–2019 board term) Chairman: Peter R. Voser Matti Alahuhta Vice-Chairman: Jacob Wallenberg Gunnar Brock Board of Directors David Constable Frederico Fleury Curado Lars Förberg Governance and Nomination Committee Jennifer Xin-Zhe Li Geraldine Matchett David Meline Satish Pai Compensation Committee Peter R. Voser (chairman) David Constable (chairman) Matti Alahuhta Lars Förberg Jacob Wallenberg Frederico Fleury Curado Jennifer Xin-Zhe Li Finance, Audit and Compliance Committee David Meline (chairman) Gunnar Brock Geraldine Matchett Satish Pai ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 37 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 man- agement and representation of ABB. The internal organizational structure and the definition of the areas of responsibility of the Board, as well as the information and control instruments vis-à-vis the Executive Committee are set forth in the ABB Ltd Board Regulations & Corporate Gover- nance Guidelines. The Board takes decisions as a whole, supported by its three committees: the Finance, Audit and Compliance Committee (FACC), the Governance and Nomination Committee (GNC), and the Com- pensation Committee (CC). These committees as- sist the Board in its tasks and report regularly to the Board. The members of the Board committees either are required to be independent or are elected directly by the shareholders. The Board and its committees meet regularly throughout the year. The directors and officers of a Swiss corporation are bound, as specified in the Swiss Code of 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 share- holders in like circumstances. value through effective governance. In addition, the Chairman (1) takes provisional decisions on behalf of the Board on urgent matters where a regular Board decision cannot be obtained, (2) calls for Board meetings and sets the related agendas, (3) interacts with the CEO and other EC members on a more frequent basis outside of Board meetings and (4) represents the Board in- ternally 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 rele- vant and as appropriate or as the Chairman may require and with a particular focus on strategic aspects related to the Company and its business in general. In addition, the Vice-Chairman takes such other actions as may be decided by the Board or requested by the Chairman. 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’ qualifica- tions and independence, (4) the performance of ABB’s internal audit function and external audi- tors, and (5) ABB’s capital structure, funding re- quirements and financial risk and policies. The Swiss Code of Obligations does not specify what standard of due care is required of the di- rectors of a corporate board. However, it is gener- ally held by Swiss legal scholars and jurisprudence that the directors must have the requisite capa- bility and skill to fulfill their function, and must devote the necessary time to the discharge of their duties. Moreover, the directors must exer- cise all due care that a prudent and diligent direc- tor would have taken in like circumstances. Finally, the directors are required to take actions in the best interests of the corporation and may not take any actions that may be harmful to the cor- poration. 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 commit- tee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained. In addition, the chief integrity officer, the head of internal audit and the external auditors participate in the meetings as appropriate. The Board has determined that each member of the FACC is an audit committee finan- cial expert. Although the Swiss Code of Obligations does not discuss specifically conflicts of interest for board members, the ABB Ltd Board Regulations and Corporate Governance Guidelines state that board members shall avoid entering into any situ- ation in which their personal or financial interest may conflict with the interests of ABB. Chairman of the Board The Chairman is elected by the shareholders to represent their interests in creating sustainable Governance and Nomination Committee The GNC is responsible for (1) overseeing corpo- rate governance practices within ABB, (2) nomi- nating candidates for the Board, the role of CEO and other positions on the Executive Commit- tee, and (3) succession planning and employ- ment matters relating to the Board and the Ex- ecutive Committee. The GNC is also responsible for maintaining an orientation program for new Board members and an ongoing education pro- gram for existing Board members. ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 38 Members of the Board (2018–2019 board term): Board Experience Corporate Officer Experience Other Business Experience d r a o B B B A ) s r a e y ( e r u n e T 4 20 5 1 4 3 2 1 1 3 3 Name Peter R. Voser Jacob Wallenberg Matti Alahuhta Gunnar Brock David Constable Frederico Fleury Curado Lars Förberg Jennifer Xin-Zhe Li Geraldine Matchett David Meline Satish Pai e c n e i r e p x E d r a o B c i l b u P r e h t O O E C O F C t n e m e g a n a M k s i R e c n e i r e p x E l a b o G l y t i l i b a n i a t s u S y g o l o n h c e T / l a t i i g D s n o i t a r e p O / n i g i r O f o y r t n u o C y t i l a n o i t a N CH SE FI SE CA BR SE CN, CA UK, FR, CH US, CH IN e v i t u c e x E - n o N r e d n e G M Yes M Yes M Yes M Yes M Yes M Yes M Yes F Yes F Yes M Yes M Yes t n e d n e p e d n I Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 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 of the Executive Committee may partic- ipate 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 Chair- man of the Board and, upon invitation by the Committee’s Chairman, the CEO or other mem- bers of the Executive Committee may participate in the committee meetings, provided that any po- tential conflict of interest is avoided and confi- dentiality of the discussions 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 strate- gic needs, business portfolio, geographic reach and culture. The Board must be diverse in all as- pects including gender, nationalities, geographic/ regional experience and business experience. In addition, the average tenure of the members of the Board should be well-balanced. The Board also considers the number of other mandates of each Board member to ensure that he/she will have sufficient time to dedicate to his/her role as an ABB Board member. 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 sharehold- ers for a term of office extending until completion of the next ordinary general meeting of share- holders. Members whose terms of office have ex- pired 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 Regulations & Cor- porate Governance Guidelines (although waivers are possible and subject to Board discretion). If the office of the Chairman of the Board of Direc- tors or any position on the Compensation Com- mittee becomes vacant during a Board term, the Board of Directors may appoint (shall appoint in the case of the Chairman of the Board) another in- dividual from among its members to that position for the remainder of that term. The Board of Di- rectors shall consist of no less than 7 and no more than 13 members. Members of the Board (2018–2019 board term): Peter R. Voser has been a member and Chairman of ABB’s Board of Di- rectors since April 2015. He is a member of the boards of directors of Roche Holding Ltd (Switzerland), IBM Corporation (U.S.) and Catalyst (U.S.), a non-profit organization. He is also a member of the Board of Directors of Temasek Holdings (Pri- vate) Limited (Singapore) as well as deputy chair- man of the board of PSA International Pte Ltd ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 39 (Singapore), one of its subsidiaries. In addition, he is the chairman of the board of trustees of the St. Gallen Foundation for International Studies. He was previously the chief executive officer of Royal Dutch Shell plc (The Netherlands). Mr. Voser was born in 1958 and is a Swiss citizen. Jacob Wallenberg has been a member of ABB’s Board of Directors since June 1999 and Vice-Chairman since April 2015. He is the chairman of the board of Investor AB (Sweden). He is Vice-Chairman of the boards of Telefonaktiebolaget LM Ericsson, FAM AB and Patricia Industries (all Sweden). He is also a member of the boards of directors of Nasdaq, Inc. (U.S.) and the Knut and Alice Wallenberg Foundation (Sweden) as well as a member of the nomination committee of SAS AB (Sweden). Mr. Wallenberg was born in 1956 and is a Swedish citizen. Matti Alahuhta has been a member of ABB’s Board of Directors since April 2014. He is the chairman of the boards of Outotec Corporation and of DevCo Partners Oy (both Finland). He is also a member of the boards of directors of KONE Corporation (Finland) and AB Volvo (Sweden). He was previously the presi- dent and chief executive officer of KONE Corpora- tion and he served in several executive positions at Nokia Corporation (Finland). Mr. Alahuhta was born in 1952 and is a Finnish citizen. Gunnar Brock has been a member of ABB’s Board of Directors since March 2018. He is currently chair- man of the boards of Slättö Invest AB, Mölnlycke Health Care AB and Stena AB (all Sweden). He is a member of the boards of directors of Syngenta Ltd (Switzerland), Investor AB and Patricia Industries (both Sweden). He was formerly president and chief executive of- ficer of Atlas Copco AB (Sweden). Mr. Brock was born in 1950 and is a Swedish citizen. David Constable has been a mem- ber of ABB’s Board of Directors since April 2015. He is a member of the Boards of Directors of Rio Tinto plc (U.K.), Rio Tinto Limited (Austra- lia) and Anadarko Petroleum Corporation (U.S.). He was formerly the chief executive officer and president as well as a member of the board of di- rectors of Sasol Limited (South Africa). He joined Sasol after more than 29 years with Fluor Corpo- ration (U.S.). Mr. Constable was born in 1961 and is a Canadian citizen. Frederico Fleury Curado has been a member of ABB’s Board of Directors since April 2016. He is the chief exec- utive officer of Ultrapar Partici- pações S.A. (Brazil) and a member of the Board of Directors of Transocean Ltd. (Switzer- land). He was formerly the chief executive officer of Embraer S.A. (Brazil). Mr. Curado was born in 1961 and is a Brazilian citizen. Lars Förberg has been a member of ABB’s Board of Directors since April 2017. He is co-founder and managing partner of Cevian Capital. Mr. För- berg is the chairman of the Human Practice Foundation (Denmark). Mr. Förberg was born in 1965 and is a Swedish citizen. Jennifer Xin-Zhe Li has been a member of ABB’s Board of Direc- tors since March 2018. She is a member of the boards of directors of Philip Morris International Inc. (U.S.), HSBC Asia (Hong Kong) and Flex Ltd (Singa- pore/U.S.). Ms. Li is a founder and general partner of Changcheng Investment Partners (P.R.C.) and was previously the chief executive officer (general managing partner) of Baidu Capital (P.R.C.). She formerly served as chief financial officer of Baidu Inc. (P.R.C.). Ms. Li was born in 1967 and is a Cana- dian citizen. Geraldine Matchett has been a member of ABB’s Board of Direc- tors since March 2018. She is the chief financial officer and a mem- ber of the managing board of Royal DSM N.V. (The Netherlands). She was previously chief financial officer of SGS Ltd (Switzerland). Prior to joining SGS she worked as an auditor at Deloitte Ltd (Switzerland) and KPMG LLP (U.K.). Ms. Matchett was born in 1972 and is a Swiss, Brit- ish and French citizen. David Meline has been a member of ABB’s Board of Directors since April 2016. He is the chief financial offi- cer of Amgen Inc. (U.S.). Mr. Meline was formerly with the 3M Company (U.S.), where he served as chief financial officer. Prior to joining 3M, Mr. Meline worked for more than 20 years for General Motors Company (U.S.). Mr. Meline was born in 1957 and is a Swiss and U.S. citizen. Satish Pai has been a member of ABB’s Board of Directors since April 2016. He is the managing director and a member of the Board of Di- rectors of Hindalco Industries Ltd. ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 40 2018 Board and board Committee Meetings Pre Annual General Meeting 2018 Post Annual General Meeting 2018 Meetings and attendance Mtg. Conf. Call Board Average duration (hours) Number of meetings Meetings attended: Peter R. Voser Jacob Wallenberg Matti Alahuhta Gunnar Brock(1) David Constable Frederico Fleury Curado Lars Förberg Louis R. Hughes(2) Jennifer Xin-Zhe Li(1) Geraldine Matchett(1) David Meline Satish Pai Ying Yeh(2) 8 1 1 1 1 — 1 1 1 1 — — 1 1 1 1 2 2 2 2 — 2 2 2 2 — — 2 2 2 FACC 2.5 2 — — — — — — — 2 — — 2 2 — GNC 1.5 2 2 2 2 — — — 2 — — — — — — CC 1.5 3 — — — — 3 2 — — — — — — 3 Board(3) Mtg. Conf. Call 8 5 5 5 5 5 5 5 5 — 4 5 5 4 — 2 9 9 9 9 9 9 9 9 — 8 9 9 9 — FACC 3.4 4 — — — 3 — — — — — 4 4 4 — GNC 1.7 5 5 5 5 — — — 5 — — — — — — CC 1.5 4 — — — — 4 4 — — 4 — — — — (1) Gunnar Brock, Jennifer Xin-Zhe Li and Geraldine Matchett were first elected to the Board at the March 2018 AGM. (2) Louis R. Hughes and Ying Yeh stepped down from the Board in March 2018. (3) One conference call post annual general meeting 2018 was attended only by the Chairman of the Board and the Chairman of the FACC to whom the Board had delegated authority. (India). He joined Hindalco in 2013 after 28 years with Schlumberger Limited (U.S.). Mr. Pai was born in 1961 and is an Indian citizen. As of December 31, 2018, all ABB Board members were non-executive and independent directors and none of them 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 meetings are supplemented by additional meet- ings (either in person or by conference call), as necessary. 2018 was a very intensive year for the Board and its committees. The table above shows the number of meetings held during 2018 by the Board and its committees, their average duration, as well as the attendance of the indi- vidual Board members. The Board meetings shown include a strategic retreat attended by the members of the Board and the EC. 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 mem- bers as well as private meetings without them. Board meetings are convened by the Chairman or upon request by any other board member or the CEO. Documentation covering the various items of the agenda for each Board meeting is sent out in advance to each Board member in order to al- low each member time to study the covered mat- ters prior to the meetings. Further, Board mem- bers are entitled to information concerning ABB’s business and affairs. Decisions made at the Board meetings are recorded in written min- utes of the meetings. Meetings and attendance The Board and its committees have regularly scheduled meetings throughout the year. These 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 man- dates, such as those in our subsidiaries, those in the same group of companies and those in non-profit and charitable institutions, are not sub- ject 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. ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 41 This policy is contained in the ABB Ltd Board Reg- ulations & Corporate Governance Guidelines. Sasol Ltd (Sasol) is an important customer of ABB. ABB supplies Sasol primarily with modular systems through its Electrification Products divi- sion. David Constable was president, chief execu- tive officer and member of the board of Sasol un- til June 2016. IBM Corporation (IBM) is an important supplier to ABB. IBM supplies ABB primarily with IT related hardware, software and services. Peter R. Voser is a director of IBM. After reviewing the level of ABB’s business with Sasol and the level of purchases from IBM, the Board has determined that ABB’s business rela- tionships 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’s Related Party Transaction Policy. — Executive Committee Composition of the Executive Committee Ulrich Spiesshofer Chief Executive Officer C O R P O R AT E O F F I C E R S D I V I S I O N P R E S I D E N T S R E G I O N P R E S I D E N T S Timo Ihamuotila Chief Financial Officer Tarak Mehta Electrification Products Frank Duggan Europe Jean-Christophe Deslarzes Sami Atiya Chunyuan Gu Chief Human Resources Officer Robotics and Motion Asia, Middle East & Africa Diane de Saint Victor General Counsel Peter Terwiesch Industrial Automation Greg Scheu Americas Claudio Facchin Power Grids Executive Committee responsibilities and organization Members of the Executive Committee (at December 31, 2018): 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 manage- ment. The CEO reports to the Board regularly, and whenever extraordinary circumstances so require, on the course of ABB’s business and fi- nancial performance and on all organizational and personnel matters, transactions and other issues material to the Group. Each member of the Executive Committee is appointed and dis- charged by the Board. 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 Head of the Discrete Automation and Motion division. He joined ABB in November 2005 as Head of Corporate Develop- ment. 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. Ke- arney Ltd. and its affiliates. Mr. Spiesshofer was born in 1964 and is a Swiss and German citizen. ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 42 Timo Ihamuotila was appointed Chief Financial Officer and member of the Executive Committee in April 2017. From 2009 to 2016, Mr. Ihamu- otila was chief financial officer and an executive vice president of the Nokia Corpora- tion (Finland). From 1999 to 2009, he held various senior roles with Nokia. Mr. Ihamuotila was born in 1966 and is a Finnish citizen. Jean-Christophe Deslarzes was ap- pointed Chief Human Resources Officer and member of the Execu- tive Committee in November 2013. He is a member of the Board of Di- rectors of Adecco Group AG (Switzerland). From 2010 through 2013, he was the chief human re- sources and organization officer of the Carrefour Group (France). From 2008 to 2010 he was the president and chief executive officer of the Down- stream Aluminum Businesses of Rio Tinto (Can- ada). He was senior vice president human re- sources of Alcan Inc. (Canada) from 2006–2008 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 man- agement roles with Alcan Inc. Mr. Deslarzes was born in 1963 and is a Swiss citizen. Sami Atiya was appointed Presi- dent of the Robotics and Motion Di- vision effective January 2017 and has been a member of the Execu- tive Committee 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 as chief executive officer of the mobility and lo- gistics 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 Ex- ecutive Committee since January 2015. He is a member of the Board of Directors of Metall Zug AG (Switzerland). He was the President of the Process Automation division from 2015 to 2016. From 2011 to 2014, Mr. Terwiesch was Head of ABB’s Central Europe region. He was ABB’s Chief Technology Officer from 2005 to 2011. From 1994 to 2005, he held several positions with ABB. Mr. Terwiesch was born in 1966 and is a Swiss and German citizen. Diane de Saint Victor was appointed General Counsel, Company Secretary and member of the Executive Com- mittee in January 2007. She is a member of the Board of Directors of Claudio Facchin was appointed President of the Power Grids divi- sion effective January 2016 and has been a member of the Executive Committee since December 2013. the American Chamber of Commerce (France). From 2013 to 2017, she was 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 Interna- tional (France/Belgium). From 1988 to 1993, she held various legal positions with General Elec- tric (U.S.). Ms. de Saint Victor was born in 1955 and is a French citizen. Tarak Mehta was appointed Presi- dent of the Electrification Prod- ucts division effective January 2016 and has been a member of the Executive Committee since Oc- tober 2010. From October 2010 through Decem- ber 2015, he was President of the Low Voltage Products division. From 2007 to 2010, he was Head of ABB’s transformers business. Between 1998 and 2006, he held several management po- sitions with ABB. Mr. Mehta was born in 1966 and is a U.S. citizen. 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 busi- ness unit and from 1995 to 2004, he held various management roles with ABB. Mr. Facchin was born in 1965 and is an Italian citizen. Frank Duggan was appointed Presi- dent of the Europe region in July 2017 and has been a member of the Executive Committee since 2011. From 2015 to June 2017, Mr. Duggan held the role of President of the Asia, Middle East and Africa region. Prior to this from 2011 to 2014, he was Head of Global Markets. From 2008 to 2014, he was also ABB’s Region Manager for India, Middle East and Africa. From 1986 and 2011, he held several management positions with ABB. Mr. Duggan was born in 1959 and is an Irish citizen. Chunyuan Gu was appointed Presi- dent of the Asia, Middle East and Af- rica region and a member of the Ex- ecutive Committee in July 2017. In ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 43 addition, Mr. Gu was the Managing Director of ABB China from 2014 to 2018. From 2012 to 2013, he was the Regional Division Head of ABB’s Dis- crete Automation and Motion for North Asia and China. From 2010 to 2011, he was the Head of ABB’s robotics business unit in China. Before this, Mr. Gu held various management and technical roles in ABB’s robotics business in China and Sweden. Mr. Gu was born in 1958 and is a Swedish citizen. Greg Scheu was appointed Pre- sident 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. 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 ad- ditional 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 rela- tionships 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 Reg- ulations & Corporate Governance Guidelines. Adecco Group AG (Adecco) is an important sup- plier to ABB. Adecco primarily supplies ABB with temporary personnel services. Jean-Christophe Deslarzes is a director of Adecco. ABB has an unsecured syndicated $2-billion re- volving credit facility. As of December 31, 2018, Barclays Bank plc (Barclays Bank) had commit- ted to approximately $74 million out of the $2-bil- lion total. In addition, ABB has regular banking business with Barclays. Diane de Saint Victor was a director of Barclays Bank and Barclays plc until May 2017. After reviewing the level of purchases from Adecco, and after reviewing the banking commit- ments of Barclays, the Board has determined that ABB’s business relationships with those compa- nies are not unusual in their nature or conditions and do not constitute material business relation- ships. This determination was made in accor- dance with ABB Ltd’s Related Party Transaction Policy. — Shares Share capital of ABB At December 31, 2018, ABB’s ordinary share capital (including treasury shares) as registered with the Commercial Register amounted to CHF 260,177,791.68, divided into 2,168,148,264 fully paid registered shares with a par value of CHF 0.12 per share. ABB Ltd’s shares are listed on the SIX Swiss Ex- change, the NASDAQ OMX Stockholm Exchange and the New York Stock Exchange (where its shares are traded in the form of American deposi- tary shares (ADS) – each ADS representing one registered ABB share). At December 31, 2018, ABB Ltd had a market capitalization based on out- standing shares (total number of outstanding shares: 2,131,962,406) of approximately CHF 40 bil- lion ($41 billion, SEK 364 billion). The only consoli- dated subsidiary in the ABB Group with listed shares is ABB India Limited, Bangalore, India, which is listed on the BSE Ltd. (Bombay Stock ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 4 4 Stock exchange listings (at December 31, 2018) Stock exchange SIX Swiss Exchange Security ABB Ltd, Zurich, share Ticker symbol ISIN code ABBN CH0012221716 NASDAQ OMX Stockholm Exchange ABB Ltd, Zurich, share New York Stock Exchange ABB Ltd, Zurich, ADS BSE Ltd. (Bombay Stock Exchange) ABB India Limited, Bangalore, share National Stock Exchange of India ABB India Limited, Bangalore, share ABB ABB ABB(1) ABB CH0012221716 US0003752047 INE117A01022 INE117A01022 (1) Also called Scrip ID. Exchange) and the National Stock Exchange of In- dia. At December 31, 2018, ABB Ltd, Switzerland, directly or indirectly owned 75 percent of ABB In- dia Limited, Bangalore, India, which at that time had a market capitalization of approximately INR 280 billion. Share repurchases and cancellation Under the share buyback program that ran from September 2014 to September 2016, ABB repur- chased a total of 146,595,000 shares for cancella- tion. In 2016, 100 million shares were cancelled. At ABB’s General Meeting of Shareholders in 2017, the shareholders approved the cancellation of 46.595 million shares. This was completed in July 2017. As a result of the share cancellation in 2017, the total number of ABB’s Ltd’s issued shares is 2,168,148,264. Changes to the ordinary share capital In 2018, ABB paid a dividend of 0.78 Swiss francs per share relating to the year 2017. In 2017, ABB paid a dividend of 0.76 Swiss francs per share re- lating to the year 2016. In 2016, ABB paid its divi- dend 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 adjust- ments were made to the par value of ABB’s contin- gent and authorized shares. Except for the share cancellation and nominal value reductions described above, there were no other changes to ABB’s ordinary share capital during 2018, 2017 and 2016. 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. Contingent share capital At December 31, 2018, 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 exer- cise of conversion rights and/or warrants granted in connection with the issuance on national or in- ternational capital markets of newly or already is- sued bonds or other financial market instruments. At December 31, 2018, ABB’s share capital may be in- creased 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 ex- cluded in connection with the issuance of convert- ible or warrant-bearing bonds or other financial market instruments or the grant of warrant rights. The then current owners of conversion rights and/or warrants will be entitled to subscribe for new shares. The conditions of the conversion rights and/or war- rants 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 registra- tion” in Shareholders section below). In connection with the issuance of convertible or warrant-bearing bonds or other financial market in- struments, the Board is authorized to restrict or deny the advance subscription rights of sharehold- ers if such bonds or other financial market instru- ments are for the purpose of financing or refinanc- ing the acquisition of an enterprise, parts of an enterprise, participations or new investments or an issuance on national or international capital ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 45 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 con- ditions 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 ex- ercised 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, 2018, ABB’s share capital may be increased by an amount not to exceed CHF 11,284,656 through the issuance of up to 94,038,800 fully paid shares with a par value of CHF 0.12 per share to employees. The pre-emptive and advance subscription rights of ABB’s share- holders are excluded. The shares or rights to sub- scribe for shares will be issued to employees pur- suant to one or more regulations to be issued by the Board, taking into account performance, func- tions, level of responsibility and profitability crite- ria. ABB may issue shares or subscription rights to employees at a price lower than that quoted on a stock exchange. The acquisition of shares within the context of employee share ownership and each subsequent transfer of the shares will be subject to the restrictions of ABB’s Articles of Incorpora- tion (see “Limitations on transferability of shares and nominee registration” in Shareholders section below). Authorized share capital At December 31, 2018, 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 13, 2019. 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 under- writing 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 ex- ercised by shareholders to expire or it may place these rights and/or shares as to which pre-emptive rights have been granted but not ex- ercised at market conditions or use them for other purposes in the interest of the company. Furthermore, the Board is authorized to restrict or deny the pre-emptive rights of shareholders and allocate such rights to third parties if the shares are used (1) for the acquisition of an enter- prise, parts of an enterprise, or participations, or for new investments, or in case of a share place- ment, for the financing or refinancing of such transactions; or (2) for the purpose of broadening the shareholder constituency in connection with a listing of shares on domestic or foreign stock ex- changes. The subscription and the acquisition of the new shares, as well as each subsequent trans- fer of the shares, will be subject to the restric- tions of ABB’s Articles of Incorporation. Share Developments ABB Ltd share price trend during 2018 During 2018, the price of ABB Ltd shares listed on the SIX Swiss Exchange decreased 28 percent, while the Swiss Performance Index decreased 9 percent. The price of ABB Ltd shares on NASDAQ OMX Stockholm decreased 23 percent, compared to the OMX 30 Index, which decreased 11 percent. The price of ABB Ltd American Depositary Shares traded on the New York Stock Exchange de- creased 29 percent compared to the Dow Jones Industrial Index, which decreased 6 percent. ABBN SW Equity Swiss Performance Index Rebased Zurich CHF 28 27 26 25 24 23 22 21 20 19 18 8 1 - J 8 1 - J 8 1 - J 8 1 - F 8 1 - F 8 1 - F 8 1 - M 8 1 - M 8 1 - A 8 1 - A 8 1 - A 8 1 - M 8 1 - M 8 1 - M 8 1 - J 8 1 - J 8 1 - J 8 1 - J 8 1 - J 8 1 - J 8 1 - A 8 1 - A 8 1 - S 8 1 - S 8 1 - S 8 1 - 0 8 1 - 0 8 1 - 0 8 1 - N 8 1 - N 8 1 - N 8 1 - D 8 1 - D ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 46 Stockholm SEK 240 230 220 210 200 190 180 170 160 ABBN SS Equity OMX 30 Index Rebased 8 1 - J 8 1 - J 8 1 - J 8 1 - F 8 1 - F 8 1 - M 8 1 - M 8 1 - M 8 1 - A 8 1 - A 8 1 - M 8 1 - M 8 1 - M 8 1 - J 8 1 - J 8 1 - J 8 1 - J 8 1 - J 8 1 - A 8 1 - A 8 1 - A 8 1 - S 8 1 - S 8 1 - 0 8 1 - 0 8 1 - 0 8 1 - N 8 1 - N 8 1 - D 8 1 - D 8 1 - D ABBN US Equity Dow Jones Index rebased New York USD 30,00 28,00 26,00 24,00 22,00 20,00 18,00 8 1 - J 8 1 - J 8 1 - J 8 1 - F 8 1 - F 8 1 - M 8 1 - M 8 1 - M 8 1 - A 8 1 - A 8 1 - M 8 1 - M 8 1 - M 8 1 - J 8 1 - J 8 1 - J 8 1 - J 8 1 - J 8 1 - A 8 1 - A 8 1 - A 8 1 - S 8 1 - S 8 1 - 0 8 1 - 0 8 1 - 0 8 1 - N 8 1 - N 8 1 - D 8 1 - D 8 1 - D 2018 High Low Year-end Average daily traded number of shares, in millions SIX Swiss Exchange (CHF) 27.13 18.18 18.70 6.05 NASDAQ OMX Stockholm (SEK) New York Stock Exchange (USD) 226.60 165.05 170.65 1.22 28.60 18.19 19.01 2.28 — Source: Bloomberg Dividends With respect to the year ended December 31, 2018, ABB Ltd’s Board of Directors has proposed to distribute a dividend to shareholders in the amount of CHF 0.80 per share. This is subject to approval by shareholders at ABB Ltd’s 2019 Annual General Meeting. The proposal is in line with the company’s dividend policy to pay a rising, sustain- able dividend. 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), (5) Dividend payout ratio (%)(4) 2018 0.80(1) 0.12 1 1.02 6.54 1.37 80% 2017 0.78 0.12 1 1.04 6.93 1.78 77% 2016 0.76 0.12 1 0.88 6.26 1.79 84% Weighted-average number of shares outstanding (in millions) 2,132 2,138 2,151 (1) Proposed by the Board of Directors and subject to approval by shareholders at the Annual General Meeting on May 2, 2019, 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, 2018. (4) Dividend per share (converted to U.S. dollars at year-end exchange rates) divided by basic earnings per share. (5) Includes cash flow from operations for both continuing and discontinued operations. ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 47 — Shareholders Shareholder structure Shareholders’ rights As of December 31, 2018, the total number of shareholders directly registered with ABB Ltd was approximately 114,000 and another 364,000 shareholders held shares indirectly through nom- inees. In total as of that date, ABB had approxi- mately 478,000 shareholders. Significant shareholders Investor AB, Sweden, held 232,165,142 ABB shares as of December 31, 2018. This holding represents approximately 10.71 percent of ABB’s total share capital and voting rights as registered in the Com- mercial Register on December 31, 2018. The num- ber of shares held by Investor AB does not include shares held by Mr. Jacob Wallenberg, the chairman of Investor AB and a director of ABB, in his individ- ual capacity. Cevian Capital II GP Limited, Jersey, disclosed that as of September 8, 2017, it held 115,868,333 ABB shares. This holding represents approximately 5.34 percent of ABB’s total share capital and vot- ing rights as registered in the Commercial Regis- ter on December 31, 2018. BlackRock Inc., U.S., disclosed that as of Au- gust 31, 2017, it, together with its direct and indi- rect subsidiaries, held 72,900,737 ABB shares. This holding represents 3.36 percent of ABB’s to- tal share capital and voting rights as registered in the Commercial Register on December 31, 2018. At December 31, 2018, to the best of ABB’s knowl- edge, no other shareholder held 3 percent or more of ABB’s total share capital and voting rights as registered in the Commercial Register on that date. ABB Ltd has no cross shareholdings in excess of 5 percent of capital, or voting rights with any other company. Under ABB’s Articles of Incorporation, each regis- tered share represents one vote. Significant shareholders do not have different voting rights. To our knowledge, we are not directly or indirectly owned or controlled by any government or by any other corporation or person. Shareholders have the right to receive dividends, to vote and to execute such other rights as granted under Swiss law and the Articles of Incorporation. Right to vote: ABB has one class of shares and each registered share carries one vote at the general meeting. Vot- ing 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 main- tains a subregister of the share register of ABB. A shareholder may be represented at the Annual General Meeting by its legal representative, by an- other shareholder with the right to vote or by the independent proxy elected by the shareholders (unabhängiger Stimmrechtsvertreter). If the Com- pany does not have an independent proxy, the Board of Directors shall appoint the independent proxy for the next General Meeting of Sharehold- ers. 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 business days before the general meeting in order to be en- titled to vote. Except for the cases described un- der Limitations on transferability of shares and nom- inee registration below, there are no voting rights restrictions limiting ABB’s shareholders’ rights. Powers of General Meetings: The Ordinary General Meeting of Shareholders must be held each year within six months after the close of the fiscal year of the Company; the business report, the Compensation Report and the Auditors’ reports must be made available for inspection by the shareholders at the place of incorporation of the Company by no later than twenty days prior to the meeting. Each share- holder is entitled to request immediate delivery of a copy of these documents. The following powers shall be vested exclusively in the General Meeting of Shareholders: • Adoption and amendment of the Articles of In- corporation • Election of the members of the Board of Direc- tors, the Chairman of the Board of Directors, the ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 48 members of the Compensation Committee, the Auditors and the independent proxy; • 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 Com- mittee 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 re- quire the approval of two-thirds of the votes rep- resented at the meeting. At December 31, 2018, shareholders representing shares of a par value totaling at least CHF 48,000 may require items to be included in the agenda of a general meeting. Any such request must be made in writing at least 40 days prior to the date of the general meeting and specify the items and the motions of such shareholder(s). ABB’s Articles of Incorporation do not contain provisions on the convocation of the general meeting of shareholders that differ from the ap- plicable legal provisions. Shareholders’ dividend rights The unconsolidated statutory financial state- ments of ABB Ltd are prepared in accordance with Swiss law. Based on these financial statements, dividends may be paid only if ABB Ltd has suffi- cient 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 divi- dends as proposed by the Board of Directors. Dividends are usually due and payable no earlier than two trading days after the shareholders’ reso- lution 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 ac- crue to ABB Ltd and are allocated to its other re- serves. 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 an- nual dividend payment for which this facility is made available, shareholders who register with Euroclear may elect to receive the dividend from ABB Norden Holding AB in Swedish krona (in an amount equivalent to the dividend paid in Swiss francs) without deduction of Swiss withholding tax. For further information on the dividend ac- cess facility, see ABB’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 ac- quired the shares in its own name and for its own account. If the shareholder refuses to make such declaration, it will be registered as a shareholder without voting rights. A person failing to ex- pressly declare in its registration / application that it holds the shares for its own account (a nominee), will be entered in the share register with voting rights, provided that such nominee has entered into an agreement with ABB concern- ing its status, and further provided that the nomi- nee is subject to recognized bank or financial market supervision. In special cases the Board may grant exemptions. There were no exemptions granted in 2018. The limitation on the transfer- ability of shares may be removed by an amend- ment of ABB’s Articles of Incorporation by a ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 49 shareholders’ resolution requiring two-thirds of the votes represented at the meeting. record date. The record date serves only to deter- mine 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, includ- ing before a General Meeting regardless of the 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 tender 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 On March 29, 2018, shareholders at the Annual General Meeting of ABB Ltd, approved the ap- pointment of KPMG AG (KPMG) to become the au- ditors of the Company starting in 2018. KPMG are the auditors of ABB’s statutory and con- solidated financial statements. KPMG, Switzer- land, assumed the sole auditing mandate of the consolidated financial statements of the ABB Group beginning in the year ended December 31, 2018. The auditor in charge and responsible for the mandate, Hans-Dieter Krauss, began serving in this capacity in respect of the financial year ended December 31, 2018. Pursuant to ABB’s Arti- cles of Incorporation, 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 audi- tors to ensure their qualifications, independence and performance. It meets regularly with the audi- tors, at least four times each calendar year, to ob- tain reports about the results of their audit proce- dures. The FACC reports the material elements of its supervision of the auditors to the Board. The audit fees charged by KPMG for the legally prescribed audit amounted to $34.1 million in 2018. 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 (no such reviews have been performed) and com- fort letters delivered to underwriters in connec- tion with debt and equity offerings. In addition, KPMG charged $0.6 million for non-audit services performed during 2018. Non-audit services include primarily accounting consultations, audits of pension and benefit plans, accounting advisory services, other attest services related to financial reporting that are not required by statute or regulation, income tax and indirect tax compliance services and tax advisory services. In accordance with the requirements of the U.S. Sarbanes-Oxley Act of 2002 and rules is- sued by the United States Securities and Ex- change Commission (SEC), ABB has, on a global basis, a process for the review and pre-approval of audit and non-audit services to be performed by KPMG. ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 50 — Other governance information 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 members, and other members of senior management do not receive any special benefits in the event of a change of control. However, the conditional grants under the Long Term Incentive Plan and the Management Incentive Plan may be subject to accelerated vesting in the event of a change of control. Employee participation programs In order to align its employees’ interests with the business goals and financial results of the com- pany, ABB operates a number of incentive plans, linked to ABB’s shares, such as the Employee Share Acquisition Plan, the Management Incentive Plan and the Long Term Incentive Plan. For a more detailed description of these incentive plans, please refer to “Note 18 Share-based payment ar- rangements” to ABB’s Consolidated Financial Statements. 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 Stan- dards and concluded that its corporate gover- nance practices are generally consistent with the Standards, with the following significant excep- tions: • Swiss law requires that the external auditors be elected by the shareholders at the Annual Gen- eral Meeting rather than by the Audit Commit- tee or the Board of Directors. • The Standards require that all equity compensa- tion 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 Compensation Committee are elected by the shareholders 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 commit- ted 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 dis- seminate material information pertaining to its businesses in a manner that complies with its ob- ligations under the rules of the stock exchanges where its shares are listed and traded. ABB publishes an annual report that provides au- dited financial statements and information about ABB including our business results, strategy, prod- ucts and services, corporate governance and exec- utive 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 reg- ulations of the stock exchanges on which its shares are listed and traded. Press releases relat- ing to financial results and material events are also filed with the SEC on Form 6-K. An archive contain- ing Annual Reports, Form 20-F reports, quarterly results releases and related presentations can be found in the “Financial results and presentations” section at www.abb.com/investorrelations. The quarterly results press releases contain unaudited financial information prepared in accordance with or reconciled to U.S. GAAP. To subscribe to im- portant press releases, please click on the “Con- tacts and Services” and choose “Subscribe to up- dates” at www.abb.com/investorrelations. Ad hoc notices can also be found in the press releases section at www.abb.com/news ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 51 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 share- holders by mail. • Articles of Incorporation • ABB Ltd Board Regulations & Corporate Gover- nance Guidelines • Regulations of the Finance, Audit and Compli- ance Committee • Regulations of the Governance and Nomination Committee • Regulations of the Compensation Committee • Related Party Transaction Policy • ABB Code of Conduct • Addendum to the ABB Code of Conduct for Members of the Board of Directors and the Ex- ecutive 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 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: investor.relations@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 ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 52 Appendix – ABB Ltd’s significant subsidiaries Company name/location ABB Australia Pty Limited, Moorebank, NSW ABB Group Investment Management Pty. Ltd., Moorebank, NSW B&R Holding GmbH, Eggelsberg B&R Industrial Automation GmbH, Eggelsberg ABB Industrial Solutions (Belgium) BVBA, Gent ABB N.V., Zaventem ABB Ltda., São Paulo ABB Bulgaria EOOD, Sofia ABB Canada Holding Limited Partnership, Saint-Laurent, Quebec ABB Inc., Saint- Laurent, Quebec ABB Installation Products Ltd., Saint -Jean- sur- Richelieu, Quebec ABB (China) Ltd., Beijing ABB Beijing Drive Systems Co. Ltd., Beijing ABB Electrical Machines Ltd., Shanghai ABB Engineering (Shanghai) Ltd., Shanghai ABB High Voltage Switchgear Co., Ltd. Beijing, Beijing ABB Shanghai Free Trade Zone Industrial Co., Ltd., Shanghai 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 SAS, 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 Industrial C&S Hungary Kft., Budapest 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 Electrical Control Systems S. de R.L. de C.V., Monterrey 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 Business Services Sp. z o.o., Warsaw ABB Industrial Solutions (Bielsko-Biala) Sp. z o.o., Bielsko-Biala ABB Sp. z o.o., Warsaw Industrial C&S of P.R. LLC, San Juan ABB Ltd., Moscow ABB interest % Share capital in thousands 100.00 131,218 100.00 100.00 100.00 100.00 100.00 505,312 35 1,240 24 13,290 Country Australia Australia Austria Austria Belgium Belgium Brazil 100.00 689,793 Bulgaria 100.00 65,110 Canada Canada 100.00 100.00 Canada 100.00 — — (1) — (1) China China China China China China China China China 100.00 310,000 90.00 100.00 100.00 60.00 100.00 100.00 64.30 90.00 5,000 14,400 40,000 11,400 6,500 15,800 23,500 6,200 Czech Republic 100.00 400,000 Denmark 100.00 100,000 Egypt Egypt Estonia Finland France France Germany Germany Germany Germany Germany Germany Hungary India India Italy Italy 100.00 353,479 100.00 166,000 100.00 100.00 99.83 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 1,663 10,003 25,778 45,921 167,500 15,000 10,620 61,355 7,500 1,535 3,000 190,000 75.00 423,817 100.00 110,000 100.00 22,000 Japan 100.00 1,000,000 Korea, Republic of 100.00 23,670,000 Mexico Mexico Mexico 100.00 315,134 100.00 633,368 100.00 667,686 Netherlands Netherlands Netherlands Netherlands Netherlands Norway Norway Poland Poland Poland Puerto Rico Russian Federation 100.00 100.00 100.00 100.00 100.00 9,200 1,000 20 119 100 100.00 250,000 100.00 240,000 99.93 99.99 99.93 100.00 100.00 50 328,124 350,656 — 5,686 Currency AUD AUD EUR EUR EUR EUR BRL BGN CAD CAD CAD USD USD USD USD USD CNY USD USD USD CZK DKK EGP USD EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR HUF INR INR EUR EUR JPY KRW MXN MXN MXN EUR USD EUR EUR EUR NOK NOK PLN PLN PLN USD RUB ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT 53 ABB interest % Share capital in thousands Currency Country Saudi Arabia Saudi Arabia Singapore Singapore South Africa South Africa 95.00 65.00 100.00 100.00 100.00 74.91 40,000 181,000 32,797 28,842 4,050 1 Spain 100.00 33,318 Sweden Sweden 100.00 400,000 100.00 2,344,783 Switzerland 100.00 2,768,000 Switzerland Switzerland Switzerland Switzerland Switzerland 100.00 100.00 100.00 100.00 100.00 500 92,054 571 55,000 10,000 Thailand 100.00 1,034,000 Turkey 99.99 13,410 United Arab Emirates 49.00(2) 5,000 United Kingdom 100.00 226,014 United Kingdom 100.00 120,000 United States 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 1 2 1 1 — 1 — — — SAR SAR SGD 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 USD Company name/location ABB Contracting Company Ltd., Riyadh ABB Electrical Industries Co. 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 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 Installation Products Inc, Memphis, TN ABB Motors and Mechanical Inc, Fort Smith, AR ABB Treasury Center (USA), Inc., Wilmington, DE Edison Holding Corporation, Wilmington, DE Industrial Connections & Solutions LLC, Cary, NC Verdi Holding Corporation, Wilmington, DE (1) Shares without par value. (2) Company consolidated as ABB exercises full management control. ABB ANNUAL REPORT 2018 02 CORPORATE GOVERNANCE REPORT — Writing the future of safe and smart operations. 03 Compensation Report — 56 – 79 Letter from the Chairman of the Compensation Committee — 58 – 59 Compensation Report — 60 – 78 Report of the statutory auditor on the Compensation Report — 79 – 79 58 — Letter from the Chairman of the Compensation Committee Dear Shareholders, On behalf of the Board of Directors and the Com- pensation Committee, I am pleased to present the Compensation Report for 2018. I appreciated the opportunity to meet many of our shareholders to discuss compensation mat- ters during 2018. During these meetings we dis- cussed the changes made to our compensation structure to increase its performance orienta- tion, and also took the opportunity to seek feed- back from numerous stakeholders on additional disclosures they would like to see. This Compen- sation Report has been enhanced to reflect the feedback received. Our Committee’s focus re- mains to ensure that the compensation structure at ABB drives value creation for our shareholders, a motivating package for our executives and strives for best-practice corporate governance standards. Performance and pay outcomes in 2018 In 2018, ABB continued to implement its strategy, which included a portfolio focus on digital indus- tries through divestment of Power Grids, and the simplification of its business model and struc- ture. The execution of the strategy has influenced the compensation outcomes. Starting with the Board, there have been no changes in the structure of fees payable to Board members for the roles they perform. The aggre- gate Board compensation for the 2018–2019 term was in line with the amount approved at the 2018 Annual General Meeting. Aggregate Executive Committee (EC) compensa- tion was 15 percent lower in 2018 than in 2017, which was influenced by a reduction in the value of short-term incentive awards received, long-term incentive awards granted and replacement share grants. There were no increases to annual base salary for Executive Committee members in 2018. Short-term incentives, formulated to drive the achievement of challenging annual performance targets, reflected an average achievement award of 85 percent for the entire EC, compared to 95 percent in 2017. The 2015 launch of the Long Term Incentive Plan (LTIP) vested in 2018, with the performance com- ponent, measured against EPS, vesting at 61 per- cent (out of a maximum of 200 percent), while the net income component vested fully. Changes in Compensation Structure in 2018 ABB continues to increase the performance orien- tation of its compensation system to better align it to the Company’s strategy, market practice and inputs received from shareholders and other stakeholders. The main considerations in making the changes have been to ensure that there is a performance linkage in every pay component, and that total compensation levels remain competitive within market benchmarks as we increase the perfor- mance orientation. These changes have been carefully phased, to allow for the same principles to be cascaded throughout the organization. Note that the final implementation of the strate- gic changes to our compensation system have now been completed and there are currently no planned further adjustments. A major part of the strategic change was to the LTIP, where the previous two-component LTIP has been merged into a single performance share grant, designed to make it simpler and more performance-oriented. The LTIP now has two, equally weighted, performance measures. Firstly, an EPS measure in line with our Company strat- egy, and secondly, a relative Total Shareholder Re- turn (TSR) measure to bring in the market compe- tition perspective. This LTIP redesign completes the transition made since 2015 from an LTIP system that was half based on a retention component (with net-income thresh- old) and half based on an EPS scale. Through these changes the target value of the LTIP (and hence the value of the total package) for EC members has re- mained broadly unchanged, but the maximum award is now two times the target award across the entire LTIP, reflecting its increased perfor- mance orientation. Previously, the two times maxi- mum only applied to the EPS component. This in- crease in upside reflects a symmetrical increase in downside and ensures that the overall value of the package remains competitive. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 59 on ABB’s compensation system and governance in the following pages. At the AGM in May 2019, you will be asked to vote on the maximum aggregate compensation for the Board for its 2019–2020 term and on the maxi- mum aggregate compensation for the EC for 2020. The proposed increase in maximum aggregate EC compensation reflects the impact of the transi- tion to the previously announced new organiza- tional structure which, for 2020, leads to the addi- tion of one EC member. Beyond 2020, the number of EC members is expected to decrease due to the elimination of the legacy matrix structure, which is in turn expected to lead to a reduction in the maxi- mum aggregate compensation requested for ap- proval by shareholders. This Compensation Report will also be submitted for a non-binding, consulta- tive vote by shareholders. We encourage and pursue an open and regular di- alogue with our stakeholders. Your constructive input is highly valued and appreciated as we con- tinue to improve the compensation system. On behalf of ABB, the Compensation Committee and the Board, I thank you for your continued trust in ABB and for your consistently supportive feedback regarding our compensation frame- work. David E. Constable Chairman of the Compensation Committee Zurich, March 27, 2019 During 2018, revisions were also made to the de- sign of the short-term variable compensation ele- ments, targeted at streamlining the weighting of Group versus team/individual metrics to a consis- tent 35 percent (Group)/65 percent (team/individ- ual) for all EC members (except for the CEO, who remains at 80 percent/20 percent). Team and indi- vidual metrics are predominantly clear, quantifi- able goals including financial targets relating to an executive’s area of responsibility. ABB’s executive shareholding requirement, al- ready one of the highest in the market, has been strengthened by requiring our EC members to re- tain any shares vesting from our LTIPs until their respective requirement is met. Governance During the reporting year, our Committee has lis- tened carefully to many of our shareholders, and the main themes of this feedback has been to continue the evolution of the performance orien- tation of ABB’s compensation system while in- creasing the transparency of our disclosure. In terms of disclosure, we have, in line with our commitment to improved transparency, disclosed our LTIP peer group in this Compensation Report and – in response to feedback from shareholders – given further transparency to both short-term and long-term performance measures and tar- gets. During 2018, the Compensation Committee per- formed its regular activities, including recom- mending performance targets to the Board at the beginning of the year, which impacts variable pay, recommending the compensation of ABB’s Board, CEO and EC members, formulating the Compen- sation Report, and preparing the “say-on-pay” vote at the Annual General Meeting (AGM). You will find further information on our activities and ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 60 — Compensation Report Compensation governance Shareholder engagement ABB’s Articles of Incorporation, approved by its shareholders, contain provisions on compensation which govern and outline the principles of compensa- tion relating to our Board and Executive Committee (EC). They can be found on ABB’s Corporate gover- nance website new.abb.com/about/corporate- governance and are summarized below: • Compensation Committee (Articles 28 to 31): The Compensation Committee (CC) is composed of a minimum of three members of the Board of Direc- tors who are elected individually by the sharehold- ers at the Annual General Meeting (AGM) for a pe- riod of one year. The CC supports the Board in establishing and reviewing the compensation strategy, principles 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 Board Regulations and Corporate Governance guidelines, which are available on ABB’s Corporate governance website. • Compensation principles (Article 33): Compensa- tion of the members of the Board consists of fixed compensation only, which is delivered in cash and shares (with an option to elect for shares only). Compensation of the members of the EC consists of fixed and variable compensation. Variable com- pensation may comprise short-term and long-term elements. Compensation may be paid in cash, shares or other benefits. • “Say-on-pay” vote (Article 34): Shareholders ap- prove the maximum aggregate amount of com- pensation of the Board for the following Board term and of the EC for the following financial year. • Supplementary amount for new EC members ( Article 35): If the maximum approved aggregate compensation amount is not sufficient to also cover the compensation of newly promoted/hired EC members, up to 30 percent of the last maxi- mum approved aggregate amount shall be avail- able as a supplementary amount to cover the com- pensation of such new EC members. • Loans (Article 37): Loans 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 Compensation Report also provides de- tails of the compensation paid 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 Remuneration in Stock Listed Corporations (Ordinance), the stan- dard relating to information on Corporate Gover- nance 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 the AGM. The authority levels of the different bodies on compensation matters are detailed in Exhibit 1. Exhibit 1: 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 ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 61 Exhibit 2: CC activities during 2018 EC Compensation Review of the EC compensation levels against external benchmarks Recommendation of individual compensation for EC members Review of the share ownership of EC members Performance – relating to past performance cycle Assessment of short-term variable compensation for 2017 Assessment of achievement of performance targets for Long Term Incentive Plan (LTIP) awards vesting in 2018 Performance – relating to forthcoming performance cycle Setting of short-term variable compensation targets for 2018 Setting of performance targets for LTIP awards granted in 2018 TSR and EPS evaluation methodologies Updates on achievement against performance targets for unvested LTIP awards Compliance Review of the Compensation Report for publication Preparation of maximum aggregate compensation for Board to be submitted for AGM vote Preparation of maximum aggregate compensation for EC to be submitted for AGM vote Activities of the CC in 2018 The CC meets as often as business requires but at least four times a year. In 2018, the CC held seven meetings and performed the activities described in Exhibit 2. Details on meeting attendance of the individual CC members are provided in the sec- tion titled “Board of Directors – Meetings and at- tendance”. The Chairman of the CC reports to the full Board after each CC meeting. The minutes of the meet- ings are available to the members of the Board. As a general rule, the CEO, the Chief Human Re- sources Officer (CHRO) and the Head of Compen- sation and Benefits attend part of the CC meet- ings in an advisory capacity. The Chairman of the CC may decide to invite other executives upon consultation with the CEO, as appropriate. Execu- tives do not attend the meetings or the parts of the meetings in which their own compensation and/or performance are being discussed. The CC may decide to consult or retain external advisors for compensation matters. In 2018, Hostettler & Company (HCM) and Pricewater- houseCoopers (PwC) were mandated to provide services related to executive compensation mat- ters. HCM has no other mandate with ABB. Apart from its CC advisory role, PwC also provides hu- man resources, tax and advisory services to ABB. Total compensation overview Exhibit 3: Board compensation (in CHF) Board of Directors Number of members Total compensation Maximum aggregate compensation amount approved at AGM Board term 2018–2019 2017–2018 11 10 4,670,000 4,340,000 4,700,000 4,400,000 Exhibit 4: EC compensation (in CHF) Executive Committee Number of members Total compensation Maximum aggregate compensation amount approved at AGM Calendar year 2018 11 2017 11 39,773,211 46,631,207(1) 52,000,000 50,000,000 (1) This amount includes CHF 2,553,435 for the fair value of the replacement share grant provided to the incoming CFO to compensate for benefits foregone from his previous employer. Excluding this, the total would have been CHF 44,077,772. Board compensation Policy and principles The compensation system for the members of the Board is designed to attract and retain expe- rienced people in 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 com- pensation 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 the Board members with those of ABB’s shareholders, half of their total compensation must be paid in ABB shares, although Board members may choose to ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 62 receive all of their compensation in shares. The number of shares delivered is calculated prior to each semi-annual payment by dividing the mone- tary amount to which the Board members are enti- tled 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 the 2018 AGM to the 2019 AGM is described in Exhibit 5 below. Exhibit 5: 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 CC or GNC(2) Member of FACC(2) Member of CC or GNC(2) 1,200,000 450,000 290,000 110,000 60,000 40,000 30,000 (1) The Chairman and the Vice-chairman do not receive any additional committee fees for their roles on the GNC. (2) CC: Compensation Committee, FACC: Finance, Audit & Compliance Committee, GNC: Governance & Nomination Committee. The compensation amounts paid to the Board members for the calendar year 2018 and for the term of office from the 2018 AGM to the 2019 AGM are disclosed in Exhibits 21 and 22, respectively, in the section “Compensation and share ownership tables.” Compensation of the Board in 2018 In 2018, the total compensation for the Board mem- bers was CHF 4.5 million and remained unchanged com pared with 2017. See Exhibit 21 in the section “Com pensation and share ownership tables” below. At the 2017 AGM, the shareholders approved a maximum aggregate compensation amount of CHF 4.4 million for the Board for the term of of- fice 2017–2018. The compensation paid for that period amounts to CHF 4.34 million as presented in Exhibit 3 above and Exhibit 22 in the section “Compensation and share ownership tables” be- low, and is therefore within the approved amount. At the 2018 AGM, the shareholders approved a maximum aggregate compensation amount of CHF 4.7 million for the Board for the term of office 2018–2019. The compensation agreed to be paid for that period amounts to CHF 4.67 million as presented in Exhibit 3 above and Exhibit 22 in the section “Compensation and share ownership ta- bles” below, and is therefore within the approved amount. Shareholdings of Board members The members of the Board collectively owned less than 1 percent of ABB’s total shares outstanding at December 31, 2018. Exhibit 23 in the section “Compensation and share ownership tables” below, shows the number of ABB shares held by each Board member at De- cember 31, 2018 and 2017. Except as described in this Exhibit, no member of the Board and no per- son closely linked to a member of the Board held any shares of ABB or options in ABB shares. In 2018, ABB did not pay any fees or compensation to the members of the Board for services rendered to ABB other than those disclosed in this Compen- sation Report. Except as disclosed in the section titled “Board of Directors – Business relationships between ABB and its Board members”, ABB did not pay any additional fees or compensation in 2018 to persons closely linked to a member of the Board for services rendered to ABB. Compensation of former Board members In 2018, no payment was made to any former Board member. Executive Committee compensation Policy and 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 in power grids, electrification products, industrial automation and robotics and motion, serving customers in utilities, industry and transport & infrastructure globally. The compensation system is designed to provide competitive compensation and to encourage ex- ecutives and employees to deliver outstanding re- sults 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 perfor- mance. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 63 ABB continues to increase the performance orien- tation of its compensation system to better align it to the Company’s strategy by having perfor- mance metrics that support the development of earnings per share (EPS) and cash return on in- vested capital (CROI). Fixed compensation – annual base salary and benefits Purpose and link to strategy • Compensates the EC members for the role. Structure of EC Compensation Overall positioning of compensation The compensation of EC members consists of an annual base salary, standard benefits, a short-term variable component based on annual performance objectives and a long-term variable component based on long-term performance. The Board considers several factors when review- ing and setting the individual target compensa- tion 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; • affordability for the company. All EC and other senior positions of 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 ap- proach provides a meaningful, transparent and consistent basis for evaluating roles and for com- paring compensation levels with those of equiva- lent jobs at other companies. The primary source of data to assess the EC com- pensation is the General Pan-European Market of Hay’s annual survey “Top Executive Compensa- tion in Europe”. The EC compensation is bench- marked against the median to upper quartile val- ues. We also use Hay’s data on Swiss and U.S. peers, as well as a global industry peer group (see Exhibit 6). The compensation that is ultimately paid depends on the performance of the Group and of the indi- vidual members of the EC. Compensation structure – overview Our compensation structure is linked to our strat- egy and, as illustrated in Exhibits 7 and 17, a sig- nificant portion of total compensation depends directly on performance achievement. Our fully performance-oriented LTIP plan and the high shareholding requirement are aligned to share- holder interests. Operation • Fixed annual base salary and benefits. • Benefits consist mainly of retirement, insurance and healthcare plans that are designed to pro- vide a reasonable level of support for the em- ployees and their dependents in case of retire- ment, disability or death. • Benefit plans vary in line with the local competi- tive and legal environment and are, at a mini- mum, in accordance with the legal requirements of the respective country. • EC members may also be provided with certain benefits 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. Opportunity level • Annual base salary based on the scope of re- sponsibilities, individual experience and skill set • The monetary value of benefits is disclosed in Exhibit 24: EC compensation 2018. Performance measures • When considering changes in base salary, the executive’s performance during the preceding Exhibit 6: Compensation benchmarks Reference Composition Rationale Main benchmark Hay 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 Global industry group Swiss market U.S. market Peer companies(1) selected based on business, geographic presence and size Specific peer group to benchmark compensation design SMI and SMIM companies that are included in Hay’s General Pan-European Market data U.S. peers of similar size and industry Comparison with other multinational Swiss companies Comparison with other multinational U.S. companies (1) The peers for the purpose of benchmarking compensation design are: Siemens, Schneider Electric, Legrand, Alstom, Atlas Copco, CNH Industrial, ThyssenKrupp, BAE systems, Rolls Royce, Linde, BASF, EADS, Schindler, Novartis, Nestlé, Lafarge Holcim, General Electric, 3M, Honeywell, Caterpillar, Emerson Electric, Eaton, Danaher and United Technologies. