ABB
Annual Report 2019

Plain-text annual report

— Annual report 2019 — A B B AT A G L A N CE — ABB is a technology leader that is driving the digital transformation of industries. With a history of innovation spanning more than 130 years, ABB has four customer- focused, globally leading Businesses: Electrification, Industrial Automation, Motion, and Robotics & Discrete Automation, supported by the ABB Ability™ digital platform. ABB’s Power Grids business will be divested to Hitachi in 2020. ABB operates in more than 100 countries with about 144,000 employees. — abb.com Contents — Annual report 2019 — 01 — 02 — 03 — 04 — 05 — 06 Introduction 6 – 31 Corporate governance report 32 – 55 Compensation report 56 – 83 Financial review of ABB Group 84 – 217 ABB Ltd statutory financial statements 218 – 235 Supplemental information 236 – 240 01 Introduction — 6 – 31 — 8 — 12 — 15 — 18 — 20 — 22 — 24 — 25 — 28 Chairman and CEO letter Electrification Industrial Automation Motion Robotics & Discrete Automation Sustainability Highlights 2019 Financial overview Shareholder returns and capital allocation 8 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N — 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, The year 2019 was one of far-reaching organiza- tional transformation for ABB. The impending sale of Power Grids, announced in December 2018, required us to devote significant attention and resources to the carve out of that business, which accounts for more than a quarter of ABB’s reve- nue. Complementing our shift away from power transmission and large-scale infrastructure projects, we focused on simplifying our business model and operational structure to create a leaner, more agile and customer-focused ABB. In geopolitical terms, 2019 was marked by uncer- tainty. Trade tensions between the United States and China, inconclusive Brexit negotiations, and continuing instability in the Middle East weighed on confidence, inhibiting in particular demand for robotics and automation solutions, which are core to our offering. Solid performance in 2019 We delivered a resilient performance for the year while undertaking a very extensive transforma- tion, slightly improving revenues and operating margins, against a backdrop of more challenging markets. Income from operations of $1.9 billion, which was 13 percent lower year-on-year, was also impacted by restructuring, Power Grids’ related transaction and separation costs and charges, as well as charges from the planned sale of the solar inverters business. We grew revenues by 1 percent and improved our profitability, posting an opera- tional EBITA margin of 11.1 percent, impacted by a combined 130 basis points due to stranded costs and non-core activities, an increase of 0.2 percent over the previous year. We continued our strategy of active portfolio management, announcing the acquisition of a majority stake in leading Chinese e-mobility solution provider, Shanghai Chargedot New Energy Technology Co., Ltd. to further strengthen our market-leading electric vehicle charging business. We also announced the divestment of businesses which are not compatible with our new business model and strategy, including our solar inverters business and two Shanghai-based joint ventures that were part of GE Industrial Solutions (GEIS), which we acquired in 2018. These achievements came against the backdrop of the most wide-ranging internal reorganization since ABB was formed from the merger of ASEA AB of Sweden and Brown Boveri AG of Switzerland in 1988. Over the course of 2019, we transformed ABB from a complex corporate-led organization into a simpler, streamlined company with four vertically integrated Businesses – Elec- trification, Industrial Automation, Motion and Robotics & Discrete Automation – and a lean corporate center. In the process, we integrated our country organi- zations into our four Businesses, and moved all Group business and service functions into either the Businesses or into business services centers, which provide expert and transactional service offerings in areas such as tax, legal, human re- sources and finance. More than 90 percent of the previous group function headcount has been moved into the four Businesses as part of the ABB-OS simplification. These achievements are a credit to our people and our leaders and I would like to thank them. Since January 2020, our four Businesses have been empowered with full operational responsi- bility