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 64 Exhibit 7: Structure of EC compensation 2018 Compensation structure Purpose and link to strategy Operation Opportunity level (as % salary) Fixed compensation – annual base salary and benefits Compensates EC members for the role Short-term variable compensation Long-term variable compensation Rewards annual company and individual performance. Drives annual strategy implementation Encourages creation of long-term, sustainable value for shareholders, and delivery of long-term strategic goals Wealth at Risk / Share Ownership Aligns individual’s personal wealth at risk directly to the ABB share price Cash salary, benefits in kind, and pension contribution Annual awards, payable in cash after a 1-year performance period Annual awards in shares which vest after 3 years subject to performance conditions Individuals required to hold ABB shares Based on scope of responsibilities, individual experience and skillset CEO Target: 150% Maximum: 225% EC: Target: 100% Maximum: 150% CEO Target at grant: 200% Max vesting: 400% EC Target at grant: 100% Max vesting: 200% CEO wealth at risk: 500% (net) EC wealth at risk: 400% (net) Time period Delivered in year 1 year 3 years Total EC tenure Performance measures Changes to base salary takes into account the executive’s performance in the preceding year and potential for the future Group objectives: Revenue, Op. EBITA %, Op. net income, OCF, Cost Savings, Individual objectives Relative TSR (50%) EPS (50%) Direct link to ABB share price year against individual objectives as well as po- tential for the future are taken into account. Opportunity level Exhibit 8: Opportunity level (% salary) Short-term variable compensation CEO EC Target Maximum 150% 100% 225% 150% Purpose and link to strategy • The short-term variable compensation is de- signed to reward EC members both 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 overall company’s success while also being rewarded for their indi- vidual contributions. Operation • Annual cash awards are based on performance assessment over the given year. Exhibit 9: Group objectives and weighting in 2018 Performance measures Group objectives (see Exhibit 9) are set in connec- tion with the annual performance management process and are mainly group financial result ori- ented. Individual objectives vary by EC member. For Divi- sion and Regional Presidents, the majority are quantifiable objectives, based on financial and op- erational metrics for their area of responsibility; for the CEO and Corporate Officers, they are typically strategic objectives set by the Board. Objective Revenues Operational EBITA margin Operational net income Operating cash flow (OCF) Cost savings Weighting Nature of assessment 25% 15% 20% 30% 10% Income realized from executing and fulfilling customer orders, before any costs or expenses are deducted 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 Operational net income is calculated as net income attributable to ABB after adjustments(1) Operating cash flow is defined as the net cash provided by operating activities, reversing the cash impact of interest, taxes and restructuring- related activities Savings generated from ABB group-wide cost reduction programs including supply chain management and operational excellence that have direct impact on the Group’s operational EBITA (1) Adjustments include: the after-tax effect of acquisition-related amortization, restructuring and restructuring-related expenses, non-operational pension cost (credit), changes in obligations related to divested businesses, changes in pre-acquisition estimates, gains and losses from sale of businesses, acquisition- and divestment-related expenses and integration costs, and certain other non-operational items, foreign exchange/commodity timing differences in income from operations. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 65 Examples of quantitative individual metrics in- clude items such as Divisional or Regional Reve- nue, Operational EBITA Margin, Operating Cash flow, Service Orders, or Demand Orders. Qualita- tive individual metrics include items such as key project delivery, talent management succession planning, and functional effectiveness. For each performance objective (group and indi- vidual), a target is set corresponding to the ex- pected level of performance that will generate a 100 percent award. Further, a minimum level of performance, below which there is no award (threshold) and a maximum level of performance, above which the award is capped at 150 percent of the target (cap), are also defined. The award percentages for achievements between the threshold, the target and the cap are determined by linear interpolations between these points. The relative weighting and composition of Group and Individual objectives are shown in Exhibit 10 below. The majority of objectives for all EC mem- bers are quantitative in nature. Exhibit 10: Weighting and composition of objectives for EC members for 2018 Division and Region Presidents Corporate Officers(1) 35% 65% 35% 65% CEO 80% 20% Group objectives Individual objectives Typical composition of objectives: Qualitative Quantitative 20% 0–20% 15–45% 80% 80–100% 55–85% (1) CFO, CHRO and General Counsel. Long-term variable compensation Purpose and link to strategy • Aimed at driving long-term shareholder value creation in a sustainable manner. It rewards the achievement of predefined performance goals over a three-year period. • The reference value for the grant size for EC members as a pool may be increased or de- creased by the Board by up to 12.5 percent. • The number of shares to be granted is deter- mined by dividing the reference value by the av- erage share price over the period 20 trading days prior, and 20 trading days after, the date of publication of ABB’s full year financial results. Settlement of the LTIP is three years after grant, subject to achievement of performance condi- tions, defined prior to grant. • The actual settlement value of awards will vary between zero and 200 percent of the reference grant according to achievement against two equally weighted performance measures, one tied to ABB’s EPS and one to ABB’s TSR (see per- formance measures section below). • Delivery is 65 percent in shares and the remain- der in cash, in order to facilitate the settlement of appropriate taxes, with the possibility to elect to receive 100 percent in shares. • Subject to malus and clawback rules if a plan participant has been involved in any illegal activ- ity. This means that the Board of Directors may decide not to pay any unpaid or unvested incen- tive compensation (malus), or may seek to re- cover incentive compensation that has been paid in the past (clawback). Performance measures TSR • Achievement against this measure is deter- mined by ABB’s Total Shareholder Return (TSR) performance against a defined peer group. • The constituents of the peer group and the ap- propriate threshold (zero), target (100 percent) and maximum (200 percent) award points are reviewed by the CC on an annual basis. • The TSR calculations are made for the reference period beginning in the year of the Conditional Grant and ending three years later. The evalua- tion is performed by an independent third party. EPS • Achievement against this measure is deter- mined by ABB’s average Earnings Per Share (EPS) over a three year period. • The average EPS result is calculated from the Operation • Annual Conditional Grant under the LTIP. • Reference grant values are defined as a percent- EPS for each of the three relevant years, divided by three. • EPS is defined as ‘Diluted earnings per share at- age of base salary. Exhibit 11: Reference value grant (% of annual base salary) CEO EC EPS measure TSR measure Total 100% 50% 100% 200% 50% 100% tributable to ABB shareholders, calculated using Income from continuing operations, net of taxes, unless the Board elects to calculate using Net In- come for a particular year’. • Appropriate threshold (zero), target (100 percent) and maximum (200 percent) award points are re- viewed by the CC on an annual basis. • Performance points are set using an ‘outside-in’ view, taking into account the growth expecta- ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 66 tions, risk profile, investment levels and profitabil- ity levels that are typical for the industry. the contracts for the EC members do not allow for any severance payment. • This ‘outside-in’ approach is provided by external advisors and 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. Non-compete agreements have been entered into with the CEO and all 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. Total Wealth at Risk Purpose and link to strategy • To align EC members’ interests with those of shareholders in order to maintain focus on the long-term success of the company. • Wealth at Risk is broadly defined as two compo- nents – namely personal share ownership and unvested shares arising from the Company’s share grants, e.g. LTIP’s. Share Ownership Programme • EC members are required to retain all shares vested from the Company’s LTIP programs and any other share based compensation until his or her share ownership requirement is met. • The share ownership requirement is equivalent to a multiple of their annual base salary, net of tax (see Exhibit 12). • These shareholding requirements are signifi- cantly above market practice and result in a wealth at risk for each EC member which is aligned with shareholder interests. Exhibit 12: Share ownership requirement CEO 5 × annual base salary, net of tax Other EC members 4 × annual base salary, net of tax • Only shares owned by an EC member and the member’s spouse are included in the share own- ership calculation. Vested and unvested stock options are not considered for this purpose. • The CC reviews the status of EC share owner- ship on an annual basis. It also reviews the re- quired shareholding amounts annually, based on salary and expected share price developments. • Two thirds of the EC members have achieved and exceeded their share ownership require- ment. See Exhibits 28 and 29 for further details. Notice period, severance provisions and non-competition clauses Compensation of the Executive Committee in 2018 Exhibit 13: Total compensation of EC members (in CHF million) Base salaries Pension benefits Other benefits Total fixed compensation Short-term variable compensation Long-term variable compensation Replacement Share Grant Total variable compensation Total compensation 2018 9.9 4.7 5.5 20.1 9.1 10.6 0.0 19.7 39.8 2017 10.0 4.7 5.1 19.8 10.4 13.8 2.6 26.8 46.6 For an overview of compensation by individual and component, please refer to Exhibit 24 and Exhibit 25 in “Compensation and share ownership tables” below. Overall positioning of compensation The ratio of fixed to variable components in any given year depends on the performance of the in- dividuals and of the Company against predefined performance objectives. In 2018, as shown in Exhibit 14 below, the CEO’s variable compensation represented 61 percent of his total compensation (previous year: 65 per- cent) and an average of 46 percent for the other EC members (previous year: 55 percent). This again illustrates the significant emphasis placed on performance-related compensation. EC members received total compensation of CHF 39.8 million in 2018 compared with CHF 46.6 million in 2017, as presented in Exhibits 23 and 24. The change in total compensation in 2018 was principally due to the lower grant fair value of the 2018 LTIP, the non-repeating one-time replacement share grant for the CFO in 2017, rep- resenting compensation for foregone benefits from his previous employer and the lower short-term Incentive (STI) achievement level. Operation 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, At the 2017 AGM, the shareholders approved a maximum aggregate compensation amount of CHF 52 million for the EC for the year 2018. The EC compensation for 2018 amounted to CHF 39.8 mil- lion and is within the approved amount. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 67 Exhibit 14: Ratios of fixed and variable compensation components of EC members in 2018 CEO Other EC members Fixed Variable 39% 24% 37% Fixed 54% Variable 22% 24% Fixed compensation Short-term variable compensation (actual award) Long-term variable compensation (fair value at grant) Base Salary There were no increases to base salary for Execu- tive Committee members in 2018. 2018 short-term variable compensation 2018 has been another strong year for revenues in ABB. Revenues, with a weight of 25 percent, were broadly in line with the challenging target set by the Board, with significant contributions from the Robotics and Motion and Industrial Automation Di- visions. The award under this parameter amounted to 99.3 percent of target. Exhibit 15: 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 award 0% 150% 100% 100% 87.5% 112.5% Conditional grant allocation(1) Operating cash flow, with a weighting of 30 per- cent, was below target. The award under this pa- rameter accordingly amounted to 56.6 percent of target. The Group continued to deliver very strong opera- tional cost savings, which were well above target. The cost savings parameter, weighted at 10 per- cent, achieved a maximum 150.0 percent award. Base salary and benefits are generally stable There will be no award 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 the LTIP (performance measures EPS and TSR) may be increased or decreased by 12.5%. 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 award on vesting depends on meeting the performance criteria of the plan (1) Note: the grant is conditional. At vesting, the award can vary from zero to 200% of the grant depending on how well the performance criteria of the LTIP are met. 200% 100% Award of the LTIP 0% There will be no award if performance is below the threshold in both the EPS and TSR measures. The maximum award is 200% of the conditional grant allocation ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 68 Operational EBITA margin, with a weighting of 15 percent, and operational net income, with a weighting of 20 percent, were below targets for both measures. The award under the Operational EBITA margin parameter was 81.1 percent and the award of the operational net income parameter was 82.6 percent. The combined achievement of these performance measures resulted in a 85.5 percent (2017: 91.9 per- cent) achievement level for the group scorecard in 2018. With respect to individual/team objectives for each EC member, the achievement ranges between 35 percent and 112 percent of target, reflecting the financial results of their respective areas of re- sponsibility as well as their achievements on oper- ational performance, strategic initiatives and lead- ership performance. The overall average award of short-term incentives for the entire EC was 85.1 percent of target, with a range from 52.3 percent (lowest achievement) to 102.4 percent of target (highest achievement), which reflected, for some executives, the material weakness in controls as outlined on page 133 in the Annual Report. See Exhibit 16. Exhibit 17: 2018 LTIP Targets EPS award curve for the 2018 LTIP ) t e g r a t f o % ( d r a w A 200% 100% 0% Exhibit 16: ‘At a Glance’ table of 2018 STI variable compensation Group Objectives Individual objectives 2018 (% of target) 2017 (% of target) 85.5% 91.9% EC (range of outcomes): 35.0–112.0% 74.9–122.4% Overall Average: Overall outcome 87.6% 99.5% EC (range of outcomes): 52.3–102.4% 80.9–107.2% Overall Average: 85.1% 95.4% 2018 long-term variable compensation The estimated value of the share-based grants to EC members under the 2018 LTIP award was CHF 10.6 million, compared with CHF 13.8 million in 2017. The 2018 LTIP comprises of two equally weighted performance factors, a three year average EPS and relative Total Shareholder Return (TSR), designed to be fully aligned with our Strategy, which focuses on EPS delivery and attractive shareholder returns, both on an absolute and relative basis. The companies approved by the Board to deter- mine ABB’s relative TSR performance for the 2018 LTIP were: 3M, Danaher, Eaton, Emerson Electric, Honeywell Intl., United Technologies, General Capped award Threshold point (Target point -17.5%) Target point Maximum point (Target point +17.5%) Threshold point: no award; target point: 100% award; maximum point: capped at 200% award; linear award between points. The actual EPS target is not disclosed for reasons of commercial sensitivity. TSR award curve for the 2018 LTIP ) t e g r a t f o % ( d r a w A 200% 100% 0% Capped award Threshold point Target point Maximum point Threshold point: TSR performance within the lower (0–25%) quartile: no award. Target point: TSR performance at the median performing company: 100% award. Maximum point: TSR performance within the upper (75–100%) quartile: 200% award. Linear award between points. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 69 Electric, Rockwell, Rolls Royce, Schneider Electric, Siemens, ThyssenKrupp, Legrand, Yokogawa and Mitsubishi Electric. These were selected to provide an appropriate and very challenging set of peers, and influenced the payment point setting accord- ingly (see Exhibit 17 above). The 2018 LTIP award curves are illustrated in the charts above. 2015 LTIP outcome The 2015 LTIP was comprised of two measures – P1 (net income) and P2 (cumulative weighted EPS) measures, that further strengthened the performance orientation of the LTIP. member of the EC held any shares of ABB or op- tions on ABB shares at December 31, 2018 and 2017. Other compensation Members of the EC are eligible to participate in the Employee Share Acquisition Plan (ESAP), a sav- ings plan based on stock options, which is open to employees around the world. Six members of the EC participated in the 15th annual launch of the plan in 2018. EC members who participated will, upon vesting, each be entitled to acquire up to 490 ABB shares at CHF 20.38 per share, the market share price at the start of the 2018 launch. The net income measure fully vested at 100 per cent. The cumulative weighted EPS measure vested at 61 percent (previous year: 37 percent) out of a potential 200 percent. For a more detailed description of ESAP, please refer to “Note 18 Share-based payment arrange- ments” to our Consolidated Financial Statements. Historical vesting outcomes The historic vesting percentages for the prior four years are shown in the table below. Exhibit 18: LTIP historical actual vesting percentage(1) Vesting in % of target award (target award) Vesting in % of maximum award (max. potential award) Plan Year of Award 2012 2013 2014 2015 80.4% 77.2% 74.8% 80.5% 57.4% 55.1% 53.4% 53.7% (1) Average of P1 (e.g. net income) and P2 (EPS) components Shareholdings of EC members The EC members owned collectively less than 1 percent of ABB’s total shares outstanding at De- cember 31, 2018. At December 31, 2018, members of the EC held ABB shares and conditional rights to receive shares, as shown in Exhibit 28 in the section “Compensation and share ownership tables” be- low. Their holdings at December 31, 2017, are shown in Exhibit 29 in the section “Compensation and share ownership tables” below. Members of the EC cannot participate in the Man- agement Incentive Plan (MIP). Any MIP instru- ments held by EC members were awarded to them as part of the compensation they received in pre- vious roles they held at ABB. For a more detailed description of MIP, please refer to “Note 18 Share-based payment arrangements” to our Con- solidated Financial Statements. Except as described in Exhibits 28 and 29, no mem- ber of the EC and no person closely linked to a In 2018, ABB did not pay any fees or compensation to the members of the EC for services rendered to ABB other than those disclosed in this Compensa- tion Report. Except as disclosed in the section ti- tled “Board of Directors – Business relations be- tween ABB and its EC members” above, ABB did not pay any additional fees or compensation in 2018 to persons closely linked to a member of the EC for services rendered to ABB. Compensation of former EC members In 2018, certain former EC members received con- tractual compensation for the period after leaving the EC, as shown in Exhibit 24, footnote (5). Votes on compensation at the 2019 AGM As illustrated in Exhibit 19, the Board’s proposals to shareholders at the 2019 AGM will relate to Board compensation for the 2019–2020 term of office and EC compensation for the calendar year 2020. There will also be a non-binding vote on the 2018 Compensation Report. In determining the proposed maximum aggregate EC compensation, the Board takes into consider- ation the criteria illustrated in Exhibit 20. Given the variable nature of a major portion of the com- pensation components, the proposed maximum aggregate EC compensation will almost always be higher than the actual award, as it must cover the potential maximum value of each component of compensation. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 70 Exhibit 19: Shareholders will have three separate votes on compensation at the 2019 AGM 2018 2019 2020 n o i t a s n e p m o c n o i t a s n e p m o c t r o p e R d r a o B C E n o i t a s n e p m o C Binding vote on maximum aggregate Board compensation for 2019–2020 term of office Binding vote on maximum aggregate EC compensation for 2020 Non-binding vote on 2018 Compensation Report March AGM May AGM March AGM Compensation period Date of vote Exhibit 20: Overview of key factors affecting the determination of maximum aggregate EC compensation 2018 2019 2020(1) Aggregate EC compensation in CHF (millions) 39.8 42.5 52 52 xx Actual Target Maximum (approved at 2017 AGM) Maximum (approved at 2018 AGM) Maximum (to be requested at 2019 AGM) Assumptions Short-term variable compensation award percentage(2) Adjustment of LTIP grant size Number of EC members 85% 2.0% 11 100% 150% 0% 11 +12.5%(3) 11 150% +12.5% 11 150% +12.5% 12 (1) Numbers will be provided in the AGM invitation. (2) For full description, see section “Executive Committee compensation”. (3) This 12.5 percent applied on the entire LTIP is equivalent to 25 percent applied to the P1 component in the design of the 2017 LTIP. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 71 n o i t a s n e p m o c l a t o T ) 3 ( 7 1 0 2 n i d i a p CHF Compensation and share ownership tables Exhibit 21: Board compensation in 2018 and 2017 (audited) Paid in 2018 Paid in 2017 November Board term 2018–2019 ) 1 ( h s a c n i d e l t t e S s e r a h s n i d e l t t e S ) 2 ( d e v i e c e r s e r a h s f o r e b m u n – May Board term 2017–2018 ) 1 ( h s a c n i d e l t t e S s e r a h s n i d e l t t e S ) 2 ( d e v i e c e r s e r a h s f o r e b m u n – n o i t a s n e p m o c l a t o T ) 3 ( 8 1 0 2 n i d i a p November Board term 2017–2018 ) 1 ( h s a c n i d e l t t e S s e r a h s n i d e l t t e S ) 2 ( d e v i e c e r s e r a h s f o r e b m u n – May Board term 2016–2017 ) 1 ( h s a c n i d e l t t e S s e r a h s n i d e l t t e S ) 2 ( d e v i e c e r s e r a h s f o r e b m u n – CHF CHF CHF CHF CHF Name Peter Voser, Chairman(4) Jacob Wallenberg(5) David Constable(8) Frederico Curado(9) Robyn Denholm(10) Lars Förberg(11) Louis R. Hughes(12) Jennifer Xin-Zhe Li(13) Geraldine Matchett(14) — 24,777 — 25,133 1,200,000 — 24,427 — 24,602 1,200,000 112,500 3,737 112,500 Matti Alahuhta(6) Gunnar Brock(7) 80,000 82,500 2,657 2,740 80,000 3,789 2,694 450,000 112,500 3,684 112,500 3,709 450,000 320,000 80,000 2,619 80,000 2,637 320,000 — — 165,000 — — — — — 87,500 2,906 87,500 2,947 350,000 87,500 2,865 80,000 2,637 335,000 80,000 2,457 80,000 2,495 320,000 80,000 2,423 80,000 2,443 320,000 — — — — 6,590 — — — — 6,690 320,000 — — — 82,500 2,397 165,000 6,494 — — 160,000 — 100,000 3,099 200,000 100,000 3,274 100,000 3,297 400,000 80,000 2,454 82,500 David Meline(15) 100,000 Satish Pai(16) 82,500 3,380 3,321 2,535 — — — 160,000 — 165,000 82,500 82,500 2,779 2,574 365,000 82,500 2,701 82,500 330,000 82,500 2,499 82,500 2,720 2,519 330,000 330,000 Michel de Rosen(17) Ying Yeh(18) Total — — — — — — — — 87,500 2,642 175,000 — 80,000 2,281 160,000 80,000 2,462 80,000 2,475 320,000 787,500 57,554 705,000 54,481 4,505,000 705,000 53,448 867,500 52,078 4,505,000 (1) Represents gross amounts paid, prior to deductions for social security, withholding tax etc. (2) Number of shares per Board member is calculated based on net amount due after deductions for social security, withholding tax etc. (3) In addition to the Board remuneration stated in the above table, the Company paid in 2017 and 2018 CHF 347,691 and CHF 288,408 respectively, in related social security payments. (4) Chairman of the ABB Ltd Board and Chairman of the Governance & Nomination Committee for the 2016–2017, 2017–2018 and 2018–2019 board terms; is receiving 100% of his compensation in the form of ABB shares. (5) Vice-Chairman of the ABB Ltd Board and member of the Governance & Nomination Committee for the 2016–2017, 2017–2018 and 2018–2019 board terms; is receiving 50 percent of his compensation in the form of ABB shares. (6) Member of the Governance & Nomination Committee for the 2016–2017, 2017–2018 and 2018–2019 board terms; is receiving 50% of his compensation in the form of ABB shares. (7) Elected as new Board member at the ABB Ltd 2018 AGM; Member of the Finance, Audit & Compliance Committee for the 2018–2019 board term; is receiving 50% of his compensation in the form of ABB shares. (8) Chairman of the Compensation Committee for the 2017–2018 and 2018–2019 board terms; Member of the Compensation Committee for the 2016–2017 board term; is receiving 50% of his compensation in the form of ABB shares. (9) Member of the Compensation Committee for the 2016–2017, 2017–2018 and 2018–2019 board terms; is receiving 50% of his compensation in the form of ABB shares. (10) Did not stand for re-election at the ABB Ltd 2017 AGM; Member of the Finance, Audit & Compliance Committee for the 2016–2017 board term; received 50% of her compensation in the form of ABB shares. (11) Member of the Governance & Nomination Committee for the 2017–2018 and 2018–2019 board terms; is receiving 100% of his compensation in the form of ABB shares. (12) Did not stand for re-election at the ABB Ltd 2018 AGM; Chairman of the Finance, Audit & Compliance Committee for the 2016–2017 and 2017–2018 board terms; received 50% of his compensation in the form of ABB shares. (13) Elected as new Board member at the ABB Ltd 2018 AGM; Member of the Compensation Committee for the 2018–2019 board term; is receiving 50% of her compensation in the form of ABB shares. (14) Elected as new Board member at the ABB Ltd 2018 AGM; Member of the Finance, Audit & Compliance Committee for the 2018–2019 board term; is receiving 50% of her compensation in the form of ABB shares. (15) Chairman of the Finance, Audit & Compliance Committee for 2018–2019 board term; Member of the Finance, Audit & Compliance Commit- tee for the 2016–2017 and 2017–2018 board terms; is receiving 50% of his compensation in the form of ABB shares. (16) Member of the Finance, Audit & Compliance Committee for the 2016–2017, 2017–2018 and 2018–2019 board terms; is receiving 50% of his compensation in the form of ABB shares. (17) Did not stand for re-election at the ABB Ltd 2017 AGM; Chairman of the Compensation Committee for the 2016–2017 board term; received 50% of his compensation in the form of ABB shares. (18) Did not stand for re-election at the ABB Ltd 2018 AGM; Member of the Compensation Committee for the 2016–2017 and 2017–2018 board terms; received 50% of her compensation in the form of ABB shares. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 72 Exhibit 22: Board compensation for the Board terms 2018–2019 and 2017–2018 (audited) Name Specific Board Roles Board term 2018–2019 Board term 2017–2018 CHF CHF Peter Voser Chairman of the Board, Chairman of GNC 1,200,000 1,200,000 Jacob Wallenberg Vice-Chairman of the Board, Member GNC Matti Alahuhta Gunnar Brock(1) Member GNC Member FACC David Constable Chairman CC Frederico Curado Member CC Lars Förberg Member GNC 450,000 320,000 330,000 350,000 320,000 320,000 450,000 320,000 — 350,000 320,000 320,000 Louis R. Hughes Chairman of FACC (until 29 March 2018, did not stand for re-election) — 400,000 Jennifer Xin-Zhe Li(1) Member CC Geraldine Matchett(1) Member FACC David Meline Chairman of FACC (as of April 2018), Member FACC Satish Pai Ying Yeh Total Member FACC Member CC (until 29 March 2018, did not stand for re-election) 320,000 330,000 400,000 330,000 — — — 330,000 330,000 320,000 4,670,000 4,340,000 (1) Joined the Board at the 2018 ABB Ltd AGM. Key: CC: Compensation Committee, FACC: Finance, Audit & Compliance Committee, GNC: Governance & Nomination Committee. Exhibit 23: Board ownership of ABB shares (audited as part of the financial statement stand-alone audit) Name Peter Voser(1) Jacob Wallenberg Matti Alahuhta Gunnar Brock David Constable Frederico Curado Lars Förberg Louis R. Hughes Jennifer Xin-Zhe Li Geraldine Matchett David Meline(2) Satish Pai Ying Yeh Total (1) (2) Includes 2,000 shares held by spouse. Includes 3,150 shares held by spouse. Total number of shares held December 31, 2018 December 31, 2017 201,076 217,109 41,872 4,740 20,650 12,391 19,774 — 2,454 3,380 17,542 12,998 — 553,986 151,166 209,583 36,521 — 14,797 7,439 6,494 35,716 — — 11,442 7,889 35,455 516,502 ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 73 Exhibit 24: EC compensation 2018 (audited) Cash compensation Name ) 1 ( n o i t a s n e p m o c m r e t - t r o h S l e b a i r a v y r a l a s e s a B s t i f e n e b n o i s n e P ) 2 ( s t i f e n e b r e h t O ) 3 ( n o i t a s n e p m o c d e s a b - h s a c l a t o T 8 1 0 2 e u l a v d e t a m i t s E d e s a b - e r a h s f o e h t r e d n u s t n a r g ) 4 ( 8 1 0 2 n i P I T L CHF CHF CHF CHF CHF CHF l a n o i t i d n o c . l c n i ( l a t o T 8 1 0 2 d e s a b - e r a h s ) 5 ( ) s t n a r g CHF Ulrich Spiesshofer Timo Ihamuotila 1,685,010 2,082,660 920,012 810,520 631,775 487,435 989,918 5,389,363 3,153,750 8,543,113 502,703 2,720,670 819,965 3,540,635 Jean-Christophe Deslarzes 940,007 908,980 506,036 718,111 3,073,134 1,005,365 4,078,499 Diane de Saint Victor 1,000,001 1,024,000 295,325 266,153 2,585,479 891,283 3,476,762 Frank Duggan(6) Greg Scheu(7) Chunyuan Gu(8) Sami Atiya Tarak Mehta Claudio Facchin Peter Terwiesch Total Executive Committee members 697,573 643,163 354,222 569,854 2,264,812 699,649 2,964,461 806,634 713,065 715,357 688,888 291,077 263,125 118,426 1,929,202 559,393 2,488,595 499,338 2,166,708 748,669 2,915,377 720,008 576,720 441,235 427,729 2,165,692 513,368 2,679,060 860,004 540,940 472,097 566,773 2,439,814 766,494 3,206,308 810,006 423,630 462,386 463,666 2,159,688 577,548 2,737,236 770,006 726,110 446,435 377,080 2,319,631 823,534 3,143,165 9,924,618 9,138,676 4,651,148 5,499,751 29,214,193 10,559,018 39,773,211 (1) Represents accrued short-term variable compensation for the year 2018 for all current EC members, which will be paid in 2019, 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 achievement 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 (April 6, 2021), the value of the share-based awards granted under the LTIP may vary from the above amounts due to changes in ABB’s share price and the outcome of the performance factors. The estimated value of the share-based grants are based on a Monte Carlo simulation and the price of ABB shares on the grant date, adjusted for EPS factor for the expected foregone dividends during the vesting period. (5) Payments totaling CHF 23,558 were made in 2018 on behalf of certain other former EC members. (6) Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR. The company purchased EUR with AED to meet this obligation. All AED amounts were converted into Swiss francs using a rate of CHF 0.2678411 per AED. (7) Greg Scheu received 100 percent of his base salary in USD. All USD amounts were converted into Swiss francs using a rate of CHF 0.9837 per USD. (8) Chunyuan Gu received 100 percent of his base salary in CNY. All CNY amounts were converted into Swiss francs using a rate of CHF 0.1430712 per CNY. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 74 Exhibit 25: EC compensation in 2017 (audited) Cash compensation ) 1 ( n o i t a s n e p m o c m r e t - t r o h S l e b a i r a v l y r a a s e s a B s t i f e n e b n o i s n e P ) 2 ( s t i f e n e b r e h t O ) 3 ( n o i t a s n e p m o c d e s a b - h s a c l a t o T 7 1 0 2 l e u a v d e t a m i t s E d e s a b - e r a h s f o e h t r e d n u s t n a r g ) 4 ( 7 1 0 2 n i I P T L l f o e u a v d e t a m i t s E e r a h s t n e m e c a p e r l ) 5 ( t n a r g Name - e r a h s l a n o i t i d n o c . l c n i ( ) 6 ( ) s t n a r g d e s a b l a t o T 7 1 0 2 CHF CHF CHF CHF CHF CHF CHF CHF Ulrich Spiesshofer 1,679,176 2,413,763 626,074 916,140 5,635,153 3,671,675 — 9,306,828 Timo Ihamuotila (EC member as of April 1, 2017)(5) Jean-Christophe Deslarzes(7) Frank Duggan(8) Greg Scheu(9) Chunyuan Gu (EC member as of July 1, 2017)(10) Sami Atiya(7) Tarak Mehta Claudio Facchin Peter Terwiesch(7) Eric Elzvik (EC member until March 31, 2017)(6) Bernhard Jucker (EC member until June 30, 2017) Total Executive Committee members Diane de Saint Victor 1,000,001 1,005,000 295,325 279,321 2,579,647 936,674 1,007,680 500,652 500,493 2,945,499 1,103,374 690,009 655,278 362,201 473,848 2,181,336 998,965 2,553,435 5,733,736 664,042 651,425 348,494 433,783 2,097,744 801,386 648,322 265,877 94,270 1,809,855 374,893 385,765 131,563 203,488 1,095,709 716,673 686,160 435,786 416,816 2,255,435 860,004 823,880 467,597 578,054 2,729,535 805,006 680,400 456,410 474,153 2,415,969 764,173 714,560 440,272 337,623 2,256,628 979,231 852,386 800,177 743,963 845,147 842,145 950,768 903,833 — 4,048,873 — 3,558,878 — 2,950,130 — 2,610,032 — 1,839,672 — 3,100,582 — 3,571,680 — 3,366,737 — 3,160,461 212,502 212,500 69,847 26,789 521,638 — — 521,638 520,006 525,000 277,663 399,154 1,721,823 1,140,137 — 2,861,960 10,024,545 10,409,733 4,677,761 5,133,932 30,245,971 13,831,801 2,553,435 46,631,207 (1) Represents accrued short-term variable compensation for the year 2017 for all current EC members, which will be paid in 2018, after the publication of ABB’s audited consolidated financial statements. Short -term variable compensation is linked to the objectives defined in each EC member’s scorecard. Upon full achievement of these objectives, the short- term variable compensation of the CEO corresponds to 150 percent of his base salary, while for each other EC member it represents 100 percent of their respective base salary. Bernhard Jucker and Eric Elzvik both received a pro-rata short-term variable compensation payment for their period of service as an EC member, in accordance with the contractual obligations of ABB. (2) Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items. (3) Prepared on an accruals basis. (4) On the day of vesting (June 13, 2020), 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 value of the share based grants are computed using a Monte Carlo simulation and the price of the ABB shares on the grant date, adjusted for expected foregone dividends during the vesting period. (5) Timo Ihamuotila received a replacement grant of 119,200 shares for foregone benefits from his previous employer, having a grant date fair (6) value of CHF 2,553,435. Of the total, 42,572 shares will vest on April 1, 2019, while 76,628 shares will vest on April 1, 2020. In addition to the total compensation of EC members, Eric Elzvik received CHF 1,389,860 representing contractual obligations of ABB for the period April–October 2017. Payments totaling CHF 113,273 were made in 2017 on behalf of certain other former EC members for the coverage of social security premium obligations and tax advice. (7) The increase in pension benefits is the result of a review of the EC’s pension arrangements during 2015. (8) Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR. The company purchased EUR with AED to meet this obligation. All AED amounts were converted into Swiss francs using a rate of CHF 0.2660876 per AED. (9) Greg Scheu received 100 percent of his base salary in USD. All USD amounts were converted into Swiss francs using a rate of CHF 0.9773 per USD. (10) Chunyuan Gu received 100 percent of his base salary in CNY. All CNY amounts were converted into Swiss francs using a rate of CHF 0.149957 per CNY. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 75 d e s a b - e r a h s f o e u l a v d e t a m i t s e l a t o T ) 3 ( , ) 2 ( 8 1 0 2 n i P I T L e h t r e d n u s t n a r g CHF r e d n u s e r a h s f o r e b m u n e c n e r e f e R f o r o t c a f e c n a m r o f r e p S P E e h t ) 1 ( P I T L e h t f o h c n u a l 8 1 0 2 e h t e h t r e d n u s t n a r g d e s a b - e r a h s e h t f o r o t c a f e c n a m r o f r e p S P E ) 3 ( , ) 2 ( P I T L e h t f o h c n u a l 8 1 0 2 CHF f o e u l a v d e t a m i t s e l a t o T r e d n u s e r a h s f o r e b m u n e c n e r e f e R f o r o t c a f e c n a m r o f r e p R S T e h t ) 1 ( P I T L e h t f o h c n u a l 8 1 0 2 e h t e h t r e d n u s t n a r g d e s a b - e r a h s e h t f o r o t c a f e c n a m r o f r e p R S T ) 3 ( , ) 2 ( P I T L e h t f o h c n u a l 8 1 0 2 CHF f o e u l a v d e t a m i t s e l a t o T r e d n u d e t n a r g s e r a h s f o r e b m u n l a t o T ) 2 ( , ) 1 ( P I T L e h t f o h c n u a l 8 1 0 2 e h t 71,572 1,646,443 71,572 1,507,307 143,144 3,153,750 18,608 22,816 20,227 15,878 12,695 16,990 11,650 17,395 13,107 18,689 428,059 524,860 465,302 365,258 292,036 390,838 267,997 400,155 301,514 429,922 18,609 22,816 20,227 15,878 12,695 16,991 11,651 17,395 13,107 18,690 391,906 480,505 425,981 334,391 267,357 357,831 245,371 366,339 276,034 393,612 37,217 819,965 45,632 1,005,365 40,454 31,756 25,390 33,981 23,301 34,790 26,214 37,379 891,283 699,649 559,393 748,669 513,368 766,494 577,548 823,534 239,627 5,512,384 239,631 5,046,634 479,258 10,559,018 Exhibit 26: LTIP grants in 2018 (audited) Name Ulrich Spiesshofer Timo Ihamuotila(4) Jean-Christophe Deslarzes(4) Diane de Saint Victor(4) Frank Duggan(4) Greg Scheu Chunyuan Gu Sami Atiya Tarak Mehta(4) Claudio Facchin Peter Terwiesch(4) Total Executive Committee members at December 31, 2018 (1) Vesting date April 6, 2021. (2) The reference number of shares of the EPS and TSR performance factors are valued using the fair value of the ABB shares on the grant date and the Monte Carlo simulation model. (3) The LTIP foresees delivering 65 percent of the value of vested performance shares (both performance factors EPS and TSR), if any, in shares and the remainder in cash. However, upon vesting participants have the possibility to elect to receive 100 percent of the vested award in shares. The plan foresees a maximum payout of 200 percent of the number of reference shares granted based on the achievement against the pre-defined average EPS and relative TSR targets. In addition to the above awards, six members of the EC participated in the 15th launch of the ESAP in 2018, which will allow them to save over a 12-month period and, in November 2019, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP will be entitled to acquire up to 490 ABB shares at an exercise price of CHF 20.38 per share. (4) ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 76 Exhibit 27: LTIP grants in 2017 (audited) Name 7 1 0 2 e h t f o 1 P t n e n o p m o c e c n a m r o f r e p e h t r e d n u s e r a h s f o r e b m u n e c n e r e f e R ) 1 ( I P T L e h t f o h c n u a l ) 3 ( I , ) 2 ( P T L e h t f o h c n u a l 7 1 0 2 e h t f o 1 P t n e n - o p m o c e c n a m r o f r e p e h t r e d n u s t n a r g d e s a b - e r a h s f o e u a v d e t a m l i t s e l a t o T CHF 7 1 0 2 e h t f o 2 P t n e n o p m o c e c n a m r o f r e p e h t r e d n u s e r a h s f o r e b m u n e c n e r e f e R ) 1 ( I P T L e h t f o h c n u a l ) 3 ( I , ) 2 ( P T L e h t f o h c n u a l 7 1 0 2 e h t f o 2 P t n e n - o p m o c e c n a m r o f r e p e h t r e d n u s t n a r g d e s a b - e r a h s f o e u a v d e t a m l i t s e l a t o T CHF ) 1 ( I P T L e h t f o h c n u a l 7 1 0 2 e h t r e d n u d e t n a r g s e r a h s f o r e b m u n l a t o T d e s a b - e r a h s f o e u a v d e t a m l i t s e l a t o T ) 3 ( , ) 2 ( 7 1 0 2 n i I P T L e h t r e d n u s t n a r g CHF Ulrich Spiesshofer(4) 80,706 1,930,649 70,180 1,741,026 150,886 3,671,675 Timo Ihamuotila (EC member as of April 1, 2017)(4) Jean-Christophe Deslarzes(4) Diane de Saint Victor(4) Frank Duggan(4) Greg Scheu Bernhard Jucker (EC member until June 30, 2017) Sami Atiya Tarak Mehta(4) Chunyuan Gu (EC member as of July 1, 2017) Claudio Facchin Peter Terwiesch(4) Total Executive Committee members at December 31, 2017 508,564 41,000 998,965 20,500 24,402 17,826 17,492 14,567 23,397 18,691 15,331 15,598 21,027 19,989 490,401 583,745 426,434 418,444 348,472 559,704 447,127 366,749 365,218 503,008 478,177 20,500 20,946 22,283 17,492 18,208 23,397 16,044 19,163 15,598 18,049 519,629 552,797 433,942 451,705 580,433 398,020 475,396 378,745 447,760 17,158 425,656 45,348 1,103,374 40,109 34,984 979,231 852,386 32,775 800,177 46,794 1,140,137 34,735 845,147 34,494 842,145 31,196 39,076 37,147 743,963 950,768 903,833 289,526 6,918,128 279,018 6,913,673 568,544 13,831,801 (1) Vesting date June 13, 2020. (2) The total estimated value of the performance components (P1 and P2) is computed using a Monte Carlo simulation and the price of the (3) (4) ABB shares on the grant date, adjusted for expected foregone dividends during the vesting period. It is expected that upon vesting 70 percent of the performance shares will be settled in shares while the value of the remaining 30 percent will be settled in cash for both performance components (P1 and P2). However, upon vesting participants have the possibility to elect to receive 100 percent of the vested award in shares. In addition to the above awards, seven members of the EC participated in the 14th launch of the ESAP in 2017, which will allow them to save over a 12-month period and, in November 2018, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP will be entitled to acquire up to 380 ABB shares at an exercise price of CHF 26.26 per share. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 7 7 Exhibit 28: EC shareholding overview at December 31, 2018 (audited as part of the financial statement stand-alone audit) Total number of shares held at December 31, 2018 Unvested at December 31, 2018 s e r a h s f o r e b m u n e c n e r e f e R 6 1 0 2 e h t r e d n u e b a r e v i l l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( P I T L e h t f o ) 2 P d n a 1 P ( s e r a h s f o r e b m u n e c n e r e f e R 7 1 0 2 e h t r e d n u e b a r e v i l l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( P I T L e h t f o ) 2 P d n a 1 P ( s e r a h s f o r e b m u n e c n e r e f e R 8 1 0 2 e h t r e d n u e b a r e v i l l e d S P E ( s r o t c a f e c n a m r o f r e p ) 2 ( P I T L e h t f o ) R S T d n a (vesting 2019) (vesting 2020) (vesting 2021) 175,881 150,886 143,144 — 56,287 47,745 48,028 43,144 25,799 37,693 45,624 47,722 44,969 41,000 45,348 40,109 34,984 32,775 31,196 34,735 34,494 39,076 37,147 37,217 45,632 40,454 31,756 25,390 33,981 23,301 34,790 26,214 37,379 509,970 22,000 172,487 569,132 224,941 146,130 28,722 — 183,328 131,987 92,811 t n a r g e r a h s t n e m e c a p e R l l ) 3 ( r e y o p m e r e m r o f m o r f s t i f e n e b e n o g e r o f r o f (vesting 2019 and 2020) — 119,200 — — — — — — — — — Name Ulrich Spiesshofer Timo Ihamuotila Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan Greg Scheu Chunyuan Gu Sami Atiya Tarak Mehta Claudio Facchin Peter Terwiesch Total Executive Committee members as of December 31, 2018 2,081,508 572,892 521,750 479,258 119,200 (1) (2) (3) It is expected that upon vesting, the LTIP 2016 and 2017 will be settled 70 percent in shares and 30 percent in cash for the performance components (P1 and P2). However, participants have the possibility to elect to receive 100 percent of the vested award in shares. It is expected that the LTIP 2018 will be settled 65 percent in shares and 35 percent in cash for the performance factors (EPS and TSR). However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. It is expected that the replacement share grant will be settled 70 percent in shares and 30 percent in cash. However, the participant has the possibility to elect to receive 100 percent of the vested award in shares. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 78 Exhibit 29: EC shareholding overview at December 31, 2017 (audited as part of the financial statement stand-alone audit) Total number of shares held at December 31, 2017 Unvested at December 31, 2017 s e r a h s f o r e b m u n e c n e r e f e R 5 1 0 2 e h t r e d n u e b a r e v i l l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( P I T L e h t f o ) 2 P d n a 1 P ( s e r a h s f o r e b m u n e c n e r e f e R 6 1 0 2 e h t r e d n u e b a r e v i l l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( P I T L e h t f o ) 2 P d n a 1 P ( s e r a h s f o r e b m u n e c n e r e f e R 7 1 0 2 e h t r e d n u e b a r e v i l l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( P I T L e h t f o ) 2 P d n a 1 P ( t n a r g e r a h s t n e m e c a p e R l l ) 2 ( r e y o p m e r e m r o f m o r f s t i f e n e b e n o g e r o f r o f t n a r g e r a h s t n e m e c a p e R l l ) 2 ( r e y o p m e r e m r o f m o r f s t i f e n e b e n o g e r o f r o f (vesting 2018) (vesting 2019) (vesting 2020) (vesting 2018) (vesting 2019 and 2020) 410,646 172,465 175,881 150,886 22,000 — — 41,000 — — — 119,200 96,651 533,482 186,576 119,561 — 159,222 13,570 85,553 63,269 51,413 45,873 46,390 45,896 — 42,780 25,937 42,845 36,698 56,287 47,745 48,028 43,144 37,693 45,624 25,799 47,722 44,969 45,348 40,109 34,984 32,775 34,735 34,494 31,196 39,076 37,147 65,819 — — — — — — — — — — — — — — — — — 1,690,530 510,297 572,892 521,750 65,819 119,200 Name Ulrich Spiesshofer Timo Ihamuotila (EC member as of April 1, 2017) Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan Greg Scheu Sami Atiya Tarak Mehta Chunyuan Gu (EC member as of July 1, 2017) Claudio Facchin Peter Terwiesch Total Executive Committee members as of December 31, 2017 (1) (2) It is expected that upon vesting, the LTIP will be settled 70 percent in shares and 30 percent in cash for the performance components (P1 and P2). However, participants have the possibility to elect to receive 100 percent of the vested award in shares. It is expected that the replacement share grants will be settled 70 percent in shares and 30 percent in cash. However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. ABB ANNUAL REPORT 2018 03 COMPENSATION REPORT 79 Report of the Statutory Auditor To the General Meeting of ABB Ltd, Zurich We have audited the accompanying compensation report of ABB Ltd for the year ended December 31, 2018. 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 71 to 73 and 75 of the compensation report. Responsibility of the Board of Directors The Board of Directors is responsible for the preparation and overall fair presentation of the compensation report in accordance with Swiss law and the Ordinance against Excessive compensation in Stock Exchange Listed Companies (Ordinance). The Board of Directors is also responsible for designing the compensation system and defining individual 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 Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the compensation report complies with Swiss law and articles 14 – 16 of the Ordinance. An audit involves performing procedures to obtain audit evidence on the disclosures made in the compensation report with regard to compensation, loans and credits in accordance with articles 14 – 16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the compensation report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of compensation, as well as assessing the overall presentation of the compensation report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the compensation report for the year ended December 31, 2018 of ABB Ltd complies with Swiss law and articles 14 – 16 of the Ordinance. Other matter The compensation report of ABB Ltd for the year ended December 31, 2017 was audited by another auditor who expressed an unmodified opinion on this report on February 22, 2018. KPMG AG Hans-Dieter Krauss Licensed Audit Expert Auditor in Charge Zurich, March 27, 2019 Douglas Mullins KPMG AG, Badenerstrasse 172, PO Box, CH-8036 Zurich KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. — Writing the future of flexible manufacturing and smart machines. 04 2018 Financial Review of ABB Group — 82 – 215 2018 Operating and financial review and prospects — 84 – 131 Consolidated Financial Statements of ABB Group — 132 –215 84 — About ABB ABB is a pioneering technology leader in power grids, electrification products, industrial automa‑ tion and robotics and motion, serving customers in utilities, industry and transport & infrastructure globally. Continuing a history of innovation span‑ ning more than 130 years, ABB today is writing the future of industrial digitalization with two clear value propositions: bringing electricity from any power plant to any plug and automating industries from natural resources to finished products. ABB has approximately 147,000 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 par‑ ticipant in the introduction of electricity into Swed‑ ish 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 re‑ named BBC Brown Boveri AG) was formed in Swit‑ zerland 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 reconfigura‑ tion designed to establish a single parent holding company and a single class of shares. ABB Ltd was incorporated on March 5, 1999, under the laws of Switzerland. In June 1999, ABB Ltd became the holding company for the entire ABB Group. This was accomplished by having ABB Ltd issue shares to the shareholders of ABB AG and ABB AB, the two companies that formerly owned the ABB Group. The ABB Ltd shares were exchanged for the shares of those two companies, which, as a re‑ sult of the share exchange and certain related transactions, became wholly‑owned subsidiaries of ABB Ltd. ABB Ltd shares are currently listed on the SIX Swiss Exchange, the NASDAQ OMX Stock‑ holm Exchange and the New York Stock Exchange (in the form of American Depositary Shares). — Organizational structure Our business is international in scope and we gen‑ erate revenues in numerous currencies. We oper‑ ate in approximately 100 countries across three regions: Europe, the Americas, and Asia, Middle East and Africa (AMEA). We are headquartered in Zurich, Switzerland. We manage our business based on a divisional structure, comprising Electrification Products, Industrial Automation and Robotics and Motion. For a breakdown of our consolidated revenues (i) by operating division (ii) by geographic re‑ gion (iii) by end‑customer markets and (iv) by product type, see “Analysis of Results of Opera‑ tions – Revenues”. We also operate our Power Grids business, which is reported as discontin‑ ued operations in the Consolidated Financial Statement (see “Discontinued Operations” sec‑ tion below). A breakdown of our employees by geographic re‑ gion is as follows: Europe The Americas December 31, 2018 2017 2016 68,300 63,000 61,400 35,600 28,800 29,000 Asia, Middle East and Africa 42,700 43,000 41,900 Total 146,600 134,800 132,300 The proportion of our employees that are repre‑ sented by labor unions or are the subject of collec‑ tive bargaining agreements varies based on the la‑ bor practices of each country in which we operate. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 85 — 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 Energy Revolu‑ tion encompasses a shift toward low carbon en‑ ergy generation, including a dramatic increase in wind and solar generation capacity; a major shift toward distributed generation as opposed to cen‑ tralized generation systems, whereby consumers also become producers, or prosumers, of energy; and finally the introduction of smart grids that will enable more efficient use of energy. The num‑ ber of feed‑in points from solar and wind is ex‑ pected to continue to multiply, and transmissions are increasingly covering longer distances. At the same time, electricity demand is anticipated to rise, due to the accelerating take‑up of electric ve‑ hicles (EVs) and significant increases in data stor‑ age needs. As a result, electrical systems are ex‑ pected to require new equipment, technology and smart solutions to ensure that electricity supply remains reliable and secure. In addition to the shifts in the energy market, digitalization is driving the Fourth Industrial Rev‑ olution and touches upon all our customer seg‑ ments, creating sizeable new market opportuni‑ ties. More than 55 percent of ABB products are already digitalized and offer connectivity. With the end‑markets ABB serves still at an early stage of digitalization, including automotive, food and beverage, rail, buildings, oil and gas, chemicals, marine, utilities, and other discrete markets, ABB expects the demand for connected devices from the company’s existing customer base to grow significantly in the coming years. ABB Ability™ is the company’s unified, cross‑industry digital portfolio, extending from device to edge to cloud on an open architecture platform. ABB Ability™ provides over 210 solu‑ tions utilizing latest software technologies, in‑ cluding artificial intelligence, to improve produc‑ tivity, security, safety and reliability, ultimately unlocking value for customers. ABB Ability™ solu‑ tions cover the entire life‑cycle of assets, from planning and building to performance manage‑ ment. ABB Ability™ is a globally recognized mar‑ ket leader for control systems for process indus‑ tries and for utility and mining‑related asset management software. ABB also has a leading of‑ fering in connected services, for example remote monitoring services for robots, motors and ma‑ chinery and remote control solutions for buildings, EV charging networks and offshore platforms. Some of the more specialized offerings address energy management for data centers and naviga‑ tion optimization and automation for maritime shipping fleets. Utilities Market ABB focuses on delivering solutions that match the changing needs of utility customers with a complete offering for transmission and distribu‑ tion. The Energy Revolution opens up numerous opportunities, and more than 30 percent of the market ABB operates in are high‑growth seg‑ ments within the sector, such as grid automation, high‑voltage direct current (HVDC), software, grid control systems and micro‑grids. Generation, transmission and distribution are being unbun‑ dled, long‑standing monopolies now have com‑ petitors and new entrants (e.g. pension funds, in‑ surance funds, project developers) are investing in the sector. Many traditional utilities have rein‑ vented themselves; some now focus purely on re‑ newables, others on providing additional energy services to the consumers they serve. Utilities continued to make selective investments in 2018, adding new capacity in emerging mar‑ kets, upgrading aging power infrastructure in ma‑ ture markets and integrating new renewable en‑ ergy capacity globally. They are also investing in automation and control solutions to enhance the stability of the grid and thus demand for services, including ABB Ability™ solutions, gained traction during the year. ABB won orders in several key geographies, in‑ cluding Australia and New Zealand, to upgrade the control and protection system of existing HVDC links with advanced digitalization technolo‑ gies. In addition, ABB was awarded multiple or‑ ders for ABB Ability™ digital substations, for ex‑ ample, to upgrade the world’s largest substation in Belarus. A significant framework agreement for grid integration and automation solutions was also won from Ørsted, the Danish power company currently installing the world’s largest offshore wind farm in the United Kingdom’s North Sea. Industry Market ABB serves production facilities and factories all around the world from process to discrete indus‑ tries with a comprehensive automation portfolio including robotics. Industry customers are diverse in nature and may be publicly traded or privately held companies. Automation and digitalized solu‑ tions that achieve improved safety, uptime, energy ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 86 efficiency and productivity are the intended hall‑ marks of ABB’s offerings in this customer seg‑ ment. The need for cutting‑edge solutions to im‑ prove industrial performance continued to be an important demand driver for industry in 2018. Investments in 2018 in robotics and machinery au‑ tomation solutions from the automotive sector, notably for new EV manufacturing lines, from the food and beverage sector and other industries re‑ mained positive. Process industries, especially oil and gas, invested more in 2018 than in the prior year, although investments remained selective and concentrated on service and productivity improvements. In robotics specifically, ABB’s customer markets are successfully expanding into new market areas, for example, the logistics sector and small and medium size enterprises, particularly in the AMEA region. Transport & Infrastructure Market ABB’s expertise provides efficient and reliable solutions for transport & infrastructure custom‑ ers. We believe our offerings are key to transport customers that are focused on energy efficiency and reduced operating costs. Other major growth drivers for this customer segment are urbaniza‑ tion, the move to electrify transportation, and growth in data centers. Demand in transport and infrastructure markets was solid in 2018. Demand for building automa‑ tion solutions as well as solutions involving en‑ ergy efficiency continued, while activity for spe‑ cialty vessels, particularly cruise ships, was strong over the period. In rail, ABB won orders worth over $100 million from Swiss train manufacturer Stadler to supply traction equipment for more than 160 trains serving urban, regional and long distance routes in Europe and the United States. Demand for hyper‑scale data center solutions was strong during 2018, especially from U.S. and Euro‑ pean based customers. The development of EV charging markets accel‑ erated sharply during 2018. ABB received multi‑ ple orders from customers in several countries across Europe and North America for EV charging infrastructure, including for the company’s new‑ est high voltage direct current (DC) fast‑charging station, the Terra HP. ABB now has more than 6,500 DC fast‑charging stations installed in 60 countries. As a pioneering technology leader, we serve utili‑ ties, industry and transport & infrastructure cus‑ tomers through our business divisions. These markets and our divisions are discussed in more detail below. Revenue figures presented in the fol‑ lowing Business divisions section are before in‑ terdivisional eliminations. — Business divisions Electrification Products division Overview The Electrification Products division provides products, services and connected solutions throughout the electrical value chain from the substation to the point of consumption across the world. The innovations from this business en‑ able safer and more reliable electricity flow, with a full range of low‑ and medium‑voltage products and solutions for intelligent protection and con‑ nection as well as pre‑engineered packaged ser‑ vices and solutions tailored to customers’ needs. The portfolio includes modular substation pack‑ ages, distribution automation products, switch‑ gear, circuit breakers, measuring and sensing de‑ vices, control products, solar power solutions, EV charging infrastructure, wiring accessories, and enclosures and cabling systems, including KNX systems (the recognized global standard for home and building control) and data communica‑ tion networks. The division delivers products to customers through a global network of channel partners and end‑customers. Most of the division’s revenue is derived from sales through distributors, original equipment manufacturers (OEMs), engineering, procurement, construction (EPC) contracting companies, system integrators, utilities and panel builders, with some direct sales to end users (util‑ ities, customers in industries, transport & infra‑ structure segments) and to other ABB divisions. The Electrification Products division had approxi‑ mately 55,100 employees on December 31, 2018, and generated $11.7 billion of revenues in 2018. On June 30, 2018, ABB acquired General Electric Industrial Solutions (GEIS). The integration of ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 87 GEIS into the Electrification Products division commenced during the second half of 2018. Customers The Electrification Products division serves a wide range of customers, including buildings, data centers, rail, wind and solar, distribution util‑ ities, food and beverage, marine, oil and gas, and e‑mobility. Products and Services The Protection and Connection business offers low‑voltage system orientated products that pro‑ tect, control and connect people, plants and sys‑ tems. ABB offers solutions to restore power rap‑ idly in case of a fault and helps provide optimum protection for people and electrical installations. The product offering includes molded‑case and air‑circuit breakers, safety switches used for power distribution in factories and buildings, switchgear systems for short circuit and overload protection as well as cabling and connection components. It also offers power protection solu‑ tions such as uninterruptible power supply (UPS) solutions, status transfer switches and power distribution units. In addition, the business of‑ fers a range of contactors, proximity sensors, safety products for industrial protection, limit switches, along with electronic relays and over‑ load relays. The Building Products business provides low‑voltage smart home and intelligent building control systems, including voice activated KNX systems to optimize efficiency, safety and com‑ fort through the automated management of light‑ ing, shutters and security. In addition, the busi‑ ness supplies conventional wiring accessories, industrial plugs and sockets, DIN‑rail products, and enclosures ideal for single family homes, mul‑ tiple dwellings, commercial buildings, infrastruc‑ ture and industrial applications, including electric vehicle charging infrastructure from AC wall boxes through to DC fast charging stations and on‑demand electric bus charging systems. The Installation Products business offers prod‑ ucts for low‑voltage wire and cable management, making the task of fastening, protecting, insulat‑ ing 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 en‑ vironments, as well as lightning protection and earth grounding apparatus. The Distribution Solutions business helps utility, industry and transport & infrastructure customers to improve power quality and control, reduce outage time and enhance operational reliability and efficiency. The business offers products and services that largely serve the power dis‑ tribution sector, often providing the requisite medium‑voltage link between high‑voltage trans‑ mission systems and low‑voltage users. Its com‑ prehensive offering includes medium‑voltage equipment (1 to 66 kilovolts), indoor and outdoor circuit breakers, reclosers, fuses, contactors, re‑ lays, 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, adding value through design, engi‑ neering, project management and service. The service offering spans the entire value chain, from the moment a customer makes the first inquiry to disposal and recycling of the product. Throughout the value chain, ABB provides training, technical support and customized contracts. All of this is supported by an extensive global sales and service network. The Solar business offers an extensive range of solar inverters for residential, commercial and utility applications designed to optimize the per‑ formance, reliability and return on investment of any solar installation. It also offers solar packages with integrated energy storage solutions, utility‑scale turnkey solutions and microgrid solutions. The new Industrial Solutions business includes the acquired GEIS business and offers product solutions, such as switchboards, panelboards, UPS and arc prevention technologies and engi‑ neered solutions, such as modular, cost‑saving medium‑voltage switchgear, motor control cen‑ ters, vacuum circuit breakers, arc‑resistant switchgear for industrial applications and indus‑ try leading telecom DC power. Sales and Marketing Sales are primarily made through indirect sales channels such as distributors to end customers including installers and system integrators. Direct customers range from electrical installers to large utilities, industrial end‑users, customers trans‑ port & infrastructure segments, as well as other ABB divisions. The proportion of direct sales com‑ pared 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 sup‑ port services including configuration and digital solutions. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 88 Competition The Electrification Products division’s principal competitors vary by product line and include Ea‑ ton, Legrand, Schneider Electric, Siemens, Hub‑ bell, Rittal and Chint. Capital Expenditures The Electrification Products division’s capital ex‑ penditures for property, plant and equipment to‑ taled $244 million in 2018, compared to $218 mil‑ lion and $215 million in 2017 and 2016, respectively. Investments in 2018 were primarily related to footprint changes, equipment replacement and upgrades. Geographically, in 2018, Europe repre‑ sented 49 percent of the capital expenditures, followed by the Americas (36 percent) and AMEA (15 percent). Industrial Automation division Overview The Industrial Automation division offers custom‑ ers solutions that are designed to optimize the productivity, energy efficiency and safety of their industrial processes and operations by combining the division’s integrated control products, sys‑ tems and service offerings with deep domain knowledge and expertise of each end market. Solutions include turnkey engineering, control systems, Human Machine Interfaces (HMI) and in‑ tegrated safety technology, measurement prod‑ ucts, lifecycle services, outsourced maintenance and industry‑specific products such as electric propulsion for ships, Azipods, mine hoists, turbo‑ chargers and pulp and paper quality control equipment. The systems can link various pro‑ cesses and information flows allowing customers to manage their entire manufacturing and busi‑ ness process based on real‑time facility or plant information. Additionally, the systems allow cus‑ tomers to increase production efficiency, opti‑ mize their assets and reduce environmental impact. The Industrial Automation division offerings are available as separately sold products or as part of a total automation, electrification and/or instru‑ mentation system. In this event, products and solutions from the Robotics and Motion and Elec‑ trification Products divisions are channeled through the Industrial Automation division. The division’s technologies are sold primarily through direct sales forces as well as third‑party channels. The division had approximately 25,700 employees as of December 31, 2018, and generated revenues of $7.4 billion in 2018. Customers The Industrial Automation division’s end custom‑ ers include companies in the oil and gas, minerals and mining, metals, pulp and paper, chemicals, plastics, pharmaceuticals, food and beverage, power generation and maritime industries. These customers are looking for digitalized and auto‑ mated offerings, instrumentation, and electrifica‑ tion solutions that deliver value mainly through lower capital costs, increased plant availability, lower life‑cycle costs and reduced project costs. Products and Services Oil, gas and chemicals solutions cover the entire hydrocarbon value chain, from exploration and production to supply, transport and distribution, as well as refining, chemicals and petrochemicals. ABB specializes in mastering the control loop and transforming client operations through actionable insights that optimize performance in real time. From the well head to the refinery, ABB Ability™ solutions connect people with data to optimize performance, improve reliability, enhance effi‑ ciency and minimize environmental impact from project start‑up throughout the entire plant life‑cycle. Other process industry markets served include mining, minerals processing, metals, pharmaceu‑ ticals and pulp and paper as well as their associ‑ ated service industries. The business’ added value is deep industry expertise coupled with the ability to integrate both automation and electronics, re‑ sulting in faster start‑up times, increased plant productivity and reduced overall capital and oper‑ ating costs for customers. For mining, metals and cement industries, solutions include specialized products and services, as well as total production systems. The business designs, plans, engineers, supplies, erects and commissions electric equip‑ ment, drives, motors, high power rectifiers and equipment for automation and supervisory con‑ trol within a variety of areas including mineral handling, mining operations, aluminum smelting, hot and cold steel applications and cement pro‑ duction. In the pharmaceuticals and fine chemi‑ cals areas, the business offers applications to support manufacturing, packaging, quality con‑ trol and compliance with regulatory agencies. The offering for the pulp and paper industries in‑ cludes 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 generation. With an offering that includes instrumentation, excitation and control systems, ABB technologies help optimize performance, im‑ prove reliability, enhance efficiency and minimize ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 89 environmental impact throughout the plant life cycle. The business also serves the water industry, including applications such as pumping stations and desalination plants. ABB serves the marine and ports business through its leading solutions for specialty vessels, con‑ tainer and bulk cargo handling. For the shipping in‑ dustry, ABB offers an extensive portfolio of inte‑ grated 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 customer’s business throughout the entire life cy‑ cle of a fleet. ABB designs, engineers, builds, sup‑ plies and commissions automation and electrical systems for marine power generation, power dis‑ tribution and electric propulsion, as well as turbo‑ chargers to improve efficiency. With ABB Ability™’s Collaborative Operations Centers around the world and marine software solutions, owners and opera‑ tors can run their fleets at lower fuel and mainte‑ nance cost, while improving crew, passenger, and cargo safety and overall productivity of their oper‑ ations. In addition, ABB delivers automation and electrical systems for container and bulk cargo handling, from ship to gate. These systems and services help terminal operators meet the chal‑ lenge of larger ships, taller cranes and bigger vol‑ umes per call, and make terminal operations safer, greener and more productive. ABB serves the hybrid and discrete market, focus‑ ing primarily on plastics, food and beverage, packaging and data centers. ABB combines state‑of‑the‑art technology with advanced engi‑ neering to provide a wide range of customers with complete solutions for machine and factory automation, motion control, HMI and integrated safety technology. ABB is one of the largest pro‑ viders focused on product‑ and software‑based, open‑architecture solutions for machine and fac‑ tory automation worldwide. ABB offers an extensive portfolio of products and software from stand‑alone basic control to inte‑ grated collaborative systems for complex or criti‑ cal processes. Solutions such as Distributed Con‑ trol System (DCS) 800xA, provides a scalable extended automation system for process and pro‑ duction control, safety, and production monitor‑ ing. Freelance, another solution, is a full‑fledged, easy‑to‑use DCS for small to medium size applica‑ tions. The Programmable Logic Controller (PLC) automation portfolio offers a scalable range for small, middle and high‑end applications. Compo‑ nents for basic automation solutions, process and safety controllers, field interfaces, panels, process recorders and HMI are available through our Com‑ pact Product Suite offering. The product portfolio is complemented by services such as Automation Sentinel, a subscription‑based life‑cycle manage‑ ment program that provides services to maintain and continually advance and enhance ABB Ability™ control systems (e.g. cyber security patches) and thus allows it to manage a customer’s life‑cycle costs. The ABB Ability™ Advanced Services offer‑ ing portfolio provides individual software‑based services to continuously improve automation and processes. ABB also offers Manufacturing Execu‑ tion Systems that enable agility and transparency for production processes by synchronizing and or‑ chestrating a flow across individual automation islands. The measurement and analytics business portfo‑ lio is designed to measure product properties, such as weight, thickness, color, brightness, mois‑ ture content and additive content and includes a full line of instrumentation and analytical prod‑ ucts to analyze, measure and record industrial and power processes. Actuators allow the cus‑ tomer to make automatic adjustments during the production process to improve the quality and consistency of the product. Field instruments measure properties of the process, such as flow rate, chemical content and temperature. ABB manufactures and maintains turbochargers for diesel and gas engines having power levels ranging from 500 kilowatts to over 80 mega‑ watts. The business provides engine builders and application operators with advanced turbocharg‑ ing solutions for efficient and flexible application operations and in compliance with the most strin‑ gent environmental requirements. Sales and Marketing The Industrial 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 Industrial Automation division’s principal competitors vary by industry or product line. Competitors include Emerson, Honeywell, Valmet, Rockwell Automation, Beckhoff Automation, Schneider Electric, Siemens, Voith, and Yokogawa Electric Corporation. Capital Expenditures The Industrial Automation division’s capital ex‑ penditures for property, plant and equipment to‑ taled $104 million in 2018, compared to $71 million and $53 million in 2017 and 2016, respectively. Principal investments in 2018 were in the Machine ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 90 and Factory Automation, Turbocharging and the Measurement and Analytics businesses. Geo‑ graphically, in 2018, Europe represented 82 per‑ cent of the capital expenditures, followed by the Americas (10 percent) and AMEA (8 percent). Robotics and Motion division Overview The Robotics and Motion division provides prod‑ ucts, solutions and related services that increase industrial productivity and energy efficiency. Our key products such as motors, generators, drives and robotics provide power, motion and control for a wide range of automation applications. Revenues are generated both from direct sales to end users as well as from indirect sales through distributors, machine builders, system integra‑ tors, and OEMs. The Robotics and Motion division had approxi‑ mately 27,600 employees as of December 31, 2018, and generated $9.1 billion of revenues in 2018. Products and Services The Robotics business offers robots, controllers, software systems, as well as complete robot auto‑ mation solutions and a comprehensive range of advanced services for automotive and Tier One OEMs as well as for general industry. These pro‑ vide flexibility for manufacturers to meet the chal‑ lenge of making smaller lots of a larger number of specific products in shorter cycles for today’s dy‑ namic global markets, while also improving quality, productivity and reliability. Robots are also used in activities or environments which may be hazard‑ ous to employee health and safety, such as repeti‑ tive or strenuous lifting, dusty, hot or cold rooms, or painting booths. In the automotive industry, ro‑ bot products and systems are used in such areas as press shop, body shop, paint shop, power train assembly, trim and final assembly. General indus‑ try segments in which robotics solutions are used range from metal fabrication, foundry, plastics, food and beverage, chemicals and pharmaceuti‑ cals, electronics and warehouse/logistics center automation. Typical robotic applications in general industry include welding, material handling, ma‑ chine tending, painting, picking, packing, palletiz‑ ing and small parts assembly automation. The Motors and Generators business supplies a comprehensive range of electrical motors, gener‑ ators, and mechanical power transmission prod‑ ucts. The range of electrical motors includes high efficiency motors that conform to leading envi‑ ronmental and Minimum Energy Performance Standards (MEPS). Efficiency is an important selection criterion for customers, because elec‑ tric 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 Com‑ mission) and NEMA (National Electrical Manufac‑ turers Association) standards. The business unit offers digitalized asset management solutions that monitor motor performance and provide vital intelligence on key operating parameters. These products and solutions help customers improve uptime, extend motor lifetimes, and increase pro‑ ductivity while becoming or remaining digitally connected. The Drives business provides low‑voltage and medium‑voltage drives and systems for indus‑ trial, commercial and residential applications. Drives provide speed, torque and motion control for equipment such as fans, pumps, compressors, conveyors, centrifuges, mixers, hoists, cranes, ex‑ truders, printing and textile machines. They are used in industries such as building automation, marine, power, transportation, food and bever‑ age, metals, mining, and oil and gas. The business unit also supplies traction converters (propulsion converters and auxiliary converters) for the trans‑ portation industry and wind converters. The division offers services that complement its products and solutions, including design and project management, engineering, installation, training and life cycle care, energy efficiency ap‑ praisals, preventive maintenance and digital ser‑ vices such as remote monitoring and software tools. Customers The Robotics and Motion division serves a wide range of customers. Customers include machin‑ ery manufacturers, process industries such as pulp and paper, oil and gas, and metals and min‑ ing companies, hybrid and batch manufacturers such as food and beverage companies, transpor‑ tation equipment manufacturers, discrete manu‑ facturing companies such as “3C” (computer, communication and consumer electronic), logis‑ tics, utilities as well as customers in the automo‑ tive industry. Sales and Marketing Sales are made both through direct sales forces as well as through third‑party channel partners, such as distributors, wholesalers, installers, ma‑ chine builders and OEMs, and system integrators. The proportion of direct sales compared to chan‑ nel partner sales varies among the different ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 91 industries, product technologies and geographic markets. Competition The Robotics and Motion division’s principal com‑ petitors vary by product line but include Fanuc, Kuka Robotics, Rockwell Automation, Schneider Electric, Siemens, Yaskawa, WEG Industries, SEW‑EURODRIVE and Danfoss. 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, le‑ gal and integrity, compliance, risk management and insurance, corporate communications, infor‑ mation systems, investor relations and human resources. Capital Expenditures The Robotics and Motion division’s capital expen‑ ditures for property, plant and equipment totaled $123 million in 2018, compared to $118 million and $112 million in 2017 and 2016, respectively. Princi‑ pal investments in 2018 were primarily related to equipment replacement, footprint adjustments and automation upgrades. Geographically, in 2018, Europe represented 45 percent of the capi‑ tal expenditures, followed by the Americas (31 percent) and AMEA (24 percent). Corporate and Other Corporate and Other includes headquarters, cen‑ tral research and development, real estate activi‑ ties, Group Treasury Operations, Global Business Services (GBS) and other minor business activi‑ ties. The remaining activities of certain EPC proj‑ ects which we are completing and are in a wind down phase are also reported in Corporate and Other. In addition, we have classified the histori‑ cal business activities of significant divested businesses in Corporate and Other. These include the high‑voltage cables business, the EPC busi‑ ness for turnkey electrical AC substations and cer‑ tain EPC contracts relating to the oil & gas industry. Corporate research and development primarily covers our research activities, as our development activities are organized under our divisions. We have two global research laboratories, one fo‑ cused on power technologies and the other fo‑ cused on automation technologies, which both work on technologies relevant to the future of our business. Each laboratory works on new and emerging technologies and collaborates with uni‑ versities and other external partners to support our divisions in advancing relevant technologies and in developing cross‑divisional technology platforms. We have corporate research centers in seven countries (China, India, Germany, Poland, Sweden, Switzerland and the United States). GBS operates in several hub locations and con‑ sists of shared services in the area of accounting, human resources, information systems and sup‑ ply chain management. A significant portion of the costs for GBS and other shared corporate overhead costs are allo‑ cated to the operating divisions. Overhead and other management costs, including GBS costs, which would have been allocated to our Power Grids business, and which are not directly attrib‑ utable to this business, are not allocated to the discontinued operation and are included in Cor‑ porate and Other. Corporate headquarters and stewardship activi‑ ties include the operations of our corporate head‑ quarters in Zurich, Switzerland, as well as Corporate and Other had approximately 5,500 employees at December 31, 2018. — Power Grids as discontinued operations The Power Grids business is reported as discon‑ tinued operations in the Consolidated Financial Statements for all years presented. See “Note 3 Changes in presentation of financial statements” to our Consolidated Financial Statements. Power Grids Business The Power Grids business is a global leader in power technologies and aspires to be the partner of choice for enabling a stronger, smarter and greener grid. The Power Grids business provides ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP in accordance with grid codes. The Grid Integra‑ tion business’ portfolio also includes a range of high power semiconductors, a core technology for power electronics deployed in HVDC, FACTS and rail applications. The High Voltage products operation is a global leader in high voltage switchgear up to 1200 kV AC and 1100 kV DC with a portfolio spanning air‑insulated, gas‑insulated and hybrid technolo‑ gies. It manufactures generator circuit breakers, a key product for integrating large power plants into the grid. The portfolio also includes a broad range of capacitors and filters that facilitate power quality, instrument transformers and other substation components. The Transformers operation supplies transform‑ ers that are an integral component found across the power value chain, enabling the efficient and safe conversion of electricity to different volt‑ ages. The product range is designed for reliability, durability and efficiency with a portfolio that in‑ cludes dry‑ and liquid‑distribution transformers, traction transformers for rail applications and special application transformers plus related components, for example, insulation kits, bush‑ ings and other transformer accessories. The Power Grids business also has an extensive portfolio of service offerings. This is a growing fo‑ cus area, leveraging the significant installed prod‑ uct base. The portfolio includes spare parts, con‑ dition monitoring and maintenance services, on‑ and off‑site repairs as well as retrofits and up‑ grades. Advanced software‑based monitoring and advisory services are being added to the portfolio to enable digitalization of grids. ABB Ability™, the company’s unified, cross‑industry digital capabil‑ ity enables the business’ specific connected solu‑ tions portfolio. 92 product, system, software and service solutions across the power value chain that are designed to meet the growing demand for electricity with minimum environmental impact. These solutions support utility, industry and transport & infra‑ structure customers to plan, build, operate and maintain their power infrastructure. They are de‑ signed to facilitate the safe, reliable and efficient integration, transmission and distribution of bulk and distributed energy generated from conven‑ tional and renewable sources. Approximately two‑thirds of the revenues in the business are generated from utility customers and the remaining portion is generated from in‑ dustry and transport & infrastructure customers. Power Grids has a worldwide customer base, with a wide geographic spread of revenues across the Americas, Europe and AMEA. The business also has a globally diversified and well‑balanced manu‑ facturing and engineering footprint. Direct sales account for the majority of total revenues gener‑ ated by the business while external channel part‑ ners such as EPCs, wholesalers, distributors and OEMs account for the rest. Products and Services The Grid Automation operation is at the forefront of grid automation and digitalization. It supplies substation automation products, systems and ser‑ vices. It also provides Supervisory Control and Data Acquisition (SCADA) systems for transmis‑ sion and distribution networks as well as a range of wireless, fiber optic and power line carrier‑based telecommunication technologies for mission criti‑ cal applications. The operation offers microgrid solutions that are being increasingly deployed for remote and partially grid‑connected applications. Also included in this operation is ABB Ability™ El‑ lipse, an industry leading software solution for managing and optimizing assets, operations, lo‑ gistics, financials and HR, reducing operating costs and improving productivity for customers. The Grid Integration operation is among the world’s leading providers of transmission and dis‑ tribution substations, associated life‑cycle ser‑ vices and HVDC systems. The substations are used in utility and non‑utility applications including re‑ newables, rail, data centers, various industries, battery energy storage and shore‑to‑ship power supply. The HVDC systems use Line Commutated Converter (HVDC Classic) technology or Voltage Sourced Converter (HVDC Light) technology. The Grid Integration portfolio also includes the Flexi‑ ble Alternating Current Transmission Systems (FACTS) business, which comprises Static Var Compensation (SVC) and static compensator (STATCOM) technology. These systems stabilize voltages, minimize losses, and keep power quality ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 93 — Simplification of business model and structure In December 2018, we announced our intention to simplify our organizational structure through the discontinuation of the existing legacy matrix, country and regional structures, including re‑ gional Executive Committee roles. Effective April 1, 2019, our new organization will provide each business with full operational ownership of prod‑ ucts, support functions, research and develop‑ ment, and geographic territories. The businesses will be the single interface to customers, maxi‑ mizing proximity and speed. Corporate activities will focus on Group strategy, portfolio and performance management, capital allocation, core technologies and the ABB Ability™ platform. In line with the simplification, as of April 1, 2019, we will operate four customer‑focused, entrepre‑ neurial businesses: Electrification, Industrial Au‑ tomation, Motion and Robotics & Discrete Automation. — Capital expenditures innovative artificial intelligence research. The share of emerging markets capital expenditures as a percentage of total capital expenditures in 2018, 2017 and 2016 was 31 percent, 28 percent and 36 percent, respectively. At December 31, 2018, construction in progress for property, plant and equipment was $464 mil‑ lion, mainly in the U.S., China, Sweden, Finland and Germany. At December 31, 2017, construction in progress for property, plant and equipment was $511 million, mainly in China, the U.S., Switzerland, Sweden and Germany, while at December 31, 2016, construction in progress for property, plant and equipment was $342 million, mainly in China, the U.S., Germany, Sweden and Switzerland. Our capital expenditures relate primarily to property, plant and equipment. For 2019, we es‑ timate the expenditures for property, plant and equipment will be higher than our annual depre‑ ciation and amortization charge, excluding acquisition‑related amortization. Total capital expenditures for property, plant and equipment and intangible assets (excluding intan‑ gibles acquired through business combinations) amounted to $772 million, $752 million and $632 mil‑ lion in 2018, 2017 and 2016, respectively. In 2018, 2017 and 2016, capital expenditures were 16 per‑ cent, 10 percent and 27 percent lower, respec‑ tively, than depreciation and amortization. Ex‑ cluding acquisition‑related amortization, capital expenditures were 20 percent, 24 percent and 1 percent higher, respectively, than depreciation and amortization. Capital expenditures in 2018 remained at a signifi‑ cant level in mature markets, reflecting the geo‑ graphic distribution of our existing production fa‑ cilities. Capital expenditures in Europe and North America in 2018 were driven primarily by up‑ grades and maintenance of existing production facilities, mainly in the U.S., Finland, Italy, Sweden and Austria, including a state‑of‑the‑art innova‑ tion and training campus in Austria, which will be‑ come one of our largest research and develop‑ ment centers. Capital expenditures in emerging markets were highest in China, Poland and India. Capital expenditures in emerging markets were made primarily to increase production capacity by investing in new or expanded facilities. We are planning to build an advanced, automated and flexible robotics factory in China, which is de‑ signed to combine our connected digital technol‑ ogies, state‑of‑the‑art collaborative robotics and ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 94 — Supplies and raw materials We purchase a variety of supplies and products which contain raw materials for use in our produc‑ tion and project execution processes. The primary materials used in our products, by weight, are copper, aluminum, steel, mineral oil and various plastics. We also purchase a wide variety of fabri‑ cated products, electronic components and sys‑ tems. We operate a worldwide supply chain man‑ agement 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 a global, divisional and/or regional level, take ad‑ vantage 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 ac‑ tivities 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 con‑ tain steel, copper, aluminum, crude oil and other commodities. Continuing global economic growth in many emerging economies, coupled with the volatility in foreign currency exchange rates, has led to significant fluctuations in these raw material costs over the last few years. While we expect global commodity prices to remain highly volatile, we expect to offset some market volatil‑ ity 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 lead‑ ing exchanges. ABB’s hedging policy is designed to safeguard margins by minimizing price volatil‑ ity and providing a stable cost base during order execution. In addition to using hedging to reduce our exposure to fluctuations in raw materials prices, in some cases we can reduce this risk by incorporating changes in raw materials prices into the prices of our end products (through price escalation clauses). Overall, during 2018 supply chain management personnel in our businesses, and in the countries in which we operate, along with the global cate‑ gory teams, continued to focus on value chain op‑ timization efforts in all areas, while maintaining and improving quality and delivery performance. In August 2012, the SEC issued its final rules re‑ garding “Conflict Minerals”, as required by sec‑ tion 1502 of the Dodd‑Frank Wall Street Reform and Consumer Protection Act. We initiated con‑ flict minerals processes in 2013 and have continu‑ ously improved and tailored the processes to our value chain. We continue to work with our suppli‑ ers and customers, to enable us to comply with the rules and disclosure obligations. Further infor‑ mation on ABB’s Conflict Minerals policy and sup‑ plier requirements can be found under “Material Compliance” at new.abb.com/about/supplying — Management overview ABB reached the conclusion of its Next Level strat‑ egy in 2018. The strategy, in execution since 2014, has focused on three areas: profitable growth, re‑ lentless execution and business‑led collaboration. During this period ABB transitioned its portfolio and operations to create a streamlined and strengthened company with two value proposi‑ tions: bringing electricity from any power plant to any plug and automating industries from natural resources to finished products. ABB has driven ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 95 profitable growth through its entrepreneurial divi‑ sions, continuing to invest in sales, research and development, and its leading digital solutions portfolio, ABB Ability™. In 2018, the Group was bet‑ ter positioned in a better market compared to 2017. reduction to deliver approximately $200 million of annual cost synergies by year five. The transaction includes a long‑term strategic supply relationship with GE and allows ABB long‑term use of the GE brand. Profitable growth During 2018, ABB recorded solid order growth across all divisions and regions as the company’s pioneering technology leadership in digital indus‑ tries advanced. Also during 2018, ABB Ability™ solutions were recognized as global leaders in Distributed Control Systems and Enterprise Asset Management software by industry analyst Arc Ad‑ visory Group. ABB's Net Promoter Score measure of customer satisfaction increased to 57, having tripled since 2010. ABB shifted its center of gravity significantly through ongoing portfolio management, driving to‑ wards greater competitiveness, higher growth and lower risk. The integration of Bernecker + Rainer Industrie‑Elektronik GmbH (B&R) into ABB’s Indus‑ trial Automation division to form its global Ma‑ chine & Factory Automation business unit is on track to increase mid‑term revenues in the busi‑ ness unit to a target of more than $1 billion. In Sep‑ tember 2018, ABB acquired Intrion, which is head‑ quartered in Belgium. The transaction will advance ABB’s logistics robotics offering to gain a strong foothold in a market that offers strong growth op‑ portunities. Also in September, ABB completed its acquisition of AB Rotech, a privately owned com‑ pany headquartered in Bursa, Turkey. AB Rotech has 20 years’ experience in robotic welding solu‑ tions and services for the automotive industry. The acquisition will boost ABB’s robotic welding solu‑ tions for all tiers in the growing automotive seg‑ ment. In August 2018, ABB sold its terminal block business, Entrelec, further demonstrating ABB’s commitment to active portfolio management. At the end of June 2018, ABB completed the acqui‑ sition of General Electric’s (GE) global electrifica‑ tion solutions business, GEIS. GEIS sells to more than 100 countries and has an established installed base with strong roots in North America. This pur‑ chase strengthens ABB’s position as a global leader in electrification and expands its access to the at‑ tractive North American market and early‑cycle business. The integration of GEIS into ABB’s Electri‑ fication Products division as its Industrial Solu‑ tions business unit (EPIS) is well underway. ABB continues to work to bring EPIS’ margin up to peer levels through an extensive turnaround plan that prioritizes product and technology portfolio har‑ monization, footprint optimization, supply chain savings and other selling and administrative cost ABB continues to invest to drive organic growth in a disciplined manner. Building on the integration of B&R, ABB announced, in April 2018, a €100 mil‑ lion investment to build a state‑of‑the‑art research center in Eggelsberg, Austria. The new campus will go into operation in 2020. ABB also inaugurated its advanced innovation and manufacturing hub in Xiamen, China, in November 2018. The hub is ex‑ pected to cost $300 million to develop and, at 425,000 square meters, is ABB’s largest innovation and manufacturing site, employing 3,500 people and covering the full range of business activities. In November, ABB further announced its intent to invest $150 million to build a factory‑of‑the‑future for robotics in Shanghai, China. ABB is China’s number one robotics manufacturer, employing more than 2,000 engineers, technology experts and operational leaders in 20 locations across the country. The new factory will combine con‑ nected digital technologies, state‑of‑the‑art col‑ laborative robotics and cutting‑edge artificial intelligence research, and is expected to be com‑ missioned by the end of 2020. Relentless execution Further to the completion of the business model change for EPC, a non‑core business unit was es‑ tablished within Corporate and Other effective January 1, 2018, reporting directly to the CFO to manage the wind down of remaining EPC activi‑ ties. Related to this, in September 2018, ABB com‑ menced transferring certain projects in its turn‑ key AC Substation business to Linxon, a new joint venture with SNC‑Lavalin. SNC‑Lavalin has a ma‑ jority and controlling interest in the joint venture. ABB is building on the achievements of the 1,000‑day programs that were completed at the end of 2017 with a continued strong focus on Sup‑ ply Chain Management and Operations Quality. Gaps in performance, informed by customer feed‑ back, are rigorously identified and addressed using Lean Six Sigma methods. ABB has about 1,500 con‑ tinuous improvement projects underway, led from within each division. ABB continues to benefit from its ongoing cost management and productivity efforts. Savings outpaced price impacts and commodity effects, including those driven by the introduction of trade tariffs, in particular in the United States, during 2018. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 96 Business-led collaboration ABB continues to strengthen its brand. Effective March 1, 2018, ABB integrated Baldor Electric Com‑ pany into its global brand. On October 1, 2018, Thomas & Betts was also officially migrated into the ABB global brand. ABB continuously strengthens the collaboration with its key customers through a focused account and segment management ap‑ proach. Dedicated sales executives serve the named customers with the clear aim of ensuring outstand‑ ing customer experience and profitable growth. Strategic partnership developments included the formation of a global alliance to provide industrial grade edge data center solutions between ABB, Hewlett Packard Enterprise and Rittal, building on the success of prior co‑operation and a software alliance for collaborative robotics with Kawasaki Heavy Industries. Further, in October 2018, ABB and the Shanghai municipal government signed a comprehensive strategic co‑operation agreement focused on supporting industry, energy, transport and infrastructure in the Shanghai region of China, and to support the “Made in Shanghai” manufac‑ turing initiative. In January 2018, ABB announced a ground break‑ ing multi‑year partnership agreement with the Formula E electric car motor racing series, now known as the “ABB FIA Formula E Championship”. ABB FIA Formula E serves as a competitive plat‑ form to develop and test e‑mobility relevant elec‑ trification and digitalization technologies. Strategy update: shaping a leader focused in digital industries On December 17, 2018, ABB announced its new strategy, with the company proposing fundamen‑ tal actions to focus, simplify and lead in digital in‑ dustries, for enhanced customer value and share‑ holder returns. ABB also announced an agreed sale of its Power Grids, expanding its existing partnership with Hitachi Ltd (Hitachi) and en‑ abling ABB to increase its focus on digital indus‑ tries, which is a rapidly developing market offer‑ ing attractive growth prospects. Starting April 1, 2019, ABB intends to simplify the group’s business model through the discontinuation of the legacy matrix structure, as well as shape four leading businesses aligned with customer patterns: Elec‑ trification, Industrial Automation, Motion and Ro‑ botics & Discrete Automation. 110,000 employees. Its four, customer‑focused, en‑ trepreneurial businesses are either the global num‑ ber one or two player in their respective markets. ABB’s addressable market is expected to grow by 3.5 to 4.0 percent per year, growing by $140 billion to reach $550 billion by 2025. Driving this demand will be the growing influence of electric mobility, data centers and robotics. ABB’s new organization will provide each business with full entrepreneurial ownership of operations, functions, research and development, and territo‑ ries. ABB’s new operating model, ABB‑OS™, will provide a common framework across the group governing management processes, such as mar‑ ket validation, budgeting and portfolio manage‑ ment, in order to facilitate clear decision making and a balanced approach to value creation. Under ABB‑OS™, the businesses will be the single interface to customers, maximizing proximity and speed. The corporate center will be further streamlined, while existing country and regional structures including regional Executive Committee roles will be discontinued after the closing of the Power Grids transaction. Existing resources at the country level will strengthen the new businesses. Further, ABB expects the ABB‑OS™ simplification program to drive approximately $500 million an‑ nual run‑rate cost reductions across the group, with the full run‑rate targeted during 2021. Ap‑ proximately $300 million of savings are planned to be realized from the businesses, for example through a reduction of areas of business respon‑ sibility through combining businesses and elimi‑ nating management layers, and optimizing ABB’s manufacturing footprint. Approximately $200 mil‑ lion of savings are planned to come from Group functions and a leaner corporate center. ABB plans to demonstrate improved commercial quality of business and enhance exposure to faster growing markets with a greater emphasis on high value‑add solutions, lower risk, less large‑order volatility and more recurring revenue streams through digital solutions, software and services. ABB’s investment proposition is reflected in a new medium‑term target framework for the Group: • 3 to 6 percent annual comparable revenue growth, based on current economic outlook, • Operational EBITA margin of 13 to 16 percent, • Return on Capital Employed (ROCE) of 15 to 20 percent, • Cash conversion to net income of approximately The new ABB is expected to generate around $29 billion in annual revenues and have around 100 percent, and • Basic EPS growth above revenue growth. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 97 Outlook Macroeconomic signs are mixed in Europe but are trending positively in the United States, and growth is expected to continue in China. The overall global market is growing, with rising geo‑ political uncertainties in various parts of the world. Oil prices and foreign exchange translation effects are expected to continue to influence the company’s results. The attractive long‑term demand outlook in ABB’s three major customer sectors – utilities, industry and transport & infrastructure – is driven by the Energy and Fourth Industrial Revolutions. We be‑ lieve ABB is well‑positioned to tap into these op‑ portunities for long‑term profitable growth with its market‑leading digital offering ABB Ability™, strong market presence, broad geographic and business scope, technology leadership and finan‑ cial strength. Capital allocation The Board of Directors is proposing a tenth con‑ secutive increase in the dividend to 0.80 Swiss francs per share at the 2019 Annual General Meeting. ABB’s sustained capital allocation priorities are unchanged: • funding organic growth, research and development, and capital expenditures at attractive cash returns, • paying a rising, sustainable dividend, • investing in value‑creating acquisitions, and • returning additional cash to shareholders. Following the expected completion of the sale of 80.1 percent of our Power Grids business to Hita‑ chi in the first half of 2020, valuing the business at $11 billion, ABB intends to return 100 percent of the net cash proceeds to shareholders in an expe‑ ditious and efficient manner. ABB intends to maintain the level of dividend per share post close and aims to maintain its “single A” credit rating long term. — Application of critical accounting policies General We prepare our Consolidated Financial State‑ ments in accordance with U.S. GAAP and present these in U.S. dollars unless otherwise stated. The preparation of our financial statements re‑ quires us to make assumptions and estimates that affect the reported amounts of assets, liabil‑ ities, revenues and expenses and the related dis‑ closure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, in‑ cluding, but not limited to, those related to: gross profit margins of performance obligations satis‑ fied over time; costs of product guarantees and warranties; provisions for bad debts; recoverabil‑ ity of inventories, investments, fixed assets, goodwill and other intangible assets; the fair val‑ ues of assets and liabilities assumed in business combinations; income tax expenses and provi‑ sions related to uncertain tax positions; pensions and other postretirement benefit assumptions; and legal and other contingencies. Where appropriate, we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the cir‑ cumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily ap‑ parent 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 peri‑ odically, could materially impact our Consolidated Financial Statements. We also deem an account‑ ing policy to be critical when the application of such policy is essential to our ongoing operations. We believe the following critical accounting poli‑ cies require us to make difficult and subjective judgments, often as a result of the need to make ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 98 estimates regarding matters that are inherently uncertain. These policies should be considered when reading our Consolidated Financial Statements. Revenue recognition A customer contract exists if collectability under the contract is considered probable, the contract has commercial substance, contains payment terms, as well as the rights and commitments of both parties, and has been approved. By analyzing the type, terms and conditions of each contract or arrangement with a customer, we determine which revenue recognition method applies. We offer arrangements with multiple performance obligations to meet our customers’ needs. These arrangements may involve the delivery of multiple products and/or performance of services (such as installation, training and maintenance) and the de‑ livery and/or performance may occur at different points in time or over different periods of time. Goods and services under such arrangements are evaluated to determine whether they form distinct performance obligations and should be accounted for as separate revenue transactions. We allocate the sales price to each distinct performance obli‑ gation based on the price of each item sold in sep‑ arate transactions at the inception of the arrangement. We recognize revenues when control of goods or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for these goods or ser‑ vices. Control is transferred when the customer has the ability to direct the use and obtain the benefits from the goods or services. Control transfer for non‑customized products is not considered to have occurred, and therefore no revenues are recognized, until the customer has taken title to the products and assumed the risks and rewards of ownership of the products speci‑ fied in the purchase order or sales agreement. Generally, the transfer of title and risks and re‑ wards of ownership are governed by the contrac‑ tually defined shipping terms. We use various International Commercial shipping terms (as pro‑ mulgated by the International Chamber of Com‑ merce) in our sales of products to third party cus‑ tomers, such as Ex Works (EXW), Free Carrier (FCA) and Delivered Duty Paid (DDP). We generally recognize revenues for the sale of customized products, including integrated automation and electrification systems and solutions, on an over time basis using the percentage‑of‑completion method of accounting. These systems are generally accounted for as a single performance obligation as we are required to integrate equipment and services into one de‑ liverable for the customer. Revenues are recog‑ nized as the systems are customized during the manufacturing or integration process and as con‑ trol is transferred to the customer as evidenced by our right to payment for work performed or by the customer’s ownership of the work in process. We use the cost‑to‑cost method to measure prog‑ ress towards completion on contracts. Under this method, progress of contracts is measured by ac‑ tual 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 ac‑ counting involves the use of assumptions and projections, principally relating to future material, labor and project‑related overhead costs as well as estimates of the amount of variable consider‑ ation to which we expect to be entitled to. As a consequence, there is a risk that total contract costs or the amount of variable consideration will either exceed or be lower than, respectively, those we originally estimated (based on all information reasonably available to us) and the margin will de‑ crease or the contract may become unprofitable. This risk increases if the duration of a contract in‑ creases because there is a higher probability that the circumstances upon which we originally devel‑ oped our estimates will change, resulting in in‑ creased costs that we may not recover. Factors that could cause costs to increase include: • unanticipated technical problems with equipment supplied or developed by us which may require us to incur additional costs to remedy, • changes in the cost of components, materials or labor, • difficulties in obtaining required governmental permits or approvals, • project modifications creating unanticipated costs, • suppliers’ or subcontractors’ failure to perform, and • delays caused by unexpected conditions or events. Changes in our initial assumptions, which we re‑ view 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 rec‑ ognizing changes in estimates cumulatively, ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 99 recorded revenue and costs to date reflect the current estimates of the stage of completion of each project. Additionally, losses on such con‑ tracts are recognized in the period when they are identified and are based upon the anticipated ex‑ cess of contract costs over the related contract revenues. Revenues from service transactions are recog‑ nized 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 activi‑ ties 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 activi‑ ties that include personnel and accompanying spare parts, training and installation and commis‑ sioning of products as a stand‑alone service or as part of a service contract. Revenues are reported net of customer rebates, early settlement discounts, and similar incentives. Rebates are estimated based on sales terms, his‑ torical experience and trend analysis. The most common incentives relate to amounts paid or cred‑ ited to customers for achieving defined volume levels. Taxes assessed by a governmental authority that are directly imposed on revenue‑producing transactions between us and our customers, such as sales, use, value‑added and some excise taxes, are excluded from revenues. Accounts receivable from customer contracts are regularly reviewed for collectability and allow‑ ances are calculated to estimate those receivables that will not be collected. These reserves assume a level of default based on historical information, as well as knowledge about specific invoices and customers. The risk remains that actual defaults will vary in number and amount from those origi‑ nally estimated. As such, the amount of revenues recognized might exceed 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. Contingencies As more fully described in “Note 15 Commitments and contingencies” to our Consolidated Financial Statements, we are subject to proceedings, litiga‑ tion 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 anal‑ ysis of each individual issue, often with assis‑ tance from both internal and external legal coun‑ sel and technical experts. The required amount of a provision for a contingency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution. We record provisions for our contingent obliga‑ tions when it is probable that a loss will be in‑ curred and the amount can be reasonably esti‑ mated. 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 es‑ timated range when a single best estimate is not determinable. In some cases, we may be able to recover a portion of the costs relating to these obligations from insurers or other third parties; however, we record such amounts only when it is probable that they will be collected. We provide for anticipated costs for warranties when we recognize revenues on the related prod‑ ucts or contracts. Warranty costs include calcu‑ lated costs arising from imperfections in design, material and workmanship in our products. We generally make individual assessments on con‑ tracts 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 war‑ ranty 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 ben‑ efits” to our Consolidated Financial Statements, we have a number of defined benefit pension and other postretirement plans and recognize an as‑ set 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 as‑ sumptions, may materially affect the pension ob‑ ligations. The effects of actual results differing ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 100 from assumptions and the changing of assump‑ tions are included in net actuarial loss within “Ac‑ cumulated 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 obli‑ gation (PBO) and the fair value of plan assets is rec ognized in earnings over the expected average remaining working lives of the employees partici‑ pating in the plan, or the expected average re‑ maining lifetime of the inactive plan participants if the plan is comprised of all or almost all inactive participants. Otherwise, the actuarial gain or loss is not recognized in the Consolidated Income Statements. We use actuarial valuations to determine our pen‑ sion and postretirement benefit costs and cred‑ its. The amounts calculated depend on a variety of key assumptions, including discount rates, mortality rates and expected return on plan as‑ sets. Under U.S. GAAP, we are required to consider current market conditions in making these as‑ sumptions. In particular, the discount rates are re‑ viewed 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 per‑ centage point decrease in the discount rate would have increased the PBO related to our defined ben‑ efit pension plans by $390 million while a 0.25 per‑ centage point increase in the discount rate would have decreased the PBO related to our defined benefit pension plans by $370 million. The expected return on plan assets is reviewed regularly and considered for adjustment annually based upon the target asset allocations and rep‑ resents 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, re‑ spectively, the net periodic benefit cost in 2018 by $26 million. The funded status, which can increase or decrease based on the performance of the financial mar‑ kets or changes in our assumptions, does not rep‑ resent 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 Decem‑ ber 31, 2018, our defined benefit pension plans were $1,677 million underfunded compared to an underfunding of $1,413 million at December 31, 2017. Our other postretirement plans were under‑ funded by $120 million and $132 million at Decem‑ ber 31, 2018 and 2017, respectively. We have multiple non‑pension postretirement benefit plans. Our health care plans are generally contributory with participants’ contributions ad‑ justed annually. For purposes of estimating our health care costs, we have assumed health care cost increases to be 6.7 percent per annum for 2019, gradually declining to 5.0 percent per an‑ num by 2028 and to remain at that level thereafter. Income taxes In preparing our Consolidated Financial State‑ ments, we are required to estimate income taxes in each of the jurisdictions in which we operate. Tax expense from continuing operations is recon‑ ciled 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 ex‑ tent, tax exempt in Switzerland. Therefore, gener‑ ally no or only limited Swiss income tax has to be provided for on the repatriated earnings of for‑ eign subsidiaries. There is no requirement in Swit‑ zerland 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 predomi‑ nantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely deter‑ mines our global weighted‑average tax rate. We account for deferred taxes by using the asset and liability method. Under this method, we de‑ termine 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 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 101 tax asset when it is more likely than not that the asset will be realized. We regularly review our de‑ ferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary dif‑ ferences. 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 un‑ less the change relates to discontinued opera‑ tions, in which case the change is recorded in “In‑ come from discontinued operations, net of tax”. Unforeseen changes in tax rates and tax laws, as well as differences in the projected taxable in‑ come 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 trea‑ ties 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 sub‑ sidiaries, insofar as such earnings are not perma‑ nently reinvested or no other reasons exist that would prevent the subsidiary from distributing them. No deferred tax liability is set up, if retained earnings are considered as permanently rein‑ vested, and used for financing current operations as well as business growth through working capi‑ tal and capital expenditure in those countries. We operate in numerous tax jurisdictions and, as a result, are regularly subject to audit by tax au‑ thorities. We provide for tax contingencies when‑ ever 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 posi‑ tion, 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 determina‑ tion of tax audits and any related litigation could be different than that which is reflected in our in‑ come 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 un‑ certainty in income taxes. The first step is to eval‑ uate the tax position for recognition by determin‑ ing 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 re‑ lated appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. The required amount of provisions for contingen‑ cies of any type may change in the future due to new developments. Business combinations The amount of goodwill initially recognized in a business combination is based on the excess of the purchase price of the acquired company over the fair value of the assets acquired and liabilities assumed. The determination of these fair values requires us to make significant estimates and as‑ sumptions. For instance, when assumptions with respect to the timing and amount of future reve‑ nues and expenses associated with an asset are used to determine its fair value, but the actual timing and amount differ materially, the asset could become impaired. In some cases, particu‑ larly for large acquisitions, we may engage inde‑ pendent third‑party appraisal firms to assist in determining the fair values. Critical estimates in valuing certain intangible assets include but are not limited to: future ex‑ pected cash flows of the acquired business, brand awareness, customer retention, technology obso‑ lescence and discount rates. In addition, uncertain tax positions and tax‑related valuation allowances assumed in connection with a business combination are initially estimated at the acquisition date. We reevaluate these items quarterly, based upon facts and circumstances that existed at the acquisition date with any ad‑ justments to our preliminary estimates being re‑ corded to goodwill provided that we are within the twelve‑month measurement period. Subse‑ quent to the measurement period or our final de‑ termination of the tax allowance’s or contingen‑ cy’s estimated value, whichever comes first, changes to these uncertain tax positions and tax‑related valuation allowances will affect our provision for income taxes in our Consolidated In‑ come Statements and could have a material im‑ pact on our results of operations and financial po‑ sition. The fair values assigned to the intangible ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 102 assets acquired are described in “Note 4 Acquisi‑ tions and business divestments” as well as “Note 11 Goodwill and other intangible assets”, to our Consolidated Financial Statements. Goodwill and other intangible assets We review goodwill for impairment annually as of October 1, or more frequently if events or circum‑ stances indicate the carrying value may not be recoverable. We use either a qualitative or quantitative assess‑ ment method for each reporting unit. The qualita‑ tive assessment involves determining, based on an evaluation of qualitative factors, whether it is more likely than not that the fair value of a report‑ ing unit is less than its carrying amount. If, based on this qualitative assessment, it is determined to be more likely than not that the reporting unit’s fair value is less than its carrying value, then a quantitative impairment test is performed. If we elect not to perform the qualitative assessment for a reporting unit, then we perform the quanti‑ tative impairment test. Our reporting units are the same as our business divisions for Electrification Products and Robot‑ ics and Motion. For the Industrial Automation di‑ vision, we determined the reporting units to be one level below the division, as the different prod‑ ucts produced or services provided by this divi‑ sion 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 in‑ cluding: (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 quantita‑ tive analysis of the reporting unit’s fair value. Key assumptions in determining the value of the re‑ porting unit include the projected level of busi‑ ness operations, the weighted‑average cost of capital, the income tax rate and the terminal growth rate. If, after performing the qualitative assessment, we conclude that events or circumstances have occurred which would indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value, or if we have elected not to perform a qualitative assessment, then a quantitative impairment test is performed. First, we calculate the fair value of the reporting unit (using an income approach 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 as‑ signed to that unit, goodwill is not impaired and no further testing is performed. However, if the carrying value of the net assets assigned to the reporting unit is equal to or exceeds the reporting unit’s fair value, we would record an impairment loss equal to the difference, up to the full amount of goodwill. Any goodwill impairment losses would be recorded as a separate line item in the income statement in continuing operations, un‑ less related to a discontinued operation, in which case the losses would be recorded in “Income from discontinued operations, net of tax”. In 2018, we performed a quantitative impairment test for all of our reporting units to reflect new as‑ sumptions and forecasts resulting from our newly developed strategic plan for the period from 2019 to 2023. The quantitative test concluded that the estimated fair values for each of our reporting units exceeded their respective carrying values by more than 20 percent and hence we concluded that none of the reporting units were “at risk” of failing the goodwill impairment test. The projected future cash flows used in the 2018 fair value calculation for all reporting units, except for Machine and Factory Automation within the In‑ dustrial Automation division, were based on ap‑ proved business plans for the reporting units which covered a period of five years plus a calculated ter‑ minal value. The after‑tax weighted‑average cost of capital of 8 percent was based on variables such as the risk‑free rate derived from the yield of 10 year U.S. treasury bonds as well as an ABB‑specific risk premium. The terminal value growth rate was as‑ sumed to be 1 percent. The mid‑term tax rate used in the test was 27 percent. For Machine and Factory Automation, which in‑ cludes the acquisition in 2017 of B&R, the projected future cash flows used in the 2018 fair value calcu‑ lation were based on an approved business plan which covered a period of eight years plus a calcu‑ lated terminal value. The business plan covered a longer projected period due to a higher growth trajectory as well as a longer term view for the business which was available following the acquisi‑ tion process. The terminal value growth rate was assumed to be 3 percent and the after tax weighted‑average cost of capital (WACC) was ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 103 9.4 percent. The mid‑term tax rate used in the test was 25 percent which is based on tax rates in coun‑ tries where the business is primarily operating. Determining the projected future cash flows re‑ quired significant judgments and estimates in‑ volving 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 eco‑ nomic factors. The projected future cash flows required signifi‑ cant judgments and estimates involving variables such as future sales volumes, sales prices, awards of large orders, production and other operating costs, capital expenditures, net working capital requirements and other economic factors. We based our fair value estimates on assumptions we believed to be reasonable, but which were in‑ herently uncertain. Consequently, actual future re‑ sults 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 as‑ sumptions used in the fair value calculation were stressed (through the use of sensitivity analysis) to determine the impact on the fair value of the reporting units. Our sensitivity analysis in 2018 showed that, holding all other assumptions con‑ stant, a 1 percentage point increase in the dis‑ count rate would have reduced the calculated fair value by approximately 13.0 percent, while a 1 per‑ centage point decrease in the terminal value growth rate would have reduced the calculated fair value by approximately 9.3 percent. In 2017, we performed a qualitative assessment and determined that it was not more likely than not that the fair value for each of these reporting units was below the carrying value. As a result, we concluded that it was not necessary to perform the quantitative impairment test. Intangible assets are reviewed for recoverability upon the occurrence of certain triggering events (such as a decision to divest a business or pro‑ jected losses of an entity) or whenever events or changes in circumstances indicate that the carry‑ ing amount may not be recoverable. We record im‑ pairment charges in “Other income (expense), net”, in our Consolidated Income Statements, un‑ less they relate to a discontinued operation, in which case the charges are recorded in “Income from discontinued operations, net of tax”. — New accounting pronouncements For a description of accounting changes and re‑ cent accounting pronouncements, including the expected dates of adoption and estimated ef‑ fects, if any, on our Consolidated Financial Statements, see “Note 2 Significant accounting policies” to our Consolidated Financial Statements. — Research and development Each year, we invest significantly in research and development. Our research and development fo‑ cuses on developing and commercializing the technologies of our businesses that are of strate‑ gic importance to our future growth. In 2018 we invested $1,147 million, or approximately 4.2 per‑ cent of our 2018 consolidated revenues on re‑ search and development activities in our continu‑ ing operations. We also had expenditures of $57 million, or approximately 0.2 percent of our 2018 consolidated revenues, on order‑related de‑ velopment activities. These are customer‑ and project‑specific development efforts that we un‑ dertake to develop or adapt equipment and sys‑ tems to the unique needs of our customers in con‑ nection with specific orders or projects. Order‑related development amounts are initially recorded in inventories as part of the work in ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 104 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 auto‑ mation 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 develop‑ ment team is to transform university research into industry‑ready technology platforms. We col‑ laborate with a number of universities and re‑ search institutions to build research networks and foster new technologies. We believe these collaborations shorten the amount of time re‑ quired to turn basic ideas into viable products, and they additionally help us recruit and train new personnel. We have built numerous university col‑ laborations in the U.S., Europe and Asia, including long‑term, strategic relationships with the Carne‑ gie Mellon University, North Carolina State Univer‑ sity, Virginia Polytechnic Institute and State Uni‑ versity, Massachusetts Institute of Technology, Imperial College London, ETH Zurich, Royal Insti‑ tute of Technology (KTH) Stockholm, Cambridge University, Dresden University of Technology, Huazhong University of Science & Technology (HUST) and Xi’an Jiaotong University (XJTU). Our collaborative projects include research on materi‑ als, sensors, micro‑engineered mechanical sys‑ tems, robotics, controls, manufacturing, distrib‑ uted power and communication. Common platforms for power and automation technologies are developed around advanced materials, effi‑ cient manufacturing, information technology and data communication, as well as sensor and actua‑ tor technology. Common applications of basic power and auto‑ mation technologies can also be found in power electronics, electrical insulation, and control and optimization. Our power technologies, including our insulation technologies, current interruption and limitation devices, power electronics, flow control and power protection processes, apply as much to large, reliable, blackout‑free transmission systems as they do to everyday household needs. Our automation technologies, including our con‑ trol and optimization processes, power electron‑ ics, sensors and microelectronics, mechatronics and wireless communication processes, are de‑ signed to improve efficiency in plants and facto‑ ries around the world, including our own. — Acquisitions and divestments Acquisitions During 2018, 2017 and 2016, ABB paid $2,638 mil‑ lion, $1,992 million and $13 million to purchase three, four and one businesses, respectively. The amounts exclude increases in investments made in cost‑ and equity‑accounted companies. The principal acquisition in 2018 was GE Industrial Solutions (GEIS), GE’s global electrification solu‑ tions business, which was acquired in June. GEIS, headquartered in the United States, has approxi‑ mately 13,500 employees and provides technolo‑ gies that distribute and control electricity and support the commercial, data center, health care, mining, renewable energy, oil and gas, water and telecommunications sectors. of product‑ and software‑based, open‑architecture solutions for machine and factory automation and employs more than 3,000 people, including about 1,000 research and development, and application engineers. It operates across 70 countries in the machine and factory automation market segment. The acquisition in 2016 was not significant. Divestments On March 1, 2017, ABB divested its high‑voltage cable system business. Total cash proceeds from all business divestments during 2017 amounted to $605 million, net of transaction costs and cash disposed. The principal acquisition in 2017 was B&R, which was acquired in July. B&R is a worldwide provider There were no significant divestments in 2016 and 2018. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 105 Planned divestment of Power Grids In December 2018, ABB announced an agreement to divest 80.1 percent of its Power Grids business to Hitachi, valuing the business at $11 billion. The business also includes certain real estate proper‑ ties which were previously reported within Corpo‑ rate and Other. The divestment is expected to be completed in the first half of 2020, following the receipt of customary regulatory approvals. As this divestment represents a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations for this business have been presented as discontin‑ ued operations and the assets and liabilities are reflected as held‑for‑sale for all periods pre‑ sented. For more information on our discontinued operations, see “Note 3 Changes in presentation of financial statements” to our Consolidated Fi‑ nancial Statements. For more information on our acquisitions and di‑ vestments, see “Note 4 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 de‑ nominated in other currencies. As a consequence, movements in exchange rates between currencies may affect: (i) our profitability, (ii) the comparabil‑ ity of our results between periods, and (iii) the re‑ ported carrying value of our assets and liabilities. We translate non‑USD denominated results of op‑ erations, assets and liabilities to USD in our Con‑ solidated Financial Statements. Balance sheet items are translated to USD using year‑end cur‑ rency exchange rates. Income statement and cash flow items are translated to USD using the rele‑ vant monthly average currency exchange rate. Increases and decreases in the value of the USD against other currencies will affect the reported results of operations in our Consolidated Income Statements and the value of certain of our assets and liabilities in our Consolidated Balance Sheets, even if our results of operations or the value of those assets and liabilities have not changed in their original currency. As foreign exchange rates impact our reported results of operations and the reported value of our assets and liabilities, changes in foreign exchange rates could signifi‑ cantly affect the comparability of our reported re‑ sults 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 be‑ tween the USD and both the EUR and the CHF are of particular importance to us due to (i) the loca‑ tion of our significant operations and (ii) our cor‑ porate headquarters being in Switzerland. The exchange rates between the USD and the EUR and the USD and the CHF at December 31, 2018, 2017 and 2016, were as follows: Exchange rates into $ EUR 1.00 CHF 1.00 2018 2017 1.15 1.02 1.20 1.02 2016 1.05 0.98 The average exchange rates between the USD and the EUR and the USD and the CHF for the years ended December 31, 2018, 2017 and 2016, were as follows: Exchange rates into $ 2018 2017 2016 EUR 1.00 CHF 1.00 1.18 1.02 1.13 1.02 1.10 1.01 When we incur expenses that are not denomi‑ nated in the same currency as the related reve‑ nues, foreign exchange rate fluctuations could af‑ fect our profitability. To mitigate the impact of exchange rate movements on our profitability, it is our policy to enter into forward foreign ex‑ change contracts to manage the foreign exchange transaction risk of our operations. In 2018, approximately 76 percent of our consoli‑ dated revenues were reported in currencies other than the USD. The following percentages of con‑ solidated revenues were reported in the following currencies: • Euro, approximately 23 percent, and • Chinese renminbi, approximately 14 percent. In 2018, approximately 73 percent of our cost of sales and selling, general and administrative ex‑ penses were reported in currencies other than the USD. The following percentages of consolidated ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 106 cost of sales and selling, general and administra‑ tive expenses were reported in the following currencies: • Euro, approximately 22 percent, and • Chinese renminbi, approximately 12 percent variations in local currency results by using a con‑ stant foreign exchange rate for all periods under comparison. Differences in our results of opera‑ tions in local currencies as compared to our re‑ sults of operations in USD are caused exclusively by changes in currency exchange rates. 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 coun‑ tries in which those subsidiaries are located. We refer to these currencies as “local currencies”. Lo‑ cal currency financial information is then trans‑ lated into USD at applicable exchange rates for in‑ clusion in our Consolidated Financial Statements. The discussion of our results of operations below provides certain information with respect to or‑ ders, revenues, income from operations and other measures as reported in USD (as well as in local currencies). We measure period‑to‑period While we consider our results of operations as measured in local currencies to be a significant in‑ dicator of business performance, local currency information should not be relied upon to the ex‑ clusion of U.S. GAAP financial measures. Instead, local currencies reflect an additional measure of comparability and provide a means of viewing as‑ pects of our operations that, when viewed to‑ gether with the U.S. GAAP results, provide a more complete understanding of factors and trends af‑ fecting the business. As local currency informa‑ tion is not standardized, it may not be possible to compare our local currency information to other companies’ financial measures that have the same or a similar title. We encourage investors to re‑ view our financial statements and publicly filed reports in their entirety and not to rely on any sin‑ gle financial measure. — Transactions with affiliates and associates In the normal course of our business, we pur‑ chase 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 en‑ gage in transactions with businesses that we have divested. We believe that the terms of the transactions we conduct with these companies are negotiated on an arm’s length basis. — Orders Our policy is to book and report an order when a binding contractual agreement has been con‑ cluded with a customer covering, at a minimum, the price and scope of products or services to be supplied, the delivery schedule and the payment terms. The reported value of an order corre‑ sponds 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 pe‑ riod, adjusted to reflect the aggregate value of any changes to the value of orders received during the period and orders existing at the beginning of the period. These adjustments, which may in the aggregate increase or decrease the orders ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 107 reported during the period, may include changes in the estimated order price up to the date of con‑ tractual performance, changes in the scope of products or services ordered and cancellations of orders. remaining portion of total orders recorded in 2018 was “base orders”, which we define as orders from third parties with a value of less than $15 million for products or services. The undiscounted value of revenues we expect to generate from our orders at any point in time is represented by our order backlog. Approximately 6.6 percent of the value of total orders we recorded in 2018 were “large orders”, which we define as or‑ ders from third parties involving a value of at least $15 million for products or services. Approximately 47 percent of the total value of large orders in 2018 were recorded in our Industrial Automation divi‑ sion. The other divisions as well as our non‑core business activities accounted for the remainder of the total large orders recorded during 2018. The 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 reve‑ nues in periods after the order is booked. Conse‑ quently, the level of large orders and orders gen‑ erally 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 re‑ duce 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 Opera‑ tional EBITA. Operational EBITA represents income from opera‑ tions excluding: • amortization expense on intangibles arising upon acquisitions (acquisition‑related amortization), • restructuring and restructuring‑related expenses, • changes in the amount recorded for obligations related to divested businesses occurring after the divestment date (changes in obligations related to divested businesses), • changes in estimates relating to opening balance sheets of acquired businesses (changes in pre‑acquisition estimates), • gains and losses from sale of businesses, • acquisition‑ and divestment‑related expenses and integration costs, • certain other non‑operational items, as well as • foreign exchange/commodity timing differences in income from operations consisting of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (c) unrealized foreign exchange movements on receivables/payables (and related assets/ liabilities). Certain other non‑operational items generally in‑ cludes: certain regulatory, compliance and legal costs, certain asset write downs/impairments as well as other items which are determined by man‑ agement on a case‑by‑case basis. See “Note 23 Operating segment and geographic data” to our Consolidated Financial Statements for a reconciliation of the total consolidated Oper‑ ational EBITA to income from continuing opera‑ tions before taxes. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 108 — Analysis of results of operations Our consolidated results from operations were as follows: ORDERS AND ORDER BACKLOG: and revenues of our divisions include interdivi‑ sional transactions which are eliminated in the “Corporate and Other” line in the tables below. ($ in millions) Orders 2018 2017 2016 28,590 25,034 23,658 Orders Order backlog at December 31, 13,084 12,491 12,950 % Change INCOME STATEMENT DATA: ($ in millions, except per share data in $) Revenues Cost of sales Gross profit Selling, general and administrative expenses 27,662 25,196 24,929 (19,118) (17,350) (17,396) 8,544 7,846 7,533 (5,295) (4,765) (4,532) Non‑order related research and development expenses (1,147) (1,013) Other income (expense), net 124 162 (967) (105) Income from operations 2,226 2,230 1,929 Net interest and other finance expense Non‑operational pension (cost) credit (190) (161) (130) 83 33 (38) ($ in millions) 2018 2017 2016 2018 2017 Electrification Products Industrial Automation Robotics and Motion Operating divisions Corporate and Other Non‑Core and divested businesses Intersegment Eliminations and Other 11,867 10,143 9,780 17% 7,631 6,553 5,990 16% 9,570 8,465 7,857 13% 29,068 25,161 23,627 16% 4% 9% 8% 6% 364 643 933 (43)% (31)% (842) (770) (902) 28,590 25,034 23,658 n.a. 14% n.a. 6% Provision for taxes (544) (583) (526) Total Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income Net income attributable to noncontrolling interests 1,575 1,519 1,235 723 846 799 2,298 2,365 2,034 (125) (152) (135) Net income attributable to ABB 2,173 2,213 1,899 Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 1,514 1,441 1,172 659 772 727 2,173 2,213 1,899 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 0.71 0.67 0.54 0.31 1.02 0.36 1.04 0.34 0.88 Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 0.71 0.67 0.54 0.31 1.02 0.36 1.03 0.34 0.88 A more detailed discussion of the orders, reve‑ nues, income from operations and Operational EBITA for our divisions follows in the sections of “Divisional analysis” below entitled “Electrifica‑ tion Products”, “Industrial Automation”, “Robotics and Motion”, and “Corporate and Other”. Orders In 2018, total orders increased 14 percent (14 per‑ cent in local currencies). Orders grew organically in all divisions with the most significant growth in the Robotics and Motion division, supported by strong orders in the Drives business while the Industrial Automation division also received strong order levels in the Marine & Ports busi‑ ness. Order growth reflected a recovery of de‑ mand in certain end‑markets as well as the de‑ mand for ABB Ability™. Orders also increased approximately 6 percent due to changes in the business portfolio as we acquired GE Industrial Solutions at the end of June 2018 and also bene‑ fitted from a full year of orders in B&R which we acquired in July 2017. For additional information about divisional order performance in all periods, please refer to the relevant sections of “Divi‑ sional analysis” below. In 2018, base orders increased 14 percent (13 per‑ cent in local currencies) with growth in all divi‑ sions. The increase in base orders reflects im‑ provements in the global economic conditions across our key markets. Large orders also in‑ creased 20 percent (18 percent in local currencies). In 2017, total orders were up 6 percent (6 percent in local currencies). Growth was driven by the Robot‑ ics and Motion division where demand was sup‑ ported by strong orders in the Robotics business. Orders grew in the Electrification Products ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP division as end‑market demand improved in the second half of the year. In 2017, orders also re‑ flected an increase in demand for ABB Ability™ solutions. Changes in the business portfolio had a limited impact on order growth as the increase in orders due to the acquisition of B&R was offset by the impacts of divestments which occurred in 2017. In 2017, base orders increased 6 percent (7 per‑ cent in local currencies) with growth in all divi‑ sions. The increase in base orders reflects im‑ provements in economic conditions across our key markets. Large orders decreased 3 percent (3 percent in local currencies). We determine the geographic distribution of our orders based on the location of the ultimate des‑ tination of the products’ end use, if known, or the location of the customer. The geographic distri‑ bution of our consolidated orders was as follows: % Change 2016 2018 2017 ($ in millions) 2018 Europe 10,725 The Americas 8,243 2017 9,202 7,006 8,920 6,520 17% 18% Asia, Middle East and Africa 9,622 8,826 8,218 9% Total 28,590 25,034 23,658 14% 3% 7% 7% 6% 109 Italy, Norway and Switzerland while orders in‑ creased in the United Kingdom, France and Spain. In the Americas orders increased 7 percent (7 per‑ cent in local currencies). In local currencies, orders increased in the U.S. and Canada. In Asia, Middle East and Africa, orders grew 7 percent (8 percent in local currencies). Orders grew in local curren‑ cies in China, India and South Korea while orders decreased in Saudi Arabia. Order backlog ($ in millions) 2018 2017 2016 2018 2017 December 31, % Change 4,113 3,098 2,839 33% 5,148 5,301 5,230 (3)% 4,016 3,823 3,514 5% 13,277 12,222 11,583 9% 9% 1% 9% 6% 555 1,055 2,308 (47)% (54)% Electrification Products Industrial Automation Robotics and Motion Operating divisions Corporate and Other Non‑core and divested businesses Intersegment Eliminations and Other (748) (786) (941) Total 13,084 12,491 12,950 n.a. 5% n.a. (4)% Orders in 2018 increased in all regions. In Europe orders grew 17 percent (14 percent in local curren‑ cies) and grew in all divisions. In local currencies, orders increased in Finland, Switzerland, Ger‑ many, Sweden and Italy while they decreased in the United Kingdom. In the Americas orders in‑ creased 18 percent (19 percent in local currencies). In local currencies, orders increased in the U.S., Brazil, Mexico and Argentina while orders de‑ creased in Canada, Chile and Panama. In Asia, Middle East and Africa orders grew 9 percent (8 percent in local currencies), driven by the Ro‑ botics and Motion division. Orders were higher in China, Japan, Egypt, Malaysia and India while they declined in Saudi Arabia, South Korea and South Africa. Growth in the Americas included a 12 per‑ cent impact due to acquisitions, including GEIS and B&R. In Europe, these acquisitions had a posi‑ tive impact of 4 percent while the impact in Asia, Middle East and Africa was 2 percent. Orders in 2017 were higher in all regions. Orders in Europe increased 3 percent (2 percent in local cur‑ rencies) due primarily to an increase in base or‑ ders compared to 2016. Orders in Europe in the Electrification Products and Industrial Automa‑ tion divisions grew in local currencies while they were flat in the Robotics and Motion division. In local currencies, orders were lower in Germany, Consolidated order backlog increased 5 percent (10 percent in local currencies) from December 31, 2017, to December 31, 2018. Order backlog in‑ creased in the Electrification Products division due to the acquisition of GEIS in June 2018 and in the Robotics and Motion division. In the Industrial Automation division, the order backlog decreased compared to the end of 2017 due to high levels of execution that could not be fully compensated with new orders. The net impact on order backlog from divestments and acquisitions was an in‑ crease of 4 percent. Consolidated order backlog declined 4 percent (9 percent in local currencies) from December 31, 2016, to December 31, 2017. Order backlog de‑ clined in the Industrial Automation division in lo‑ cal currencies while increasing in the Electrifica‑ tion Products as well as in the Robotics and Motion divisions. The decrease in the order back‑ log was mainly due to the divestment of the cable business as the net impact on order backlog from divestments and acquisitions was a decrease of 7 percent ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 110 Revenues ($ in millions) 2018 2017 2016 2018 2017 % Change Electrification Products Industrial Automation Robotics and Motion Operating divisions Corporate and Other Non‑Core and divested businesses Intersegment Eliminations and Other 11,686 10,094 9,920 16% 2% 7,394 6,879 6,654 7% 3% 9,147 8,396 7,888 9% 6% 28,227 25,369 24,462 11% 4% 273 661 1,595 (59)% (59)% Total 27,662 25,196 24,929 10% (838) (834) (1,128) n.a. n.a. 1% Revenues in 2018 increased 10 percent (9 percent in local currencies) with growth in all divisions, re‑ flecting the trend in orders during 2018. In Electri‑ fication Products, the increase in revenues was mainly attributable to the acquisition of GEIS but also other revenues through distributors and to end‑customer channels grew compared to 2017. The increase in revenues in the Industrial Automa‑ tion division was mainly attributable to the inclu‑ sion of a full year of revenues for B&R which was acquired in July 2017 and a recovery in Measure‑ ment and Analytics business. The growth in the Robotics and Motion division was mainly attribut‑ able to the growth in the Drives business. For ad‑ ditional information about the divisional revenues performance in all periods, please refer to “Divi‑ sional analysis” below. Revenues in 2017 increased 1 percent (flat in local currencies) as growth in 2017 was generally hin‑ dered by a lower opening order backlog compared to 2016. Revenues in the Robotics and Motion di‑ vision were positively impacted by growth in the Robotics business with strong demand from the automotive and general industry sectors. The in‑ crease in revenues in the Industrial Automation di‑ vision was mainly attributable to the acquisition of B&R in July 2017, partially offset by lower reve‑ nues in the division’s other businesses. Revenues in the Electrification Products division increased with growth from both the distributors as well as certain end‑customer channels. 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 dis‑ tribution of our consolidated revenues was as follows: % Change ($ in millions) 2018 2017 2016 2018 2017 Europe 10,129 9,142 8,959 The Americas 8,042 6,870 6,807 11% 17% Asia, Middle East and Africa 9,491 9,184 9,163 3% Total 27,662 25,196 24,929 10% 2% 1% 0% 1% In 2018, revenues increased in all regions. In Eu‑ rope, revenues increased 11 percent (9 percent in local currencies) reflecting growth in the Robotics and Motion division, the Electrification Products division, which benefited from the acquisition of GEIS, as well as the Industrial Automation divi‑ sion, which benefited from the inclusion of a full year of revenues from B&R. In local currencies, rev‑ enues declined in Sweden, Norway and the United Kingdom, while revenues increased in Switzer‑ land, Spain and Poland. Revenues in the Americas increased 17 percent (19 percent in local curren‑ cies), mainly driven by the acquisition of GEIS. In local currencies, revenues were higher in the U.S., Canada, Brazil, Mexico and Argentina. In Asia, Middle East and Africa, revenues increased 3 per‑ cent (3 percent in local currencies). In local curren‑ cies, revenues declined in Saudi Arabia, Qatar and South Korea while revenues increased in China, In‑ dia, and Australia. In 2017, revenues increased in Europe and in the Americas but were flat in Asia, Middle East and Af‑ rica. In Europe, revenues increased 2 percent (1 percent in local currencies) reflecting growth in the Robotics and Motion and Electrification Prod‑ ucts divisions, as well as in the Industrial Automa‑ tion division, which benefited from the acquisi‑ tion of B&R. In local currencies, revenues declined in Germany and the United Kingdom, while reve‑ nues increased in France, Italy, Spain and Sweden. Revenues in the Americas were up 1 percent (flat in local currencies). In local currencies, revenues decreased in Brazil, Canada, Chile and Peru, while revenues were higher in the United States. In Asia, Middle East and Africa, revenues were flat (also flat in local currencies). In local currencies, reve‑ nues declined in India, Japan, Saudi Arabia, South Korea and Singapore while revenues increased in China and Australia. Cost of sales Cost of sales consists primarily of labor, raw ma‑ terials and component costs but also includes in‑ direct production costs, expenses for warranties, contract and project charges, as well as order‑related development expenses incurred in connection with projects for which corresponding revenues have been recognized. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP In 2018, cost of sales increased 10 percent (10 per‑ cent in local currencies) to $19,118 million, a simi‑ lar increase as revenues. Growth was due to the acquisition of GEIS, a full year of inclusion of B&R and growth in the Robotics and Motion division. Cost of sales as a percentage of revenues in‑ creased slightly from 68.9 percent in 2017 to 69.1 percent in 2018, due to the impact of the lower gross margin business in the acquired GEIS business, the impact of higher commodity prices and certain project‑related charges in the non‑core EPC business. Cost of sales benefited from continued efforts to generate savings from supply chain and operational excellence programs. In 2017, cost of sales was flat (flat in local curren‑ cies) at $17,350 million while revenues increased slightly. As a percentage of revenues, cost of sales decreased from 69.8 percent in 2016 to 68.9 percent in 2017. The decrease in the cost of sales as a percentage of revenues occurred in all divisions except Robotics and Motion, and was impacted by the reversal in 2017 of previously re‑ corded restructuring costs. Total restructuring costs in cost of sales, net of reversals, was $72 million in 2017 compared to $126 million in 2016. In addition, cost of sales continued to re‑ flect improvements generated from supply chain programs aimed at reducing costs. In 2017, cost of sales also included additional charges re‑ corded in the turnkey full train retrofit business, which is included as a non‑core business within Corporate and Other. Selling, general and administrative expenses The components of selling, general and adminis‑ trative expenses were as follows: ($ in millions, unless otherwise stated) Selling expenses Selling expenses as a percentage of orders received 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 2018 2017 3,228 2,864 2016 2,796 11.3% 11.4% 11.8% 2,067 1,901 1,736 7.5% 7.5% 7.0% 5,295 4,765 4,532 19.1% 18.9% 18.2% 18.8% 19.0% 18.7% 111 In 2018, general and administrative expenses in‑ creased 9 percent compared to 2017 (8 percent in local currencies). As a percentage of revenues, general and administrative expenses remained at 7.5 percent. Despite a significant reduction in re‑ structuring and restructuring‑related expenses for the White Collar Productivity program of $131 million compared to last year, general and administrative expenses increased driven by the continuation of a series of strategic initiatives and additional general and administrative ex‑ penses from the acquired B&R and GEIS busi‑ nesses. General and administrative expenses in 2018 includes $297 million of stranded corporate costs compared with $286 million in 2017. Stranded costs are overhead and other manage‑ ment costs which were previously allocated to the Power Grids business which is reported as discon‑ tinued operations. In 2017, general and administrative expenses in‑ creased 10 percent compared to 2016 (9 percent in local currencies). As a percentage of revenues, general and administrative expenses increased from 7.0 percent to 7.5 percent. Although we re‑ corded a reduction of $48 million in restructuring and restructuring‑related expenses for the White Collar Productivity program compared to last year, general and administrative expenses in‑ creased driven by a series of strategic invest‑ ments including the Power Up program and addi‑ tional general and administrative expenses from the acquired B&R business. General and adminis‑ trative expenses in 2017 includes $286 million of stranded corporate costs compared with $252 million in 2016. In 2018, selling expenses increased 13 percent compared to 2017 (12 percent in local currencies) primarily driven by extended sales activities in se‑ lective business units like Robotics, Drives and Motors & Generators and additional selling ex‑ penses from the acquired B&R and GEIS busi‑ nesses. Selling expenses as a percentage of or‑ ders received decreased from 11.4 percent to 11.3 percent on higher orders received. In 2017, selling expenses increased 2 percent com‑ pared to 2016 (2 percent in local currencies) pri‑ marily driven by extended sales activities in selec‑ tive business units like Robotics and Building Products and additional selling expenses from the acquired B&R business, despite a reduction of $29 million in expenses for the White Collar Pro‑ ductivity program. Selling expenses as a percent‑ age of orders received decreased from 11.8 per‑ cent to 11.4 percent on higher orders received. In 2018, selling, general and administrative ex‑ penses increased 11 percent compared to 2017 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 112 (10 percent in local currencies) and as a percent‑ age of the average of orders and revenues, selling, general and administrative expenses decreased from 19.0 percent to 18.8 percent mainly from the impact of the higher average orders and revenues. In 2017, selling, general and administrative ex‑ penses increased 5 percent compared to 2016 (5 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses increased from 18.7 percent to 19.0 percent mainly from the impact of the higher expenses described above. Non-order related research and development expenses In 2018, non‑order related research and develop‑ ment expenses increased 13 percent (11 percent in local currencies) compared to 2017 due to ex‑ panded investment in specific future growth ar‑ eas. In 2017, non‑order related research and devel‑ opment expenses increased 5 percent (4 percent in local currencies) compared to 2016 reflecting a focused increase in investment to build up com‑ petencies in certain new technologies. Non‑order related research and development ex‑ penses as a percentage of revenues increased in 2018 to 4.1 percent, after increasing to 4.0 per‑ cent in 2017 from 3.9 percent in 2016. Other income (expense), net In 2018, “Other income (expense), net” was an in‑ come of $124 million, lower than in 2017. The pri‑ mary reason was that 2017 included a significant gain on sale of the Cables business. Partially off‑ setting this was that 2018 included lower costs for legal claims (recorded within other expense), a currency‑related gain on a substantial liquida‑ tion of a foreign subsidiary and a partial recovery of funds misappropriated by the former treasurer of our subsidiary in South Korea in previous years. In 2017, “Other income (expense), net” was an in‑ come of $162 million compared to an expense of $105 million in 2016. The change was mainly due to a significant gain recorded on the sale of the Cables business in 2017. In 2017, we also recorded higher charges in connection with certain legal claims and lower asset impairments. The change compared to 2016 also reflects that in 2016 we re‑ corded a large misappropriation loss, for the mis‑ appropriation of cash by the treasurer of our sub‑ sidiary in South Korea. Income from operations ($ in millions) 2018 2017 2016 2018 2017 % Change Electrification Products Industrial Automation Robotics and Motion Operating divisions Corporate and Other Intersegment elimination 1,290 1,352 1,094 (5)% 24% 887 798 772 11% 1,346 1,126 1,048 20% 3% 7% 3,523 3,276 2,914 8% 12% (1,302) (1,052) (989) n.a. n.a. ($ in millions) 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) recovery, net Gain on liquidation of foreign subsidiary Income from equity‑accounted companies and other income (expense), net Total (1) Excluding asset impairments. 2018 2017 2016 (37) (35) (35) 50 (36) 37 (27) 37 (57) 57 18 31 252 (10) (9) — (73) — Total 2,226 2,230 1,929 5 6 4 n.a. 0% n.a. 16% In 2018 and 2017, 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 41 124 (56) 162 33 (105) Net interest and other finance expense consists of “Interest and dividend income” offset by “Inter‑ est and other finance expense”. “Other income (expense), net” primarily includes certain restructuring and restructuring‑related ex‑ penses, 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. “Interest and other finance expense” includes in‑ terest expense on our debt, the amortization of upfront transaction costs associated with long‑term debt and committed credit facilities, commitment fees on credit facilities, foreign ex‑ change gains and losses on financial items and gains and losses on marketable securities. In ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 113 addition, interest accrued relating to uncertain tax positions is included within interest expense. “Interest and other finance expense” excludes in‑ terest expense which has been allocated to dis‑ continued operations. ($ in millions) 2018 2017 2016 Interest and dividend income 72 73 71 Interest and other finance expense Net interest and other finance expense (262) (234) (201) (190) (161) (130) In 2018, “Interest and other finance expense” in‑ creased compared to 2017 primarily due to an increase in average outstanding commercial pa‑ per borrowings and the interest expense associ‑ ated with the bonds issued in 2018. In 2017, “Interest and other finance expense” in‑ creased compared to 2016. Interest expense on issued bonds and other outstanding borrowings was lower than 2016 but was offset by higher in‑ terest charges for uncertain tax positions. Non-operational pension (cost) credit The Non‑operational pension credit of $83 million in 2018 was higher than the $33 million recorded in 2017 primarily due to a reduction in 2018 of the discount rate applicable to the computation of the defined benefit pension obligation and a larger pension asset base used in the computation of the expected return on plan assets. The change in the amount in 2017 compared to the Non‑operational pension cost of $38 million in 2016 was due pri‑ marily to changes in actuarial assumptions, includ‑ ing the discount rate but also lower curtailment and settlement costs in 2017 compared to 2016. Provision for taxes ($ in millions) 2018 2017 2016 Income from continuing operations before taxes Provision for taxes 2,119 (544) 2,102 (583) 1,761 (526) Effective tax rate for the year 25.7% 27.7% 29.9% In 2018, the effective tax rate decreased from 27.7 percent to 25.7 percent. The distribution of income within the Group resulted in a lower weighted‑average global tax rate. In addition, the impact from changes in interpretation of law and double tax treaty agreements by competent tax authorities decreased the effective tax rate. These impacts were partially offset by a negative impact from changes in valuation allowance and a lower positive impact compared to 2017 from non‑taxable amounts for net gains from sale of businesses. In 2017, the effective tax rate decreased from 29.9 percent to 27.7 percent. The distribution of income within the group resulted in a higher weighted‑average global tax rate. In addition, the impact from changes to the interpretation of law and double tax treaty agreements by competent tax authorities increased the effective tax rate. However, these were more than offset primarily by the positive impact from non‑taxable amounts for the net gain from sale of businesses and the net benefit from a change in tax rate. Income from continuing operations, net of tax As a result of the factors discussed above, income from continuing operations, net of tax, increased by $56 million to $1,575 million in 2018 compared to 2017, and increased by $284 million to $1,519 million in 2017 compared to 2016. Income from discontinued operations, net of tax Income from discontinued operations, net of tax, was $723 million, $846 million and $799 million for 2018, 2017 and 2016, respectively. In December 2018, we announced an agreement to divest 80.1 percent of our Power Grids business to Hitachi. The business also includes certain real es‑ tate properties which were previously reported within Corporate and Other. The divestment is expected to be completed in the first half of 2020, following the receipt of customary regulatory ap‑ provals. As this divestment represents a strategic shift that will have a major effect on our operations and financial results, the results of operations for this business have been presented as discontin‑ ued operations for all periods presented. Income from discontinued operations before taxes excludes certain costs which were previ‑ ously allocated to the Power Grids division as these costs were not directly attributable to the business. As a result, $297 million, $286 million and $252 million, for 2018, 2017 and 2016, respec‑ tively, of allocated overhead and other manage‑ ment costs (stranded corporate costs), which were previously included in the measure of divi‑ sion profit for Power Grids are now reported as part of Corporate and Other. In 2018, income from ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 114 discontinued operations, before taxes, includes $18 million for costs incurred to execute the transaction. Earnings per share attributable to ABB shareholders Income from discontinued operations for 2018, 2017 and 2016 included income from operations of $951 million, $1,119 million and $1,050 million, re‑ spectively. In addition, in 2018, 2017 and 2016 we recorded $228 million, $273 million and $251 mil‑ lion, respectively, as provision for taxes within discontinued operations. For additional information on the planned divest‑ ment and discontinued operations see “Note 3 Changes in presentation of financial statements” to our Consolidated Financial Statements. Net income attributable to ABB As a result of the factors discussed above, net in‑ come attributable to ABB decreased by $40 mil‑ lion to $2,173 million in 2018 compared to 2017, and increased by $314 million to $2,213 million in 2017 compared to 2016. (in $) 2018 2017 2016 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 0.71 0.67 0.54 0.31 1.02 0.36 1.04 0.34 0.88 0.71 0.67 0.54 0.31 1.02 0.36 1.03 0.34 0.88 Basic earnings per share is calculated by dividing income by the weighted‑average number of shares outstanding during the year. Diluted earn‑ ings per share is calculated by dividing income by the weighted‑average number of shares out‑ standing during the year, assuming that all poten‑ tially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise: outstand‑ ing written call options and outstanding options and shares granted subject to certain conditions under our share‑based payment arrangements. See “Note 20 Earnings per share” to our Consoli‑ dated Financial Statements. — Divisional analysis Electrification Products The financial results of our Electrification Prod‑ ucts division, including the operations of GEIS which was acquired on June 30, 2018, were as follows: ($ in millions) 2018 2017 2016 2018 2017 Orders 11,867 10,143 9,780 17% 4% % Change 11,240 9,559 9,242 18% 3% Third‑party base orders Order backlog at December 31, Revenues 11,686 10,094 4,113 3,098 2,839 9,920 33% 16% 9% 2% Income from operations Operational EBITA 1,290 1,352 1,094 (5)% 24% 1,626 1,510 1,459 8% 3% Orders Approximately two‑thirds of the division’s orders are for products with short delivery times; or‑ ders are usually recorded and delivered within a three‑month period and thus are generally con‑ sidered as short‑cycle. The remainder of orders is ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 115 comprised of smaller projects that require longer lead times, as well as larger solutions requiring engineering and installation. Substantially all of the division’s orders are comprised of base or‑ ders. In addition, approximately half of the divi‑ sion’s orders are received via third‑party distribu‑ tors; as a consequence, end‑customer market data is based partially on management estimates. In 2018, orders increased 17 percent (16 percent in local currencies) with broad‑based growth across business units and regions. The increase in orders was impacted by 12 percent due to acquisitions, primarily GEIS, which was acquired on June 30, 2018. Orders for products grew stronger than the orders for systems. Construction demand was ro‑ bust, driven by continued investment in residen‑ tial and commercial buildings. Transport & infra‑ structure demand was positive with continued investment in rail infrastructure and strong de‑ mand for electric vehicles infrastructure. Demand for data centers was also strong and resulted in the award of a few large orders. From an industry perspective, stronger oil prices earlier in the year contributed to a return to investment in oil and gas projects. Solar orders improved slightly from the low levels recorded in 2017. In 2017, orders increased 4 percent (4 percent in local currencies) with stronger order growth in the second half of the year. Orders for products increased throughout the division as end market demand improved in utilities and construction, specifically non‑residential construction. Increased demand for low‑voltage and medium‑voltage solu‑ tions was primarily driven by continued invest‑ ments in light industries such as data centers as well as food and beverage. The division’s order growth was also supported by large orders for electric vehicle products and systems, while a lower order level for solar products and systems negatively impacted the order intake in 2017. The geographic distribution of orders for our Electrification Products division was as follows: (in %) Europe The Americas Asia, Middle East and Africa 2018 2017 2016 35 32 33 37 27 36 37 27 36 Total 100 100 100 In 2018, orders grew in all regions. The relative share of orders from the Americas increased due to strong order growth in the United States in‑ cluding the impact of the acquisition of GEIS, which has a significant portion of its operations in the United States. Although the share of orders from Europe decreased slightly compared with the previous year, orders in Europe developed positively with order growth in key markets such as Germany and Italy compensating for lower or‑ der volumes in Turkey. Order growth in Asia, Mid‑ dle East and Africa was supported by growth in China, Taiwan and Egypt, whereas orders from Saudi Arabia and Qatar were significantly lower than in 2017. In 2017, relative order growth was similar in all re‑ gions, leading to a stable regional distribution. In Asia, Middle East and Africa, a positive order trend was seen in China, Australia and India. The European market performed well with order growth across the majority of countries including Germany, Turkey and Sweden. Growth in the Americas was mainly supported by the United States and Canada. Order backlog In 2018, the order backlog increased 33 percent (39 percent in local currencies). The acquisition of the GEIS business contributed 36 percentage points to the growth of the order backlog. The re‑ maining order backlog increase in local currencies reflected the receipt of orders for electric vehicle charging infrastructure with deliveries scheduled to occur after 2018. In 2017, the order backlog increased 9 percent (3 percent in local currencies), with strong growth in the Building Products business, driven by sig‑ nificant order intake for electric vehicle charging infrastructure. Revenues In 2018, revenues increased by 16 percent (16 per‑ cent in local currencies). The acquisition of the GEIS business contributed 13 percentage points of the revenue growth. Revenues grew in the short‑cycle low‑voltage product businesses, with growth broad‑based across end‑customer markets including construction, specifically non‑residential construction, and industries such as oil and gas. Revenue growth from the distributor channel was strong. There was signif‑ icant revenue growth in our electric vehicle charging infrastructure business, although the business remains a small portion of total reve‑ nues. Revenues from the medium‑voltage sys‑ tems business decreased, negatively impacted by longer lead times for the conversion of orders into revenues. Revenues decreased in solar, re‑ flecting a lower opening order backlog and the impact of continued price pressure across the solar market. In 2017, revenues increased 2 percent (2 percent in local currencies) compared to 2016. Revenues for low‑voltage products for buildings, protection and connection and installation increased, driven ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 116 by end‑market demand in utilities and construc‑ tion, specifically non‑residential construction. Across the division, revenue levels improved both from distributors as well as some end‑customer channels. Revenues were lower in medium voltage systems and in solar, impacted by a lower opening order backlog. organizational simplification. Acquisition‑related amortization was 8 percent higher than in 2017, mainly due to the GEIS acquisition. Changes in for‑ eign currencies, including the impacts from FX/ commodity timing differences summarized in the table below, negatively affected income from op‑ erations by 2 percent. The geographic distribution of revenues for our Electrification Products division was as follows: (in %) Europe The Americas Asia, Middle East and Africa 2018 2017 2016 35 32 33 37 27 36 36 27 37 Total 100 100 100 In 2018, the relative share of revenues from the Americas increased primarily due to the impact of the acquisition of GEIS, which has a significant portion of its operations in the United States. Al‑ though the relative share of revenues from Eu‑ rope decreased, revenues were higher as growth in multiple markets such as Germany, Switzerland and Netherlands helped offset a lower revenue level from Turkey. Although the share of revenues from Asia, Middle East and Africa decreased, rev‑ enues for this region were steady as a positive revenue development in China and Egypt offset lower revenue volumes from Saudi Arabia and Qatar. In 2017, the share of revenues from Europe in‑ creased, supported by positive growth in Ger‑ many. The share of revenues from the Americas was stable supported by the United States, which returned to growth. The relative share of revenues from Asia, Middle East and Africa decreased slightly despite China returning to growth and mixed results in the Middle East. Income from operations In 2018, income from operations decreased 5 per‑ cent, mainly reflecting a $145 million increase of acquisition‑related expenses and post‑acquisition integration costs compared with 2017, due to the acquisition of GEIS. Pricing actions across the product businesses and the benefits from sav‑ ings from ongoing restructuring and cost savings programs had a positive impact on the operating margin. The division realized a gain of $81 million on the sale of a business. These benefits were offset by the negative impact of higher commod‑ ity prices and pricing pressures for distribution solutions and solar. The division also recorded significant costs for warranty liabilities for cer‑ tain solar inverters. In addition, restructuring and restructuring‑related expenses in 2018 of $98 mil‑ lion were $70 million higher than in 2017, reflecting manufacturing footprint changes as well as In 2017, income from operations increased 24 per‑ cent, mainly reflecting significantly lower war‑ ranty costs than in 2016 when the division re‑ corded significant costs for a change in estimated warranty liabilities for certain solar inverters de‑ signed and sold by Power‑One. Restructuring and restructuring‑related expenses in 2017 of $28 mil‑ lion were $65 million lower than in 2016, partially because we recorded a reversal of the previously recorded estimated restructuring expenses in connection with the White Collar Productivity pro‑ gram. Acquisition‑related amortization was lower in 2017 as certain intangibles from previous acqui‑ sitions had been fully amortized. During 2017, we also realized higher income due to the impact of price increases in certain businesses and the ben‑ efits from savings resulting from ongoing re‑ structuring and cost savings programs. Partially offsetting these benefits was the impact of higher commodity prices, which affected all busi‑ nesses, as well as the impacts from pricing pres‑ sures. Changes in foreign currencies, including the impacts from FX/commodity timing differ‑ ences, positively impacted income from opera‑ tions by 3 percent. Operational EBITA The reconciliation of Income from operations to Operational EBITA for the Electrification Products division was as follows: ($ in millions) 2018 2017 2016 Income from operations 1,290 1,352 1,094 Acquisition‑related amortization Restructuring and restructuring‑related expenses(1) Changes in pre‑acquisition estimates Gains and losses on sale of businesses Acquisition‑related expenses and integration costs Certain other non‑operational items FX/commodity timing differences in income from operations 106 98 121 98 19 (81) 168 (2) 28 8 — 23 21 93 131 — — 8 28 (20) 12 Operational EBITA 1,626 1,510 1,459 (1) Amounts in 2017 and 2016 also include the incremental implementation costs in relation to the White Collar Productivity program. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 117 In 2018, Operational EBITA increased 8 percent (6 percent excluding the impacts from changes in foreign currencies) compared to 2017, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. In 2017, Operational EBITA increased 3 percent (4 percent excluding the impacts from changes in foreign currencies) compared to 2016, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. Industrial Automation The results of B&R, acquired in July 2017, have been included in the Industrial Automation divi‑ sion since the acquisition date, including for the full year 2018. The financial results of our Industrial Automation division were as follows: ($ in millions) Orders Third‑party base orders Order backlog at December 31, Revenues Income from operations Operational EBITA % Change 2018 7,631 2017 2016 2018 2017 6,553 5,990 16% 9% 6,592 5,840 5,229 13% 12% 5,148 7,394 5,301 6,879 5,230 (3)% 6,654 7% 1% 3% 887 798 772 11% 3% 1,019 953 897 7% 6% Orders Orders in 2018 increased 16 percent (15 percent in local currencies) primarily reflecting the im‑ pact of including B&R for a full‑year in 2018 which contributed 7 percent to the order growth. Large orders as a percent of total orders was 12 per‑ cent in 2018 compared to 9 percent in 2017, sup‑ ported by selective demand for cruise ships and specialty vessels. Large capital expenditure proj‑ ects in some end‑markets like oil and gas, and mining continued to be selective and at low lev‑ els. Investment in maintenance activities, digita‑ lization upgrades and other discretionary proj‑ ects improved, in particular for oil, gas and chemical, and process industry customers. De‑ mand for factory automation solutions contin‑ ued to be positive. In 2018, third‑party base or‑ ders improved 13 percent (12 percent in local currencies), in particular in the Measurement and Analytics and Machine and Factory Automation businesses. Demand for ABB Ability™ solutions and services contributed to positive third‑party base order growth. Orders in 2017 increased 9 percent (9 percent in lo‑ cal currencies) primarily reflecting the impact of the B&R acquisition which contributed 7 percent to or‑ der growth. Large orders as a percent of total or‑ ders was 9 percent in 2017 compared to 10 percent in 2016, showing a continued low level of large capi‑ tal expenditure projects in some end‑markets in‑ cluding oil and gas, and mining. Market demand for maintenance activities and other discretionary in‑ vestments improved, in particular for oil, gas and chemical customers. Demand for factory automa‑ tion solutions was positive. In 2017, third‑party base orders improved 12 percent (11 percent in local cur‑ rencies), in particular in the Measurement and Ana‑ lytics and Process Industries businesses, aided by selective capital expenditure investments in mining. The geographic distribution of orders for our In‑ dustrial Automation division was as follows: (in %) Europe The Americas Asia, Middle East and Africa Total 2018 2017 2016 47 22 31 42 23 35 42 21 37 100 100 100 Orders from all regions increased in 2018. The share of revenues for each region was affected primarily due to inclusion of B&R for a full‑year in 2018. In Europe, the share of orders increased as the operations of B&R are more concentrated in this region as well as due to strong demand for cruise and specialty vessels. Orders in the Ameri‑ cas grew but the share of orders decreased as the business of B&R is more focused in the other two regions. In Asia, Middle East and Africa, growth was steady but lower than the other regions, thus reducing this region’s share. In 2017, the share of orders from the Americas in‑ creased, helped by strong base order develop‑ ment in the U.S., mainly in the Measurement and Analytics business. In 2017, Europe maintained its share of orders as impacts from weakness in the large German market were offset from the im‑ pacts of the inclusion of B&R. The share of orders from the Asia, Middle East and Africa region de‑ clined as the region had only moderate growth due mainly to weak demand in China. Order backlog The order backlog at end of 2018 was 3 percent lower (2 percent higher in local currencies) than at the end of 2017. The backlog continued to benefit from orders for cruise and specialty vessels which are executed over multiple years. In addition, the division continued to see recovery in demand for oil, gas and chemical, and the process industries as well as strong demand for shorter cycle products. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 118 The order backlog at end 2017 was 1 percent higher (6 percent lower in local currencies) than at the end of 2016. Although the division saw some stabilization in demand, shown by a lower decline in the backlog than in previous year, the market environment was difficult while political uncer‑ tainty weakened confidence in key markets. Europe benefited from the acquisition of B&R as well as higher revenues from the Marine and Ports business. In the Americas region, revenues were higher in the U.S., especially in the Measurement and Analytics and Turbocharging businesses, though the increase was offset by revenue de‑ clines in other countries in the region. Revenues In 2018, revenues increased 7 percent (7 percent higher in local currencies) primarily reflecting the impact of including B&R for a full‑year in 2018 which contributed 6 percent to the revenue growth. The majority of the other businesses in the division also recorded higher revenues, espe‑ cially the Process Industries, Measurement and Analytics and Turbocharging businesses. Reve‑ nues were lower in the Oil and Gas, and Power Generation businesses. During the year, the divi‑ sion realized higher revenues from book‑and‑bill business and good execution of the backlog. Not‑ withstanding, the lower order backlog at the be‑ ginning of 2018 dampened revenue growth. In 2017, revenues increased 3 percent (3 percent in local currencies) compared to 2016 due to the ac‑ quisition of B&R, which contributed 6 percent to revenue growth. The majority of the division’s other businesses recorded lower revenues as the project business units suffered from a weaker opening order backlog and the market environ‑ ment dampened the book‑to‑bill ratio. However, revenues were higher in the Measurement and An‑ alytics and Turbocharging businesses. The geographic distribution of revenues for our Industrial Automation division was as follows: (in %) Europe The Americas Asia, Middle East and Africa Total 2018 2017 2016 44 21 35 42 20 38 37 22 41 100 100 100 In 2018, revenues improved in Europe and the Americas primarily benefiting from a selective re‑ covery in Process Industries and the inclusion of B&R for a full‑year in 2018. The share of revenues from Europe increased due to the inclusion of B&R. The Americas increased their share of revenues benefitting from an upturn in mining as well as continued demand for Measurement and Analytics and Turbocharging products. The share of reve‑ nues from Asia, Middle East and Africa was lower as the region recorded lower revenue growth com‑ pared to the other regions, impacted by the lower opening backlog and lower book‑and‑bill orders. In 2017, revenues continued to decline in the Americas and in Asia, Middle East and Africa while Income from operations In 2018, income from operations increased 11 per‑ cent compared to 2017. Of this increase, B&R con‑ tributed approximately 8 percent which included both the inclusion of the operations for a full‑year as well as the negative comparative impact in 2017 of purchase price adjustments (primarily for inventories) which reduced income in 2017. In ad‑ dition, income from operations benefitted from an improved revenue mix, ongoing progress in the division’s rationalization efforts and benefits real‑ ized from cost savings measures, productivity im‑ provements and solid project execution. Income from operations was also higher due to a reduc‑ tion of restructuring and restructuring‑related ex‑ penses compared to 2017. The impact from changes in foreign currencies, including the im‑ pacts from changes in FX/commodity timing dif‑ ferences summarized in the table below which, combined, negatively impacted income from op‑ erations by 4 percent. In 2017, income from operations increased 3 per‑ cent compared to 2016. The inclusion of B&R re‑ duced income from operations by 4 percent driven by the related charges for amortization of intangible assets and the higher charges in cost of sales resulting from recording the opening bal‑ ance of inventory at fair value. Offsetting this was the impact from changes in foreign currencies, in‑ cluding the impacts from changes in FX/com‑ modity timing differences summarized in the ta‑ ble below which, combined, positively impacted income from operations by 7 percent. Restructur‑ ing and restructuring‑related expenses in 2017 of $85 million were $9 million higher than in 2016. Restructuring expenses recorded for the White Collar Productivity program were $57 million lower compared to 2016 because 2017 included a net reversal of $23 million of estimated amounts recorded in previous years. This benefit was more than offset by an increased amount of restructur‑ ing expenses for specific initiatives to align the cost structure and footprint of the operations to reflect changing market conditions. Excluding these impacts, higher income from operations re‑ flects an improved mix, ongoing progress in the division’s rationalization efforts and benefits se‑ cured from the implementation of the White Col‑ lar Productivity program. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP Operational EBITA The reconciliation of Income from operations to Operational EBITA for the Industrial Automation division was as follows: ($ in millions) 2018 2017 2016 Income from operations Acquisition‑related amortization Restructuring and restructuring‑related expenses(1) Changes in pre‑acquisition estimates Gains and losses on sale of businesses Acquisition‑related expenses and integration costs Certain other non‑operational items FX/commodity timing differences in income from operations Operational EBITA 887 86 35 (11) 3 4 3 798 47 772 11 85 — (2) 52 1 76 — — 4 5 12 1,019 (28) 953 29 897 (1) Amounts in 2017 and 2016 also include the incremental implementation costs in relation to the White Collar Productivity program. In 2018, Operational EBITA increased 7 percent (7 percent excluding the impacts from changes in foreign currencies) compared to 2017. The change is due to the reasons described under “Income from operations”, excluding the explanations re‑ lated to the reconciling items in the table above. The inclusion of B&R for a full year increased Op‑ erational EBITA by 5 percent after consideration of the related adjustments in the table above re‑ lating to that business. In 2017, Operational EBITA increased 6 percent (5 percent excluding the impacts from changes in foreign currencies) compared to 2016. The change is due to the reasons described under “Income from operations”, excluding the explanations re‑ lated to the reconciling items in the table above. The acquisition of B&R increased Operational EBITA by 5 percent after consideration of the re‑ lated adjustments in the table above relating to that business. Robotics and Motion 119 % Change 2018 13% 2017 8% ($ in millions) 2018 2017 2016 9,570 8,465 7,857 Orders Third‑party base orders Order backlog at December 31, 8,560 7,651 7,029 12% 4,016 3,823 3,514 5% 9% Revenues 9,147 8,396 7,888 Income from operations Operational EBITA 1,346 1,126 1,048 20% 1,447 1,260 1,232 15% 9% 9% 6% 7% 2% Orders In 2018, orders increased 13 percent (12 percent in local currencies). Third‑party base orders grew 12 percent (11 percent in local currencies). Order growth was driven by demand from process in‑ dustries such as oil, gas, and mining and metals as well as demand from discrete industries such as automotive and food and beverage. The divi‑ sion noted rising demand from light industries for smaller robots and smaller‑sized drives and motor solutions. The division benefited from solid large order intake for robot systems from the automo‑ tive sector, including for new electric vehicle man‑ ufacturing lines, and for traction solutions from the rail industry. Orders in 2017 were 8 percent higher (8 percent in local currencies). Third‑party base orders in 2017 were 9 percent higher (9 percent in local curren‑ cies). The third‑party base order growth was driven by increased demand for operational solutions in process and discrete industries. Growth was partic‑ ularly strong in the Robotics business with strong demand from general industry sectors as well as demand for industry solutions such as motors, generators and drives. Demand from the automo‑ tive sector remained at a high level. Large orders were received for transportation‑related orders and for robotics driven by ongoing investment in the au‑ tomotive industry as well as investment by the elec‑ tronics and semiconductor industries. The divi‑ sion noted rising demand for smaller robots and smaller‑sized drives and motor as solutions for light industries, such as food and beverage, were in high demand. Orders from process industries such as the oil, gas and mining sectors stabilized. The financial results of our Robotics and Motion division were as follows: The geographic distribution of orders for our Ro‑ botics and Motion division was as follows: (in %) Europe The Americas Asia, Middle East and Africa Total 2018 2017 2016 36 30 34 35 32 33 37 33 30 100 100 100 In 2018, orders grew in all regions. The relative share of orders from Asia, Middle East and Africa ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 120 increased on double‑digit growth in China and In‑ dia. The European market performed well with or‑ der growth across the majority of countries includ‑ ing Germany, Italy and Switzerland. The relative share of orders from the Americas declined de‑ spite solid growth in the United States. In 2017, the share of orders from Asia, Middle East and Africa increased on double‑digit growth in China but was somewhat tempered by lower or‑ der growth from India, following the introduction of both a new Goods and Services Tax and a new tariff regime for wind renewables. The Americas performed well, with the U.S. market exhibiting increased demand for solutions for motors and drives. Order backlog The order backlog in 2018 increased 5 percent (10 percent in local currencies) compared to 2017. The backlog improved in all business units on strong order growth in 2018. The order backlog in 2017 increased 9 percent (1 percent in local currencies) compared to 2016. In local currencies, the backlog improved in the Motors and Generators business, while the back‑ log in the Drives and Robotics businesses re‑ mained stable. Revenues In 2018, revenues increased 9 percent (8 percent in local currencies) compared to 2017. Revenues grew in all business units driven by steady execution of the order backlog as well as book‑and‑bill busi‑ ness. Service revenues continued to improve as the division leveraged its installed base and increased customer demand for ABB Ability™ solutions. In 2017, revenues were 6 percent higher compared to 2016 (6 percent in local currencies). Revenues were positively impacted by growth in deliveries of robotics solutions for the automotive and gen‑ eral industry sectors with stronger growth in the second half of 2017, due to execution of the strong order levels received in the first half of the year. Service revenues were higher as the division ser‑ viced more of the installed base and as customers demanded remote monitoring solutions such as ABB Ability™. The geographic distribution of revenues for our Robotics and Motion division was as follows: (in %) Europe The Americas Asia, Middle East and Africa Total 2018 2017 2016 35 31 34 35 33 32 36 34 30 100 100 100 In 2018, revenues were higher in all regions. The relative share of revenues from Asia, Middle East and Africa increased on double‑digit revenue growth in China and India. The share of revenues from Europe remained steady despite revenue growth across the majority of countries including Germany, Italy and Switzerland. The relative share of revenues from the Americas declined despite generating higher revenues including moderate growth in the United States. In 2017, revenues grew in all regions. The relative share of revenues from Europe declined despite modest growth in the region, supported by Fin‑ land, Germany and Sweden. The share of revenues from the Americas decreased slightly with growth in the United States and lower revenues in Brazil. The share of revenues from Asia, Middle East and Africa increased, supported by double‑digit reve‑ nue growth in China, especially in the Robotics business. This reflected ongoing strong orders from China. Income from operations In 2018, income from operations increased 20 per‑ cent compared to 2017, driven by positive volumes and continued cost discipline. Restructuring and restructuring‑related expenses were lower in 2018 than in 2017, positively impacting income from operations. Acquisition‑related amortization was slightly lower as certain acquired intangible as‑ sets were fully amortized in early 2018. These pos‑ itive effects were partly offset by the effects of increased commodity prices and pricing pres‑ sures. Changes in foreign currencies, including the impacts from FX/commodity timing differ‑ ences summarized in the table below, positively impacted income from operations by 2 percent. In 2017, income from operations increased 7 per‑ cent compared to 2016. Income from operations benefited from positive impacts of cost reduction efforts in all businesses, including cost savings from the White Collar Productivity program. In ad‑ dition, increased volumes, especially in the Robot‑ ics business, contributed positively. Income from operations also reflected the positive impact of lower amortization of intangible assets as certain acquired intangible assets were fully amortized. These positive effects were offset by negative im‑ pacts including increased commodity prices and the impact of low capacity utilization in the Mo‑ tors and Generators business. There was no sig‑ nificant impact on income from operations from changes in foreign currencies. Operational EBITA The reconciliation of income from operations to Operational EBITA for the Robotics and Motion di‑ vision was as follows: ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP ($ in millions) Income from operations 2018 2017 1,346 1,126 2016 1,048 Acquisition‑related amortization Restructuring and restructuring‑related expenses(1) Gains and losses on sale of businesses Acquisition‑related expenses and integration costs Certain other non‑operational items FX/commodity timing differences in income from operations 63 66 94 21 64 4 2 11 — — 2 — 2 69 — — 18 3 Operational EBITA 1,447 1,260 1,232 (1) Amounts in 2017 and 2016 also include the incremental implementation costs in relation to the White Collar Productivity program. In 2018, Operational EBITA increased 15 percent (14 percent excluding the impact from changes in foreign currency exchange rates) primarily due to the reasons described under “Income from opera‑ tions”, excluding the explanations related to the reconciling items in the table above. In 2017, Operational EBITA increased 2 percent (2 percent excluding the impact from changes in foreign currency exchange rates) primarily due to the reasons described under “Income from opera‑ tions”, excluding the explanations related to the reconciling items in the table above. Corporate and Other Net loss from operations for Corporate and Other was as follows: ($ in millions) 2018 2017 2016 Corporate headquarters and stewardship Corporate research and development (496) (430) (347) (170) (128) (133) Corporate real estate 75 45 47 Net gain (loss) from sale of businesses White Collar Productivity program costs Misappropriation loss, net (17) 250 (10) — (107) 18 (9) (199) (73) (252) (29) Stranded corporate costs (297) (286) Other corporate costs (99) (83) Divested businesses and other non‑core activities (316) (304) 7 Total Corporate and Other (1,302) (1,052) (989) In 2018, the net loss from operations within Cor‑ porate and Other was $1,302 million compared to $1,052 million in 2017. The primary reason was that 2017 included a significant net gain on sales of businesses, primarily a gain of $338 million for the sale of the high‑voltage cables business. In addition, lower White Collar Productivity costs 121 were offset by an increase in corporate headquar‑ ters and stewardship costs. In 2017, the loss from operations within Corporate and Other was $1,052 million, $63 million higher than in 2016. The increase was primarily due to significant losses in divested businesses and other non‑core activi‑ ties. In addition, higher corporate headquarters and stewardship costs offset lower White Collar Productivity program costs. 2017 also included the gain on the sale of the cables businesses. In 2018, corporate headquarters and stewardship costs were $496 million, an increase of $66 million from 2017. Higher costs were due to higher costs relating to ABB Digital and the sponsorship of the ABB FIA Formula E Championship. In 2017, corpo‑ rate headquarters and stewardship costs in‑ creased to $430 million from $347 million in 2016, mainly due to higher costs for information tech‑ nology and costs relating to ABB Digital. Corporate real estate primarily includes income from property rentals and gains from the sale of real estate properties. In 2018, 2017 and 2016, in‑ come from operations in Corporate real estate in‑ cluded gains from the sale of real estate proper‑ ties of $49 million, $28 million and $33 million, respectively. As of December 31, 2017, we had incurred substan‑ tially all costs related to the White Collar Produc‑ tivity program. In 2017 and 2016, costs incurred in connection with this program amounted to $107 million and $199 million, respectively, includ‑ ing program implementation costs. In 2017, the amount decreased as 2017 included the impact of a change in estimated costs and the related rever‑ sal of the previously recorded liability. The pro‑ gram costs relate mainly to employee severance and both external and internal costs relating to the execution of the program. For further infor‑ mation on the White Collar Productivity program see “Restructuring and other cost savings initia‑ tives” below. In 2017 and 2016, we recorded a loss of $9 million and $73 million, respectively, net of expected in‑ surance recoveries, for the misappropriation of cash by the treasurer of our subsidiary in South Korea. In 2018, recoveries relating to this loss to‑ taled $18 million. Stranded corporate costs includes the amount of allocated general and administrative and other overhead costs previously included in the mea‑ sure of segment profit (Operational EBITA) for the Power Grids business which has been reclassified to discontinued operations. These allocated costs do not qualify for being reported as costs within the discontinued operation. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 122 Other corporate costs consists of operational costs of our Global Treasury Operations and cer‑ tain other charges such as costs and penalties as‑ sociated with legal cases, environmental expenses and impairment charges related to investments. Other corporate costs in 2017 were higher than the previous year as 2016 included the positive impact of a reduction in certain insurance‑related provi‑ sions for self‑insured risks. Divested businesses and other non-core activities The results of operations for certain divested businesses and other non‑core activities are pre‑ sented in Corporate and Other. Divested busi‑ nesses include the high‑voltage cables business, which was divested in March 2017. Also, certain EPC contracts relating to the oil & gas industry were divested to an unconsolidated joint venture at the end of 2017. In addition, in September 2018, we commenced transferring certain projects in our EPC business for turnkey electrical AC substa‑ tions to a new unconsolidated joint venture, Linxon, which is controlled by the SNC‑Lavalin Group. Other non‑core activities includes amounts relating to the execution and wind‑down of cer‑ tain legacy EPC and other contracts. Income from operations for divested businesses and other non‑core activities in 2018 primarily re‑ flects losses incurred in legacy substations and plant electrification EPC contracts and were driven by project cost overruns and contractual costs relating to delayed project completion. The amount in 2018 also reflects project cost overruns in the full train retrofit business. In 2017, the loss includes charges of $94 million recorded for cer‑ tain retained liabilities associated with the di‑ vested cables businesses and losses for project cost overruns in the full train retrofit business. In 2017, the amount also includes losses incurred in legacy substations and plant electrification EPC contracts driven by cost overruns, credit losses and contractual costs for delayed project completion. At December 31, 2018, our remaining non‑core ac‑ tivities primarily include the completion of the re‑ maining EPC contracts for substations and plant electrification and the completion of the remain‑ ing obligations for the full train retrofit business. Of the open order backlog at December 31, 2018, approximately 40 percent relates to contracts which are planned to be transferred to the Linxon joint venture and the majority of the remaining amounts are expected to be fulfilled in 2019. Restructuring and other cost savings initiatives White Collar Productivity program From September 2015 to December 2017, we exe‑ cuted a restructuring program to make ABB leaner, faster and more customer‑focused. The program involved the rapid expansion and use of regional shared service centers as well as a streamlining of global operations and head office functions, with business units moving closer to their respective key markets. The program in‑ volved various restructuring initiatives across all operating segments and regions. The restructuring program resulted in total an‑ nual cost savings of $1.2 billion in continuing op‑ erations. The savings were realized as reductions in cost of sales, selling, general and administra‑ tive expenses and non‑order related research and development expenses. As of December 31, 2017, we had incurred substan‑ tially all costs related to the White Collar Produc‑ tivity program. The following table outlines the costs incurred in 2017 and 2016 as well as the cumulative amount of costs incurred under the program. Net costs incurred in ($ in millions) 2017(1) 2016(1) Cumulative costs incurred up to December 31, 2017(1) Electrification Products Industrial Automation Robotics and Motion Corporate and Other Total (17) (23) (14) (32) (86) 15 34 26 32 107 72 106 56 91 325 (1) Total costs have been recast to reflect the reorganization of our operating segments as outlined in “Note 23 Operating segment and geographic data” to our Consolidated Financial Statements. During the course of the restructuring program total expected costs were reduced mainly due to the realization of significantly higher than origi‑ nally expected attrition and internal redeploy‑ ment rates. The reductions were made across all operating divisions as well as for corporate functions. In 2017, net restructuring reversals of $86 million were recorded mainly due to higher than expected rates of attrition and internal redeployment. In 2016, net restructuring costs of $107 million were recorded based on the anticipated number of per‑ sonnel to be impacted by the program and a country‑specific average severance cost per ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 123 person. Various functions including marketing and sales, supply chain management, research and development, engineering, service, and cer‑ tain other support functions were impacted in various phases commencing in 2015 and continu‑ ing in 2016 and in 2017. Over the course of the program, we will execute a number of restructuring activities across all oper‑ ating segments and functions. The following table outlines the cumulative amount of costs incurred to date and the total amount of costs expected under the program: In 2017 and 2016, we experienced a significantly higher than expected rate of attrition and rede‑ ployment and a lower than expected severance cost per employee for the employee groups af‑ fected by the restructuring programs initiated in 2015 and 2016. As a result, in 2017, we adjusted the amount of our estimated liability for restructuring which was recorded in 2016 and 2015. This change in estimate of $118 million during 2017 resulted in a reduction primarily in cost of sales of $53 million and in selling, general and administrative ex‑ penses of $55 million in the year. In 2016, we ad‑ justed the amount of our estimated liability for re‑ structuring which was recorded in 2015. This change in estimate of $86 million during 2016 re‑ sulted in a reduction primarily in cost of sales of $38 million and in selling, general and administra‑ tive expenses of $35 million for the year. The remaining cash outlays as of December 31, 2018, primarily for employee severance benefits, are expected to occur in 2019. For details of the nature of the costs incurred and their impact on the Consolidated Financial State‑ ments, see ‘‘Note 22 Restructuring and related ex‑ penses’’ to our Consolidated Financial Statements. OS program In December 2018, ABB announced a two‑year re‑ structuring program with the objective to simplify its business model and structure through the im‑ plementation of a new organizational structure driven by its businesses. The program includes the elimination of the country and regional structures within the current matrix organization, including the elimination of the three regional Executive Committee roles. The operating businesses will each be responsible for both their customer‑facing activities and business support functions, while the remaining Group‑level corporate activities will primarily focus on Group strategy, portfolio and performance management, capital allocation and core technologies. Costs incurred in 2018 Cumulative costs incurred up to December 31, 2018 Total expected costs Electrification Products Industrial Automation Robotics and Motion Corporate and Other Total 32 21 1 11 65 32 21 1 11 65 40 60 50 200 350 By the completion of the program, we expect to re‑ alize annual cost savings of approximately $500 mil‑ lion. These savings are expected to impact cost of sales, selling, general and administrative expenses and non‑order related research and development expenses. For details of the nature of the costs incurred and the impact on the Consolidated Financial State‑ ments, see “Note 22 Restructuring and related ex‑ penses” to our Consolidated Financial Statements. We expect the majority of the cash payments, pri‑ marily for employee severance benefits, to be in 2019 and 2020. We expect that our cash provided by operating activities will be sufficient to cover any expenditures for this restructuring program. Other restructuring-related activities and cost savings initiatives In 2018, 2017 and 2016, we also executed other restructuring‑related and cost savings measures to sustainably reduce our costs and protect our prof‑ itability. Costs associated with these other mea‑ sures amounted to $116 million, $181 million and $133 million in 2018, 2017 and 2016, respectively. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 124 — 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 2018, 2017 and 2016, our financial position was strengthened by the positive total cash flow from operating activities (both from continuing and discontinued operations) of $2,924 million, $3,799 million and $3,843 million, respectively. Our net debt is shown in the table below: ($ 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, 2018 2017 2,031 6,587 726 6,682 (3,445) (4,526) (712) (1,083) 4,461 1,799 Net debt at December 31, 2018, increased $2,662 million compared to December 31, 2017, as cash flows from operating activities during 2018 of $2,924 million was more than offset by cash out‑ flows for acquisitions of businesses ($2,664 mil‑ lion) (primarily GEIS), the dividend payment to our shareholders ($1,717 million), net purchases of property, plant and equipment and intangible as‑ sets ($700 million) and amounts paid to purchase treasury stock ($250 million). Other significant transactions affecting our liquidity included the is‑ suance of treasury shares for $42 million and pay‑ ments of dividends to noncontrolling shareholders of $86 million. There was no significant movement in net debt due to changes in foreign exchange rates. See “Financial position”, “Investing activi‑ ties” and “Financing activities” for further details. Our Group Treasury Operations is responsible for providing a range of treasury management ser‑ vices to our group companies, including investing cash in excess of current business requirements. At December 31, 2018 and 2017, the proportion of our aggregate “Cash and equivalents” and “Mar‑ ketable securities and short‑term investments” managed by our Group Treasury Operations amounted to approximately 38 percent and 49 percent, respectively. Throughout 2018 and 2017, the investment strat‑ egy for cash (in excess of current business re‑ quirements) has generally been to invest in short‑term time deposits with maturities of less than 3 months, supplemented at times by invest‑ ments in corporate commercial paper, money market funds, and in some cases, government se‑ curities. During 2018 and 2017, we also continued to place limited funds in connection with reverse repurchase agreements. We actively monitor credit risk in our investment portfolio and hedg‑ ing activities. Credit risk exposures are controlled in accordance with policies approved by our se‑ nior management to identify, measure, monitor and control credit risks. We have minimum rating requirements for our counterparts and closely monitor developments in the credit markets mak‑ ing appropriate changes to our investment policy as deemed necessary. In addition to minimum rat‑ ing criteria, we have strict investment parameters and specific approved instruments as well as re‑ strictions on the types of investments we make. These parameters are closely monitored on an on‑ going basis and amended as we consider necessary. Our cash is held in various currencies around the world. Approximately 24 percent of our cash and cash equivalents held at December 31, 2018, was in U.S. dollars, while other significant amounts were held in Chinese renminbi (28 percent), euro (17 percent) and Indian rupee (6 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 facil‑ ities are sufficient to support business opera‑ tions, 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 commit‑ ments for the next twelve months. See “Disclo‑ sures about contractual obligations and commitments”. Due to the nature of our operations, including the timing of annual incentive payments to employ‑ ees, 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. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 125 Debt and interest rates Total outstanding debt was as follows: whereby an event of default would occur if we were to default on indebtedness, as defined in the facility, at or above a specified threshold. ($ in millions) Short‑term debt and current maturities of long‑term debt Long‑term debt: Bonds Other long‑term debt Total debt December 31, 2018 2017 2,031 726 6,411 6,487 176 195 8,618 7,408 The increase in short‑term debt in 2018 was due to the reclassification from long‑term debt of our EUR 1,250 million 2.625% instruments due in 2019, offset by the repayment in 2018 of the CHF 350 mil‑ lion 1.5% Bonds. In addition, we increased the amount of issued commercial paper ($464 million outstanding at December 31, 2018, compared to $259 million outstanding at December 31, 2017). At December 31, 2018, Long‑term debt remained at a similar amount to the end of 2017 as the issu‑ ance in 2018 of three bonds with net proceeds to‑ taling $1,494 million was offset by the reclassifi‑ cation to short‑term debt of the EUR 1,250 million bond discussed above, which had a book value of $1,493 million at the end of 2017. 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 ex‑ posure. For example, we use interest rate swaps to effectively convert fixed rate debt into floating rate liabilities. After considering the effects of in‑ terest rate swaps, the effective average interest rate on our floating rate long‑term debt (including current maturities) of $3,106 million and our fixed rate long‑term debt (including current maturities) of $4,951 million was 1.1 percent and 3.6 percent, respectively. This compares with an effective rate of 0.6 percent for floating rate long‑term debt of $3,213 million and 3.5 percent for fixed rate long‑term debt of $3,878 million at December 31, 2017. For a discussion of our use of derivatives to mod‑ ify the interest characteristics of certain of our in‑ dividual bond issuances, see “Note 12 Debt” to our Consolidated Financial Statements. Credit facility We have a $2 billion multicurrency revolving credit facility expiring in 2021 that is available for gen‑ eral corporate purposes. No amount was drawn under the credit facility at December 31, 2018 and 2017. The facility contains cross‑default clauses The credit facility does not contain financial cove‑ nants that would restrict our ability to pay divi‑ dends or raise additional funds in the capital mar‑ kets. For further details of the credit facility, see “Note 12 Debt” to our Consolidated Financial Statements. Commercial paper At December 31, 2018, we had two commercial pa‑ per 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 • a $2 billion Euro‑commercial paper program for the issuance of commercial paper in a variety of currencies. At December 31, 2018, $292 million was outstand‑ ing under the $2 billion program in the United States, compared to $259 million outstanding at December 31, 2017. At March 27, 2019, the amount outstanding under this program had increased to $825 million. At December 31, 2018, $172 million was outstand‑ ing under the $2 billion Euro‑commercial paper program. No amount was outstanding under this program at December 31, 2017. At March 27, 2019, the amount outstanding under this program had increased to $509 million. European program for the issuance of debt The European program for the issuance of debt al‑ lows the issuance of up to the equivalent of $8 bil‑ lion 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 issu‑ ing any debt under the program are determined with respect to, and as of the date of issuance of, each debt instrument. During 2017, we issued EUR 750 million 0.75% Notes, due 2024, and during 2016, we issued EUR 700 million 0.625% Notes, due 2023, under the program. At December 31, 2018, three bonds (principal amount of EUR 1,250 million, due in 2019, principal amount of EUR 700 million, due in 2023 and principal amount of EUR 750 million, due in 2024) having a com‑ bined carrying amount of $3,100 million, were out‑ standing under the program. At December 31, ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 126 2017, the same three bonds were outstanding hav‑ ing a combined carrying amount of $3,216 million. At March 27, 2019, 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. 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, 2018 and 2017, 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 re‑ lated to the transfer of funds exist in a number of countries where we operate, including: China, Egypt, India, Indonesia, South Korea, Malaysia, Tai‑ wan (Chinese Taipei), Thailand and Turkey. 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 coun‑ tries. In addition, there are certain countries where, for tax reasons, it is not considered opti‑ mal to transfer the cash offshore. As a conse‑ quence, 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 con‑ sider these funds immediately available for the re‑ payment of debt outside the respective countries where the cash is situated, including those de‑ scribed above. At December 31, 2018 and 2017, the balance of “Cash and equivalents” and “Market‑ able securities and other short‑term investments” under such limitations (either regulatory or sub‑optimal from a tax perspective) totaled ap‑ proximately $1,796 million and $2,010 million, respectively. During 2018 we continued to direct our subsid‑ iaries in countries with restrictions to place such cash with our core banks or investment grade banks, in order to minimize credit risk on such cash positions. We continue to closely monitor the situation to ensure bank counterparty risks are minimized. — Financial position Balance sheets ($ in millions) Current assets December 31, 2018 2017 % Change Cash and equivalents 3,445 4,526 (24)% Marketable securities and short‑term investments Receivables, net Contract assets Inventories, net Prepaid expenses Other current assets 712 6,386 1,082 4,284 176 616 1,083 5,861 1,141 3,737 159 585 Assets held for sale 5,164 5,043 Total current assets 21,865 22,135 (34)% 9% (5)% 15% 11% 5% 2% (1)% For a discussion on cash and equivalents, see sec‑ tions “Liquidity and Capital Resources – Principal sources of funding” and “Cash flows” for further details. Marketable securities and short‑term investments decreased in 2018 as the amount of excess liquid‑ ity available for investments was reduced as funds were needed for acquisitions of businesses. The reduction resulted primarily in lower amounts deposited with banks with fixed deposit terms over three months (see “Cash flows – Investing ac‑ tivities”, below, and “Note 5 Cash and equivalents, marketable securities and short‑term invest‑ ments” to our Consolidated Financial Statements). ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 127 Receivables increased 9 percent (14 percent in lo‑ cal currencies). The increase was primarily due to the impact of the acquisition of GEIS. For details on the components of Receivables, see “Note 8 Receivables, net and Contract assets and liabili‑ ties” to our Consolidated Financial Statements. Contract assets decreased 5 percent (2 percent in local currencies). Inventories increased 15 percent (20 percent in lo‑ cal currencies). The increase in inventory was pri‑ marily due to the impact of the GEIS acquisition but also due to increases of inventories resulting from growth in certain businesses. and contingencies” to our Consolidated Financial Statements. Other provisions increased 7 percent (10 percent in local currencies) as we recorded higher loss or‑ der provisions for certain EPC projects in the non‑core business. The increase in Other current liabilities of 8 per‑ cent (12 percent in local currencies) was primarily due to the impact on accrued liabilities of the ac‑ quired business of GEIS. ($ in millions) 2018 2017 % Change December 31, ($ in millions) Current liabilities Accounts payable, trade Contract liabilities Short‑term debt and current maturities of long‑term debt Provisions for warranties Other provisions Other current liabilities Liabilities held for sale December 31, 2018 2017 % Change 4,424 1,707 3,736 1,792 18% (5)% 2,031 726 180% 948 1,372 3,780 4,185 909 1,277 3,509 4,520 4% 7% 8% (7)% 12% Total current liabilities 18,447 16,469 Accounts payable increased 18 percent (22 per‑ cent in local currencies) primarily as a result of the acquisition of GEIS, but as well as a result of con‑ tinuing efforts to negotiate extended payment terms with suppliers. During 2018, we also en‑ hanced our supplier payment processes and the changes resulted in generally longer payment times. The increase in Short‑term debt and current ma‑ turities of long‑term debt was primarily due to in‑ creases in the U.S. and Euro commercial paper programs of $205 million and the reclassification to short‑term debt of the EUR 1,250 million bond (having a book value of $1,431 million) partially offset by the repayment at maturity of the CHF 350 million bond. Contract liabilities decreased 5 percent (flat in lo‑ cal currencies). Provisions for warranties increased 4 percent (8 percent in local currencies). Warranties in‑ creased approximately 5 percent due to the acqui‑ sition of GEIS. In addition, we recorded an in‑ crease of $92 million in the warranty provision relating to a divested business. We also had higher claims paid in cash due to warranties in the solar business. For details on the change in the Provi‑ sion for warranties, see “Note 15 Commitments 4,133 10,764 3,804 9,536 2,607 2,425 9% 13% 8% Non-current assets Property, plant and equipment, net Goodwill Other intangible assets, net Prepaid pension and other employee benefits Investments in equity‑ accounted companies 83 87 143 (42)% 72 21% (17)% Deferred taxes 1,006 1,212 Other non‑current assets Non‑current assets held for sale Total non-current assets 469 571 (18)% 3,427 3,560 (4)% 22,576 21,323 6% In 2018, Property, plant and equipment increased 9 percent (13 percent in local currencies) predomi‑ nately due to the acquisition of GEIS, but as well due to the significant capital expenditures in the recently acquired B&R as well as the expenditures for the Xiamen hub construction in China. In 2018, Goodwill increased 13 percent (15 percent in local currencies) due primarily to the acquisi‑ tion of GEIS. Other intangible assets increased 8 percent (10 percent in local currencies) primarily due to the addition of intangibles related to the acquisition of GEIS, partially offset by the impact of amortiza‑ tion of intangibles in 2018. For additional informa‑ tion on intangible assets see “Note 11 Goodwill and other intangible assets” to our Consolidated Financial Statements. In 2018, Deferred taxes, non‑current, decreased 17 percent (11 percent in local currencies) primar‑ ily due to the impacts of the adoption of a new ac‑ counting standard affecting the income tax con‑ sequences of intra‑entity transfer of assets other than inventory (see “Note 2 Significant accounting policies” to our Consolidated Financial Statements). ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 128 December 31, Operating activities ($ in millions) 2018 2017 % Change ($ in millions) Non-current liabilities Net income 2018 2017 2,298 2,365 2016 2,034 Long‑term debt 6,587 6,682 (1)% Pension and other employee benefits Deferred taxes Other non‑current liabilities Non‑current liabilities held for sale Total non-current liabilities 1,828 927 1,589 1,050 15% (12)% 1,689 1,849 (9)% 429 470 (9)% 11,460 11,640 (2)% Long‑term debt decreased 1 percent. During 2018, we issued three new bonds with net proceeds to‑ taling $1,494 million. This was offset by the reclas‑ sification to short‑term debt of the EUR 1,250 mil‑ lion bond, which had a book value of $1,493 million at the end of 2017. See “Liquidity and Capital Re‑ sources – Debt and interest rates” for information on long‑term debt. The increase in the Pension and other employee benefits liability was primarily due to lower than expected returns on pension plan assets in 2018. For additional information, see “Note 17 Employee benefits” to our Consolidated Financial Statements. For a breakdown of Other non‑current liabilities, see “Note 13 Other provisions, other current liabil‑ ities and other non‑current liabilities” to our Con‑ solidated Financial Statements. Cash flows The Consolidated Statements of Cash Flows are shown on a continuing operations basis, with the effects of discontinued operations shown in ag‑ gregate for each major cash flow activity. The Consolidated Statements of Cash Flows can be summarized as follows: ($ in millions) 2018 2017 2016 Net cash provided by operating activities 2,924 3,799 3,843 Net cash used in investing activities Net cash used in financing activities (3,085) (1,450) (1,305) (789) (1,735) (3,355) Effects of exchange rate changes on cash and equivalents (131) 268 (104) Net change in cash and equivalents (1,081) 882 (921) Less: Income from discontinued operations, net of tax (723) (846) (799) Depreciation and amortization 916 836 870 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 – continuing operations Net cash provided by operating activities – discontinued operations (189) (406) (26) 50 639 528 2,352 2,588 2,607 572 1,211 1,236 Cash flows from operating activities of continu‑ ing operations in 2018 provided net cash of $2,352 million, a decrease of 9 percent from 2017 as higher cash effective net income (net income adjusted for depreciation, amortization and other non‑cash items) was offset by a lower improve‑ ment in working capital. Cash flow impacts from changes in working capital continued to show the impact of extending payment terms with suppli‑ ers and the changes in our supplier payment pro‑ cess, which resulted in an increase in trade pay‑ ables. Payables and inventory also increased due to higher inventories to support growth. In addi‑ tion, the timing of tax payments, including in‑ come taxes and value‑added taxes, negatively im‑ pacted cash provided by operating activities. Cash flows from operating activities in 2017 pro‑ vided net cash of $2,588 million, a decrease of 1 percent from 2016 as lower cash effective net in‑ come mostly offset the positive cash effects of stronger net working capital management. Work‑ ing capital improvements included a significant in‑ crease in trade and non‑trade payables, resulting from continuing company‑wide efforts to extend payment terms with suppliers. Partially offsetting these benefits were cash outflows resulting from higher inventories and trade receivables. In addi‑ tion, the timing of tax payments positively im‑ pacted cash provided by operating activities. Cash flows from operating activities of discontin‑ ued operations in 2018 decreased to $572 million from $1,211 million in 2017. The primary reason was lower income as well as negative impacts from the timing of cash collections on large projects and other receivables. Cash flows from operating ac‑ tivities of discontinued operations in 2017 was similar to 2016 as the impacts of higher income were offset by negative impacts from the timing of tax payments. The amount reported for cash flows from operating activities of discontinued ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 129 operations benefits directly from the allocation of stranded costs to continuing operations. Investing activities ($ in millions) Purchases of 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 investments Proceeds from maturity of investments 2018 (322) 2017 2016 (666) (4,299) (772) (752) (632) (2,664) (2,011) (26) 567 1,443 3,295 160 100 539 Proceeds from sales of property, plant and equipment 72 61 59 but was partially offset by sales of marketable se‑ curities and short‑term investments as well as the proceeds received from sales of businesses (pri‑ marily the high‑voltage cables business). We also had higher purchases of property, plant and equipment and intangible assets due to higher in‑ vestments in information technology assets as well as specific investments in facilities in the U.S. and China. In addition, changes in the impacts from derivative cash flows classified as investing activities reduced cash used in investing activi‑ ties by $120 million. The following presents purchases of property, plant and equipment and intangibles by signifi‑ cant asset category: Proceeds from sales of businesses (net of transaction costs and cash disposed) and cost‑ and equity‑accounted companies Net cash from settlement of foreign currency derivatives Other investing activities Net cash used in investing activities – continuing operations Net cash used in investing activities – discontinued operations 113 607 (1) ($ in millions) Construction in process Purchase of machinery and equipment (30) (32) 63 37 (57) 14 Purchase of land and buildings Purchase of intangible assets (2,908) (1,118) (1,108) Purchases of property, plant and equipment and intangible assets 2018 523 2017 520 2016 459 152 28 69 125 32 75 126 10 37 772 752 632 (177) (332) (197) Net cash used in investing activities for continu‑ ing operations in 2018 was $2,908 million, com‑ pared to $1,118 million in 2017. The amount in 2018 reflects higher amounts used to fund acquisitions of businesses (primarily GEIS). In addition, cash used in investing activities was higher in 2018 as 2017 included the positive cash flows resulting from reducing investments in marketable securi‑ ties and short‑term investments. Purchases of property, plant and equipment and intangible as‑ sets were slightly higher in 2018 with continued global investment including high spending on in‑ formation technology as well as large investments in the U.S. and China. We also increased our capi‑ tal expenditures in Austria with large investments in the B&R business. In addition, changes in the impacts from derivative cash flows classified as investing activities increased cash used in invest‑ ing activities by $93 million. These cash flows pri‑ marily result from the maturity and settlement of derivatives that are in place to hedge foreign cur‑ rency exposures on internal subsidiary funding and the amount of the settlement results from movements in foreign currency exchange rates throughout the year. In 2018 and 2017, we decreased the amount of our excess liquidity invested in marketable securities and short‑term investments as funds were needed for acquisitions of businesses while, in 2016, we increased the amounts invested in mar‑ ketable securities and short‑term investments. Marketable securities and short‑term investments at December 31, 2018 and 2017, consisted primar‑ ily of fixed‑term deposits with banks, available‑for‑sale debt securities as well as amounts placed in reverse repurchase agree‑ ments. At December 31, 2016, amounts were placed primarily in fixed‑term deposits with banks and in short‑term money market funds. In 2018 and 2017, the net decrease in investments during the year resulted in inflows of $405 million and $877 million, respectively, while in 2016, the net increase in investments resulted in outflows of $465 million. In 2018, acquisitions of businesses primarily rep‑ resents the purchase of GEIS, which was acquired in June. In 2017, acquisitions of businesses pri‑ marily represents the purchase of B&R, which was acquired in July, while proceeds from sales of businesses primarily represents the divestment of the high‑voltage cables and cable accessories businesses. In 2016, there were no significant ac‑ quisitions or divestments of businesses. Net cash used in investing activities in 2017 was $1,118 million, compared to $1,108 million in 2016. Cash used to fund acquisitions of businesses (pri‑ marily B&R) was significantly higher than in 2016 Cash used in investing activities from discontin‑ ued operations primarily represents net pur‑ chases of property, plant and equipment. Cash used in investing activities was higher in 2017 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP borrowings having an original maturity of more than 90 days. During 2017, $1,000 million of debt was repaid, reflecting primarily the repayment at maturity of both the USD 500 million 1.625% Notes and the AUD 400 million 4.25% Notes (in total equivalent to $803 million at dates of repayment). During 2016, $1,242 million of debt was repaid, re‑ flecting primarily the repayment at maturity of the USD 600 million 2.5% Notes and CHF 500 million 1.25% Bonds (in total equivalent to $1,106 million at dates of repayment). In 2018 and 2017, “Purchase of treasury stock” re‑ flects the cash paid to purchase 10 million of our own shares on the open market in each period. In 2016, the amount reflects the cash paid to pur‑ chase 65 million of our own shares in connection with the share buyback program which was an‑ nounced in September 2014 and completed in Sep‑ tember 2016. For additional information on the share buyback program see “Note 19 Stockholders’ equity” to our Consolidated Financial Statements. Disclosures about contractual obligations and commitments The contractual obligations presented in the table below represent our estimates of future pay‑ ments under fixed contractual obligations and commitments. The amounts in the table may dif‑ fer from those reported in our Consolidated Bal‑ ance Sheet at December 31, 2018. Changes in our business needs, cancellation provisions and changes in interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Therefore, our actual pay‑ ments in future periods may vary from those pre‑ sented in the table. The following table summa‑ rizes certain of our contractual obligations and principal and interest payments under our debt instruments, leases and purchase obligations at December 31, 2018. 130 compared to both 2018 and 2016 as 2017 also in‑ cluded cash paid for acquisition of a business. Financing activities ($ in millions) 2018 2017 2016 Net changes in debt with maturities of 90 days or less Increase in debt Repayment of debt Delivery of shares 221 1,914 204 920 (144) 911 (830) (1,000) (1,242) 42 163 192 Purchase of treasury stock (250) (251) (1,299) Dividends paid (1,717) (1,635) — Reduction in nominal value of common shares paid to shareholders Dividends paid to noncontrolling shareholders Other financing activities Net cash used in financing activities – continuing operations Net cash used in financing activities – discontinued operations — — (1,610) (86) (35) (83) (6) (89) (27) (741) (1,688) (3,308) (48) (47) (47) Our financing cash flow activities primarily in‑ clude debt transactions (both from the issuance of debt securities and borrowings directly from banks), share transactions and payments of dis‑ tributions to controlling and noncontrolling shareholders. Net cash used in financing activi‑ ties for discontinued operations represents pri‑ marily distributions paid to noncontrolling share‑ holders of certain subsidiaries classified in discontinued operations. In 2018, the net inflow for debt with maturities of 90 days or less related primarily to combined in‑ creases of $194 million for borrowings outstand‑ ing under our commercial paper programs in the U.S. and Europe. In 2017, a net increase of $202 million related to borrowings outstanding under our commercial paper program in the U.S. In 2018, the increase in debt was due primarily to the issuance of the following: USD 300 million 2.8% Notes due 2020, USD 450 million 3.375% Notes due 2023 and USD 750 million 3.8% Notes due 2028. In 2018, the increase also included $316 million for commercial paper borrowings having an original maturity of more than 90 days. In 2017, the in‑ crease in debt was due primarily to the issuance of our EUR 750 million 0.75% Notes due 2024 (equal to $824 million at date of issuance). In 2016, the in‑ crease 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 issuance). During 2018, the CHF 350 million 1.50% bonds (equivalent to $350 million on the date of repay‑ ment) were repaid as well as repayments at matu‑ rity of $316 million in commercial paper ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 131 parties amounts paid out under such guarantees. The maximum potential exposure does not allow any discounting of our assessment of actual expo‑ sure under the guarantees. The information below reflects our maximum potential exposure under the guarantees, which is higher than our assess‑ ment of the expected exposure. ($ in millions) Total Less than 1 year 1–3 years 3–5 years More than 5 years 7,911 1,448 1,595 2,502 2,366 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 1,496 221 346 187 742 1,278 329 445 237 267 239 34 51 2,862 2,419 407 43 22 111 14 Guarantees The following table provides quantitative data re‑ garding our third‑party guarantees. The maxi‑ mum potential payments represent a worst‑case scenario, and do not reflect our expected outcomes. Total 13,786 4,451 2,844 2,991 3,500 (1) Capital lease obligations represent the total cash payments to be made in the future and include interest expense of $87 million and executory costs of $1 million. In the table above, the long‑term debt obligations reflect the cash amounts to be repaid upon matu‑ rity of those debt obligations. The cash obliga‑ tions above will differ from the long‑term debt balance reflected in “Note 12 Debt” to our Consoli‑ dated Financial Statements due to the impacts of fair value hedge accounting adjustments and pre‑ miums 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 Bal‑ ance Sheets. We have determined the interest payments re‑ lated to long‑term debt obligations by reference to the payments due under the terms of our debt obligations at the time such obligations were in‑ curred. However, we use interest rate swaps to modify the interest characteristics of certain of our debt obligations. The net effect of these swaps may be to increase or decrease the actual amount of our cash interest payment obligations, which may differ from those stated in the above table. For further details on our debt obligations and the related hedges, see “Note 12 Debt” to our Consolidated Financial Statements. Of the total of $1,163 million unrecognized tax benefits (net of deferred tax assets) at Decem‑ ber 31, 2018, it is expected that $52 million will be paid within less than a year. However, we cannot make a reasonably reliable estimate as to the re‑ lated future payments for the remaining amount. Off-balance sheet arrangements Commercial commitments We disclose the maximum potential exposure of certain guarantees, as well as possible recourse provisions that may allow us to recover from third December 31, ($ in millions) 2018 2017 Maximum potential payments(1) Performance guarantees 1,584 1,775 Financial guarantees Indemnification guarantees Total 10 64 17 72 1,658 1,864 (1) Maximum potential payments include amounts in both continuing and discontinued operations. The carrying amounts of liabilities recorded in the Consolidated Balance Sheets in respect of the above guarantees were not significant at Decem‑ ber 31, 2018 and 2017, and reflect our best esti‑ mate 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 “perfor‑ mance bonds”) with various financial institutions. Customers can draw on such performance bonds in the event that ABB does not fulfill its contrac‑ tual obligations. ABB would then have an obliga‑ tion to reimburse the financial institution for amounts paid under the performance bonds. At December 31, 2018 and 2017, the total outstand‑ ing performance bonds aggregated to $7.4 billion and $7.7 billion, respectively, of which $4.3 billion and $4.7 billion, respectively, relate to discontin‑ ued operations. There have been no significant amounts reimbursed to financial institutions un‑ der these types of arrangements in 2018, 2017 and 2016. For additional descriptions of our performance, financial and indemnification guarantees see “Note 15 Commitments and contingencies” to our Consolidated Financial Statements. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP — Consolidated Financial Statements of ABB Group 133 — Report of management on internal control over financial reporting America as well as for select Group applications. As a result of these deficiencies, the process level controls dependent on the affected applications, could not be relied upon. This material weakness did not result in any mis- statements in the financial statements. However, due to the existence of the material weakness, a reasonable possibility exists that material mis- statements in the Company’s financial state- ments would not have been prevented or detected on a timely basis. We completed additional substantive procedures prior to filing this annual report to ensure that the financial statements, prepared in accordance with U.S. GAAP, were not materially misstated. Based on these procedures no adjustments to our finan- cial statements were required. Based on its evaluation, our management has concluded that, as of December 31, 2018, as a re- sult of the material weakness described above, our internal control over financial reporting was not effective. KPMG AG, the independent registered public ac- counting firm who audited the Company’s consoli- dated financial statements, has issued an adverse opinion on the effectiveness of ABB’s internal con- trol over financial reporting as of December 31, 2018, which is included on pages 140–141 of this Annual Report. Ulrich Spiesshofer Chief Executive Officer Timo Ihamuotila Chief Financial Officer Zurich, Switzerland March 27, 2019 The Board of Directors and Management of ABB Ltd and its consolidated subsidiaries (“ABB”) are responsible for establishing and maintaining adequate internal control over financial reporting. ABB’s internal control over financial reporting is designed to provide reasonable assurance re- garding the reliability of financial reporting and the preparation and fair presentation of the pub- lished Consolidated Financial Statements in ac- cordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal con- trol 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 inad- equate because of changes in conditions, or that the degree of compliance with ABB’s policies and procedures may deteriorate. Management conducted an assessment of the ef- fectiveness of internal control over financial re- porting based on the criteria established in Inter- nal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Man- agement’s assessment of the effectiveness of in- ternal controls over financial reporting excludes the evaluation of the internal controls over finan- cial reporting for GE Industrial Solutions (GEIS), which was acquired on June 30, 2018. The total as- sets of GEIS represent 8 percent of total assets of the Company as of December 31, 2018, and the revenues and loss from continuing operations, be- fore taxes, represent 5 percent and 1 percent of total revenues and income from continuing opera- tions before taxes, respectively, of the Company for the year then ended. A material weakness is a deficiency, or a combina- tion of deficiencies, in internal control over finan- cial reporting, such that there is a reasonable pos- sibility that a material misstatement of the company's financial statements will not be pre- vented or detected on a timely basis. We have identified a material weakness in our information technology general controls (ITGCs) based on de- ficiencies in selection, development, and monitor- ing of control activities in ITGCs. We did not main- tain sufficient user access or segregation of duties controls in certain applications in North ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 134 Statutory Auditor’s Report To the General Meeting of ABB Ltd, Zurich Report of the Statutory Auditor on the Audit of the Consolidated Financial Statements Opinion As statutory auditor, we have audited the accompanying consolidated financial statements of ABB Ltd and subsidiaries (the Group), which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated income statement, statements of comprehensive income, cash flows and changes in stockholders’ equity for the year ended December 31, 2018, and the related notes (pages 143 to 215). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2018, and the consolidated results of its operations and its cash flows for the year ended December 31, 2018, in accordance with U.S. generally accepted accounting principles and comply with Swiss law. Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation 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 audit. We are a public accounting firm and are required to be independent with respect to the Group. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement, whether due to fraud or error. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Revenue recognition on long-term projects GEIS purchase price allocation Tax contingencies related to transfer pricing Statutory Auditor’s Report To the General Meeting of ABB Ltd, Zurich Report of the Statutory Auditor on the Audit of the Consolidated Financial Statements Opinion As statutory auditor, we have audited the accompanying consolidated financial statements of ABB Ltd and subsidiaries (the Group), which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated income statement, statements of comprehensive income, cash flows and changes in stockholders’ equity for the year ended December 31, 2018, and the related notes (pages 143 to 215). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2018, and the consolidated results of its operations and its cash flows for the year ended December 31, 2018, in accordance with U.S. generally accepted accounting principles and comply with Swiss law. Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation 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 audit. We are a public accounting firm and are required to be independent with respect to the Group. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement, whether due to fraud or error. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Revenue recognition on long-term projects GEIS purchase price allocation Tax contingencies related to transfer pricing 135 Planned divestment of Power Grids business Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements 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. Revenue recognition on long-term projects Key Audit Matter Our response The Group conducts a significant portion of its business under long-term projects, including construction-type, fixed price projects. Revenues from long-term contracts are recognized using the percentage of completion method of accounting. The Group uses the cost- to-cost method to measure the extent of progress towards completion of each contract. The determination of the extent of progress towards completion for long-term projects is an area of significant judgment. Management assesses total contract revenues, the scope of deliveries required to fulfill the contract, total contract cost and remaining cost to completion, all of which may deviate from original estimates, for example as a result of contract amendments or scope changes. For the estimate of cost to complete, there is also significant judgment on the recognition and measurement of technical, commercial or legal risks. Revenue recognition on long-term projects using the percentage of completion method may also be subject to potential manipulation by management to achieve performance targets. As part of our audit, we initially obtained an understanding of the Group’s long-term project business. As all revenues from long-term projects originate at component level, we performed our audit procedures by involving our component audit teams based on risk-specific instructions. To confirm that component audit teams performed adequate procedures, we were involved in the planning of relevant audit procedures, and reviewed the execution of these procedures and conclusions reached by these teams. We assessed the design and operating effectiveness of the financial reporting related internal controls by examining specific long-term projects, from the initiation of business transactions through recognition in the financial statements. As part of the substantive audit procedures, we evaluated management’s assumptions for a sample of contracts, selected based on their risk profile, examined the terms and conditions of the contracts, including variation orders, and obtained an understanding of the stage of completion through inquiring with the project managers on the status of projects and by participating in project review meetings. We analyzed whether revenues and corresponding cost of sales are recognized in the correct reporting period considering the extent of progress towards completion, and whether changes in cost estimates, caused for example by project delays or cost changes for services provided by subcontractors, were appropriately considered by management. 136 As a response to the risk of fraud in revenue recognition on long-term projects, we tested on a sample basis the accuracy of the sales recorded, based on inspection of externally available evidence, such as approvals of milestones and customer correspondence. We also inquired with external and internal legal counsels regarding alleged breaches of contract and asserted claims. We assessed the consistency of the accounting information with the project information obtained. For further information on revenue recognition on long-term projects refer to the following: — Note 2 “Significant accounting policies” GEIS purchase price allocation Key Audit Matter Our response Effective June 30, 2018, the Group has completed its acquisition of GE Industrial Solutions (GEIS) for a net consideration of $2,622 million. Taking into account the acquired net assets of $1,180 million, goodwill amounted to $1,442 million. We read the purchase agreement to understand the key terms and conditions of the transaction, and inquired with management of the Group and of the acquired business as well as employees of the accounting department and the M&A department on specific matters relevant to the accounting for the acquisition. The acquired identifiable assets and assumed liabilities are recognized at their fair value on the acquisition date. Management has appointed an external expert to assist them in the identification and measurement of acquired assets and liabilities. The notes to the financial statements indicate that the purchase price allocation is preliminary for up to 12 months after the acquisition date and is subject to refinement as more detailed analyses are completed and additional information about the fair values of the acquired assets and liabilities becomes available. The identification and measurement of acquired assets is complex and based on judgment, in particular for intangible assets. Key valuation assumptions for intangible assets include, among others, forecasted sales revenues and expected margin developments of the acquired business as well as the determination of the cost of capital. There is a risk that the fair value of the acquired assets, specifically acquired intangible assets, is incorrectly determined by management and as a result, that the goodwill related to the transaction is derived inaccurately. We evaluated the competence, capabilities and objectivity of the external valuation expert assisting management in the identification and measurement of acquired assets and liabilities. We assessed the process and the internal controls of the Group related to the purchase price allocation. In our evaluation of the appropriateness of the material assumptions made by management, including those related to the identification and measurement of intangible assets, we involved our own valuation specialists. We considered and challenged the appropriateness of the methodologies underlying the fair value estimation of the identified intangible assets. Further, we challenged the underlying business plan, its derivation and respective assumptions, and compared it, where available, to relevant benchmarks. In addition, we compared the assumptions and parameters underlying the cost of capital with our own expectations and publicly available data. We examined the valuation models used for compliance with generally accepted valuation principles. As a response to the risk of fraud in revenue recognition on long-term projects, we tested on a sample basis the accuracy of the sales recorded, based on inspection of externally available evidence, such as approvals of milestones and customer correspondence. We also inquired with external and internal legal counsels regarding alleged breaches of contract and asserted claims. We assessed the consistency of the accounting information with the project information obtained. For further information on revenue recognition on long-term projects refer to the following: — Note 2 “Significant accounting policies” GEIS purchase price allocation Key Audit Matter Our response Effective June 30, 2018, the Group has We read the purchase agreement to understand completed its acquisition of GE Industrial the key terms and conditions of the transaction, Solutions (GEIS) for a net consideration of $2,622 and inquired with management of the Group and million. Taking into account the acquired net of the acquired business as well as employees of assets of $1,180 million, goodwill amounted to the accounting department and the M&A $1,442 million. department on specific matters relevant to the accounting for the acquisition. The acquired identifiable assets and assumed liabilities are recognized at their fair value on the We evaluated the competence, capabilities and acquisition date. Management has appointed an objectivity of the external valuation expert external expert to assist them in the identification assisting management in the identification and and measurement of acquired assets and measurement of acquired assets and liabilities. liabilities. The notes to the financial statements We assessed the process and the internal indicate that the purchase price allocation is controls of the Group related to the purchase preliminary for up to 12 months after the price allocation. acquisition date and is subject to refinement as more detailed analyses are completed and In our evaluation of the appropriateness of the additional information about the fair values of the material assumptions made by management, acquired assets and liabilities becomes available. including those related to the identification and measurement of intangible assets, we involved The identification and measurement of acquired our own valuation specialists. We considered and assets is complex and based on judgment, in challenged the appropriateness of the particular for intangible assets. Key valuation methodologies underlying the fair value assumptions for intangible assets include, among estimation of the identified intangible assets. others, forecasted sales revenues and expected Further, we challenged the underlying business margin developments of the acquired business as plan, its derivation and respective assumptions, well as the determination of the cost of capital. and compared it, where available, to relevant There is a risk that the fair value of the acquired benchmarks. assets, specifically acquired intangible assets, is incorrectly determined by management and as a In addition, we compared the assumptions and result, that the goodwill related to the transaction parameters underlying the cost of capital with our is derived inaccurately. own expectations and publicly available data. We examined the valuation models used for compliance with generally accepted valuation principles. 137 For further information on the GEIS purchase price allocation refer to the following: — Note 2 “Significant accounting policies” — Note 4 “Acquisitions and business divestments” Tax contingencies related to transfer pricing Key Audit Matter Our response The Group operates across multiple tax jurisdictions around the world, and is thus exposed to numerous tax laws and is regularly subject to tax audits by local tax authorities. The application of local regulations on income tax, and transfer pricing is complex. The recognition and measurement of income tax liabilities related to transfer pricing require management to exercise judgment in assessing tax matters and to make estimates regarding tax contingencies. Specifically, legal disputes attributable to the determination of earnings under local tax laws, intragroup arrangements, intragroup sales of goods and services and intragroup transfers of technology are areas of complexity monitored closely by management. Tax contingency provisions are recorded by the Group based on management’s assessment of the technical merits of tax filings, considering applicable tax laws of the relevant jurisdictions and the facts and circumstances of each case. As such, significant management judgment is involved in the recognition and the measurement of group tax contingency provisions, specifically as they relate to intragroup arrangements and transfer pricing. We obtained an understanding of existing transfer pricing tax risks through inquiry of the Group’s tax department and the management of group companies. We evaluated management’s process and internal controls related specifically to the assessment of transfer pricing tax risks, estimates of tax exposures and tax contingencies. Involving our own tax specialists, we reviewed documentation in relation to tax audits as well as transfer pricing documentation and analyzed correspondence with tax authorities to verify whether tax exposures have been considered and accurately provided for where necessary. The Group’s past and current experience with tax authorities in the respective jurisdictions was used to evaluate the appropriateness of tax contingency reserves. Our audit approach included additional reviews performed at Group level to consider the Group’s uncertain tax positions viewed from a global perspective – in particular for transfer pricing, intragroup arrangements and intragroup business transactions where multiple jurisdictions and tax authorities are involved. We drew on our own tax expertise and knowledge gained with other international groups to conclude on management’s estimate of the outcome on the Group’s tax contingencies. For further information on tax contingencies refer to the following: — Note 2 “Significant accounting policies” — Note 16 “Income taxes” 138 Planned divestment of Power Grids business Key Audit Matter Our response The Group announced on December 17, 2018, that it intends to divest its Power Grids business to Hitachi Ltd. Closing of the transaction is expected to be completed in the first half of 2020, following the receipt of customary regulatory approvals. As a result of the planned divestiture, management has reported the Power Grids business as discontinued operations. Due to the significance and the complexity of the planned Power Grids transaction, we consider the allocation and presentation of assets and liabilities, as well as income and expenses, in particular of information system costs, a key audit matter. Our audit procedures included, amongst others, testing the effectiveness of the Group’s internal controls over the appropriate accounting and assessing the appropriateness of the Group’s accounting policies in relation to discontinued operations. We inquired with management on a regular basis to understand the status of the planned divestiture of the Power Grids business. Further, we inspected the relevant sale and purchase agreement and other relevant documentation on the planned transaction. Involving local component audit teams, we tested on a sample basis the allocation of assets, liabilities, income and expenses presented in discontinued operations, to assess whether they are attributable to the Power Grids business. At the Group level, we specifically assessed the allocation of expenses, in particular whether information system costs are accurately presented, including reallocations to continuing operations, where required. For further information on the planned divestment of the Power Grids business refer to the following: — Note 3 “Changes in presentation of financial statements” Other Matter The consolidated financial statements of the Group for the years ended December 31, 2017 and 2016 were audited by other auditors who expressed an unmodified opinion on those statements on February 22, 2018, except for Note 3 for which the date is March 27, 2019. 139 Report on Other Legal and Regulatory Requirements We are a public accounting firm registered with the Swiss Federal Audit Oversight Authority (FAOA) and the PCAOB and we confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA). We are independent with respect to the Group in accordance with Swiss law (article 728 CO and article 11 AOA) and U.S. federal securities laws as well as the applicable rules and regulations of the Swiss audit profession, the U.S. Securities and Exchange Commission and the PCAOB, and we have fulfilled our other ethical responsibilities in accordance with these requirements. In the course of our audit performed in accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we noted that an internal control system for the preparation of the consolidated financial statements was adequately designed and documented according to the instructions of the Board of Directors. However, a material weakness has been identified in information technology general controls (ITGCs) based on deficiencies in selection, development, and monitoring of control activities in ITGCs. The Company did not maintain sufficient user access or segregation of duties controls in certain applications in North America as well as for select Group applications. 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. The Group acquired GEIS during 2018. At GEIS, the documentation and implementation of an internal control system relating to financial reporting for consolidation purposes was foregone for the year of acquisition. We recommend that the consolidated financial statements submitted to you be approved. We have also audited, in accordance with the standards of the PCAOB, the Group’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 27, 2019, because of the effect of the material weakness as described therein, expressed an adverse opinion on the effectiveness of the Group’s internal control over financial reporting. We have served as the Group’s auditor since 2018. KPMG AG Hans-Dieter Krauss Licensed Audit Expert Auditor in Charge Zurich, Switzerland March 27, 2019 Douglas Mullins KPMG AG, Badenerstrasse 172, PO Box, CH-8036 Zurich KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. 140 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of ABB Ltd Opinion on Internal Control Over Financial Reporting We have audited ABB Ltd’s (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in COSO. We also have audited, in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, the related consolidated income statement, statements of comprehensive income, cash flows and changes in stockholders’ equity for the year ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated March 27, 2019 expressed an unqualified opinion on those consolidated financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim 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: A material weakness has been identified in the Company’s information technology general controls (ITGCs) based on deficiencies in selection, development, and monitoring of control activities in ITGCs. The Company did not maintain sufficient user access or segregation of duties controls in certain applications in North America as well as for select Group applications. As a result of these deficiencies, the process level controls dependent on the affected applications, could not be relied upon. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report on those consolidated financial statements. The Company acquired General Electric Industrial Solutions (GEIS) during 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, GEIS’s internal control over financial reporting associated with total assets of $3.8 billion and total revenues of $1.3 billion included in the consolidated financial statements of the Company as of and for the year ended December 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of GEIS. Basis for Opinion The Company’s Board of Directors and management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 141 We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. KPMG AG Hans-Dieter Krauss Licensed Audit Expert Auditor in Charge Zurich, Switzerland March 27, 2019 Douglas Mullins KPMG AG, Badenerstrasse 172, PO Box, CH-8036 Zurich KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. 142 — Report of Independent Registered Public Accounting Firm whether due to error or fraud. Our audits included performing procedures to assess the risks of ma- terial misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such pro- cedures included examining, on a test basis, evi- dence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Ernst & Young AG We served as the Company’s auditor from 1994 to 2018. Zurich, Switzerland February 22, 2018 Except for Note 3 for the aforementioned periods, as to which the date is March 27, 2019 To the Board of Directors and Stockholders of ABB Ltd Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of ABB Ltd (the Company) as of De- cember 31, 2017, and the related consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity for each of the two years in the period ended De- cember 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017, and the consolidated results of its operations and its cash flows for each of the two years in the pe- riod ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s Board of Directors and manage- ment. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm regis- tered with the PCAOB and are required to be inde- pendent with respect to the Company in accor- dance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain rea- sonable assurance about whether the financial statements are free of material misstatement, — This report of Ernst & Young AG has been provided in connection with the Company’s Consolidated Financial Statements included in its annual report filed on Form 20-F with the United States Securities and Exchange Commission. It is provided here for information purposes. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 143 — Consolidated Income Statements Year ended December 31 ($ in millions, except per share data in $) Sales of products Sales of services and other Total revenues Cost of sales of products Cost of services and other 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 Non-operational pension (cost) credit 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 Income from discontinued operations, net of tax Net income Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 2018 2017 22,366 20,438 5,296 4,758 27,662 25,196 2016 20,327 4,602 24,929 (15,961) (14,485) (14,629) (3,157) (2,865) (2,767) (19,118) (17,350) (17,396) 8,544 (5,295) (1,147) 7,846 (4,765) (1,013) 124 2,226 72 (262) 83 2,119 (544) 1,575 723 2,298 (125) 2,173 1,514 659 2,173 0.71 0.31 1.02 0.71 0.31 1.02 162 2,230 73 (234) 33 2,102 (583) 1,519 846 2,365 (152) 2,213 1,441 772 2,213 0.67 0.36 1.04 0.67 0.36 1.03 7,533 (4,532) (967) (105) 1,929 71 (201) (38) 1,761 (526) 1,235 799 2,034 (135) 1,899 1,172 727 1,899 0.54 0.34 0.88 0.54 0.34 0.88 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 2,132 2,139 2,138 2,148 2,151 2,154 Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 14 4 — Consolidated Statements of Comprehensive Income Year ended December 31 ($ in millions) Net income Other comprehensive income (loss), net of tax: Foreign currency translation adjustments: Foreign currency translation adjustments Gain on liquidation of foreign subsidiary Changes attributable to divestments Foreign currency translation adjustments Available-for-sale securities: Net unrealized gains (losses) arising during the year Reclassification adjustments for net losses included in net income Unrealized gains (losses) on available-for-sale securities Pension and other postretirement plans: Prior service costs arising during the year Net actuarial gains (losses) arising during the year Amortization of prior service cost (credit) included in net income Amortization of net actuarial loss included in net income Net losses from pension settlements included in net income Changes attributable to divestments 2018 2,298 2017 2,365 2016 2,034 (627) (31) 12 (646) (4) 1 (3) (7) (352) (24) 69 19 — 912 — 12 924 1 — 1 (16) (139) 6 63 9 6 (481) — 7 (474) — — — (40) 44 26 62 26 — 118 16 (6) — 10 Pension and other postretirement plan adjustments (295) (71) Cash flow hedge derivatives: Net unrealized gains (losses) arising during the year Reclassification adjustments for net (gains) losses included in net income Changes attributable to divestments Unrealized gains (losses) of cash flow hedge derivatives (49) 21 — (28) 38 (22) (3) 13 Total other comprehensive income (loss), net of tax (972) 867 (346) Total comprehensive income, net of tax Comprehensive income attributable to noncontrolling interests, net of tax Total comprehensive income, net of tax, attributable to ABB 1,326 (110) 1,216 3,232 (177) 3,055 1,688 (118) 1,570 Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP — Consolidated Balance Sheets December 31 ($ in millions, except share data) Cash and equivalents Marketable securities and short-term investments Receivables, net Contract assets Inventories, net Prepaid expenses Other current assets Current 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 Non-current assets held for sale Total assets Accounts payable, trade Contract liabilities Short-term debt and current maturities of long-term debt Provisions for warranties Other provisions Other current liabilities Current liabilities held for sale Total current liabilities Long-term debt Pension and other employee benefits Deferred taxes Other non-current liabilities Non-current liabilities held for sale Total liabilities Commitments and contingencies Stockholders’ equity: Common stock, CHF 0.12 par value (2,168,148,264 issued shares at December 31, 2018 and 2017) Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost (36,185,858 and 29,541,775 shares at December 31, 2018 and 2017, respectively) Total ABB stockholders’ equity Noncontrolling interests Total stockholders’ equity Total liabilities and stockholders’ equity Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements. 145 2017 4,526 1,083 5,861 1,141 3,737 159 585 5,043 22,135 3,804 9,536 2,425 143 72 1,212 571 3,560 2018 3,445 712 6,386 1,082 4,284 176 616 5,164 21,865 4,133 10,764 2,607 83 87 1,006 469 3,427 44,441 43,458 4,424 1,707 2,031 948 1,372 3,780 4,185 3,736 1,792 726 909 1,277 3,509 4,520 18,447 16,469 6,587 1,828 927 1,689 429 6,682 1,589 1,050 1,849 470 29,907 28,109 188 56 19,839 (5,311) (820) 13,952 582 14,534 44,441 188 29 19,594 (4,345) (647) 14,819 530 15,349 43,458 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 146 — Consolidated Statements of Cash Flows Year ended December 31 ($ in millions) 2018 2017 2016 Operating activities: Net income Less: Income from discontinued operations, net of tax Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred taxes Net loss (gain) 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 Contract assets and liabilities Inventories, net Trade payables Accrued liabilities Provisions, net Income taxes payable and receivable Other assets and liabilities, net Net cash provided by operating activities – continuing operations Net cash provided by operating activities – discontinued operations Net cash provided by operating activities Investing activities: Purchases of 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 investments Proceeds from maturity of 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 – continuing operations Net cash used in investing activities – discontinued operations Net cash used in investing activities 2,298 (723) 916 (142) 93 (57) (57) 50 (76) (144) (18) (336) 454 252 87 (102) (143) 2,352 572 2,924 2,365 (846) 836 (199) 29 (37) (252) 49 4 2,034 (799) 870 (145) (10) (37) 10 45 111 (178) (118) 6 (66) 474 99 (4) 202 106 2,588 1,211 3,799 (38) 185 186 52 40 115 106 2,607 1,236 3,843 (322) (772) (666) (752) (4,299) (632) (2,664) 567 160 72 113 (30) (32) (2,011) 1,443 100 61 607 63 37 (26) 3,295 539 59 (1) (57) 14 (2,908) (1,118) (1,108) (177) (332) (197) (3,085) (1,450) (1,305) ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 147 Year ended December 31 ($ in millions) 2018 2017 2016 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 – continuing operations Net cash used in financing activities – discontinued operations Net cash used in financing activities Effects of exchange rate changes on cash and equivalents Net change in cash and equivalents Cash and equivalents, beginning of period Cash and equivalents, end of period Supplementary disclosure of cash flow information: Interest paid Income taxes paid Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements. 221 1,914 (830) 42 (250) (1,717) — (86) (35) (741) (48) (789) (131) (1,081) 4,526 3,445 204 920 (144) 911 (1,000) (1,242) 163 (251) (1,635) — (83) (6) 192 (1,299) — (1,610) (89) (27) (1,688) (3,308) (47) (47) (1,735) (3,355) 268 882 3,644 4,526 (104) (921) 4,565 3,644 243 1,026 205 894 213 814 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 148 — Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2018, 2017 and 2016 ($ in millions) Balance at January 1, 2016 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 to noncontrolling shareholders Share-based payment arrangements Reduction in nominal value of common shares paid to shareholders Cancellation of treasury shares Purchase of treasury stock Delivery of shares Call options Balance at December 31, 2016 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 to noncontrolling shareholders Dividends paid to shareholders Share-based payment arrangements Cancellation of treasury shares Purchase of treasury stock Delivery of shares Call options Balance at December 31, 2017 Cumulative effect of changes in accounting principles Comprehensive income: Net income Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized 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 Noncontrolling interests recognized in connection with business combination Dividends to noncontrolling shareholders Dividends paid to shareholders Share-based payment arrangements Purchase of treasury stock Delivery of shares Call options Balance at December 31, 2018 Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements. Common stock 1,440 Additional paid-in capital 4 Retained earnings Treasury stock stockholders’ equity interests Total ABB Noncontrolling Total stockholders’ Accumulated other comprehensive loss (4,858) (2,581) (1,239) (9) 192 (4) 188 188 54 15 (31) (22) 4 24 17 58 (27) (46) 4 29 (4) 60 (35) 5 56 20,476 1,899 (402) (2,007) (41) 19,925 2,213 (1,622) (922) 19,594 (192) 2,173 (1,736) (457) — 118 10 (5,187) 899 1 (71) 13 (4,345) (9) (631) (3) (295) (28) 19,839 (5,311) 14,481 1,899 (457) — 118 10 1,570 — — 54 — (1,626) (1,280) 192 4 13,395 2,213 899 1 (71) 13 3,055 (1,622) 17 — 58 — (251) 163 4 14,819 (201) 2,173 (631) (3) (295) (28) 1,216 (4) — — (1,736) 60 (249) 42 5 13,952 2,047 (1,280) 255 (1,559) 953 (251) 209 (647) (249) 77 (820) 507 135 (17) 118 (1) (122) 502 152 25 177 (14) (134) 530 125 (15) 110 (19) 107 (146) 582 equity 14,988 2,034 (474) — 118 10 1,688 (1) (122) (1,626) (1,280) 54 — 192 4 13,897 2,365 924 1 (71) 13 3,232 3 (134) (1,622) 58 — (251) 163 4 15,349 (201) 2,298 (646) (3) (295) (28) 1,326 (23) 107 (146) (1,736) 60 (249) 42 5 14,534 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP — Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2018, 2017 and 2016 ($ in millions) Balance at January 1, 2016 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 to noncontrolling shareholders Share-based payment arrangements Reduction in nominal value of common shares paid to shareholders 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 Cancellation of treasury shares Purchase of treasury stock Delivery of shares Call options Balance at December 31, 2016 Comprehensive income: Net income Total comprehensive income Changes in noncontrolling interests Dividends to noncontrolling shareholders Dividends paid to shareholders Share-based payment arrangements Cancellation of treasury shares Purchase of treasury stock Delivery of shares Call options Balance at December 31, 2017 Cumulative effect of changes in accounting principles Comprehensive income: Net income Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivatives qualifying as cash flow hedges, net of tax Noncontrolling interests recognized in connection with business combination Total comprehensive income Changes in noncontrolling interests Dividends to noncontrolling shareholders Dividends paid to shareholders Share-based payment arrangements Purchase of treasury stock Delivery of shares Call options Balance at December 31, 2018 Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements. (1,239) (9) 192 (4) 188 54 15 (31) (22) 4 24 17 58 (27) (46) 4 29 (4) 60 (35) 5 56 Common stock 1,440 Additional paid-in capital 4 Accumulated other comprehensive loss (4,858) Treasury stock (2,581) Retained earnings 20,476 1,899 (457) — 118 10 (5,187) 899 1 (71) 13 (4,345) (9) (631) (3) (295) (28) (402) (2,007) (41) 19,925 2,213 (1,622) (922) 19,594 (192) 2,173 (1,736) 188 19,839 (5,311) 2,047 (1,280) 255 (1,559) 953 (251) 209 (647) (249) 77 (820) 149 Total ABB stockholders’ equity Noncontrolling interests Total stockholders’ equity 14,481 1,899 (457) — 118 10 1,570 — — 54 (1,626) — (1,280) 192 4 13,395 2,213 899 1 (71) 13 3,055 17 — (1,622) 58 — (251) 163 4 14,819 (201) 2,173 (631) (3) (295) (28) 1,216 (4) — — (1,736) 60 (249) 42 5 13,952 507 135 (17) 118 (1) (122) 502 152 25 177 (14) (134) 530 125 (15) 110 (19) 107 (146) 582 14,988 2,034 (474) — 118 10 1,688 (1) (122) 54 (1,626) — (1,280) 192 4 13,897 2,365 924 1 (71) 13 3,232 3 (134) (1,622) 58 — (251) 163 4 15,349 (201) 2,298 (646) (3) (295) (28) 1,326 (23) 107 (146) (1,736) 60 (249) 42 5 14,534 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 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 power grids, electrification products, industrial automation and robotics and motion, serving customers in utilities, industry and transport & infrastructure globally. — Note 2 Significant accounting policies The following is a summary of significant accounting policies followed in the preparation of these Consolidated Financial Statements. Basis of presentation The Consolidated Financial Statements are prepared in accordance with United States of America (United States or U.S.) generally accepted accounting principles (U.S. GAAP) and are presented in United States dollars ($ or USD) unless otherwise stated. Due to rounding, numbers presented may not add to the totals provided. The par value of capital stock is denominated in Swiss francs. See Note 3 for a summary of changes in presentation and other reclassifications affecting these financial statements compared to the previous year. 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. Discontinued operations The Company reports a disposal, or planned disposal, of a component or a group of components as a discontinued operation if the disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results. A strategic shift could include a disposal of a major geographical area, a major line of business or other major parts of the Company. A component may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group. Assets and liabilities of a component reported as a discontinued operation are presented separately as held for sale in the Company’s Consolidated Balance Sheets. Interest that is not directly attributable to or related to the Company’s continuing business or discontinued business is allocated to discontinued operations based on the ratio of net assets to be sold less debt that is required to be paid as a result of the planned disposal transaction to the sum of total net assets of the Company plus consolidated debt. General corporate overhead is not allocated to discontinued operations (see Note 3). ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 151 Operating cycle A portion of the Company’s activities (primarily long-term system integration activities) has an operating cycle that exceeds one year. For classification of current assets and liabilities related to such activities, the Company elected to use the duration of the individual contracts as its operating cycle. Accordingly, there are accounts receivable, inventories and provisions related to these contracts which will not be realized within one year that have been classified as current. 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 accounting assumptions and estimates include: • estimates and assumptions used in determining the fair values of assets and liabilities assumed in business combinations, • assumptions used in the determination of corporate costs directly attributable to discontinued operations, • assumptions used in determining inventory obsolescence and net realizable value, • estimates used to record expected costs for employee severance in connection with restructuring programs, • assumptions and projections, principally related to future material, labor and project-related overhead costs, used in determining the percentage-of-completion on projects, as well as the amount of variable consideration the Company expects to be entitled to, • 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, 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 debt securities at the time of purchase. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity debt securities are carried at amortized cost, adjusted for accretion of discounts or amortization of premiums to maturity computed under the effective interest method. Such accretion or amortization is included in “Interest and dividend income”. Marketable debt securities not classified as held-to-maturity are classified as available-for-sale and reported at fair value. Unrealized gains and losses on available-for-sale debt securities are excluded from the determination of earnings and are instead recognized in the “Accumulated other comprehensive loss” component of stockholders’ equity, net of tax, until realized. Realized gains and losses on available-for-sale debt securities are computed based upon the historical cost of these securities, using the specific identification method. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 152 Marketable debt securities are classified as either “Cash and equivalents” or “Marketable securities and short-term investments” according to their maturity at the time of acquisition. Marketable equity securities are generally classified as “Marketable securities and short-term investments”, however any marketable securities held as a long-term investment rather than as an investment of excess liquidity, are classified as “Other non-current assets”. Equity securities are measured at fair value with fair value changes reported in net income. Fair value changes for equity securities are reported in “Interest and other finance expense”. The Company performs a periodic review of its debt securities to determine whether an other-than-temporary impairment has occurred. Generally, when an individual security has been in an unrealized loss position for an extended period of time, the Company evaluates whether an impairment has occurred. The evaluation is based on specific facts and circumstances at the time of assessment, which include general market conditions, and the duration and extent to which the fair value is below cost. If the fair value of a debt security is less than its amortized cost, then an other-than-temporary impairment for the difference is recognized if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost base or (iii) a credit loss exists insofar as the Company does not expect to recover the entire recognized amortized cost of the security. Such impairment charges are generally recognized in “Interest and other finance expense”. If the impairment is due to factors other than credit losses, and the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security before recovery of the security’s amortized cost, such impairment charges are recorded in “Accumulated other comprehensive loss”. In addition, equity securities without readily determinable fair value are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than carrying amount. The impairment charge is recorded in “Interest and other finance expense”. Accounts receivable 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 creditworthiness of customers and assign to those customers a risk category. Third-party agencies’ ratings are considered, if available. For customers where agency ratings are not available, the customer’s most recent financial statements, payment history and other relevant information are considered in the assignment to a risk category. Customers are assessed at least annually or more frequently when information on significant changes in the 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 receivables. Control is deemed to have been surrendered when (i) the transferred receivables have been put presumptively beyond the reach of the Company and its creditors, even in bankruptcy or other receivership, (ii) the third-party transferees have the right to pledge or exchange the transferred receivables, and (iii) the Company has relinquished effective control over the transferred receivables and does not retain the ability or obligation to repurchase or redeem the transferred receivables. At the time of sale, the sold receivables are removed from the Consolidated Balance Sheets and the related cash inflows are classified as operating activities in the Consolidated Statements of Cash Flows. Costs associated with the sale of receivables, including the related gains and losses from the sales, are included in “Interest and other finance expense”. Transfers of receivables that do not meet the ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 153 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. It is the Company’s policy to invest cash in deposits with banks throughout the world with certain minimum credit ratings and in high quality, low risk, liquid investments. The Company actively manages its credit risk by routinely reviewing the creditworthiness of the banks and the investments held. The Company has not incurred significant credit losses related to such investments. The Company’s exposure to credit risk on derivative financial instruments is the risk that the counterparty will fail to meet its obligations. To reduce this risk, the Company has credit policies that require the establishment and periodic review of credit limits for individual counterparties. In addition, the Company has entered into close-out netting agreements with most derivative counterparties. Close-out netting agreements provide for the termination, valuation and net settlement of some or all outstanding transactions between two counterparties on the occurrence of one or more pre-defined trigger events. In the Consolidated Financial Statements derivative transactions are presented on a gross basis. Revenue recognition A customer contract exists if collectability under the contract is considered probable, the contract has commercial substance, contains payment terms, as well as the rights and commitments of both parties, and has been approved. The Company offers arrangements with multiple performance obligations to meet its customers’ needs. These arrangements may involve the delivery of multiple products and/or performance of services (such as installation and training) and the delivery and/or performance may occur at different points in time or over different periods of time. Goods and services under such arrangements are evaluated to determine whether they form distinct performance obligations and should be accounted for as separate revenue transactions. The Company allocates the sales price to each distinct performance obligation based on the price of each item sold in separate transactions at the inception of the arrangement. The Company generally recognizes revenues for the sale of non-customized products including switchgear, circuit breakers, modular substation packages, control products, motors, generators, drives, robots, turbochargers, measurement and analytical instrumentation, and other goods which are manufactured on a standardized basis at a point in time. Revenues are recognized at the point in time that the customer obtains control of the good which is when it has taken title to the products and assumed the risks and rewards of ownership of the products specified in the purchase order or sales agreement. Generally, the transfer of title and risks and rewards of ownership are governed by the contractually defined shipping terms. The Company uses various International Commercial shipping terms (as promulgated by the International Chamber of Commerce) in its sales of products to third party customers, such as Ex Works (EXW), Free Carrier (FCA) and Delivered Duty Paid (DDP). Billing terms for these point in time contracts vary but generally coincide with delivery to the customer. Payment is generally due upon receipt of the invoice, payable within 90 days or less. The Company generally recognizes revenues for the sale of customized products, including integrated automation and electrification systems and solutions, on an over time basis using the percentage-of-completion method of accounting. These systems are generally accounted for as a single performance obligation as the Company is required to integrate equipment and services into one ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 154 deliverable for the customer. Revenues are recognized as the systems are customized during the manufacturing or integration process and as control is transferred to the customer as evidenced by the Company’s right to payment for work performed or by the customer’s ownership of the work in process. The Company principally uses the cost-to-cost method to measure progress towards completion on contracts. Under this method, progress of contracts is measured by actual costs incurred in relation to the Company’s best estimate of total estimated costs based on the Company’s history of manufacturing or constructing similar assets for customers. Estimated costs are reviewed and updated routinely for contracts in progress to reflect changes in quantity or pricing of the inputs. The cumulative effect of any change in estimate is recorded in the period when the change in estimate is determined. Contract costs include all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools and depreciation costs. The nature of the Company’s contracts for the sale of customized products gives rise to several types of variable consideration, including claims, unpriced change orders, liquidated damages and penalties. These amounts are estimated based upon the most likely amount of consideration to which the customer or the Company will be entitled. The estimated amounts are included in the sales price to the extent it is probable that a significant reversal of cumulative revenues recognized will not occur when the uncertainty associated with the variable consideration is resolved. All estimates of variable consideration are reassessed periodically. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable and the amounts can be reliably estimated. Billing terms for these over-time contracts vary but are generally based on achieving specified milestones. The differences between the timing of revenues recognized and customer billings result in changes to contract assets and contract liabilities. Payment is generally due upon receipt of the invoice, payable within 90 days or less. Contractual retention amounts billed to customers are generally due upon expiration of the contractual warranty period. Service revenues reflect revenues earned from the Company’s activities in providing services to customers primarily subsequent to the sale and delivery of a product or complete system. Such revenues consist of maintenance type contracts, repair services, equipment upgrades, field service activities that include personnel and accompanying spare parts, training, and installation and commissioning of products as a stand alone service or as part of a service contract. The Company generally recognizes revenues from service transactions as services are performed or at the point in time that the customer obtains control of the spare parts. For long-term service contracts including monitoring and maintenance services, revenues are recognized on a straight line basis over the term of the contract consistent with the nature, timing and extent of the services or, if the performance pattern is other than straight line, as the services are provided based on costs incurred relative to total expected costs. In limited circumstances the Company sells extended warranties that extend the warranty coverage beyond the standard coverage offered on specific products. Revenues for these warranties are recorded over the length of the warranty period based on their stand-alone selling price. Billing terms for service contracts vary but are generally based on the occurrence of a service event. Payment is generally due upon receipt of the invoice, payable within 90 days or less. Revenues are reported net of customer rebates, early settlement discounts, and similar incentives. Rebates are estimated based on sales terms, historical experience and trend analysis. The most common incentives relate to amounts paid or credited to customers for achieving defined volume levels. Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between the Company and its customers, such as sales, use, value added and some excise taxes, are excluded from revenues. The Company does not adjust the contract price for the effects of a financing component if the Company expects, at contract inception, that the time between control transfer and cash receipt is less than 12 months. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 155 Sales commissions are expensed immediately when the amortization period for the costs to obtain the contract is less than a year. 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 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. Goodwill is evaluated for impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. For the annual impairment review performed in 2018, the reporting units were the same as the operating segments for Electrification Products and Robotics and Motion, while for the Industrial Automation operating segment the reporting units were determined to be one level below the operating segment. When evaluating goodwill for impairment, the Company uses either a qualitative or quantitative assessment method for each reporting unit. The qualitative assessment involves determining, based on an evaluation of qualitative factors, if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on this qualitative assessment, it is determined to be more likely than not that the reporting unit’s fair value is less than its carrying value, a quantitative impairment test (described below) is performed, otherwise no further analysis is required. If the Company elects not to perform the qualitative assessment for a reporting unit, then a quantitative impairment test is performed. The quantitative impairment test calculates the fair value of a reporting unit (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 records an impairment ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 156 charge equal to the difference, provided that the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit. The cost of acquired intangible assets with a finite life is amortized using a method of amortization that reflects the pattern of intangible assets’ expected contributions to future cash flows. If that pattern cannot be reliably determined, the straight-line method is used. The amortization periods range from 3 to 5 years for software and from 5 to 20 years for customer-, technology- and marketing-related intangibles. Intangible assets with a finite life are tested for impairment upon the occurrence of certain triggering events. 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. 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 6). The Company recognizes all derivatives, other than certain derivatives indexed to the Company’s own stock, at fair value in the Consolidated Balance Sheets. Derivatives that are not designated as hedging instruments are reported at fair value with derivative gains and losses reported through earnings and classified consistent with the nature of the underlying transaction. If the derivatives are designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged item attributable to the risk being hedged through earnings (in the case of a fair value hedge) or recognized in “Accumulated other comprehensive loss” until the hedged item is recognized in earnings (in the case of a cash flow hedge). The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings consistent with the classification of the hedged item. Where derivative financial instruments have been designated as cash flow hedges of forecasted transactions and such forecasted transactions are no longer probable of occurring, hedge accounting is discontinued and any derivative gain or loss previously included in “Accumulated other comprehensive loss” is reclassified into earnings consistent with the nature of the original forecasted transaction. Gains or losses from derivatives designated as hedging instruments in a fair value hedge are reported through earnings and classified consistent with the nature of the underlying hedged transaction. Certain commercial contracts may grant rights to the Company or the counterparties, or contain other provisions that are considered to be derivatives. Such embedded derivatives are assessed at inception of the contract and depending on their characteristics, accounted for as separate derivative instruments and shown at their fair value in the balance sheet with changes in their fair value reported in earnings consistent with the nature of the commercial contract to which they relate. Derivatives are classified in the Consolidated Statements of Cash Flows in the same section as the underlying item. Cash flows from the settlement of undesignated derivatives used to manage the risks of different underlying items on a net basis, are classified within “Net cash provided by operating activities”, as the underlying items are primarily operational in nature. Other cash flows on the settlement of derivatives are recorded within “Net cash used in investing activities”. Leases The Company leases primarily real estate, vehicles and machinery. 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. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 157 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 liquidated or evaluated for impairment in anticipation of disposal. Foreign currency exchange gains and losses, such as those resulting from foreign currency denominated receivables or payables, are included in the determination of earnings, except as they relate to intercompany loans that are equity-like in nature with no reasonable expectation of repayment, which are recognized in “Accumulated other comprehensive loss”. Exchange gains and losses recognized in earnings are included in “Total revenues”, “Total cost of sales”, “Selling, general and administrative expenses” or “Interest and other finance expense” consistent with the nature of the underlying item. 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. Contingency provisions are recorded based on the technical merits of the Company’s filing position, considering the applicable tax laws and Organisation for Economic Co-operation and Development (OECD) guidelines and are based on its evaluations of the facts and circumstances as of the end of each reporting period. The Company applies a two-step approach to recognize and measure uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. Uncertain tax positions that could be settled against existing loss carryforwards or income tax credits are reported net. Expenses related to tax penalties are classified in the Consolidated Income Statements as “Provision for taxes”, while interest thereon is classified as “Interest and other finance expense”. 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 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 158 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 remeasured at each reporting period, based on the fair value and vesting percentage of the award at each of those dates, with changes in the liability recorded in earnings. 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 nature of those inputs. The Company has categorized its financial assets and liabilities and non-financial assets measured at fair value within this hierarchy based on whether the inputs to the valuation technique are observable or unobservable. An observable input is based on market data obtained from independent sources, while an unobservable input reflects the Company’s assumptions about market data. The levels of the fair value hierarchy are as follows: 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-traded 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). ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 159 Investments in private equity, real estate and collective funds held within the Company’s pension plans, are generally valued using the net asset value (NAV) per share as a practical expedient for fair value provided certain criteria are met. The NAVs are determined based on the fair values of the underlying investments in the funds. These assets are not classified in the fair value hierarchy but are separately disclosed. Whenever quoted prices involve bid-ask spreads, the Company ordinarily determines fair values based on mid-market quotes. However, for the purpose of determining the fair value of cash-settled call options serving as hedges of the Company’s management incentive plan (MIP), bid prices are used. When determining fair values based on quoted prices in an active market, the Company considers if the level of transaction activity for the financial instrument has significantly decreased, or would not be considered orderly. In such cases, the resulting changes in valuation techniques would be disclosed. If the market is considered disorderly or if quoted prices are not available, the Company is required to use another valuation technique, such as an income approach. Disclosures about the Company’s fair value measurements of assets and liabilities are included in Note 7. 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 contingencies is made after analysis of each individual issue, often with assistance from both internal and external legal counsel and technical experts. The required amount of a provision for a contingency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution. The Company records a provision for its contingent obligations when it is probable that a loss will be incurred and the amount can be reasonably estimated. Any such provision is generally recognized on an undiscounted basis using the Company’s best estimate of the amount of loss incurred or at the lower end of an estimated range when a single best estimate is not determinable. In some cases, the Company may be able to recover a portion of the costs relating to these obligations from insurers or other third parties; however, the Company records such amounts only when it is probable that they will be collected. The Company provides for anticipated costs for warranties when it recognizes revenues on the related products or contracts. Warranty costs include calculated costs arising from imperfections in design, material and workmanship in the Company’s products. The Company makes individual assessments on contracts with risks resulting from order-specific conditions or guarantees and assessments on an overall, statistical basis for similar products sold in larger quantities. The Company may have legal obligations to perform environmental clean-up activities related to land and buildings as a result of the normal operations of its business. In some cases, the timing or the method of settlement, or both, are conditional upon a future event that may or may not be within the control of the Company, but the underlying obligation itself is unconditional and certain. The Company recognizes a provision for these obligations when it is probable that a liability for the clean-up activity has been incurred and a reasonable estimate of its fair value can be made. In some cases, a portion of the costs expected to be incurred to settle these matters may be recoverable. An asset is recorded when it is probable that such amounts are recoverable. Provisions for environmental obligations are not discounted to their present value when the timing of payments cannot be reasonably estimated. Pensions and other postretirement benefits The Company has a number of defined benefit pension and other postretirement plans. The Company recognizes an asset for such a plan’s overfunded status or a liability for such a plan’s underfunded status in its Consolidated Balance Sheets. Additionally, the Company measures such a plan’s assets and obligations that determine its funded status as of the end of the year and recognizes the changes in the funded status in the year in which the changes occur. Those changes are reported in “Accumulated other comprehensive loss”. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 160 The Company uses actuarial valuations to determine its pension and postretirement benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates and expected return on plan assets. Current market conditions are considered in selecting these assumptions. The Company’s various pension plan assets are assigned to their respective levels in the fair value hierarchy in accordance with the valuation principles described in the “Fair value measures” section above. See Note 17 for further discussion of the Company’s employee benefit plans. 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 Revenue from contracts with customers As of January 1, 2018, the Company adopted a new accounting standard for recognizing revenues from contracts with customers. The new standard, which supersedes substantially all previously existing revenue recognition guidance, provides a single comprehensive model for recognizing revenues on the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The adoption of this standard resulted in only insignificant differences between the identification of performance obligations and the current unit of accounting determination. Therefore, the cumulative effect on retained earnings of applying this standard on a modified retrospective basis was not material. However, total assets and total liabilities increased by $196 million, of which $50 million relate to held for sale, due to the reclassification of certain advances from customers, previously reported as a reduction in inventories, to liabilities. While comparative information has not been restated and continues to be measured and reported under the accounting standards in effect for those periods presented, other than the additional disclosure requirements, the impact of the adoption on the Company’s 2018 consolidated financial statements, was not significant. Income taxes – Intra-entity transfers of assets other than inventory In January 2018, the Company adopted an accounting standard update requiring it 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 was applied on a ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 161 modified retrospective basis and resulted in a net reduction in deferred tax assets of $201 million with a corresponding reduction in retained earnings. Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost In January 2018, the Company adopted an accounting standard update which changes how employers that sponsor defined benefit pension plans and other postretirement plans present the net periodic benefit cost in the income statement. Under this standard, the Company is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations. Under the amendment only the current service cost component is allowed to be capitalized as a cost of internally manufactured inventory or a self-constructed asset. This update was applied retrospectively for the presentation requirements, and prospectively for the capitalization of the current service cost component requirements. The Company has used the practical expedient, as the amount of other components of net periodic benefit cost capitalized in inventory for prior periods is not significant. For 2017 and 2016, the Company reclassified income of $42 million and expenses of $38 million, respectively, and presented it outside of income from operations relating to net periodic pension costs. Of these amounts, $9 million and $0 million, respectively, relate to discontinued operations. Recognition and measurement of financial assets and financial liabilities In January 2018, the Company adopted two accounting standard updates enhancing the reporting model for financial instruments, which include amendments to address aspects of recognition, measurement, presentation and disclosure. The Company is required to measure equity investments (except those accounted for under the equity method) at fair value with changes in fair value recognized in net income. The adoption of this update resulted in the reclassification of the net cumulative unrealized gains on available-for-sale equity securities of $9 million (net of tax) at December 31, 2017 from Total accumulated comprehensive loss to Retained earnings on January 1, 2018. Disclosure Framework – Changes to the disclosure requirements for defined benefit plans In December 2018, the Company early adopted an accounting standard update which modifies the disclosure requirements for defined benefit pension or other postretirement benefit plans. The update removes certain disclosures relating to (i) amounts expected to be recognized in net periodic benefit cost over the next twelve months, (ii) plan assets expected to be returned to the Company, (iii) a one-percentage-point change in assumed health care costs, and (iv) related parties, including insurance and annuity contracts. It clarifies the disclosure requirements for both the projected and accumulated benefit obligations, as well as requiring additional disclosures for cash balance plans and explanations for significant gains and losses related to changes in the benefit obligations. This update was applied on a retrospective basis and did not have a significant impact on the consolidated financial statements. Classification of certain cash receipts and cash payments in the statement of cash flows In January 2018, the Company adopted an accounting standard update 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 was applied retrospectively and did not have a significant impact on the consolidated financial statements. Statement of cash flows – Restricted cash In January 2018, the Company adopted an accounting standard update 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 did not have a significant impact on the consolidated financial statements. Clarifying the definition of a business In January 2018, the Company adopted an accounting standard update which narrows the definition of a business. It also provides a framework for determining whether a set of transferred assets and ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 162 activities involves a business. This update was applied prospectively and did not have a significant impact on the consolidated financial statements. Clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets In January 2018, the Company adopted an accounting standard update which clarifies the scope of asset derecognition 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. This update was applied retrospectively and did not have a significant impact on the consolidated financial statements. Compensation – Stock compensation In January 2018, the Company adopted an accounting standard update which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this update, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This update was applied prospectively and did not have a significant impact on the consolidated financial statements. Applicable for future periods 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 twelve months with several practical expedients. 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. It also requires additional disclosures about the Company’s leasing activities. The Company has elected to not recognize lease assets and lease liabilities for leases with terms of less than twelve months and to not separate lease and non-lease components for leases other than real estate. This update is effective for the Company for annual and interim periods beginning January 1, 2019, and is applicable on a modified retrospective basis with various optional practical expedients. In July 2018, a further accounting standard update was issued, allowing the Company the additional option of adopting the standard retrospectively with the cumulative-effect of initially applying the new standard recognized at the date of adoption in retained earnings. A further update was issued in December 2018 clarifying certain aspects of accounting for leases by lessors. The Company will elect to adopt the standard using the additional option outlined above and currently expects the update will increase total assets and total liabilities by approximately $1.4 billion of which approximately $0.2 billion relate to liabilities held for sale. The Company expects that the adoption of this update will only have an insignificant impact on its results of operations and cash flows. Measurement of credit losses on financial instruments In June 2016, an accounting standard update was issued which replaces the existing incurred loss impairment methodology for most financial assets with a new “current expected credit loss” model. 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. The Company is currently evaluating the impact of this update on its consolidated financial statements. Derivatives and hedging – Targeted improvements to accounting for hedging activities In August 2017, an accounting standard update was issued which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. This update is effective for the Company for annual and interim periods beginning ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 163 January 1, 2019. For cash flow and net investment hedges as of the adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. The Company will adopt this update as of January 1, 2019, and does not believe that this update will have a significant impact on its consolidated financial statements. Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, an accounting standard update was issued which allows a reclassification of the stranded tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings. This update is effective for the Company for annual and interim periods beginning January 1, 2019. The updated guidance is to be applied in the period of adoption or retrospectively to each period in which the effect of the Tax Cuts and Jobs Act related to items remaining in accumulated other comprehensive income are recognized. The Company is currently evaluating the impact of this update on its consolidated financial statements. Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract In August 2018, an accounting standard update was issued which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update is effective for the Company for annual and interim periods beginning January 1, 2020, with early adoption in any interim period permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements. Disclosure Framework – Changes to the disclosure requirements for fair value measurement In August 2018, an accounting standard update was issued which modifies the disclosure requirements for fair value measurements. The update eliminates the requirements to disclose the amount of and reasons for transfers between Level 1 and 2 of the fair value hierarchy, the timing of transfers between levels and the Level 3 valuation process, while expanding the Level 3 disclosures to include the range and weighted average used to develop significant unobservable inputs and the changes in unrealized gains and losses on recurring fair value measurements. This update is effective for the Company for annual and interim periods beginning January 1, 2020, with early adoption permitted. The changes and modifications to the Level 3 disclosures are to be applied prospectively, while all other amendments are to be applied retrospectively. The Company is currently evaluating the impact of this update on its disclosures but does not expect that it will have a material effect on its consolidated financial statements. — Note 3 Changes in presentation of financial statements Discontinued operations In December 2018, the Company announced an agreement to divest 80.1 percent of its Power Grids business to Hitachi Ltd. (Hitachi) valuing the business at $11 billion. The business also includes certain real estate properties which were previously reported within Corporate and Other as the Company primarily manages real estate assets centrally as corporate assets. As a result, this business, along with the related real estate assets previously included in Corporate and Other, have been reported as discontinued operations. The divestment is expected to be completed in the first half of 2020, following the receipt of customary regulatory approvals as well as the completion of certain legal entity reorganizations expected to be completed before the sale. Assets and liabilities in the discontinued operation have maintained their existing classification as current or non-current as the sale is not expected to be completed for more than 12 months. As this planned divestment represents a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations for this business have been presented as discontinued operations and the assets and liabilities are reflected as held-for-sale for all periods presented. Financial information and disclosures previously reported in 2017 and 2016 have been retroactively recast to give effect to the discontinued operations presentation. In addition, amounts ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 164 relating to stranded corporate costs have been separately disclosed as a component of Corporate and Other (see Note 23). Stranded costs represent overhead and other management costs which were previously included in the measure of segment profit (Operational EBITA) for the former Power Grids operating segment but are not directly attributable to the discontinued operation and thus do not qualify to be recorded as part of income from discontinued operations. Operating results of the discontinued operations are summarized as follows: ($ millions) Total revenues Total cost of sales Gross profit Expenses Income from operations Net interest and other finance expense Non-operational pension (cost) credit Income from discontinued operations before taxes Provision for taxes Income from discontinued operations, net of tax 2018 9,698 (7,378) 2,320 (1,326) 994 (55) 12 951 (228) 723 2017 10,028 (7,501) 2,527 (1,376) 1,152 (42) 9 1,119 (273) 846 2016 9,984 (7,597) 2,387 (1,278) 1,108 (58) — 1,050 (251) 799 Of the total Income from discontinued operations before taxes in the table above, $874 million, $1,034 million and $966 million in 2018, 2017 and 2016, respectively, are attributable to the Company, while the remainder is attributable to noncontrolling interests. Income from discontinued operations before taxes excludes the stranded costs previously allocated to the Power Grids operating segment. As a result, $297 million, $286 million and $252 million, for 2018, 2017 and 2016, respectively, of allocated overhead and other management costs which were previously included in the measure of segment profit for the Power Grids operating segment are now reported as part of Corporate and Other. In addition, in the table above, Net interest and other finance expense in 2018, 2017 and 2016 includes $43 million, $33 million and $36 million, respectively, of interest expense which has been recorded on an allocated basis in accordance with the Company’s accounting policy election. In 2018, Income from discontinued operations before taxes includes $18 million for costs incurred to execute the transaction. Included in the reported Total revenues of the Company for 2018, 2017 and 2016 are revenues for sales from the Company’s operating segments to the Power Grids business of $243 million, $263 million and $300 million, respectively, which represent intercompany transactions that, prior to Power Grids being classified as a discontinued operation, were eliminated in the Company’s Consolidated Financial Statements (See Note 23). ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP The major components of assets and liabilities held for sale and in discontinued operations in the Company’s Consolidated Balance Sheets are summarized as follows: December 31, ($ in millions) Receivables, net Contract assets Inventories, net Other current assets Current assets held for sale Property, plant and equipment, net Goodwill Other non-current assets Non-current assets held for sale Accounts payable, trade Contract liabilities Other current liabilities Current liabilities held for sale Pension and other employee benefits Other non-current liabilities Non-current liabilities held for sale 2018 2,377 1,236 1,457 94 5,164 1,477 1,620 330 3,427 1,732 998 1,455 4,185 268 161 429 165 2017 2,406 1,008 1,518 111 5,043 1,559 1,663 338 3,560 1,683 1,116 1,721 4,520 293 177 470 Reclassifications and other changes Changes in presentation and disclosure relating to the adoption of new accounting pronouncements Revenue from contracts with customers In connection with the adoption of the new accounting pronouncement, Revenue from contracts with customers (see Note 2 for a description of the adoption of the policy), the Company has provided certain additional disaggregated revenue disclosures in Note 23, including the initial disclosure of amounts for 2017 and 2016. While comparative information has not been restated due to the adoption of this standard, the separate presentation of Contract assets and Contract liabilities in the Consolidated Balance Sheets resulted in a reclassification of certain previously presented amounts. The following table presents the changes in prior period amounts which have been reclassified in the Consolidated Balance Sheets to conform to the presentation requirements of the new standard and all amounts presented give effect to the discontinued operations as described above: ($ in millions) Consolidated Balance Sheet Current assets Receivables, net(1) Contract assets(1) Inventories, net(3) December 31, 2017 Previous classification Adjusted presentation Previous classification Adjusted presentation 7,002 — 3,591 Current liabilities 5,861 Contract liabilities(2), (3), (4) 1,141 Billings in excess of sales(2) 3,737 Advances from customers(2), (3) Other current liabilities(4) — 744 1,047 3,510 1,792 — — 3,509 Total assets 43,262 43,458 Total liabilities 27,913 28,109 (1) $1,141 million of unbilled receivables previously included in Receivables have been reclassified to Contract assets. (2) Amounts previously presented as Billings in excess of sales and Advances from customers have been reclassified to Contract liabilities. (3) $146 million of advances from customers, previously recorded net within Inventories, have been reclassified to Advances from customers that are now recorded within Contract liabilities. This accounting change also increased the amounts previously reported at December 31, 2017 and 2016, for the respective Total assets for the operating segments. (4) Certain amounts recorded as deferred revenues, totaling $1 million, have been reclassified from Other current liabilities to Contract liabilities. In addition, new disclosures have been provided in Note 8 relating to Contract assets and Contract liabilities. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 166 Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost As described in Note 2, the Company now presents the total Non-operational pension cost/credit as a total outside of income from operations. The components of Non-operational pension cost/credit are summarized in Note 17. The amounts disclosed for 2017 and 2016 were previously included as a component of income from operations. Changes affecting operating segments Effective January 1, 2018, management responsibility and oversight of certain remaining engineering, procurement and construction (EPC) businesses, previously included principally in the Robotics and Motion operating segment (EPC-RM) and the former Power Grids business (EPC-PG), were transferred to a new non-core operating business within Corporate and Other. As a result, the following amounts, which were previously reported in their respective operating segments, have been included in Corporate and Other in 2017 and 2016: ($ millions) Third-party revenues Operational EBITA Total assets Depreciation and amortization Capital expenditure 2017 2016 EPC-RM EPC-PG EPC-RM EPC-PG 5 (82) 18 — — 526 (55) 680 2 — 18 (9) 13 — — 897 (13) 853 6 3 In addition, during 2018, the Company changed the allocation of Cash and cash equivalents to the operating segments such that all amounts are attributed to Corporate and Other (see Note 23). As a result, at December 31, 2017 and 2016, $1,932 million and $2,098 million, respectively, of Cash and cash equivalents was reallocated from the Company’s operating segments (including the former Power Grids segment) to Corporate and Other. Previously, these amounts were primarily reported in the total assets for the Electrification Products operating segment and the former Power Grids segment. Total assets at December 31, 2017 and 2016 for the reportable segments and Corporate and Other have been adjusted to reflect this classification. Separate disclosure of Swiss and International employee benefit plans and other In 2018, the Company commenced separate disclosure of Swiss and International (outside Switzerland) benefit plans and has provided a comparable presentation for 2017 and 2016 information. Certain pension plan assets previously disclosed within the fair value hierarchy at December 31, 2017, are now presented using the NAV practical expedient and not subject to leveling (see Note 17). — Note 4 Acquisitions and business divestments Acquisitions Acquisitions were as follows: ($ in millions, except number of acquired businesses) Purchase price for acquisitions (net of cash acquired)(1) Aggregate excess of purchase price over fair value of net assets acquired(2) Number of acquired businesses (1) Excluding changes in cost- and equity-accounted companies. (2) Recorded as goodwill (see Note 11). 2018 2,638 1,472 3 2017 1,992 1,267 4 2016 13 12 1 In the table above, the “Purchase price for acquisitions” and “Aggregate excess of purchase price over fair value of net assets acquired” amounts for 2018, relate primarily to the acquisition of GE Industrial Solutions (GEIS), and for 2017, relate primarily to the acquisition of Bernecker + Rainer Industrie-Elektronik GmbH (B&R). In 2016, acquisitions were not significant. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 167 Acquisitions of controlling interests have been accounted for under the acquisition method and have been included in the Company’s Consolidated Financial Statements since the date of acquisition. On June 30, 2018, the Company acquired through numerous share and asset purchases substantially all the assets, liabilities and business activities of GEIS, General Electric’s global electrification solutions business. GEIS, headquartered in Atlanta, United States, provides technologies that distribute and control electricity and support the commercial, data center, health care, mining, renewable energy, oil and gas, water and telecommunications sectors. The resulting cash outflows for the Company amounted to $2,622 million (net of cash acquired of $192 million). The acquisition strengthens the Company’s global position in electrification and expands its access to the North American market through strong customer relationships, a large installed base and extensive distribution networks. Consequently, the goodwill acquired represents expected operating synergies and cost savings as well as intangible assets that are not separable such as employee know-how and expertise. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the purchase price allocation for acquisitions is preliminary for up to 12 months after the acquisition date and is subject to refinement as more detailed analyses are completed and additional information about the fair values of the acquired assets and liabilities becomes available. Given the timing and complexity of the acquisition of GEIS, the purchase price allocation in the Company’s Consolidated Financial Information has not yet been finalized, primarily relating to amounts allocated to net working capital, pension obligations, current and deferred income taxes as well as intangible assets. At December 31, 2018, the Company is still gathering, analyzing and evaluating relevant information, including certain inputs required for the valuation of intangibles. As a result, amounts recorded in the preliminary purchase price allocation may change in 2019. The final purchase price adjustments as well as the final fair value determinations could result in material adjustments to the values presented in the preliminary purchase price allocation table below. On July 6, 2017, the Company acquired the shares of B&R, a worldwide provider of product- and software-based, open-architecture solutions for machine and factory automation. This acquisition closes a gap in the Company’s industrial automation portfolio and consequently the goodwill acquired represents the future benefits associated with product portfolio expansion. The aggregate allocation of the purchase consideration for business acquisitions in 2018 and 2017, was as follows: 2018 2017 ($ in millions) Technology Customer Relationships Trade names Supply agreement Intangible assets Property, plant and equipment Debt acquired Deferred tax liabilities Inventories Other assets and liabilities, net(2) Goodwill (3) Noncontrolling interest Total consideration (net of cash acquired)(4) Preliminary allocated amounts(1) Weighted- average useful life GEIS Other Total 7 years 14 years 13 years 13 years 87 214 122 34 457 379 — (110) 435 126 1,442 (107) 2,622 — — — — — 9 — (1) 3 (25) 30 — 16 87 214 122 34 457 388 — (111) 438 101 1,472 (107) 2,638 Weighted- average useful life 7 years 20 years 10 years Allocated amounts(1) 412 264 61 — 737 131 (50) (249) 176 (20) 1,267 — 1,992 (1) Excludes measurement period adjustments related to prior year acquisitions. (2) Gross receivables from the GEIS acquisition totaled $658 million; the fair value of which was $624 million after adjusting for contractual cash flows not expected to be collected. (3) The Company expects that goodwill recorded in certain jurisdictions will be tax deductible. The amount is subject to the finalization of the purchase price allocation in 2019. (4) Primarily relates to the acquisition of GEIS in 2018 and B&R in 2017. Cash acquired in the GEIS acquisition totaled $192 million. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 168 The Company’s Consolidated Income Statement for 2018, includes total revenues of $1,317 million and net income of $1 million in respect of GEIS since the date of acquisition. The unaudited pro forma financial information in the table below summarizes the combined pro forma results of the Company and GEIS for 2018 and 2017, as if GEIS had been acquired on January 1, 2017. ($ in millions) Total revenues Income from continuing operations, net of tax 2018 28,936 1,622 2017 27,881 1,631 The pro forma results are for information purposes only and do not include any anticipated cost synergies or other effects of the planned integration of GEIS. Accordingly, such pro forma amounts are not necessarily indicative of the results that would have occurred had the acquisition been completed on the date indicated, nor are they indicative of the future operating results of the combined company. The unaudited pro forma results above include certain adjustments related to the GEIS acquisition. The table below summarizes the adjustments necessary to present the pro forma financial information of the combined entity as if GEIS had been acquired on January 1, 2017. ($ in millions) 2018 2017 Impact on cost of sales from additional amortization of intangible assets Impact on cost of sales from fair valuing acquired inventory Impact on cost of sales from additional depreciation of property, plant and equipment Impact on selling, general and administrative expenses from additional amortization of intangible assets Impact on selling, general and administrative expenses from acquisition-related costs Impact on interest expense from financing costs Taxation adjustments Total pro forma adjustments (10) 26 (4) (5) 44 (15) (5) 31 (20) (26) (8) (12) 20 (62) 33 (75) Business divestments In 2017, the Company received proceeds (net of transaction costs and cash disposed) of $605 million, relating to divestments of consolidated businesses and recorded net gains of $252 million in “Other income (expense), net” on the sale of such businesses. These are primarily due to the divestment of the Company’s high-voltage cables and cable accessories businesses (the Cables business) in March 2017 and the divestment of the Oil & Gas EPC business in December 2017. The assets and liabilities of the Cables business were classified as held for sale in the Company’s Consolidated Balance Sheets at December 31, 2016. The Company has retained certain obligations of the Cables business and thus the Company remains directly or indirectly liable for these liabilities which existed at the date of the divestment. Subsequent to the divestment, the Company recorded a loss of $94 million in 2017 for changes in the amounts recorded for these obligations. In addition, the Company has provided certain performance guarantees to third parties which guarantee the performance of the buyer under existing contracts with customers as well as for certain capital expenditures of the divested business (see Note 15). In 2018 and 2016, there were no significant amounts recognized from divestments of consolidated businesses. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 169 — Note 5 Cash and equivalents, marketable securities and short-term investments Current assets Cash and equivalents and marketable securities and short-term investments consisted of the following: December 31, 2018 ($ in millions) Cost basis Changes in fair value recorded in net income Cash Time deposits Other short-term investments Equity securities(1) 1,983 1,463 206 206 3,858 Changes in fair value recorded in other comprehensive income Debt securities available-for-sale: — U.S. government obligations — Corporate Total 217 90 307 4,165 Gross unrealized gains Gross unrealized losses Fair value Marketable securities and short- term investments Cash and equiva- lents 1,983 1,462 1,983 1,463 206 203 3,855 3,445 214 88 302 — 4,157 3,445 1 206 203 410 214 88 302 712 — — — (3) (3) (3) (2) (5) (8) December 31, 2017 ($ in millions) Cost basis Gross unrealized gains Gross unrealized losses Fair value Marketable securities and short- term investments Cash and equiva- lents Changes in fair value recorded in net income Cash Time deposits Other short-term investments 1,963 2,834 305 5,102 Changes in fair value recorded in other comprehensive income Equity securities Debt securities available-for-sale: — U.S. government obligations — Other government obligations — Corporate Total 152 127 2 215 496 5,598 — — 13 1 14 14 — (2) — (1) (3) (3) 1,963 2,834 305 5,102 165 125 2 215 507 1,963 2,563 4,526 — 271 305 576 165 125 2 215 507 5,609 4,526 1,083 (1) See “New accounting pronouncements – Applicable for current period” in Note 2 for changes applicable in 2018. Included in Other short-term investments at December 31, 2018 and 2017, are receivables of $206 million and $305 million, respectively, representing reverse repurchase agreements. These collateralized lendings, made to a financial institution, have maturity dates of less than one year. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 170 Contractual maturities Contractual maturities of debt securities consisted of the following: December 31, 2018 ($ in millions) Less than one year One to five years Six to ten years Due after ten years Total Available-for-sale Cost basis Fair value 80 166 60 1 307 80 163 58 1 302 At December 31, 2018 and 2017, the Company pledged $68 million and $66 million, respectively, of available-for-sale marketable securities as collateral for issued letters of credit and other security arrangements. — Note 6 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 its subsidiaries to hedge their foreign currency exposures from binding sales and purchase contracts denominated in foreign currencies. For forecasted foreign currency denominated sales of standard products and the related foreign currency denominated purchases, the Company’s policy is to hedge up to a maximum of 100 percent of the forecasted foreign currency denominated exposures, depending on the length of the forecasted exposures. Forecasted exposures greater than 12 months are not hedged. Forward foreign exchange contracts are the main instrument used to protect the Company against the volatility of future cash flows (caused by changes in exchange rates) of contracted and forecasted sales and purchases denominated in foreign currencies. In addition, within its treasury operations, the Company primarily uses foreign exchange swaps and forward foreign exchange contracts to manage the currency and timing mismatches arising in its liquidity management activities. 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, the Company’s policies require that its subsidiaries hedge the commodity price risk exposures from binding contracts, as well as at least 50 percent (up to a maximum of 100 percent) of the forecasted commodity exposure over the next 12 months or longer (up to a maximum of 18 months). Primarily swap contracts are used to manage the associated price risks of commodities. 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. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 171 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 ($ in millions) Foreign exchange contracts Embedded foreign exchange derivatives Interest rate contracts Total notional amounts at December 31, 2018 13,612 733 3,300 2017 16,261 899 5,706 2016 14,144 1,125 3,021 Derivative commodity contracts The Company uses derivatives to hedge its direct or indirect exposure to the movement in the prices of commodities which are primarily copper, silver and aluminum. The following table shows the notional amounts of outstanding commodity derivatives (whether designated as hedges or not), on a net basis, to reflect the Company’s requirements in the various commodities: Type of derivative Copper swaps Silver swaps Aluminum swaps Unit metric tonnes ounces metric tonnes Total notional amounts at December 31, 2018 46,143 2017 28,976 2016 17,667 2,861,294 1,966,729 1,586,395 9,491 1,869 27 Equity derivatives At December 31, 2018, 2017 and 2016, the Company held 41 million, 37 million and 47 million cash-settled call options indexed to ABB Ltd shares (conversion ratio 5:1) with a total fair value of $6 million, $42 million and $23 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 comprehensive loss” and subsequently reclassified into earnings in the same line item and in the same period as the underlying hedged transaction affects earnings. Any ineffectiveness in the hedge relationship, or hedge component excluded from the assessment of effectiveness, is recognized in earnings during the current period. At December 31, 2018, 2017 and 2016, “Accumulated other comprehensive loss” included net unrealized losses of $16 million, net unrealized gains of $12 million and net unrealized losses of $1 million, respectively, net of tax, on derivatives designated as cash flow hedges. Of the amount at December 31, 2018, net losses of $6 million are expected to be reclassified to earnings in 2019. At December 31, 2018, the longest maturity of a derivative classified as a cash flow hedge was 61 months. In 2018, 2017 and 2016, the amounts of gains or losses, net of tax, reclassified into earnings due to the discontinuance of cash flow hedge accounting and the amount of ineffectiveness in cash flow hedge relationships directly recognized in earnings were not significant. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 172 The pre-tax effects of derivative instruments, designated and qualifying as cash flow hedges, on “Accumulated other comprehensive loss” (OCI) and the Consolidated Income Statements were as follows: ($ in millions) Type of derivative Foreign exchange contracts Commodity contracts Cash-settled call options Total Gains (losses) recognized in OCI on Gains (losses) reclassified from OCI derivatives (effective portion) into income (effective portion) 2018 2017 2016 2018 2017 2016 (6) (9) (36) (51) 3 9 22 34 Location Total revenues (7) Total cost of sales 3 Total cost of sales SG&A expenses(1) 15 11 — — — (22) (22) 2 2 6 15 25 1 9 (2) 9 17 (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 2018, 2017 and 2016. Net derivative losses of $24 million and net derivative gains of $23 million and $14 million, net of tax, were reclassified from “Accumulated other comprehensive loss” to earnings during 2018, 2017 and 2016, respectively. Fair value hedges To reduce its interest rate exposure arising primarily from its debt issuance activities, the Company uses interest rate swaps. Where such instruments are designated as fair value hedges, the changes in the fair value of these instruments, as well as the changes in fair value of the risk component of the underlying debt being hedged, are recorded as offsetting gains and losses in “Interest and other finance expense”. Hedge ineffectiveness of instruments designated as fair value hedges in 2018, 2017 and 2016, was not significant. The effect of Interest rate contracts, designated and qualifying as fair value hedges, on the Consolidated Income Statements was as follows: ($ in millions) 2018 2017 2016 Gains (losses) recognized in Interest and other finance expense: — on derivatives designated as fair value hedges — on hedged item (4) 5 (23) 27 (28) 30 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. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 173 The gains (losses) recognized in the Consolidated Income Statements on derivatives not designated in hedging relationships were as follows: ($ in millions) Gains (losses) recognized in income Type of derivative not designated as a hedge Location Foreign exchange contracts Embedded foreign exchange contracts Commodity contracts Other Total Total revenues Total cost of sales SG&A expenses(1) Non-order related research and development Interest and other finance expense Total revenues Total cost of sales SG&A expenses(1) Total cost of sales Interest and other finance expense 2018 (121) 46 10 (1) 40 58 (4) 2 (33) 3 — 2017 92 (41) (18) — 22 7 (2) 5 31 (2) 94 2016 (90) (28) 8 (1) (35) (5) (4) (2) 31 (7) (133) (1) SG&A expenses represent “Selling, general and administrative expenses”. The fair values of derivatives included in the Consolidated Balance Sheets were as follows: December 31, 2018 ($ 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 Embedded foreign exchange derivatives Total Total fair value December 31, 2017 ($ 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, 2018 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” — — — 3 3 117 8 15 140 143 — — 35 3 38 14 1 10 25 63 1 2 — — 3 160 21 8 189 192 4 — 1 — 5 30 1 1 32 37 December 31, 2017 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” 1 5 — 25 31 134 31 — — 15 180 211 — — 41 16 57 24 1 — 1 10 36 93 — — — — — 183 7 2 — 15 207 207 1 — 4 — 5 62 — — — 3 65 70 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 174 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, 2018 and 2017, 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, 2018 and 2017, information related to these offsetting arrangements was as follows: ($ in millions) December 31, 2018 Type of agreement or similar arrangement Derivatives Reverse repurchase agreements Total December 31, 2018 ($ in millions) Type of agreement or similar arrangement Derivatives Total December 31, 2017 ($ in millions) Type of agreement or similar arrangement Derivatives Reverse repurchase agreements Total December 31, 2017 ($ 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 Net asset exposure 181 206 387 (121) — (121) — — — — (206) (206) 60 — 60 Gross amount of recognized liabilities Derivative liabilities eligible for set-off in case of default Cash collateral pledged Non-cash collateral pledged Net liability exposure 220 220 (121) (121) — — — — 99 99 Gross amount of recognized assets Derivative liabilities eligible for set-off in case of default Cash collateral received Non-cash collateral received Net asset exposure 279 305 584 (167) — (167) — — — — (305) (305) 112 — 112 Gross amount of recognized liabilities Derivative liabilities eligible for set-off in case of default Cash collateral pledged Non-cash collateral pledged Net liability exposure 259 259 (167) (167) — — — — 92 92 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 175 — Note 7 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, 2018 ($ in millions) Level 1 Level 2 Level 3 Assets Securities in “Marketable securities and short-term investments”: Equity securities Debt securities – U.S. 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 — 214 — — — 214 — — — 203 — 88 143 63 497 192 37 229 — — — — — — — — — December 31, 2017 ($ in millions) Level 1 Level 2 Level 3 Assets Securities in “Marketable securities and short-term investments”: Equity securities Debt securities – U.S. government obligations Debt securities – Other government obligations Debt securities – Corporate Receivable in “Other non-current assets”: Receivable under securities lending arrangement 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 — 125 — — 79 — — 204 — — — 165 — 2 215 — 211 93 686 207 70 277 — — — — — — — — — — — Total fair value 203 214 88 143 63 711 192 37 229 Total fair value 165 125 2 215 79 211 93 890 207 70 277 During 2018, 2017 and 2016 there have been no reclassifications for any financial assets or liabilities between Level 1 and Level 2. The Company uses the following methods and assumptions in estimating fair values of financial assets and liabilities measured at fair value on a recurring basis: • Securities in “Marketable securities and short-term investments” and “Other non-current assets”: If quoted market prices in active markets for identical assets are available, these are considered Level 1 inputs; however, when markets are not active, these inputs are considered Level 2. If such quoted market prices are not available, fair value is determined using market prices for similar assets or present value techniques, applying an appropriate risk-free interest rate adjusted for non-performance risk. The inputs used in present value techniques are observable and fall into the Level 2 category. The fair value of the receivable under the securities lending arrangement has been determined based on the fair value of the security lent. • 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 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 176 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. Non-recurring fair value measures There were no significant non-recurring fair value measurements during 2018 and 2017. 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, 2018 ($ in millions) Assets Cash and equivalents (excluding securities with original maturities up to 3 months): Carrying value Level 1 Level 2 Level 3 Total fair value Cash Time deposits 1,983 1,462 1,983 — — 1,462 Marketable securities and short-term investments (excluding securities): Time deposits Receivables under reverse repurchase agreements Other non-current assets: Loans granted Restricted cash and cash deposits Liabilities 1 206 30 39 — — — 39 Short-term debt and current maturities of long-term debt (excluding capital lease obligations) Long-term debt (excluding capital lease obligations) 2,008 6,457 1,480 5,839 1 206 31 — 528 707 — — — — — — — — 1,983 1,462 1 206 31 39 2,008 6,546 December 31, 2017 ($ in millions) Assets Cash and equivalents (excluding securities with original maturities up to 3 months): Carrying value Level 1 Level 2 Level 3 Total fair value Cash Time deposits 1,963 2,563 1,963 — — 2,563 Marketable securities and short-term investments (excluding securities): Time deposits Receivables under reverse repurchase agreements Other non-current assets: Loans granted Restricted cash and cash deposits Liabilities 271 305 29 35 — — — 35 Short-term debt and current maturities of long-term debt (excluding capital lease obligations) Long-term debt (excluding capital lease obligations) 694 6,567 400 6,046 271 305 30 — 294 773 — — — — — — — — 1,963 2,563 271 305 30 35 694 6,819 The Company uses the following methods and assumptions in estimating fair values of financial instruments carried on a cost basis: • Cash and equivalents (excluding securities with original maturities up to 3 months), and Marketable securities and short-term investments (excluding 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) restricted cash whose fair values approximate the carrying amounts (Level 1 inputs). ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 17 7 • 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). — Note 8 Receivables, net and Contract assets and liabilities “Receivables, net” consisted of the following: December 31, ($ in millions) Trade receivables Other receivables Allowance Total 2018 5,970 635 (219) 6,386 2017 5,553 510 (202) 5,861 “Trade receivables” in the table above includes contractual retention amounts billed to customers of $176 million and $168 million at December 31, 2018 and 2017, respectively. Management expects that the substantial majority of related contracts will be completed and the substantial majority of the billed amounts retained by the customer will be collected. Of the retention amounts outstanding at December 31, 2018, 62 percent and 28 percent are expected to be collected in 2019 and 2020, respectively. “Other receivables” in the table above consists of value added tax, claims, rental deposits and other non-trade receivables. The reconciliation of changes in the allowance for doubtful accounts is as follows: ($ in millions) Balance at January 1, Additions Deductions Exchange rate differences Balance at December 31, 2018 2017 2016 202 126 (93) (16) 219 202 61 (74) 13 202 160 116 (64) (10) 202 The following table provides information about Contract assets and Contract liabilities: ($ in millions) Contract assets Contract liabilities 2018 1,082 1,707 2017 1,141 1,792 2016 1,222 1,690 Contract assets primarily relate to the Company’s right to receive consideration for work completed but for which no invoice has been issued at the reporting date. Contract assets are transferred to receivables when rights to receive payment become unconditional. Management expects that the majority of the amounts will be collected within one year of the respective balance sheet date. Contract liabilities primarily relate to up-front advances received on orders from customers as well as amounts invoiced to customers in excess of revenues recognized predominantly on long-term projects. Contract liabilities are reduced as work is performed and as revenues are recognized. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 178 The significant changes in the Contract assets and Contract liabilities balances were as follows: ($ in millions) Revenue recognized, which was included in the Contract liabilities balance at Jan 1, 2018/2017 Additions to Contract liabilities – excluding amounts recognized as revenue during the period Receivables recognized that were included in the Contract assets balance at Jan 1, 2018/2017 2018 2017 Contract assets Contract liabilities Contract assets Contract liabilities (879) 518 (1,212) 868 (633) (584) At December 31, 2018, the Company had unsatisfied performance obligations totaling $13,084 million and, of this amount, the Company expects to fulfill approximately 76 percent of the obligations in 2019, approximately 14 percent of the obligations in 2020 and the balance thereafter. — Note 9 Inventories, net “Inventories, net” consisted of the following: December 31, ($ in millions) Raw materials Work in process Finished goods Advances to suppliers Total 2018 1,823 837 1,525 99 4,284 2017 1,412 840 1,379 106 3,737 — 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 2018 3,573 5,624 464 9,661 (5,528) 4,133 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 2018 171 69 240 (122) 118 2017 3,268 5,572 511 9,351 (5,547) 3,804 2017 127 81 208 (105) 103 In 2018, 2017 and 2016 depreciation, including depreciation of assets under capital leases, was $578 million, $549 million and $566 million, respectively. In 2018, 2017 and 2016 there were no significant impairments of property, plant or equipment. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP — Note 11 Goodwill and other intangible assets The changes in “Goodwill” below have been recast to reflect the reorganization in 2018 of the Company’s operating segments as outlined in Note 23: ($ in millions) Products Automation Motion and Other Electrification Industrial Robotics and Corporate Cost at January 1, 2017 Accumulated impairment charges Balance at January 1, 2017 Goodwill acquired during the year Goodwill allocated to disposals Exchange rate differences and other Balance at December 31, 2017 Goodwill acquired during the year Goodwill allocated to disposals Exchange rate differences and other Balance at December 31, 2018 2,805 — 2,805 — — 164 2,969 1,442 (31) (104) 4,276 1,592 — 1,592 1,263 (1) 85 2,939 — — (75) 2,864 3,536 — 3,536 4 — 67 3,607 30 — (34) 3,603 38 (18) 20 — (1) 2 21 — — — 21 179 Total 7,971 (18) 7,953 1,267 (2) 318 9,536 1,472 (31) (213) 10,764 In 2018, goodwill acquired primarily relates to GEIS, acquired in June, 2018, which has been allocated to the Electrification Products operating segment. In 2017, goodwill acquired primarily relates to B&R, acquired in July, 2017, which has been allocated to the Industrial Automation operating segment. Intangible assets other than goodwill consisted of the following: 2018 Gross 2017 Gross carrying Accumulated Net carrying carrying Accumulated Net carrying December 31, ($ in millions) amount amortization amount amount amortization amount Capitalized software for internal use Capitalized software for sale Intangibles other than software: Customer-related Technology-related Marketing-related Other Total 779 30 2,609 1,131 483 67 (586) (30) (909) (701) (240) (26) 193 — 1,700 430 243 41 704 31 2,452 1,082 366 33 (572) (31) (782) (636) (199) (23) 132 — 1,670 446 167 10 5,099 (2,492) 2,607 4,668 (2,243) 2,425 Additions to intangible assets other than goodwill consisted of the following: ($ in millions) Capitalized software for internal use Intangibles other than software: Customer-related Technology-related Marketing-related Other Total 2018 139 214 87 122 34 596 2017 69 264 412 61 — 806 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 180 Included in the additions of $596 million and $806 million in 2018 and 2017, respectively, were the following intangible assets other than goodwill related to business combinations: ($ in millions) Capitalized software for internal use Intangibles other than software: Customer-related Technology-related Marketing-related Other Total 2018 2017 Amount acquired Weighted- average useful life 65 2 years Amount acquired Weighted- average useful life 14 years 7 years 13 years 13 years 214 87 122 34 522 20 years 7 years 10 years 264 412 61 — 737 Amortization expense of intangible assets other than goodwill consisted of the following: ($ in millions) Capitalized software for internal use Intangibles other than software Total 2018 59 279 338 2017 50 237 287 2016 50 254 304 In 2018, 2017 and 2016, impairment charges on intangible assets other than goodwill were not significant. At December 31, 2018, future amortization expense of intangible assets other than goodwill is estimated to be: ($ in millions) 2019 2020 2021 2022 2023 Thereafter Total — Note 12 Debt 342 321 285 253 234 1,172 2,607 The Company’s total debt at December 31, 2018 and 2017, amounted to $8,618 million and $7,408 million, respectively. Short-term debt and current maturities of long-term debt The Company’s “Short-term debt and current maturities of long-term debt” consisted of the following: December 31, ($ in millions) Short-term debt (weighted-average interest rate of 2.3% and 2.7%, respectively) Current maturities of long-term debt (weighted-average nominal interest rate of 2.7% and 2.0%, respectively) Total 2018 561 1,470 2,031 2017 317 409 726 Short-term debt primarily represents short-term loans from various banks and issued commercial paper. At December 31, 2018, 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 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 181 paper in the United States. At December 31, 2018 and 2017, $292 million and $259 million, respectively, was outstanding under the $2 billion program in the United States. At December 31, 2018, $172 million was outstanding under the Euro-commercial $2 billion program. No amount was outstanding under this program at December 31, 2017. In addition, the Company has a $2 billion multicurrency revolving credit facility, maturing in 2021, for general corporate purposes. Interest costs on drawings under the facility are LIBOR or EURIBOR (depending on the currency of the drawings) plus a margin of 0.20 percent, while commitment fees (payable on the unused portion of the facility) amount to 35 percent of the margin, which represents commitment fees of 0.07 percent per annum. Utilization fees, payable on drawings, amount to 0.075 percent per annum on drawings up to one-third of the facility, 0.15 percent per annum on drawings in excess of one-third but less than or equal to two-thirds of the facility, or 0.30 percent per annum on drawings over two-thirds of the facility. No amount was drawn at December 31, 2018 and 2017. The facility contains cross-default clauses whereby an event of default would occur if the Company were to default on indebtedness as defined in the facility, at or above a specified threshold. Long-term debt The Company raises long term debt in various currencies, maturities and on various interest rate terms. For certain of its debt obligations, the Company utilizes derivative instruments to modify its interest rate exposure. In particular, the Company uses interest rate swaps to effectively convert certain fixed-rate long-term debt into floating rate obligations. The carrying value of debt, designated as being hedged by fair value hedges, is adjusted for changes in the fair value of the risk component of the debt being hedged. The following table summarizes the Company’s long-term debt considering the effect of interest rate swaps. Consequently, a fixed-rate debt subject to a fixed-to-floating interest rate swap is included as a floating rate debt in the table below: ($ in millions, except % data) Floating rate Fixed rate Current portion of long-term debt Total 2018 2017 Nominal rate Effective rate Balance Nominal rate Effective rate 1.7% 3.6% 1.1% 3.6% 2.7% 2.7% 3,213 3,878 7,091 (409) 6,682 1.7% 3.5% 0.6% 3.5% 2.0% 2.0% Balance 3,106 4,951 8,057 (1,470) 6,587 At December 31, 2018, the principal amounts of long-term debt repayable (excluding capital lease obligations) at maturity were as follows: 2019 2020 2021 2022 2023 Thereafter Total ($ in millions) 1,448 326 1,269 1,250 1,252 2,366 7,911 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 182 Details of the Company’s outstanding bonds were as follows: December 31, (in millions) outstanding Carrying value(1) 2018 Nominal 2017 Nominal outstanding Carrying value(1) Bonds: 1.50% CHF Bonds, due 2018 2.625% EUR Instruments, due 2019 2.8% USD Notes, due 2020 4.0% USD Notes, due 2021 2.25% CHF Bonds, due 2021 5.625% USD Notes, due 2021 2.875% USD Notes, due 2022 3.375% USD Notes, due 2023 0.625% EUR Instruments, due 2023 0.75% EUR Instruments, due 2024 3.8% USD Notes, due 2028 4.375% USD Notes, due 2042 Total EUR USD USD CHF USD USD USD EUR EUR USD USD 1,250 300 650 350 250 1,250 450 700 750 750 750 CHF EUR USD CHF USD USD EUR EUR 350 1,250 650 350 250 1,250 700 750 USD 750 $ $ $ $ $ $ $ $ $ $ $ $ 1,431 299 646 373 265 1,242 448 807 862 746 723 7,842 $ $ $ $ $ $ $ $ $ $ 358 1,493 644 378 270 1,256 834 889 723 6,845 (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 2018, the Company repaid at maturity the 1.50% CHF Bonds, due 2018. The 1.50% CHF Bonds, due 2018, paid interest annually in arrears at a fixed annual rate of 1.5 percent. The 2.625% EUR Instruments, due 2019, pay interest annually in arrears at a fixed rate of 2.625 percent per annum. The 4.0% USD Notes, due 2021, pay interest semi-annually in arrears, at a fixed annual rate of 4.0 percent. The Company may redeem these notes prior to maturity, in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. The 2.25% CHF Bonds, due 2021, pay interest annually in arrears, at a fixed annual rate of 2.25 percent. The Company has the option to redeem the bonds prior to maturity, in whole, at par plus accrued interest, if 85 percent of the aggregate principal amount of the bonds has been redeemed or purchased and cancelled. The Company entered into interest rate swaps to hedge its interest obligations on these bonds. After considering the impact of such swaps, these bonds effectively became floating rate Swiss franc obligations and consequently have been shown as floating rate debt in the table of long-term debt above. The 5.625% USD Notes, due 2021, pay interest semi-annually in arrears at a fixed annual rate of 5.625 percent. The Company has the option to redeem the notes prior to maturity at the greater of (i) 100 percent of the principal amount of the notes to be redeemed, and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. The 2.875% USD Notes, due 2022, pay interest semi-annually in arrears at a fixed annual rate of 2.875 percent. The 4.375% USD Notes, due 2042, pay interest semi-annually in arrears at a fixed annual rate of 4.375 percent. The Company may redeem both of these notes (which were issued together in May 2012) prior to maturity, in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. These notes, registered with the U.S. Securities and Exchange Commission, were issued by ABB Finance (USA) Inc., a 100 percent owned finance subsidiary, and were fully and unconditionally guaranteed by ABB Ltd. There are no significant restrictions on the ability of the parent company to obtain funds from ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 183 its subsidiaries by dividend or loan. In reliance on Rule 3-10 of Regulation S-X, the separate financial statements of ABB Finance (USA) Inc. are not provided. The Company has entered into interest rate swaps for an aggregate nominal amount of $1,050 million to partially hedge its interest obligations on the 2.875% USD Notes, due 2022. After considering the impact of such swaps, $1,050 million of the outstanding principal is shown as floating rate debt in the table of long-term debt above. The 0.625% EUR Instruments, due 2023, were issued in May 2016, with total net issuance proceeds of EUR 697 million (equivalent to approximately $807 million on date of issuance). These Instruments pay interest annually in arrears at a fixed rate of 0.625 percent per annum. The Company may redeem these notes three months prior to maturity (Par call date), in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. The Company may redeem these instruments in whole or in part, after the Par call date at 100 percent of the principal amount of the notes to be redeemed. In 2017, the Company entered into interest rate swaps to hedge its interest on these bonds. After considering the impact of such swaps, these notes effectively became floating rate euro obligations and consequently have been shown as floating rate debt, in the table of long-term debt above. The 0.75% EUR Instruments, due 2024, were issued in May 2017, with total net issuance proceeds of EUR 745 million (equivalent to approximately $824 million on date of issuance). These Instruments pay interest annually in arrears at a fixed rate of 0.75 percent per annum and have the same early redemption terms as the 0.625% EUR Instruments above. The Company entered into interest rate swaps to hedge its interest on these bonds. After considering the impact of such swaps, these bonds effectively became floating rate euro obligations and consequently have been shown as floating rate debt in the table of long-term debt above. In April 2018, the Company issued the following notes (i) $300 million of 2.8% USD Notes, due 2020, (ii) $450 million of 3.375% USD Notes, due 2023, and (iii) $750 million of 3.8% USD Notes, due 2028. Each of the respective notes pays interest semi-annually in arrears. The aggregate net proceeds of these bond issues, after underwriting discount and other fees, amounted to $1,494 million. The Company may redeem the notes at any time prior to their maturity date in the case of the 2020 Notes, up to one month prior to their maturity date in the case of the 2023 Notes, and up to three months prior to their maturity date in the case of the 2028 Notes, in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the Notes terms, plus interest accrued at the redemption date. On or after March 3, 2023 (one month prior to their maturity date) in the case of the 2023 Notes and on or after January 3, 2028 (three months prior to their maturity date) in the case of the 2028 Notes, the Company may also redeem the notes of the applicable series, in whole or in part, at any time at a redemption price equal to 100 percent of the principal amount of the notes to be redeemed plus unpaid accrued interest to, but excluding, the redemption date. These notes, registered with the U.S. Securities and Exchange Commission, were issued by ABB Finance (USA) Inc., a 100 percent owned finance subsidiary, and were fully and unconditionally guaranteed by ABB Ltd. There are no significant restrictions on the ability of the parent company to obtain funds from its subsidiaries by dividend or loan. In reliance on Rule 3-10 of Regulation S-X, the separate financial statements of ABB Finance (USA) Inc. are not provided. The Company’s various debt instruments contain cross-default clauses which would allow the bondholders to demand repayment if the Company were to default on any borrowing at or above a specified threshold. Furthermore, all such bonds constitute unsecured obligations of the Company and rank pari passu with other debt obligations. In addition to the bonds described above, included in long-term debt at December 31, 2018 and 2017, are capital lease obligations, bank borrowings of subsidiaries and other long-term debt, none of which is individually significant. In February 2019, the Company issued the following notes: (i) CHF 280 million of 0.3% CHF Notes, due 2024 and (ii) CHF 170 million of 1.0% CHF Notes, due 2029. Each of the respective notes pays interest ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 184 annually in arrears. The Company recorded aggregate net proceeds, after underwriting discount and other fees, of CHF 449 million (equivalent to approximately $449 million on date of issuance). On March 26, 2019, the Company repaid at maturity its EUR 1,250 million 2.625% Instruments, equivalent to $1,414 million at date of payment. In addition, at March 27, 2019, the amount outstanding under the $2 billion program in the United States had increased to $825 million from $292 million at December 31, 2018, and the amount outstanding under the $2 billion Euro-commercial paper program had increased to $509 million from $172 million at December 31, 2018. — Note 13 Other provisions, other current liabilities and other non-current liabilities “Other provisions” consisted of the following: December 31, ($ 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 “Other current liabilities” consisted of the following: December 31, ($ in millions) Employee-related liabilities Accrued expenses Non-trade payables Accrued customer rebates Other tax liabilities Income taxes payable Derivative liabilities (see Note 6) Accrued interest Deferred income Pension and other employee benefits Other Total “Other non-current liabilities” consisted of the following: December 31, ($ in millions) Income tax related liabilities Provisions for contractual penalties and compliance and litigation matters Non-current deposit liabilities Employee-related liabilities Environmental provisions Derivative liabilities (see Note 6) Deferred income Other Total 2018 2017 590 277 209 166 130 443 334 209 153 138 1,372 1,277 2018 1,506 2017 1,439 546 477 299 277 260 192 73 36 34 80 389 454 230 274 313 207 61 33 40 69 3,780 3,509 2018 1,111 132 91 74 56 37 12 2017 1,197 137 95 70 53 70 11 176 1,689 216 1,849 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 185 — Note 14 Leases The Company’s lease obligations primarily relate to real estate, vehicles and machinery. Rent expense was $364 million, $385 million and $390 million in 2018, 2017 and 2016, respectively. Sublease income received by the Company on leased assets was $7 million, $11 million and $13 million in 2018, 2017 and 2016, respectively. At December 31, 2018, future net minimum lease payments for operating leases, having initial or remaining non-cancelable lease terms in excess of one year, consisted of the following: ($ in millions) 2019 2020 2021 2022 2023 Thereafter Sublease income Total 329 254 191 132 105 267 1,278 (13) 1,265 At December 31, 2018, the future net minimum lease payments for capital leases and the present value of the net minimum lease payments consisted of the following: ($ in millions) 2019 2020 2021 2022 2023 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 34 27 24 24 19 111 239 (1) 238 (87) 151 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. — Note 15 Commitments and contingencies Contingencies – Regulatory, Compliance and Legal Regulatory In April 2014, the European Commission announced its decision regarding its investigation of anticompetitive practices in the cables industry and granted the Company full immunity from fines under its leniency program. In February 2019, the Brazilian Antitrust Authority (CADE) announced its decision regarding its investigation of anticompetitive practices in certain power businesses of the Company, including ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 186 flexible alternating current transmission systems (FACTS) and power transformers, and granted the Company full immunity from fines under its leniency program. As a result of an internal investigation, the Company self-reported to the Securities and Exchange Commission (SEC) and the Department of Justice (DoJ) in the United States as well as to the Serious Fraud Office (SFO) in the United Kingdom concerning certain of its past dealings with Unaoil and its subsidiaries, including alleged improper payments made by these entities to third parties. The SFO has commenced an investigation into this matter. The Company is cooperating fully with the authorities. At this time, it is not possible for the Company to make an informed judgment about the outcome of these matters. Based on findings during an internal investigation, the Company self-reported to the SEC and the DoJ, to various authorities in South Africa and other countries as well as to certain multilateral financial institutions potential suspect payments and other compliance concerns in connection with some of the Company’s dealings with Eskom and related persons. Many of those parties have expressed an interest in, or commenced an investigation into, these matters and the Company is cooperating fully with them. At this time, it is not possible for the Company to make an informed judgment about the outcome of these matters. General The Company is aware of proceedings, or the threat of proceedings, against it and others in respect of private claims by customers and other third parties with regard to certain actual or alleged anticompetitive practices. Also, the Company is subject to other claims and legal proceedings, as well as investigations carried out by various law enforcement authorities. With respect to the above-mentioned claims, regulatory matters, and any related proceedings, the Company will bear the related costs, including costs necessary to resolve them. Liabilities recognized At December 31, 2018 and 2017, the Company had aggregate liabilities of $221 million and $229 million, respectively, included in “Other provisions” and “Other non-current liabilities”, for the above regulatory, compliance and legal contingencies, and none of the individual liabilities recognized was significant. As it is not possible to make an informed judgment on, or reasonably predict, the outcome of certain matters and as it is not possible, based on information currently available to management, to estimate the maximum potential liability on other matters, there could be material adverse outcomes beyond the amounts accrued. Guarantees General The following table provides quantitative data regarding the Company’s third-party guarantees. The maximum potential payments represent a “worst-case scenario”, and do not reflect management’s expected outcomes. December 31, ($ in millions) Performance guarantees Financial guarantees Indemnification guarantees Total Maximum potential payments(1) 2018 1,584 10 64 2017 1,775 17 72 1,658 1,864 (1) Maximum potential payments include amounts in both continuing and discontinued operations. The carrying amount of liabilities recorded in the Consolidated Balance Sheets reflects the Company’s best estimate of future payments, which it may incur as part of fulfilling its guarantee obligations. In respect of the above guarantees, the carrying amounts of liabilities at December 31, 2018 and 2017, were not significant. The Company is party to various guarantees providing financial or performance assurances to certain third parties. These guarantees, which have various maturities up to 2027, mainly consist of performance guarantees whereby (i) the Company guarantees the performance of a third party’s product or service according to the terms of a contract and (ii) as member of a consortium/joint ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 187 venture that includes third parties, the Company guarantees not only its own performance but also the work of third parties. Such guarantees may include guarantees that a project will be completed within a specified time. If the third party does not fulfill the obligation, the Company will compensate the guaranteed party in cash or in kind. The original maturity dates for the majority of these performance guarantees range from one to eight years. In conjunction with the divestment of the high-voltage cable and cables accessories businesses, the Company has entered into various performance guarantees with other parties with respect to certain liabilities of the divested business. At December 31, 2018 and 2017, the maximum potential payable under these guarantees amounts to $771 million and $929 million, respectively, and these guarantees have various maturities ranging from one to ten 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, 2018 and 2017, the total outstanding performance bonds aggregated to $7.4 billion and $7.7 billion, respectively, of which $4.3 billion and $4.7 billion, respectively, relate to discontinued operations. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2018, 2017 and 2016. Product and order-related contingencies The Company calculates its provision for product warranties based on historical claims experience and specific review of certain contracts. The reconciliation of the “Provisions for warranties”, including guarantees of product performance, was as follows: ($ 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 Exchange rate differences Balance at December 31, 2018 909 41 (307) 341 (36) 948 2017 815 30 (243) 234 73 909 2016 763 — (248) 327 (27) 815 During 2018, the Company recorded changes in the estimated amount for a product warranty relating to a divested business which is included within Corporate and Other. The relevant product had an unexpected level of product failure which requires higher than expected costs to remediate. As a result, warranty expenses of $92 million were recorded in “Cost of sales of products” in 2018. As these costs relate to a divested business, in accordance with the definition of the Company’s primary measure of segment performance, Operational EBITA (see Note 23), the costs have been excluded from this measure. 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 $36 million, $23 million and $151 million, during 2018, 2017 and 2016, respectively. The corresponding increases were included in “Cost of sales of products”. As $16 million, $8 million and $131 million, in 2018, 2017 and 2016, respectively, relates to products which were sold prior to the acquisition date these costs have been excluded from the Company’s measure of segment profit, Operational EBITA (see Note 23). The warranty liability has been recorded based on the information currently available and is subject to change in the future. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 188 Related party transactions The Company conducts business with certain companies where members of the Company’s Board of Directors or Executive Committee act, or in recent years have acted, as directors or senior executives. The Company’s Board of Directors has determined that the Company’s business relationships with those companies do not constitute material business relationships. This determination was made in accordance with the Company’s related party transaction policy which was prepared based on the Swiss Code of Best Practice and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange. — Note 16 Income taxes “Provision for taxes” consisted of the following: ($ in millions) Current taxes Deferred taxes Tax expense from continuing operations Tax expense from discontinued operations 2018 686 (142) 544 228 2017 782 (199) 583 273 2016 671 (145) 526 251 Income tax expense from continuing operations is reconciled below from the Company’s weighted-average global tax rate (rather than from the Swiss domestic statutory tax rate) as the parent company of the ABB Group, ABB Ltd, is domiciled in Switzerland and income generated in jurisdictions outside of Switzerland (hereafter “foreign jurisdictions”) which has already been subject to corporate income tax in those foreign jurisdictions is, to a large extent, tax exempt in Switzerland. There is no re- quirement in Switzerland for any parent company of a group to file a tax return of the consolidated group determining domestic and foreign pre-tax income. As the Company’s consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines the weighted-average global tax rate of the Company. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code. The SEC staff issued Staff Accounting Bulletin No. 118, which has allowed the Company to record provisional amounts in income tax expense from continuing operations in the 2017 financial statements. The estimated impact included a benefit of $30 million due to changes in tax rates, valuation allowance on foreign tax credits and undistributed earnings of subsidiaries, offset by $26 million charge for one-time transition tax. The amounts were finalized in 2018 and no material change to the estimated figures was recorded. The reconciliation of “Tax expense from continuing operations” at the weighted-average tax rate to the effective tax rate is as follows: ($ in millions, except % data) 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 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 Effective tax rate for the year 2018 2,119 22.2% 470 (43) 41 1 86 (11) 544 2017 2,102 23.6% 497 (114) 763 (747) 58 126 583 25.7% 27.7% 2016 1,761 19.9% 350 9 (8) 42 79 54 526 29.9% In 2018 and 2017, the benefit reported in “Items taxed at rates other than the weighted-average tax rate” included positive impacts of $17 million and $72 million, respectively, relating to non-taxable amounts for net gains from sale of businesses. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 189 In 2018, the “Changes in valuation allowance, net” included adjustments in valuation allowance recorded in certain jurisdictions where the company updated its assessment that it was more likely than not that such deferred tax assets would be realized. The amount included an increase of $40 million relating to certain operations in Central Europe. In 2017, the relevant tax rate applicable to one of the Company’s subsidiaries increased and in connection with this change, the company benefited from an increase of $721 million in deferred tax assets relating to certain long-term assets. The respective effect is reported in “Effects of changes in tax laws and (enacted) tax rates”. After evaluating the recoverability of this deferred tax asset, the Company recorded a valuation allowance of $668 million as the Company determined that it was more likely than not that such deferred tax assets would not be realized. This is reported in the table above in “Changes in valuation allowance, net”. In 2016, “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 2018, 2017 and 2016, “Non-deductible expenses” of $86 million, $58 million and $79 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 2018, “Other, net” in the table above included a net benefit of $22 million while in 2017 and 2016, “Other, net” included net charges of $148 million and $53 million, respectively, related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. Deferred income tax assets and liabilities from continued operations consisted of the following: December 31, ($ 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 assets Pension and other liabilities Inventories Unremitted earnings Total gross deferred tax liability Net deferred tax asset (liability) Included in: “Deferred taxes” – non-current assets “Deferred taxes” – non-current liabilities Net deferred tax asset (liability) 2018 2017 600 769 476 253 1,039 114 3,251 (1,535) 1,716 (202) (770) (153) (67) (445) 521 761 458 263 1,146 93 3,242 (1,303) 1,939 (210) (724) (217) (69) (557) (1,637) (1,777) 79 162 1,006 (927) 79 1,212 (1,050) 162 Certain entities have deferred tax assets related to net operating loss carry-forwards and other items. As recognition of these assets in certain entities did not meet the more likely than not criterion, valuation allowances have been recorded and amount to $1,535 million and $1,303 million, at December 31, 2018 and 2017, respectively. “Unused tax losses and credits” at December 31, 2018 and 2017, in the table above, included $145 million and $148 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. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 190 The valuation allowance at December 31, 2018, 2017 and 2016 was $1,535 million, $1,303 million and $539 million, respectively. At December 31, 2018 and 2017, deferred tax liabilities totaling $445 million and $557 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 re- claimed by the shareholder, although they have to be declared and withheld by the subsidiary. In 2018 and 2017, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow utiliza- tion of benefits. At both December 31, 2018 and 2017, foreign subsidiary retained earnings subject to with- holding taxes upon distribution of approximately $100 million were considered as permanently reinvested, as these funds are used for financing current operations as well as business growth through working capi- tal and capital expenditure in those countries and, consequently, no deferred tax liability was recorded. At December 31, 2018, net operating loss carry-forwards of $2,153 million and tax credits of $120 million were available to reduce future taxes of certain subsidiaries. Of these amounts, $1,413 million of loss carry-forwards and $95 million of tax credits will expire in varying amounts through 2038, while the remainder will not expire. The largest amount of these carry-forwards related to the Company’s Europe operations. Unrecognized tax benefits consisted of the following: ($ in millions) Classification as unrecognized tax items on January 1, 2016 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 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, 2017, which would, if recognized, affect the effective tax rate Net change due to acquisitions and divestments Increase relating to prior year tax positions Decrease relating to prior year tax positions Increase relating to current year tax positions Decrease due to settlements with tax authorities Decrease as a result of the applicable statute of limitations Exchange rate differences Balance at December 31, 2018, which would, if recognized, affect the effective tax rate Penalties and interest related to unrecognized tax benefits Unrecognized tax benefits 744 88 (21) 167 (96) (95) (27) 760 115 (76) 223 (23) (75) 101 1,025 8 35 (99) 126 (44) (66) (24) 961 145 74 (20) 13 (21) (13) (6) 172 103 (37) — (2) (12) 18 242 — 37 14 5 (17) (31) (11) 239 Total 889 162 (41) 180 (117) (108) (33) 932 218 (113) 223 (25) (87) 119 1,267 8 72 (85) 131 (61) (97) (35) 1,200 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 191 In 2018, 2017 and 2016, the “Increase relating to current year tax positions” included a total of $111 million, $193 million and $132 million, respectively, in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. At December 31, 2018, the Company expected the resolution, within the next twelve months, of unrecognized tax benefits related to pending court cases amounting to $52 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, 2018, the earliest significant open tax years that remained subject to examination were the following: Region Europe The Americas Asia, Middle East and Africa — Note 17 Employee benefits Year 2011 2015 2009 The Company operates defined benefit pension plans, defined contribution pension plans, and termination indemnity plans, in accordance with local regulations and practices. The Company’s most significant defined benefit pension plans are in Switzerland as well as in Germany, the United Kingdom, the U.S., Sweden and Finland. These plans cover a large portion of the Company’s employees and provide benefits to employees in the event of death, disability, retirement, or termination of employment. Certain of these plans are multi-employer plans. The Company also operates other postretirement benefit plans including postretirement health care benefits and other employee-related benefits for active employees including long-service award plans. The measurement date used for the Company’s employee benefit plans is December 31. The funding policies of the Company’s plans are consistent with the local government and tax requirements. The Company recognizes in its Consolidated Balance Sheets the funded status of its defined benefit pension plans, postretirement plans, and other employee-related benefits measured as the difference between the fair value of the plan assets and the benefit obligation. Unless otherwise indicated, the following tables include amounts relating to both continuing and discontinued operations. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 192 Obligations and funded status of the plans The change in benefit obligation, change in fair value of plan assets, and funded status recognized in the Consolidated Balance Sheets were as follows: ($ in millions) Benefit 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 assets of businesses acquired (divested) Plan amendments and other Exchange rate differences Fair value of plan assets at December 31, Funded status – underfunded Defined pension benefits benefits Switzerland International International Other postretirement 2018 4,055 92 30 69 2017 3,708 106 41 70 2018 7,892 122 198 16 2017 7,188 122 208 12 (239) (245) (318) (345) 10 6 (4) (26) 3,993 4,020 (41) 89 69 56 127 23 169 4,055 3,682 207 90 70 60 (92) (119) (330) 7,429 6,514 (184) 152 16 8 101 (45) 643 7,892 5,811 437 139 12 2018 132 2017 147 1 4 — (11) 8 (12) — (2) 120 — — 11 — 1 5 — (11) — (11) (1) 2 132 — — 11 — (239) (245) (318) (345) (11) (11) 7 — (26) 3,879 (114) 52 (3) 167 4,020 39 (94) (259) 5,866 — (47) 507 6,514 — — — — — — — — (35) (1,563) (1,378) (120) (132) The amounts recognized in "Accumulated other comprehensive loss" and "Noncontrolling interests" were: December 31, ($ in millions) 2018 2017 2016 2018 2017 2016 ($ in millions) Net actuarial (loss) gain Prior service credit Defined pension benefits Other postretirement benefits (2,628) (2,321) (2,237) 74 99 108 Amount recognized in OCI(1) and NCI(2) (2,554) (2,222) (2,129) Taxes associated with amount recognized in OCI and NCI 535 503 487 Amount recognized in OCI and NCI, net of tax(3) (2,019) (1,719) (1,642) (1) OCI represents “Accumulated other comprehensive loss”. (2) NCI represents “Noncontrolling interests”. (3) NCI, net of tax, amounted to $(1) million, $0 million, and $0 million at December 31, 2018, 2017 and 2016. 30 23 53 — 53 20 27 47 — 47 10 31 41 — 41 In addition, the following amounts were recognized in the Company's Consolidated Balance Sheets: December 31, ($ in millions) 2018 2017 2018 2017 2018 2017 ($ in millions) Overfunded plans Underfunded plans – current Underfunded plans – non-current Funded status – underfunded Defined pension benefits Other postretirement benefits Switzerland International International 24 — (138) (114) 60 — (95) (35) 59 (19) (1,603) (1,563) 62 (18) (1,422) (1,378) — (11) (109) (120) — (12) (120) (132) Amounts reported as assets and liabilities held for sale (93) (133) (120) (106) — — ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP December 31, ($ in millions) Non-current assets Overfunded pension plans Other employee-related benefits Pension and other employee benefits Amounts reported as Non-current assets held for sale December 31, ($ in millions) Current liabilities Underfunded pension plans Underfunded other postretirement benefit plans Other employee-related benefits Pension and other employee benefits Amounts reported as Current liabilities held for sale December 31, ($ in millions) Non-current liabilities Underfunded pension plans Underfunded other postretirement benefit plans Other employee-related benefits Pension and other employee benefits Amounts reported as Non-current liabilities held for sale 193 2018 2017 83 1 84 1 122 22 144 1 2018 2017 (19) (11) (10) (40) (4) (18) (12) (17) (47) (7) 2018 2017 (1,741) (1,517) (109) (246) (2,096) (266) (120) (245) (1,882) (291) The accumulated benefit obligation (ABO) for all defined benefit pension plans was $11,249 million and $11,683 million at December 31, 2018 and 2017, respectively. The projected benefit obligation (PBO), ABO and fair value of plan assets, for pension plans with a PBO in excess of fair value of plan assets or ABO in excess of fair value of plan assets, was: ($ in millions) December 31, PBO ABO Fair value of plan assets PBO exceeds fair value of plan assets ABO exceeds fair value of plan assets Switzerland International Switzerland International 2018 3,482 3,482 2017 3,557 3,557 2018 6,897 6,743 2017 7,477 7,235 2018 3,482 3,482 2017 3,557 3,557 2018 6,872 6,724 2017 5,864 5,725 3,344 3,461 5,275 6,038 3,344 3,461 5,254 4,453 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: Defined pension benefits Other postretirement benefits Switzerland International International 2018 2017 2016 2018 2017 2016 2018 2017 2016 ($ in millions) Operational pension cost: Service cost Operational pension cost Non-operational pension cost (credit): Interest cost 92 92 30 106 106 133 133 122 122 122 122 116 116 41 46 198 208 234 Expected return on plan assets (117) (112) (130) (305) (295) (272) Amortization of prior service cost (credit) Amortization of net actuarial loss Curtailments, settlements and special termination benefits Non-operational pension cost (credit) Net periodic benefit cost (15) — — (102) (10) 10 — — (61) 45 36 — — (48) 85 1 92 23 9 1 91 16 21 4 85 41 92 131 143 208 1 1 4 — (5) (1) — (2) (1) 1 1 5 — (5) (1) (1) (2) (1) 1 1 6 — (12) — — (6) (5) The components of net periodic benefit cost other than the service cost component are included in the line “Non-operational pension (cost) credit” in the income statement. Net periodic benefit cost includes ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 194 $45 million, $55 million and $67 million in 2018, 2017 and 2016, respectively, related to discontinued operations. 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 Cash balance interest credit rate 2018 2017 2018 2017 2018 2017 Defined pension benefits Other postretirement benefits Switzerland International International 0.8 — — 1.0 0.8 — — 1.0 2.8 2.4 1.4 1.6 2.6 2.5 1.5 1.7 3.9 0.2 — — 3.2 — — — For the Company’s significant benefit plans, the discount rate used at each measurement date is set based on a high-quality corporate bond yield curve – derived based on bond universe information sourced from reputable third-party index and data providers and rating agencies – reflecting the timing, amount and currency of the future expected benefit payments for the respective plan. Consistent discount rates are used across all plans in each currency zone, based on the duration of the applicable plan(s) in that zone. For plans in the other countries, the discount rate is based on high quality corporate or government bond yields applicable in the respective currency, as appropriate at each measurement date with a duration broadly consistent with the respective plan’s obligations. At the end of 2018, the Company changed the approach used to calculate the service and interest components of net periodic benefit cost for its significant benefit plans to provide a more precise measurement of service and interest costs. This change compared to the previous approach is expected to result in a net decrease in the service and interest components for benefit cost in 2019. The Company calculates the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Going forward, the Company has elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. This change does not affect the measurement of our total benefit obligations. The Company has accounted for this change as a change in accounting estimate and, accordingly, has accounted for it prospectively. 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 Cash balance interest credit rate Defined pension benefits Other postretirement benefits Switzerland International International 2018 2017 2016 2018 2017 2016 2018 2017 2016 0.8 1.1 1.2 2.6 2.9 3.4 3.2 3.3 3.6 3.0 — 1.0 3.0 — 1.0 3.5 — 1.3 4.9 2.5 1.7 5.0 2.5 1.7 4.8 2.4 1.6 — — — — — — — — — 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 2018 6.7% 5.0% 2028 2017 7.1% 5.0% 2028 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 195 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 investment returns. The boards of trustees have the responsibility for making key investment strategy decisions within a risk-controlled framework. The pension plan assets are invested in diversified portfolios that are managed by third-party asset managers, in accordance with local statutory regulations, pension plan rules and the respective plans’ investment guidelines, as approved by the boards of trustees. Plan assets are generally segregated from those of the Company and invested with the aim of meeting the respective plans’ projected future pension liabilities. Plan assets are measured at fair value at the balance sheet date. The boards of trustees manage the assets of the pension plans in a risk-controlled manner and assess the risks embedded in the pension plans through asset/liability management studies. Asset/liability management studies typically take place every three years. However, the risks of the plans are monitored on an ongoing basis. The board of trustees’ investment goal is to maximize the long-term returns of plan assets within specified risk parameters, while considering the future liabilities and liquidity needs of the individual plans. Risk measures taken into account include the funding ratio of the plan, the likelihood of extraordinary cash contributions being required, the risk embedded in each individual asset class, and the plan asset portfolio as a whole. The Company’s global pension asset allocation is the result of the asset allocations of the individual plans, which are set by the respective boards of trustees. The target asset allocation of the Company’s plans on a weighted-average basis is as follows: (in %) Asset class Equity Fixed income Real estate Other Target Switzerland International 19 54 22 5 100 22 61 7 10 100 The actual asset allocations of the plans are in line with the target asset allocations. Equity securities primarily includes investments in large-cap and mid-cap publicly traded companies. Fixed income assets primarily include corporate bonds of companies from diverse industries and government bonds. Both fixed income and equity assets are invested either via funds or directly in segregated investment mandates, and include an allocation to emerging markets. Real estate consists primarily of investments in real estate in Switzerland held in the Swiss plans. The “Other” asset class includes investments in private equity, hedge funds, commodities, and cash and reflects a variety of investment strategies. Based on the above global asset allocation and the fair values of the plan assets, the expected long-term return on assets at December 31, 2018, is 4.1 percent. The Company and the local boards of trustees regularly review the investment performance of the asset classes and individual asset managers. Due to the diversified nature of the investments, the Company is of the opinion that no significant concentration of risks exists in its pension fund assets. At December 31, 2018 and 2017, 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 $11 million, respectively. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 196 The fair values of the Company’s pension plan assets by asset class are presented below. For further information on the fair value hierarchy and an overview of the Company’s valuation techniques applied, see the “Fair value measures” section of Note 2. ($ in millions) Asset class Equity Equity securities Mutual funds/commingled funds Emerging market mutual funds/commingled funds Fixed income Government and corporate securities Government and corporate – mutual funds/commingled funds Emerging market bonds – mutual funds/commingled funds Real estate Insurance contracts Cash and short-term investments Private equity Hedge funds Commodities Total ($ in millions) Asset class Equity Equity securities Mutual funds/commingled funds Emerging market mutual funds/commingled funds Fixed income Government and corporate securities Government and corporate – mutual funds/commingled funds Emerging market bonds – mutual funds/commingled funds Real estate Insurance contracts Cash and short-term investments Private equity Hedge funds Commodities Total Level 1 Level 2 Not subject to leveling(1) Total fair value 209 — — 524 — — — — 202 — — — — 1,433 363 997 3,496 729 — 121 86 — — 24 — 39 — — — — 1,381 — — 139 2 — 209 1,472 363 1,521 3,496 729 1,381 121 288 139 2 24 935 7,249 1,561 9,745 Level 1 Level 2 Not subject to leveling(1) Total fair value 274 — — 564 — — — — 162 — — — — 1,726 507 1,092 3,622 708 9 113 140 — — 73 — 46 — — — — 1,355 — — 128 15 — 274 1,772 507 1,656 3,622 708 1,364 113 302 128 15 73 1,000 7,990 1,544 10,534 (1) Amounts relate to assets measured using the NAV practical expedient which are not subject to leveling. The Company applies accounting guidance related to the presentation of certain investments using the net asset value (NAV) practical expedient. This accounting guidance exempts investments using this practical expedient from categorization within the fair value hierarchy. Contributions Employer contributions were as follows: Defined pension benefits Other postretirement benefits Switzerland International International ($ in millions) 2018 2017 2018 2017 2018 2017 Total contributions to defined benefit pension and other postretirement benefit plans Of which, discretionary contributions to defined benefit pension plans 89 — 90 — 152 25 139 15 11 — 11 — ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 197 In 2018, 2017 and 2016, total contributions included non-cash contributions totaling $31 million, $31 million and $52 million, respectively, of available-for-sale debt securities to certain of the Company’s pension plans. The Company expects to contribute approximately $202 million, including $8 million in discretionary contributions, to its defined benefit pension plans in 2019. Of these discretionary contributions $6 million are expected to be non-cash contributions. The Company expects to contribute approximately $11 million to its other postretirement benefit plans in 2019. The Company also contributes to a number of defined contribution plans. The aggregate expense for these plans was $245 million, $233 million and $210 million in 2018, 2017 and 2016, respectively. Contributions to multi-employer plans were not significant in 2018, 2017 and 2016. Defined contribution expense includes $59 million, $61 million and $58 million in 2018, 2017 and 2016, respectively, related to discontinued operations. Estimated future benefit payments The expected future cash flows to be paid by the Company’s plans in respect of pension and other postretirement benefit plans at December 31, 2018, are as follows: ($ in millions) Switzerland International International Defined pension benefits Other postretirement benefits 2019 2020 2021 2022 2023 Years 2024–2028 357 271 233 228 213 941 338 348 345 350 350 1,840 11 11 11 10 10 42 — 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 $50 million, $49 million and $45 million in 2018, 2017 and 2016, respectively. Compensation cost for cash-settled awards is recorded in “Selling, general and administrative expenses” and is disclosed in the “WARs”, “LTIP” and “Other share-based payments” sections of this note. The total tax benefit recognized in 2018, 2017 and 2016 was not significant. At December 31, 2018, 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, 36 million shares held by the Company as treasury stock at December 31, 2018, could be used to settle share-based payment arrangements. As the primary trading market for the shares of ABB Ltd is the SIX Swiss Exchange (on which the shares are traded in Swiss francs) and substantially all the share-based payment arrangements with employees are based on the Swiss franc share or have strike prices set in Swiss francs, certain data disclosed below related to the instruments granted under share-based payment arrangements are presented in Swiss francs. 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 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 198 warrants are listed by a third-party bank on the SIX Swiss Exchange, which facilitates pricing and transferability of options granted under this plan. The options entitle the holder to request that the third-party bank purchase such options at the market price of equivalent listed warrants related to that MIP launch. If the participant elects to sell the options, the options will thereafter be held by a third party and, consequently, the Company’s obligation to deliver shares will be toward this third party. Each WAR gives the participant the right to receive, in cash, the market price of an equivalent listed warrant on the date of exercise of the WAR. Participants may exercise or sell options and exercise WARs after the vesting period, which is three years from the date of grant. All options and WARs expire six years from the date of grant. Options The fair value of each option is estimated on the date of grant using a lattice model that uses the assumptions noted in the table below. Expected volatilities are based on implied volatilities from equivalent listed warrants on ABB Ltd shares. The expected term of the options granted is the contractual six-year life of each option, based on the fact that after the vesting period, a participant can elect to sell the option rather than exercise the right to purchase shares, thereby also realizing the time value of the options. The risk-free rate is based on a six-year Swiss franc interest rate, reflecting the six-year contractual life of the options. In estimating forfeitures, the Company has used the data from previous comparable MIP launches. Expected volatility Dividend yield Expected term Risk-free interest rate 2018 17% 3.1% 2017 19% 4.7% 6 years 6 years -0.1% -0.1% 2016 19% 4.9% 6 years -0.5% Presented below is a summary of the activity related to options under the MIP: Number of options (in millions) Number of shares (in millions)(1) Weighted- average exercise price (in Swiss francs)(2) Weighted- average remaining contractual term (in years) Aggregate intrinsic value (in millions of Swiss francs)(3) Outstanding at January 1, 2018 Granted Exercised(4) Forfeited Outstanding at December 31, 2018 Vested and expected to vest at December 31, 2018 Exercisable at December 31, 2018 390.6 71.3 (10.3) (6.7) 444.9 439.4 250.5 78.1 14.3 (2.1) (1.3) 89.0 87.9 50.1 21.06 23.50 16.66 21.86 21.54 21.52 20.76 3.0 3.0 1.7 — — — Information presented reflects the number of ABB Ltd shares that can be received upon exercise, as options have a conversion ratio of 5:1. Information presented reflects the exercise price per ABB Ltd share. (1) (2) (3) Options outstanding at December 31, 2018, did not have any intrinsic value as the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange was below the various exercise prices per share. (4) The cash received upon exercise amounted to approximately $35 million. The shares were delivered out of treasury stock. At December 31, 2018, 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 option) of options granted during 2018, 2017 and 2016 was 0.46 Swiss francs, 0.47 Swiss francs and 0.47 Swiss francs, respectively. In 2018, 2017 and 2016 the aggregate intrinsic value (on the date of exercise) of options exercised was $13 million, $38 million and $27 million, respectively. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 199 Presented below is a summary, by launch, related to options outstanding at December 31, 2018: Exercise price (in Swiss francs)(1) Number of options (in millions) Number of shares (in millions)(2) Weighted- average remaining contractual term (in years) 21.50 21.00 19.50 21.50 22.50 23.50 Total number of options and shares 81.0 72.3 78.1 74.2 68.7 70.7 444.9 16.2 14.5 15.6 14.8 13.7 14.1 89.0 0.4 1.7 2.6 3.7 4.6 5.7 3.0 (1) (2) Information presented reflects the exercise price per share of ABB Ltd. Information presented reflects the number of shares of ABB Ltd that can be received upon exercise. 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 income of $14 million and an expense of $19 million in 2018 and 2017, respectively, as a result of changes in both the fair value and vested portion of the outstanding WARs. The amount recorded in 2016 was not significant. To hedge its exposure to fluctuations in the fair value of outstanding WARs, the Company purchased cash-settled call options, which entitle the Company to receive amounts equivalent to its obligations under the outstanding WARs. The cash-settled call options are recorded as derivatives measured at fair value (see Note 6), with subsequent changes in fair value recorded in earnings to the extent that they offset the change in fair value of the liability for the WARs. In 2018 and 2017, the Company recorded an expense of $18 million and an income of $15 million in “Selling, general and administrative expenses” related to the cash-settled call options. The amount recorded in 2016 was not significant. The aggregate fair value of outstanding WARs was $6 million and $42 million at December 31, 2018 and 2017, respectively. The fair value of WARs was determined based upon the trading price of equivalent warrants listed on the SIX Swiss Exchange. Presented below is a summary of the activity related to WARs: (in millions) Outstanding at January 1, 2018 Granted Exercised Forfeited Outstanding at December 31, 2018 Exercisable at December 31, 2018 Number of WARs 37.1 10.9 (6.3) (0.5) 41.2 14.4 The aggregate fair value at date of grant of WARs granted in 2018, 2017 and 2016 was not significant. In 2018, 2017 and 2016, share-based liabilities of $6 million, $10 million and $7 million, respectively, were paid upon exercise of WARs by participants. 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. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 200 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 2018 19% 4.1% 1 year -0.6% 2017 17% 3.1% 1 year -0.6% 2016 20% 3.7% 1 year -0.7% Presented below is a summary of activity under the ESAP: Weighted- average exercise price (in Swiss francs)(2) Weighted- average remaining contractual term (in years) Aggregate intrinsic value (in millions of Swiss francs)(2), (3) Number of shares (in millions)(1) Outstanding at January 1, 2018 Granted Forfeited Not exercised (savings returned plus interest) Outstanding at December 31, 2018 Vested and expected to vest at December 31, 2018 Exercisable at December 31, 2018 2.9 3.6 (0.2) (2.7) 3.6 3.4 — 26.26 20.38 26.01 26.26 20.38 20.38 — 0.8 0.8 — — — — (1) (2) (3) Includes shares represented by ADS. Information presented for ADS is based on equivalent Swiss franc denominated awards. Options outstanding at December 31, 2018, did not have any intrinsic value as the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange was below the exercise price per share. The exercise prices per ABB Ltd share and per ADS of 20.38 Swiss francs and $20.37, respectively, for the 2018 grant, 26.26 Swiss francs and $26.24, respectively, for the 2017 grant, and 20.12 Swiss francs and $20.52, respectively, for the 2016 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, 2018, 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 2018, 2017 and 2016 was 1.10 Swiss francs, 1.37 Swiss francs and 1.24 Swiss francs, respectively. The total intrinsic value (on the date of exercise) of options exercised in 2017 was $17 million, while in 2018 and 2016 it 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 ultimate amount delivered under the LTIP is based on achieving certain results against targets, as set out below, over a three-year period from grant and the final amount is delivered to Eligible Participants at the end of this period. The 2018 LTIP launch is composed of a performance component, based on the Company’s earnings per share performance, and a market component, based on the Company’s relative total shareholder return. The 2017 LTIP launch is composed of two performance components: (i) a component which is based on the average percentage achievement of income from continuing operations, net of tax, versus budget and (ii) a component which is based on the Company’s earnings per share performance. The 2016 LTIP launch is composed of two performance components: (i) a component which is based on the achievement of a net income threshold and (ii) a component which is based on the Company’s earnings per share performance. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 201 For the relative total shareholder return component of the 2018 LTIP launch, the actual number of shares that will be delivered at a future date is based on the Company’s total shareholder return performance relative to a peer group of companies over a three-year period starting with the year of grant. The actual number of shares that will ultimately be delivered will vary depending on the relative total shareholder return outcome achieved between a lower threshold (no shares delivered) and an upper threshold (the number of shares delivered is capped at 200 percent of the conditional grant). For the average percentage achievement of income versus budget component of the 2017 LTIP launch, the actual number of shares that will be delivered at a future date is dependent on the average percentage (of each year in a three-year period starting with the year of grant) of the Company’s income from continuing operations, net of tax, divided by the Company’s budgeted income from operations, net of tax. The actual number of shares that will ultimately be delivered will vary depending on the average percentage that is achieved between a lower threshold (no shares delivered) and an upper threshold (the number of shares delivered is capped at 150 percent of the conditional grant). For shares to be delivered under the threshold net income component of the 2016 LTIP launch, the Company’s net income has to reach a certain level in 2018 as set by the Board of Directors at the launch of the LTIP. No shares will be delivered if this threshold is not achieved and 100 percent of the conditional grant will be delivered if this threshold is equaled or exceeded. For the earnings per share performance component of the 2018 LTIP launch, the actual number of shares that will be delivered at a future date is based on the Company’s average earnings per share over three financial years, beginning with the year of launch. For the earnings per share performance component of the 2017 and 2016 LTIP launches, the actual number of shares that will be delivered at a future date is dependent on the Company’s weighted cumulative earnings per share performance over three financial years, beginning with the year of launch. The cumulative earnings per share performance is weighted as follows: 33 percent of the first year’s result, 67 percent of the second year’s result and 100 percent of the third year’s result. Under all LTIP launches, the actual number of shares that will ultimately be delivered will vary depending on the earnings per share outcome as computed under each LTIP launch, interpolated between a lower threshold (no shares delivered) and an upper threshold (the number of shares delivered is capped at 200 percent of the conditional grant). Under each component of the 2018 LTIP, an Eligible Participant receives 65 percent of the shares that have vested in the form of shares and 35 percent of the value of the shares that have vested in cash, with the possibility to elect to also receive the 35 percent portion in shares rather than in cash. Under each component of the 2017 and 2016 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. In addition, for certain awards to vest, the Eligible Participant has to fulfill a three-year service condition as defined in the terms and conditions of the LTIP. Presented below is a summary of activity under the LTIP: Nonvested at January 1, 2018 Granted Vested Forfeited Nonvested at December 31, 2018 Number of Shares Conditionally Granted (in millions) Weighted-average grant-date fair value per share (Swiss francs) 1.4 0.8 (0.7) (0.2) 1.3 21.47 21.97 21.78 21.50 21.61 Equity-settled awards are recorded in the “Additional paid-in capital” component of stockholders’ equity, with compensation cost recorded in “Selling, general and administrative expenses” over the vesting period (which is from grant date to the end of the vesting period) based on the grant-date fair value of the shares. Cash-settled awards are recorded as a liability, remeasured at fair value at each reporting date for the percentage vested, with changes in the liability recorded in “Selling, general and administrative expenses”. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 202 At December 31, 2018, total unrecognized compensation cost related to equity-settled awards under the LTIP was not significant. The compensation cost recorded in 2018, 2017 and 2016 for cash-settled awards was not significant. The aggregate fair value, at the dates of grant, of shares granted in 2018, 2017 and 2016 was $19 million, $22 million and $22 million, respectively. The total grant-date fair value of shares that vested during 2018, 2017 and 2016 was $17 million, $22 million and $15 million, respectively. The weighted-average grant-date fair value (per share) of shares granted during 2018, 2017 and 2016 was 21.97 Swiss francs, 22.13 Swiss francs and 20.77 Swiss francs, respectively. For the relative total shareholder return component of the 2018 LTIP launch, the fair value of granted shares at grant date, for equity-settled awards, and at each reporting date, for cash-settled awards, is determined using a Monte Carlo simulation model. The main inputs to this model are the Company’s share price and dividend yield, the volatility of the Company’s and the peer group’s share price as well as the correlation between the peer companies. For the average percentage achievement of income versus budget component of the 2017 LTIP launch the fair value of granted shares is based on the market price of the ABB Ltd share at grant date for equity-settled awards and at each reporting date for cash-settled awards, as well as the probable outcome of the average percentage achievement of income versus budget 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 net income threshold component of the 2016 LTIP launch, 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. Other share-based payments The Company has other minor share-based payment arrangements with certain employees. The compensation cost related to these arrangements in 2018, 2017 and 2016 was not significant. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 203 — Note 19 Stockholders’ equity At both December 31, 2018 and 2017, the Company had 2,672 million authorized shares, of which 2,168 million were registered and issued. At the Annual General Meeting of Shareholders (AGM) in March 2018, shareholders approved the proposal of the Board of Directors to distribute a total of 0.78 Swiss francs per share. The approved dividend distribution amounted to $1,736 million and was paid in April 2018. At the AGM in April 2017, shareholders approved the proposal of the Board of Directors to distribute a total of 0.76 Swiss francs per share. The approved dividend distribution amounted to $1,622 million and was paid in April 2017. At the 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 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 an increase in Additional paid-in capital of $1,239 million and $15 million, respectively, and a reduction in Retained earnings of $402 million in relation to the nominal value reduction. 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 the first quarter of 2018, the Company purchased on the open market an aggregate of 10 million of its own shares to be available for delivery under its employee share programs. These transactions resulted in an increase in Treasury stock of $249 million. In the second quarter of 2017, the Company purchased on the open market an aggregate of 10 million of its own shares to be available for delivery under its employee share programs. These transactions resulted in an increase in Treasury stock of $251 million. At the AGM in April 2017, shareholders approved the proposal of the Board of Directors to reduce the share capital of the Company by cancelling 46,595,000 treasury shares which were acquired under the $4 billion share buyback program. This cancellation was completed in July 2017, resulting in a decrease in Treasury stock of $953 million and a corresponding combined decrease in Capital stock, Additional paid-in capital and Retained earnings. 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 100,000,000 treasury shares which were acquired under the $4 billion 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, 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, 2018, such call options representing 13.3 million shares and with strike prices ranging from 19.50 to 23.50 Swiss francs (weighted-average strike price of 21.57 Swiss francs) were held by the bank. The call options expire in periods ranging from May 2019 to August 2024. However, only 5.1 million of these instruments, with strike prices ranging from 19.50 to 22.50 Swiss francs (weighted-average strike price of 21.12 Swiss francs), could be exercised at December 31, 2018, under the terms of the agreement with the bank. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 204 In addition to the above, at December 31, 2018, the Company had further outstanding obligations to deliver: • up to 16.2 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, • up to 14.5 million shares relating to the options granted under the 2014 launch of the MIP, with a strike price of 21.00 Swiss francs, vested in August 2017 and expiring in August 2020, • up to 15.6 million shares relating to the options granted under the 2015 launch of the MIP, with a strike price of 19.50 Swiss francs, vested in August 2018 and expiring in August 2021, • up to 14.8 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 13.7 million shares relating to the options granted under the 2017 launch of the MIP, with a strike price of 22.50 Swiss francs, vesting in August 2020 and expiring in August 2023, • up to 14.1 million shares relating to the options granted under the 2018 launch of the MIP, with a strike price of 23.50 Swiss francs, vesting in August 2021 and expiring in August 2024, • up to 3.6 million shares relating to the ESAP, vesting and expiring in October 2019, • up to 4.5 million shares to Eligible Participants under the 2018, 2017 and 2016 launches of the LTIP, vesting and expiring in April 2021, June 2020 and June 2019, 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 2018, 2017 and 2016, the Company delivered 2.4 million, 6.3 million and 8.9 million shares, respectively, out of treasury stock, for options exercised in relation to the MIP. In addition, in 2017 and 2016 the Company delivered 2.8 million and 2.6 million shares from treasury stock under the ESAP. No shares were delivered in 2018 under the ESAP. Amounts available to be distributed as dividends to the stockholders of ABB Ltd are based on the requirements of Swiss law and ABB Ltd’s Articles of Incorporation, and are determined based on amounts presented in the unconsolidated financial statements of ABB Ltd, prepared in accordance with Swiss law. At December 31, 2018, the total unconsolidated stockholders’ equity of ABB Ltd was 8,511 million Swiss francs ($8,652 million), including 260 million Swiss francs ($264 million) representing share capital, 9,045 million Swiss francs ($9,195 million) representing reserves and 794 million Swiss francs ($807 million) representing a reduction of equity for own shares (treasury stock). Of the reserves, 794 million Swiss francs ($807 million) relating to own shares and 52 million Swiss francs ($53 million) representing 20 percent of share capital, are restricted and not available for distribution. In February 2019, the Company announced that a proposal will be put to the 2019 AGM for approval by the shareholders to distribute 0.80 Swiss francs per share to shareholders. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 205 — Note 20 Earnings per share Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise outstanding written call options and outstanding options and shares granted subject to certain conditions under the Company’s share-based payment arrangements. In 2018, 2017 and 2016, outstanding securities representing a maximum of 88 million, 31 million and 87 million shares, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would have been antidilutive. Basic earnings per share: ($ in millions, except per share data in $) 2018 2017 2016 Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 1,514 659 2,173 1,441 772 2,213 1,172 727 1,899 Weighted-average number of shares outstanding (in millions) 2,132 2,138 2,151 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income Diluted earnings per share: 0.71 0.31 1.02 0.67 0.36 1.04 0.54 0.34 0.88 ($ in millions, except per share data in $) 2018 2017 2016 Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 1,514 659 2,173 1,441 772 2,213 1,172 727 1,899 Weighted-average number of shares outstanding (in millions) 2,132 2,138 2,151 Effect of dilutive securities: Call options and shares Adjusted weighted-average number of shares outstanding (in millions) Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 7 2,139 10 2,148 3 2,154 0.71 0.31 1.02 0.67 0.36 1.03 0.54 0.34 0.88 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 206 — Note 21 Other comprehensive income The following table includes amounts recorded within “Total other comprehensive income (loss)” including the related income tax effects: ($ in millions) Foreign currency translation adjustments: Foreign currency translation adjustments Gain on liquidation of foreign subsidiary Changes attributable to divestments(1) Net change during the year Available-for-sale securities: Net unrealized gains (losses) arising during the year Reclassification adjustments for net (gains) losses included in net income Net change during the year Pension and other postretirement plans: Prior service (costs) credits arising during the year Net actuarial gains (losses) arising during the year Amortization of prior service cost (credit) included in net income Amortization of net actuarial loss included in net income Net losses from pension settlements included in net income Changes attributable to divestments(1) Net change during the year Cash flow hedge derivatives: 2018 2017 2016 Before tax Tax effect Net of tax Before tax Tax effect Net of tax Before tax Tax effect Net of tax (641) (31) 12 (660) (5) 1 (4) 14 — — 14 1 — 1 (627) 911 (31) 12 — 12 (646) 923 (4) 1 (3) 1 — 1 1 — — 1 — — — (11) 4 (7) (20) 4 (16) (46) (411) 59 (352) (184) 45 (139) (19) (5) (24) 6 — 91 (22) 23 — (327) (4) — 32 69 19 — 13 8 (4) (2) 16 (295) (87) (71) 142 90 (27) 85 (23) 912 (469) (12) (481) — 12 — 7 — — — 7 924 (462) (12) (474) 1 — 1 — — — 38 28 37 — 21 (7) — 14 6 63 9 6 (22) (3) 13 — — — 6 6 (2) (11) — (24) (5) 1 — (4) — — — (40) 44 26 62 26 — 118 16 (6) — 10 867 (306) (40) (346) Net gains (losses) arising during the year (51) 2 (49) 45 (7) 38 Reclassification adjustments for net (gains) losses included in net income Changes attributable to divestments(1) Net change during the year 20 — (31) 1 — 3 21 — (28) (26) (4) 15 Total other comprehensive income (loss) (1,022) 50 (972) 852 4 1 (2) 15 (1) Changes attributable to divestments are included in the computation of the net gain or loss on sale of businesses (see Note 4). ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 207 The following table shows changes in “Accumulated other comprehensive loss” (OCI) attributable to ABB, by component, net of tax: ($ in millions) Balance at January 1, 2016 Other comprehensive (loss) income before reclassifications Amounts reclassified from OCI Changes attributable to divestments Total other comprehensive (loss) income Less: Amounts attributable to noncontrolling interests Balance at December 31, 2016 Other comprehensive (loss) income before reclassifications Amounts reclassified from OCI Changes attributable to divestments Total other comprehensive (loss) income Less: Amounts attributable to noncontrolling interests Balance at December 31, 2017 Cumulative effect of changes in accounting principles(1) Other comprehensive (loss) income before reclassifications Amounts reclassified from OCI Changes attributable to divestments Total other comprehensive (loss) income Less: Amounts attributable to noncontrolling interests Balance at December 31, 2018 Foreign currency translation adjustments (3,135) (481) — 7 (474) (17) (3,592) 912 — 12 924 25 (2,693) — (627) (31) 12 (646) (15) (3,324) Unrealized gains (losses) on available- for-sale securities Pension and other post- retirement plan adjustments Unrealized gains (losses) of cash flow hedge derivatives Accumulated other comprehensive loss 7 — — — — — 7 1 — — 1 — 8 (9) (4) 1 — (3) — (4) (1,719) (11) (4,858) 4 114 — 118 — (1,601) (155) 78 6 (71) — (1,672) — (359) 64 — (295) — (1,967) 16 (6) — 10 — (1) 38 (22) (3) 13 — 12 — (49) 21 — (28) — (16) (461) 108 7 (346) (17) (5,187) 796 56 15 867 25 (4,345) (9) (1,039) 55 12 (972) (15) (5,311) (1) See “New accounting pronouncements, Applicable for the current period” section of Note 2 for more details. The following table reflects amounts reclassified out of OCI in respect of Foreign currency translation adjustments and Pension and other postretirement plan adjustments: ($ in millions) Details about OCI components Location of (gains) losses reclassified from OCI 2018 2017 2016 Foreign currency translation adjustments: Gain on liquidation of foreign subsidiary Other income (expense), net Pension and other postretirement plan adjustments: Amortization of prior service cost (credit) Non-operational pension (cost) credit(1) Amortization of net actuarial loss Non-operational pension (cost) credit(1) Net losses from pension settlements Non-operational pension (cost) credit(1) Total before tax Tax Amounts reclassified from OCI Provision for taxes (31) (19) 91 23 95 (31) 64 — 6 90 13 109 (31) 78 — 28 85 37 150 (36) 114 (1) Amounts include a total of $12 million, $9 million and $0 million in 2018, 2017 and 2016, respectively, reclassified from OCI to Income from discontinued operations (see Note 3). The amounts reclassified out of OCI in respect of Unrealized gains (losses) on available-for-sale securities and Unrealized gains (losses) of cash flow hedge derivatives were not significant in 2018, 2017 and 2016. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 208 — Note 22 Restructuring and related expenses White Collar Productivity program From September 2015 to December 2017, the Company executed a restructuring program to make the Company leaner, faster and more customer-focused. The program involved the rapid expansion and use of regional shared service centers as well as a streamlining of global operations and head office functions, with business units moving closer to their respective key markets. The program involved various restructuring initiatives across all operating segments and regions. As of December 31, 2017, the Company had incurred substantially all costs related to the White Collar Productivity program. Liabilities associated with the White Collar Productivity program are primarily included in “Other provisions”. The following table shows the activity from the beginning of the program to December 31, 2018: ($ 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 Expenses Cash payments Change in estimates Exchange rate differences Liability at December 31, 2017 Cash payments Change in estimates and exchange rate differences Liability at December 31, 2018 Employee severance costs Contract settlement, loss order and other costs — 300 (27) 273 182 (91) (85) (17) 262 28 (92) (118) 21 101 (55) (13) 33 — 3 — 3 3 (2) (1) (1) 2 3 (4) — — 1 — — 1 Total — 303 (27) 276 185 (93) (86) (18) 264 31 (96) (118) 21 102 (55) (13) 34 The change in estimates during 2017 of $118 million is mainly due to higher than expected rates of attrition and internal redeployment. The reduction in the liability was recorded in income from operations, primarily as reductions in “Total cost of sales” of $53 million and in “Selling, general and administrative expenses” of $55 million. The change in estimates during 2016 of $86 million is due to significantly higher than expected rates of attrition and internal redeployment and a lower than expected severance cost per employee for the employee groups affected by the first phase of restructuring initiated in 2015. The reduction in the liability was recorded in income from operations, primarily as reductions in “Total cost of sales” of $38 million and in “Selling, general and administrative expenses” of $35 million. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 209 The following table outlines the net costs incurred in 2017 and 2016 and the cumulative net costs incurred up to December 31, 2017: ($ in millions) Electrification Products Industrial Automation Robotics and Motion Corporate and Other Total Net costs incurred in 2017(1) 2016(1) Cumulative costs incurred up to December 31, 2017(1) (17) (23) (14) (32) (86) 15 34 26 32 107 72 106 56 91 325 (1) Amounts in the table above have been recast to reflect the reorganization of the Company’s operating segments in 2018 as outlined in Note 23. 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 2017 (90) 3 1 (86) 2016 97 2 8 107 Cumulative costs incurred up to December 31, 2017 307 8 10 325 Expenses, net of changes in estimates, associated with this program are recorded in the following line items in the Consolidated Income Statements: ($ in millions) Total cost of sales Selling, general and administrative expenses Non-order related research and development expenses Other income (expense), net Total 2017 (47) (35) (5) 1 (86) 2016 57 35 1 14 107 OS program In December 2018, the Company announced a two-year restructuring program with the objective to simplify its business model and structure through the implementation of a new organizational structure driven by its businesses. The program includes the planned elimination of the country and regional structures within the current matrix organization, including the elimination of the three regional Executive Committee roles. The operating businesses will each be responsible for both their customer-facing activities and business support functions, while the remaining Group-level corporate activities will primarily focus on Group strategy, portfolio and performance management, capital allocation and core technologies. The program is expected to be performed over two years and incur restructuring expenses of $350 million. The following table outlines the costs incurred in 2018, the cumulative costs incurred to date and the total amount of costs expected to be incurred under the program per operating segment: Electrification Products Industrial Automation Robotics and Motion Corporate and Other Total Costs incurred in 2018 Cumulative costs incurred up to December 31, 2018 Total expected costs 32 21 1 11 65 32 21 1 11 65 40 60 50 200 350 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 210 In 2018, restructuring expenses recorded for this program relate to employee severance costs and are included in the following line items in the Consolidated Income Statements: ($ in millions) Total cost of sales Selling, general and administrative expenses Non-order related research and development expenses Other income (expense), net Total 2018 35 23 3 4 65 At December 31, 2018, liabilities associated with the program amount to $65 million and are primarily included in “Other provisions”. Other restructuring-related activities In 2018, 2017 and 2016, the Company executed various other restructuring-related activities and incurred charges of $116 million, $181 million and $133 million, respectively. ($ in millions) Employee severance costs Estimated contract settlement, loss order and other costs Inventory and long-lived asset impairments Total 2018 74 29 13 116 2017 130 32 19 181 2016 66 32 35 133 Expenses associated with these activities 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 2018 24 52 2 38 116 2017 119 10 — 52 181 2016 69 4 5 55 133 At December 31, 2018 and 2017, $245 million and $246 million, respectively, was recorded for other restructuring-related liabilities and is primarily included in “Other provisions”. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 211 — 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 is organized into operating segments based on products and services and the operating segments consist of Electrification Products, Industrial Automation and Robotics and Motion. The remaining operations of the Company are included in Corporate and Other. As the Power Grids business is reported as discontinued operations, it no longer is reported as an operating segment. In addition, certain real estate assets previously included in Corporate and Other are included in this planned business divestment and have also been reported in discontinued operations (see Note 3). Effective January 1, 2018, management responsibility and oversight of certain remaining engineering, procurement and construction (EPC) businesses, previously included in the Industrial Automation and Robotics and Motion operating segments as well as the former Power Grids business, were transferred to a new non-core operating business within Corporate and Other. During 2018, the Company also changed the presentation of Cash and cash equivalents within the reported total segment assets such that all amounts are now considered as part of Corporate and Other. The segment information for 2017 and 2016, and at December 31, 2017 and 2016, has been recast to reflect these 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 solutions which are designed to provide smarter and safer electrical flow from the substation to the socket. The portfolio of increasingly digital and connected solutions includes electric vehicle charging infrastructure, solar power solutions, modular substation packages, distribution automation products, switchboard and panelboards, switchgear, UPS solutions, circuit breakers, measuring and sensing devices, control products, wiring accessories, enclosures and cabling systems and intelligent home and building solutions, designed to integrate and automate lighting, heating, ventilation, security and data communication networks. • Industrial Automation: develops and sells integrated automation and electrification systems and solutions, such as process and discrete control solutions, advanced process control software and manufacturing execution systems, sensing, measurement and analytical instrumentation and solutions, electric ship propulsion systems, as well as solutions for modern machine and factory automation and large turbochargers. In addition, the division offers a comprehensive range of services ranging from repair to advanced services such as remote monitoring, preventive maintenance and cybersecurity services. • Robotics and Motion: manufactures and sells robotics, motors, generators, drives, wind converters, components and systems for railways and related services and digital solutions for a wide range of applications in industry, transportation and infrastructure, and utilities. • 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 non-core operating activities. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 212 The primary measure of profitability on which the operating segments are evaluated is Operational EBITA, which represents income from operations excluding: • amortization expense on intangibles arising upon acquisition (acquisition-related amortization), • restructuring and restructuring-related expenses, • changes in the amount recorded for obligations related to divested businesses occurring after the divestment date (changes in obligations related to divested businesses), • changes in estimates relating to opening balance sheets of acquired businesses (changes in pre- acquisition estimates), • gains and losses from sale of businesses, • acquisition- and divestment-related expenses and integration costs, • certain other non-operational items, as well as • foreign exchange/commodity timing differences in income from operations consisting of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (c) unrealized foreign exchange movements on receivables/payables (and related assets/liabilities). Certain other non-operational items generally includes: certain regulatory, compliance and legal costs, certain asset write downs/impairments as well as other items which are determined by management on a case-by-case basis. The CODM primarily reviews the results of each segment on a basis that is before the elimination of profits made on inventory sales between segments. Segment results below are presented before these eliminations, with a total deduction for intersegment profits to arrive at the Company’s consolidated Operational EBITA. Intersegment sales and transfers are accounted for as if the sales and transfers were to third parties, at current market prices. The following tables present segment revenues for 2018, 2017 and 2016. ($ in millions) Geographical markets Europe The Americas Asia, Middle East and Africa End Customer Markets Utilities Industry Transport and infrastructure Product type Products Systems Services and software Third-party revenues Intersegment revenues(1) Total Revenues Electrification Products Industrial Automation Robotics and Motion Corporate and Other 2018 3,881 3,650 3,680 11,211 2,452 4,395 4,364 11,211 9,679 617 915 11,211 11,211 475 11,686 3,145 1,544 2,565 7,254 1,168 4,447 1,639 7,254 2,391 1,853 3,010 7,254 7,254 140 7,394 2,929 2,788 2,922 8,639 749 6,529 1,361 8,639 6,206 1,062 1,371 8,639 8,639 508 9,147 58 21 236 315 176 98 41 315 118 197 — 315 315 (880) (565) Total 10,013 8,003 9,403 27,419 4,545 15,469 7,405 27,419 18,394 3,729 5,296 27,419 27,419 243 27,662 ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP ($ in millions) Geographical markets Europe The Americas Asia, Middle East and Africa End Customer Markets Utilities Industry Transport and infrastructure Product type Products Systems Services and software Third-party revenues Intersegment revenues(1) Total Revenues ($ in millions) Geographical markets Europe The Americas Asia, Middle East and Africa End Customer Markets Utilities Industry Transport and infrastructure Product type Products Systems Services and software Third-party revenues Intersegment revenues(1) Total Revenues Electrification Products Industrial Automation Robotics and Motion Corporate and Other 2017 3,514 2,613 3,464 9,591 2,597 4,022 2,972 9,591 8,322 614 655 9,591 9,591 503 10,094 2,773 1,381 2,570 6,724 1,270 3,796 1,658 6,724 1,796 2,089 2,839 6,724 6,724 155 6,879 2,613 2,721 2,543 7,877 633 5,991 1,253 7,877 5,661 959 1,257 7,877 7,877 519 8,396 132 116 493 741 575 155 11 741 169 565 7 741 741 (914) (173) Electrification Products Industrial Automation Robotics and Motion Corporate and Other 2016 3,309 2,571 3,457 9,337 2,568 4,083 2,686 9,337 8,042 656 639 9,337 9,337 583 9,920 2,398 1,420 2,673 6,491 1,236 3,625 1,630 6,491 1,355 2,364 2,772 6,491 6,491 163 6,654 2,571 2,588 2,227 7,386 657 5,351 1,378 7,386 5,366 853 1,167 7,386 7,386 502 7,888 541 182 692 1,415 1,189 200 26 1,415 434 957 24 1,415 1,415 (948) 467 213 Total 9,032 6,831 9,070 24,933 5,075 13,964 5,894 24,933 15,948 4,227 4,758 24,933 24,933 263 25,196 Total 8,819 6,761 9,049 24,629 5,650 13,259 5,720 24,629 15,197 4,830 4,602 24,629 24,629 300 24,929 (1) Intersegment revenues include sales to the Power Grids business which is presented as discontinued operations and are not eliminated from Total revenues. Revenues by geography reflect the location of the customer. Approximately 22 percent, 20 percent and 19 percent of the Company’s total revenues in 2018, 2017 and 2016, respectively, came from customers in the United States. Approximately 15 percent, 15 percent and 14 percent of the Company’s total revenues in 2018, 2017 and 2016, respectively, were generated from customers in China. In 2018, 2017 and 2016 more than 98 percent of the Company’s total revenues were generated from customers outside Switzerland. The following tables present Operational EBITA, the reconciliations of consolidated Operational EBITA to Income from continuing operations before taxes, as well as Depreciation and amortization, and Capital expenditure for 2018, 2017 and 2016, as well as Total assets at December 31, 2018, 2017 and 2016. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP 214 ($ in millions) Operational EBITA: Electrification Products Industrial Automation Robotics and Motion Corporate and Other: — Non-Core and divested businesses — Stranded corporate costs — Corporate costs and other intersegment elimination Consolidated Operational EBITA Acquisition-related amortization Restructuring and restructuring-related expenses(1) Changes in obligations related to divested businesses Changes in pre-acquisition estimates Gains and losses on sale of businesses Acquisition- and divestment-related expenses and integration costs 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) Certain other non-operational items: Regulatory, compliance and legal costs Asset write downs/impairments Gain on liquidation of foreign subsidiary Corporate re-branding and marketing costs Losses and other (costs) recoveries on Korea fraud Other non-operational items Income from operations Interest and dividend income Interest and other finance expense Non-operational pension cost Income from continuing operations before taxes 2018 2017 2016 1,626 1,019 1,447 (291) (297) (499) 3,005 (273) (172) (106) (8) 57 (204) (1) (23) (9) (34) (25) 31 — 8 (20) 2,226 72 (262) 83 2,119 1,510 953 1,260 (163) (286) (457) 2,817 (229) (300) (94) (8) 252 (81) 56 8 (30) (102) — — — (40) (19) 2,230 73 (234) 33 2,102 1,459 897 1,232 (30) (252) (378) 2,928 (245) (442) — (131) (10) (9) (19) (1) (8) (10) (16) — (30) (73) 5 1,929 71 (201) (38) 1,761 (1) Amounts in 2017 and 2016 also include the incremental implementation costs in relation to the White Collar Productivity program. Depreciation and amortization Capital expenditure(1) Total assets(1), (2) at December 31, ($ in millions) Electrification Products Industrial Automation Robotics and Motion Corporate and Other Consolidated 2018 2017 2016 2018 2017 2016 2018 355 160 208 193 916 315 112 216 193 836 348 71 249 202 870 244 104 123 301 772 218 71 118 345 752 215 12,049 6,669 8,397 53 112 252 632 2017 8,881 6,961 8,416 2016 8,343 4,294 7,870 17,326 19,200 18,884 44,441 43,458 39,391 (1) Capital expenditure and Total assets are after intersegment eliminations and therefore reflect third-party activities only. (2) Assets held for sale of $8,591 million, $8,603 million and $8,504 million are included in Corporate and Other at December 31, 2018, 2017 and 2016, respectively (see Note 3). ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP Other geographic information Geographic information for long-lived assets was as follows: ($ in millions) Europe The Americas Asia, Middle East and Africa Total 215 Long-lived assets at December 31, 2018 2,110 1,168 855 4,133 2017 2,040 934 830 3,804 Long-lived assets represent “Property, plant and equipment, net” and are shown by location of the assets. At December 31, 2018, approximately 22 percent, 11 percent and 11 percent of the Company’s long-lived assets were located in the U.S., Switzerland and China, respectively. At December 31, 2017, approximately 19 percent, 13 percent and 10 percent of the Company’s long-lived assets were located in the U.S., Switzerland and China, respectively. 2019 Realignment of segments On December 17, 2018, the Company announced a planned reorganization of its operating segments into four customer-focused, entrepreneurial businesses. With effect from April 1, 2019: • the Electrification Products segment will be renamed the Electrification segment, • the Industrial Automation segment will remain unchanged except that it will now exclude the Machine and Factory Automation business, which will be transferred to the new Robotics & Discrete Automation segment, • the new Robotics & Discrete Automation segment will include the combined businesses of the Machine and Factory Automation business, previously included in the Industrial Automation segment, and the Robotics business from the former Robotics and Motion segment, and • the new Motion segment will contain the remaining businesses of the former Robotics and Motion segment. ABB ANNUAL REPORT 2018 04 FINANCIAL REVIEW OF ABB GROUP — Writing the future of flexible manufacturing and smart machines. 05 ABB Ltd Statutory Financial Statements — 218 – 234 ABB Ltd Management Report 2018 — 220 – 220 Financial Statements 2018 ABB Ltd, Zurich — 221 – 222 Notes to Financial Statements — 223 – 231 Proposed appropriation of available earnings — 232 – 232 Report of the Statutory Auditor on the Financial Statements — 233 – 234 220 — ABB Ltd Management Report 2018 ABB Ltd is the holding company of the ABB Group, owning directly or indirectly all subsidiaries globally. The major business activities during 2018 can be summarized as follows: Management services The Company provided management services to a Group company of CHF 24 million. Share transactions • share buyback for employee share programs of CHF 232 million; • share deliveries for employee share programs of CHF 74 million. Dividend payment to external shareholders • from retained earnings of CHF 1,282 million. Other information In 2018, the Company employed on average 20 employees. Once a year, the Company’s Board of Directors performs a risk assessment in accordance with the Group’s risk management process and discusses appropriate actions if necessary. The Company does not carry out any research and development business. In 2019, the Company will continue to operate as the holding company of the ABB Group. No change of business is expected. March 27, 2019 ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 221 — Financial Statements 2018 Income Statement Year ended December 31 (CHF in thousands) Note 2018 2017 Dividend income Finance income Other operating income Finance expenses Personnel expenses Other operating expenses Net income before taxes Income taxes Net income Balance Sheet December 31 (CHF in thousands) Cash Cash deposit with ABB Group Treasury Operations Non-trade receivables Non-trade receivables – Group Short-term loans – Group Accrued income and prepaid expenses 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 Interest-bearing liabilities Interest-bearing liabilities – Group Non-trade payables Non-trade payables – Group Deferred income and accrued expenses Deferred income and accrued expenses – Group 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 Retained earnings Net income Own shares Total stockholders’ equity Total liabilities and stockholders’ equity 8 9 1,300,000 1,000,000 37,921 83,902 (52,755) (39,826) (31,542) 1,297,700 (116) 28,179 39,981 (45,939) (38,761) (32,918) 950,542 (802) 1,297,584 949,740 Note 2018 318 2017 689 2 11,522 503,868 46 12,143 344,703 737 3,927 — 153 7,682 50,000 807 3,452 562 373,396 567,213 417,665 756,273 3 8,973,229 8,973,229 1,552 2,096 9,392,446 9,731,598 9,765,842 10,298,811 5 5 5 5 7 7 7 7 7 — 350,016 344,703 50,000 10,699 3,018 9,897 2,670 126,577 124,598 1,989 1,489 486,986 538,670 350,000 417,665 350,000 756,273 767,665 1,106,273 1,254,651 1,644,943 260,178 260,178 30,430 30,430 1,000,000 1,000,000 6,716,999 7,048,809 1,297,584 949,740 (794,000) (635,289) 8,511,191 8,653.868 9,765,842 10,298,811 ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 222 Cash Flow Statement Year ended December 31 (CHF in thousands) Note 2018 2017 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 Loss from delivery of own shares Changes in operating assets and liabilities: Receivables, accrued income and prepaid expenses Current liabilities (excl. interest-bearing liabilities) Net cash provided by operating activities Investing activities: Loans granted to Group companies Partial repayment of loan granted to Group companies Change in cash deposit with ABB Group Treasury Operations Net cash provided by investing activities Financing activities: Repayment of bonds 2012–2018 Loans granted by Group companies Partial repayment of loan granted by Group companies Purchase of own shares Delivery of own shares Dividends paid from retained earnings Net cash used in financing activities Net change in cash Cash opening balance Cash closing balance 5 7 5 5 5 7 7 7 1,297,584 949,740 1,106 (16) 1,152 (18) (12,701) (14,254) (4,759) 3,629 1,284,843 (2,048) 38,521 973,093 — (295,598) 49,774 492,346 542,120 (350,000) — (49,774) (232,300) 86,290 24,014 337,463 65,879 — 295,598 (24,014) (243,746) 220,898 (1,281,550) (1,287,758) (1,827,334) (1,039,022) (371) 689 318 (50) 739 689 ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 223 — 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. Certain prior-year amounts have been reclassified to conform to the current year’s presentation. — 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, 2018 and 2017 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. ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 224 — 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, 2018 and 2017. Company name/location SARPI – Société Algérienne pour la réalisation de projets industriels, Alger ABB S.A., Buenos Aires Country Algeria Argentina —(5) —(3) —(5) —(3) ABB Australia Pty Limited, Moorebank, NSW Australia 100.00 131,218 ABB Group Investment Management Pty. Ltd., Moorebank, NSW B&R Holding GmbH, Eggelsberg B&R Industrial Automation GmbH, Eggelsberg Australia Austria Austria 100.00 100.00 100.00 ABB Industrial Solutions (Belgium) BVBA, Gent Belgium 100.00(4) ABB ownership and voting rights % 2018 Share capital in thousands 2018 ABB ownership and voting rights % 2017 Share capital in thousands 2017 Currency 50.00 814,500 100.00 100.00 278,860 131,218 100.00 100.00 100.00 — 100.00 100.00 100.00 100.00 100.00 100.00 90.00 505,312 35 1,240 — 13,290 689,793 65,110 — —(1) —(1) 5,000 505,312 35 1,240 24(4) 13,290 689,793 65,110 — —(1) —(1) 5,000 310,000 100.00 310,000 14,400 40,000 —(3) —(3) 100.00 40,000 Belgium Brazil Bulgaria Canada Canada Canada China China China China 100.00 100.00 100.00 100.00 100.00 100.00 90.00 100.00 100.00 100.00 China 60.00 11,400 60.00 11,400 USD China 100.00 6,500 —(3) —(3) CNY China China China Czech Republic Denmark Egypt Egypt Estonia Finland France France Germany Germany Germany Germany Germany Germany Hong Kong Hong Kong 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 —(5) —(3) 15,800 23,500 6,200 400,000 100,000 353,479 166,000 1,663 10,003 25,778 45,921 167,500 15,000 10,620 61,355 7,500 1,535 —(5) —(3) 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 — 15,800 23,500 6,200 400,000 100,000 353,479 166,000 1,663 10,003 25,778 45,921 167,500 15,000 10,620 61,355 7,500 1,535 27,887 20,000 — DZD ARS AUD AUD EUR EUR EUR 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 HUF INR INR EUR ABB N.V., Zaventem ABB Ltda., São Paolo ABB Bulgaria EOOD, Sofia ABB Canada Holding Limited Partnership, Saint-Laurent, Quebec ABB Inc., Saint-Laurent, Quebec ABB Installation Products Ltd., Saint-Jean-sur-Richelieu, Quebec ABB Beijing Drive Systems Co. Ltd., Beijing ABB (China) Ltd., Beijing ABB Electrical Machines Ltd., Shanghai ABB Engineering (Shanghai) Ltd., Shanghai ABB High Voltage Switchgear Co., Ltd. Beijing, Beijing ABB Shanghai Free Trade Zone Industrial Co., Ltd., Shanghai 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 SAS, 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 Industrial C&S Hungary Kft., Budapest Hungary 100.00(4) 3,000(4) ABB Global Industries and Services Private Limited, Bangalore ABB India Limited, Bangalore ABB S.p.A., Milan India India Italy 100.00 190,000 100.00 190,000 75.00 423,817 75.00 423,817 100.00 110,000 100.00 110,000 ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 225 ABB ownership and voting rights % 2018 Share capital in thousands 2018 ABB ownership and voting rights % 2017 Share capital in thousands 2017 Currency 100.00 22,000 100.00 22,000 100.00 1,000,000 100.00 1,000,000 EUR JPY 100.00 23,670,000 100.00 23,670,000 KRW Country Italy Japan Korea, Republic of Mexico 100.00(4) 315,134(4) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.93 633,368 667,686 9,200 1,000 20 119 100 250,000 240,000 50 Mexico Mexico Netherlands Netherlands Netherlands Netherlands Netherlands Norway Norway Poland Poland Poland — 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.92 — 633,368 667,686 9,200 1,000 20 119 100 250,000 240,000 50 — 99.99(4) 328,124(4) — 99.93 350,656 99.92 350,656 Company name/location Power-One Italy S.p.A., Terranuova Bracciolini (AR) ABB K.K., Tokyo ABB Ltd., Seoul ABB Electrical Control Systems S. de R.L. de C.V., Monterrey 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 Business Services Sp. z o.o., Warsaw ABB Industrial Solutions (Bielsko-Biała) Sp. z o.o., Bielsko-Biała ABB Sp. z o.o., Warsaw Industrial C&S of P.R. LLC, San Juan Puerto Rico 100.00(4) —(4) — — ABB Ltd., Moscow ABB Contracting Company Ltd., Riyadh ABB Electrical Industries Co. 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 Russian Federation Saudi Arabia Saudi Arabia Singapore Singapore South Africa South Africa Spain Sweden Sweden Switzerland Switzerland Switzerland Switzerland Switzerland 100.00 95.00 65.00 100.00 100.00 100.00 74.91 100.00 100.00 5,686 40,000 181,000 32,797 28,842 4,050 1 33,318 400,000 100.00 95.00 65.00 100.00 100.00 100.00 74.91 100.00 100.00 5,686 40,000 168,750 32,797 28,842 4,050 1 33,318 400,000 100.00 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.S., Istanbul Turkey 99.99 13,410 99.99 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 ABB Installation Products Inc, Memphis, TN ABB Motors and Mechanical Inc, Fort Smith, AR United Arab Emirates United Kingdom United Kingdom United States United States United States United States United States ABB Treasury Center (USA), Inc., Wilmington, DE United States Edison Holding Corporation, Wilmington, DE United States 49.00(2) 5,000 49.00(2) 5,000 AED 100.00 226,014 100.00 226,014 GBP 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 120,000 1 2 1 1 — 1 — —(4) — 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 — 100.00 120,000 1 2 1 1 — 1 — — — GBP USD USD USD USD USD USD USD USD USD Industrial Connections & Solutions LLC, Cary, NC United States 100.00(4) Verdi Holding Corporation, Wilmington, DE United States 100.00 (1) Shares without par value. (2) Company consolidated as ABB exercises full management control. (3) Based on the internal defined thresholds, these indirect participations are considered not significant, and therefore no details to these participations are disclosed in the respective year. (4) Participation was acquired in 2018 as part of the GEIS acquisition. (5) Participation was either sold or liquidated in 2018. MXN MXN MXN EUR USD EUR EUR EUR NOK NOK PLN PLN PLN USD RUB SAR SAR SGD SGD ZAR ZAR EUR SEK SEK CHF CHF CHF CHF CHF THB TRY ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 226 — Note 5 Interest-bearing liabilities December 31 (CHF in thousands) Bonds 2012–2018 1.5% coupon nominal value premium on issuance 2018 — — Bonds 2011–2021 2.25% coupon nominal value 350,000 Loan 2016–2024, $450 million (in 2017 $475 million) Loan 2017–2019, $325 million (in 2017 $350 million) Group Group 442,665 319,703 2017 350,000 16 350,000 464,218 342,055 Total thereof current liabilities thereof non-current liabilities 1,112,368 1,506,289 344,703 400,016 767,665 1,106,273 The 1.5% bonds paid interest in arrears, at fixed annual rate of 1.5% and were repaid in November 2018. The 2.25% bonds, due 2021, pay interest annually in arrears, at fixed annual rates of 2.25%. 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 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. The interest rate swap is treated as an off-balance sheet item and is therefore not recorded. In 2016, the Company entered into a loan agreement of USD 500 million with Group Treasury Operations due in 2024 to hedge the USD 500 million loan granted to a Group company. In both 2018 and 2017, the Company repaid USD 25 million. The average interest in 2018 and 2017 was 3.11% and 2.11%, respectively. In 2017, the Company entered into a loan agreement of USD 350 million with Group Treasury Operations due in 2027 to hedge the USD 350 million loan granted to a Group company. In 2018, the Company repaid USD 25 million. The average interest in 2018 and 2017 was 3.08% and 2.20%, respectively. In February 2019, the remaining outstanding principal amount of USD 325 million was repaid before maturity, concurrent with the repayment of the loan, that had been granted to the Group company. — 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 737,775 thousand as of December 31, 2018 and CHF 732,975 thousand as of December 31, 2017. With certain Group companies, the Company has keep-well agreements. A keep-well agreement is a shareholder agreement between the Company and a Group company. These agreements provide for maintenance of a minimum net worth in the Group company and the maintenance of 100% direct or indirect ownership by the Company. The keep-well agreements additionally provide that if at any time the Group company has insufficient liquid assets to meet any payment obligation on its debt (as defined in the agreements) and has 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. ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 227 The Company has also provided certain guarantees securing the performance of Group companies in connection with commercial paper programs, indentures or other debt instruments to enable them to fulfill the payment obligations under such instruments as they fall due. The amount guaranteed under these instruments was CHF 7,567,523 thousand as of December 31, 2018 and CHF 6,241,482 thousand as of December 31, 2017. Additionally, the Company has provided certain guarantees securing the performance of contracts and undertakings of Group companies with third parties entered into in the normal course of business of an aggregate value of approximately CHF 78,336 thousand as per December 31, 2018 and CHF 77,991 thousand as per December 31, 2017. Furthermore, the Company is the guarantor in the Group’s USD 2 billion multicurrency revolving credit facility, maturing in 2021 but no amounts were outstanding at December 31, 2018 and 2017. 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 contri bution from retained earnings from retained earnings Net income Own shares Total Opening balance as of January 1, 2018 Allocation to retained earnings Dividend payment CHF 0.78 per share Purchases of own shares Delivery of own shares Net income for the year Closing balance as of December 31, 2018 260,178 30,430 1,000,000 7,048,809 949,740 (635,289) 8,653,868 949,740 (949,740) — (1,281,550) (1,281,550) (232,300) (232,300) 73,589 73,589 1,297,584 1,297,584 260,178 30,430 1,000,000 6,716,999 1,297,584 (794,000) 8,511,191 Share capital as of December 31, 2018 Issued shares Contingent shares Authorized shares Share capital as of December 31, 2017 Issued shares Contingent shares Authorized shares Number of registered shares 2,168,148,264 304,038,800 200,000,000 Number of registered shares 2,168,148,264 304,038,800 200,000,000 Par value (CHF) (CHF in thousands) 0.12 0.12 0.12 260,178 36,485 24,000 Par value (CHF) (CHF in thousands) 0.12 0.12 0.12 260,178 36,485 24,000 Own shares are valued at acquisition cost. During 2018 and 2017, a loss from the delivery of own shares of CHF 12,701 thousand and CHF 14,254 thousand, respectively, was recorded in the income statement under finance expenses. ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 228 During 2018, a bank holding call options related to ABB Group’s management incentive plan (MIP) exercised a portion of these options. Such options had been issued at fair value in 2012 by the Group company that facilitates the MIP and had a strike price of CHF 15.75 and CHF 17.50. At issuance, the Group company had entered into an intercompany option agreement with the Company, having the same terms and conditions to enable it to meet its future obligations. As a result of the exercise by the bank, the Company issued 1,708,620 shares at CHF 15.75 and 416,373 shares at CHF 17.50, respectively, out of own shares. During 2017, 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 at fair value in 2012 by the Group company that facilitates the MIP and had a strike price of CHF 15.75 and CHF 17.50. At issuance, the Group company had entered into an intercompany option agreement with the Company, having the same terms and conditions to enable it to meet its future obligations. As a result of the exercise by the bank, the Company issued 3,912,080 shares at CHF 15.75 and 2,337,031 shares at CHF 17.50, respectively, out of own shares. During 2018 and 2017, the Company delivered 308,706 and 63,542 own shares, respectively, as a result of option exercises under the MIP by employees of Group companies. The ABB Group has an annual employee share acquisition plan (ESAP) which provides share options to em- ployees globally. To enable the Group company that facilitates the ESAP to deliver shares to employees who have exercised their stock options, the Group company entered into an agreement with the Company to acquire the required number of shares at their then market value from the Company. Consequently in November 2017, the Company issued, out of own shares, to the Group company 2,836,204 shares at CHF 25.16. No shares were delivered in 2018 in connection with ESAP. In 2018 and 2017, the Company transferred 922,218 and 750,797 own shares at an average acquisition price per share of CHF 21.93 and CHF 21.23, respectively, to fulfill its obligations under other share-based arrangements. In both 2018 and 2017, the Company purchased 10 million shares, for CHF 232.3 million and CHF 243.7 million, respectively, to support its employee share programs globally. At the AGM in April 2017, shareholders approved the proposal of the Board of Directors to reduce the share capital of the Company by cancelling 46,595,000 treasury shares which were acquired under the share buyback program. This cancellation was completed in July 2017, resulting in a decrease in Treasury stock (own shares) of CHF 922 million and a corresponding combined decrease in share capital and retained earnings. The movement in the number of own shares during the year was as follows: 2018 2017 Average acquisition price Number of shares per share (in CHF) Number of shares Average acquisition price per share (in CHF) Opening balance at January 1 Purchases for employee share programs Cancellation Delivery Closing balance at December 31 Thereof pledged for MIP 29,541,775 10,000,000 — (3,355,917) 36,185,858 13,336,804 21.50 23.23 76,036,429 10,000,000 — (46,595,000) 21.93 21.94 (9,899,654) 29,541,775 11,703,709 19.99 24.37 19.78 20.87 21.50 — Note 8 Dividend income The Company received in 2018 and 2017, a dividend payment from ABB Asea Brown Boveri Ltd of CHF 1.3 billion and CHF 1.0 billion, respectively. ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 229 — Note 9 Other operating income Other operating income includes mainly outgoing charges for division management services, income from the sale of MIP options and guarantee compensation fees to Group companies. — Note 10 Significant shareholders Investor AB, Sweden, held 232,165,142 ABB Ltd shares as of December 31, 2018 and 2017, respectively. This corresponds to 10.71 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register on December 31, 2018 and 2017. Pursuant to its disclosure notice, Cevian Capital II GP Limited, Channel Islands, announced that, on behalf of its general partners it held 115,868,333 ABB Ltd shares as of September 8, 2017 which corresponds to 5.34 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register on December 31, 2018 and 2017, respectively. Pursuant to its disclosure notice, BlackRock, Inc., USA, disclosed that, as per August 31, 2017, it, together with its direct and indirect subsidiaries, held 72,900,737 ABB Ltd shares. This corresponds to 3.36 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register on December 31, 2018 and 2017, 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, 2018 and 2017, respectively. — Note 11 Shareholdings of Board and Executive Committee At December 31, 2018 and 2017, the members of the Board of Directors as of that date, held the following numbers of shares (or ADSs representing such shares): Name Peter Voser(1) Jacob Wallenberg Matti Alahuhta Gunnar Brock(2) David Constable Frederico Curado Lars Förberg Louis R. Hughes(3) Jennifer Xin-Zhe Li(2) Géraldine Matchett(2) David Meline(4) Satish Pai Ying Yeh(3) Total Total number of shares held at December 31 2018 201,076 217,109 41,872 4,740 20,650 12,391 19,774 — 2,454 3,380 17,542 12,998 — 2017 151,166 209,583 36,521 — 14,797 7,439 6,494 35,716 — — 11,442 7,889 35,455 553,986 516,502 Includes 2,000 shares held by spouse. (1) (2) First elected to the Board at the ABB Ltd AGM in 2018. (3) Louis R. Hughes and Ying Yeh left the Board at the end of the 2017/2018 term of office. (4) Includes 3,150 shares held by spouse. ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 230 At December 31, 2018, the members of the Executive Committee, as of that date, held the following number of shares (or ADSs representing such shares), the conditional rights to receive ABB shares under the LTIP and unvested shares in respect of other compensation arrangements. Unvested at December 31, 2018 l d e h s e r a h s f o r e b m u n l a t o T 8 1 0 2 , 1 3 r e b m e c e D t a s e r a h s f o r e b m u n e c n e r e f e R 6 1 0 2 e h t l r e d n u e b a r e v i l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( I P T L e h t f o ) 2 P d n a 1 P ( s e r a h s f o r e b m u n e c n e r e f e R 7 1 0 2 e h t l r e d n u e b a r e v i l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( I P T L e h t f o ) 2 P d n a 1 P ( s e r a h s f o r e b m u n e c n e r e f e R 8 1 0 2 e h t l r e d n u e b a r e v i l e d S P E ( r o t c a f e c n a m r o f r e p I ) 2 ( P T L e h t f o ) R S T d n a (vesting 2019) (vesting 2020) (vesting 2021) 175,881 150,886 143,144 — 56,287 47,745 48,028 43,144 25,799 37,693 45,624 47,722 44,969 41,000 45,348 40,109 34,984 32,775 31,196 34,735 34,494 39,076 37,147 37,217 45,632 40,454 31,756 25,390 33,981 23,301 34,790 26,214 37,379 509,970 22,000 172,487 569,132 224,941 146,130 28,722 — 183,328 131,987 92,811 m o r f s t i f e n e b e n o g e r o f r o f t n a r g e r a h s t n e m e c a p e R l l ) 3 ( r e y o p m e r e m r o f (vesting 2019 and 2020) — 119,200 — — — — — — — — — Name Ulrich Spiesshofer Timo Ihamuotila Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan Greg Scheu Chunyuan Gu Sami Atiya Tarak Mehta Claudio Facchin Peter Terwiesch Total Executive Committee members as of December 31, 2018 2,081,508 572,892 521,750 479,258 119,200 (1) (2) (3) It is expected that upon vesting, the LTIP 2016 and 2017 will be settled 70 percent in shares and 30 percent in cash for the performance components (P1 and P2). However, participants have the possibility to elect to receive 100 percent of the vested award in shares. It is expected that the LTIP 2018 will be settled 65 percent in shares and 35 percent in cash for the performance factors (EPS and TSR). However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. It is expected that the replacement share grant will be settled 70 percent in shares and 30 percent in cash. However, the participant has the possibility to elect to receive 100 percent of the vested award in shares. At December 31, 2017, 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 unvested shares in respect of other compensation arrangements. ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 231 m o r f s t i f e n e b e n o g e r o f r o f t n a r g e r a h s t n e m e c a p e R l l ) 2 ( r e y o p m e r e m r o f (vesting 2019 and 2020) — 119,200 — — — — — — — — — — — 65,819 — — — — — — — — Unvested at December 31, 2017 l d e h s e r a h s f o r e b m u n l a t o T 7 1 0 2 , 1 3 r e b m e c e D t a s e r a h s f o r e b m u n e c n e r e f e R 5 1 0 2 e h t l r e d n u e b a r e v i l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( I P T L e h t f o ) 2 P d n a 1 P ( s e r a h s f o r e b m u n e c n e r e f e R 6 1 0 2 e h t l r e d n u e b a r e v i l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( I P T L e h t f o ) 2 P d n a 1 P ( s e r a h s f o r e b m u n e c n e r e f e R 7 1 0 2 e h t l r e d n u e b a r e v i l e d s t n e n o p m o c e c n a m r o f r e p ) 1 ( I P T L e h t f o ) 2 P d n a 1 P ( m o r f s t i f e n e b e n o g e r o f r o f t n a r g e r a h s t n e m e c a p e R l l ) 2 ( r e y o p m e r e m r o f (vesting 2018) (vesting 2019) (vesting 2020) (vesting 2018) Name Ulrich Spiesshofer 410,646 172,465 175,881 150,886 Timo Ihamuotila (EC member as of April 1, 2017) Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan Greg Scheu Sami Atiya Tarak Mehta Chunyuan Gu (EC member as of July 1, 2017) Claudio Facchin Peter Terwiesch Total Executive Committee members as of December 31, 2017 22,000 96,651 533,482 186,576 119,561 — — 51,413 45,873 46,390 45,896 — 159,222 42,780 13,570 85,553 63,269 25,937 42,845 36,698 — 56,287 47,745 48,028 43,144 37,693 45,624 25,799 47,722 44,969 41,000 45,348 40,109 34,984 32,775 34,735 34,494 31,196 39,076 37,147 1,690,530 510,297 572,892 521,750 65,819 119,200 (1) (2) It is expected that upon vesting, the LTIP will be settled 70 percent in shares and 30 percent in cash for the performance components (P1 and P2). However, participants have the possibility to elect to receive 100 percent of the vested award in shares. It is expected that the replacement share grants will be settled 70 percent in shares and 30 percent in cash. However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. — Note 12 Full time employees During 2018 and 2017, the Company employed on average 20 and 21 employees, respectively. — Note 13 Subsequent events In February 2019, the Company issued two bonds in the amount of CHF 280 million, due in 2024 and CHF 170 million, due in 2029. Each of the respective bonds pays interest annually in arrears, at fixed annual rates of 0.3% and 1.0% respectively. The Company recorded aggregated net proceeds, after underwriting discount and other fees, of CHF 449 million. ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 232 — 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 0.78 per share paid directly by the Company(1) Gross dividend of CHF 0.80 per share on total number of registered shares(1) Balance to be carried forward 2018 1,297,584 6,716,999 — 8,014,583 2017 949,740 7,964,925 (916,116) 7,998,549 — (1,281,550) (1,734,519) 6,280,064 — 6,716,999 (1) Shareholders who are resident in Sweden participating in the established dividend access facility received and will receive an amount in Swedish kronor from ABB Norden Holding AB which corresponds to the dividend resolved on a registered share of ABB Ltd without deduction of the Swiss withholding tax. This amount however is subject to taxation according to Swedish law. However, no dividend was and will be paid on own shares held by the Company. On February 28, 2019, the Company announced that the Board of Directors will recommend for approval at the May 2, 2019, Annual General Meeting that a dividend of CHF 0.80 per share be distributed out of the retained earnings available, to be paid in May 2019. ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS 233 Report of the Statutory Auditor To the General Meeting of ABB Ltd, Zurich Report of the Statutory Auditor on the Financial Statements As statutory auditor, we have audited the accompanying financial statements of ABB Ltd, which comprise the balance sheet, income statement, cash flow statement and notes (pages 221 to 231) for the year ended December 31, 2018. Board of Directors’ Responsibility The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the company’s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. 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, 2018 comply with Swiss law and the company’s articles of incorporation. Other Matter The financial statements of ABB Ltd for the year ended December 31, 2017 were audited by another auditor who expressed an unmodified opinion on those statements on February 22, 2018. 234 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 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 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. KPMG AG Hans-Dieter Krauss Licensed Audit Expert Auditor in Charge Zurich, March 27, 2019 Douglas Mullins KPMG AG, Badenerstrasse 172, PO Box, CH-8036 Zurich KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. 235 ABB ANNUAL REPORT 2018 05 ABB LTD STATUTORY FINANCIAL STATEMENTS — Writing the future of a stronger, smarter and greener grid. 06 Supplemental information — 238 – 242 Supplemental information — 240 – 242 240 — Supplemental information The following are definitions of key financial mea‑ sures used to evaluate ABB’s operating perfor‑ mance. These financial measures are referred to in this Annual Report and are not defined under United States generally accepted accounting prin‑ ciples (U.S. GAAP). While ABB’s management believes that the non‑GAAP financial measures herein are useful in evaluating ABB’s operating results, this informa‑ tion should be considered as supplemental in na‑ ture and not as a substitute for the related finan‑ cial information prepared in accordance with U.S. GAAP. For a full reconciliation of ABB’s non‑GAAP mea‑ sures, please refer to Supplemental Reconcilia‑ tions and Definitions, ABB Q4 2018 Financial In‑ formation new.abb.com/investorrelations/ financial‑results‑and‑presentations/quarterly‑ results‑and‑annual‑reports Comparable growth rates Growth rates for certain key figures may be pre‑ sented 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 re‑ sults 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 ex‑ change rates in effect for the comparable periods in the previous year. Comparable growth rates are also adjusted for changes in our business portfolio. Adjustments to our business portfolio occur due to acquisitions, divestments, or by exiting specific business activ‑ ities 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 compara‑ ble periods, the reported key figures of such busi‑ ness are adjusted to exclude the relevant key fig‑ ures of any corresponding quarters which are not comparable when computing the comparable growth rate. Certain portfolio changes which do not qualify as divestments under U.S. GAAP have been treated in a similar manner to divestments. Changes in our portfolio where we have exited certain business activities or customer markets are adjusted as if the relevant business was di‑ vested in the period when the decision to cease business activities was taken. We do not adjust for portfolio changes where the relevant business has annualized revenues of less than $50 million. Operational EBITA margin Operational EBITA margin Operational EBITA margin is Operational EBITA as a percentage of Operational revenues. Operational EBITA Operational earnings before interest, taxes and acquisition‑related amortization (Operational EBITA) represents Income from operations ex‑ cluding: • acquisition‑related amortization (as defined below), • restructuring and restructuring‑related expenses, • changes in the amount recorded for obligations related to divested businesses occurring after the divestment date (changes in obligations re‑ lated to divested businesses), • changes in estimates relating to opening bal‑ ance sheets of acquired businesses (changes in pre‑acquisition estimates), • gains and losses from sale of businesses, • acquisition‑ and divestment‑related expenses and integration costs, • certain other non‑operational items, as well as • foreign exchange/commodity timing differ‑ ences in income from operations consisting of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded de‑ rivatives), (b) realized gains and losses on deriv‑ atives where the underlying hedged transaction has not yet been realized, and (c) unrealized for‑ eign exchange movements on receivables/pay‑ ables (and related assets/liabilities). Certain other non‑operational items generally in‑ cludes: certain regulatory, compliance and legal ABB ANNUAL REPORT 2018 06 SUPPLEMENTAL INFORMATION 241 costs, certain asset write downs/impairments as well as other items which are determined by man‑ agement on a case‑by‑case basis. certain specific cases, computed using the actual income tax effects of the relevant item in (i) to (ix) above. Operational EBITA is our measure of segment profit but is also used by management to evaluate the profitability of the Company as a whole. Acquisition‑related amortization Amortization expense on intangibles arising upon acquisitions. Acquisition‑related amortization Amortization expense on intangibles arising upon acquisitions. Operational revenues The Company presents Operational revenues solely for the purpose of allowing the computa‑ tion 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 de‑ rivatives, (ii) realized gains and losses on deriva‑ tives where the underlying hedged transaction has not yet been realized, and (iii) unrealized for‑ eign exchange movements on receivables (and re‑ lated assets). Operational revenues are not in‑ tended to be an alternative measure to Total Revenues, which represent our revenues mea‑ sured in accordance with U.S. GAAP. Operational EPS Operational EPS Operational EPS is calculated as Operational net income divided by the weighted‑average number of shares outstanding used in determining basic earnings per share. Operational net income Operational net income is calculated as Net in‑ come attributable to ABB adjusted for the follow‑ ing: (i) acquisition‑related amortization, (ii) re‑ structuring and restructuring‑related expenses, (iii) non‑operational pension cost (credit), (iv) changes in obligations related to divested businesses, (v) changes in pre‑acquisition esti‑ mates, (vi) gains and losses from sale of busi‑ nesses, (vii) acquisition‑ and divestment‑related expenses and integration costs, (viii) certain other non‑operational items, (ix) foreign ex‑ change/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 under‑ lying hedged transaction has not yet been real‑ ized, and (c) unrealized foreign exchange move‑ ments on receivables/payables (and related assets/liabilities), and (x) the amount of income tax on operational adjustments either estimated using the Adjusted Group effective tax rate or in Adjusted Group effective tax rate The Adjusted Group effective tax rate is com‑ puted by dividing an adjusted provision for taxes by an adjusted income from continuing opera‑ tions before taxes. Certain amounts recorded in income from continuing operations before taxes and the related provision for taxes (primarily gains and losses from sale of businesses) are ex‑ cluded from the computation. Constant currency Operational EPS adjustment and Operational EPS growth rate (constant currency) In connection with ABB’s 2015–2020 targets, Op‑ erational EPS growth is measured assuming 2014 as the base year and uses constant exchange rates. We compute the constant currency opera‑ tional net income for all periods using the relevant monthly exchange rates which were in effect during 2014 and any difference in computed Oper‑ ational net income is divided by the relevant weighted‑average number of shares outstanding to identify the constant currency Operational EPS adjustment. 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 ac‑ tivities of certain acquisitions / (divestments). Adjusted total fixed assets Adjusted total fixed assets is the sum of (i) prop‑ erty, 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 acqui‑ sitions. Net working capital Net working capital is the sum of (i) receivables, net, (ii) contract assets, (iii) inventories, net, and ABB ANNUAL REPORT 2018 06 SUPPLEMENTAL INFORMATION 242 (iv) prepaid expenses; less (v) accounts payable, trade, (vi) contract liabilities, and (vii) other cur‑ rent liabilities (excluding primarily: (a) income taxes payable, (b) current derivative liabilities, (c) pension and other employee benefits, and (d) pay‑ ables under the share buyback program); and in‑ cluding the amounts related to these accounts which have been presented as either assets or lia‑ bilities held for sale. Capital invested Capital invested is the sum of (i) Adjusted total fixed assets, (ii) Net working capital and (iii) Accu‑ mulated depreciation and amortization. Free cash flow conversion to net income Free cash flow conversion to net income Free cash flow conversion to net income is calcu‑ lated as adjusted free cash flow divided by Net in‑ come attributable to ABB. Adjusted free cash flow Adjusted free cash flow is calculated as net cash provided by operating activities adjusted for: (i) purchases of property, plant and equipment and intangible assets, (ii) proceeds from sales of property, plant and equipment, and (iii) changes in financing and other non‑current receivables, net (included in other investing activities). ABB ANNUAL REPORT 2018 06 SUPPLEMENTAL INFORMATION Parts of the ABB Annual Report 2018 have been translated into German and 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 2018 includes “forward‑looking state‑ ments” 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 sim‑ ilar 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 © C o p y r i g h t 2 0 1 9 A B B . A l l r i g h t s r e s e r v e d .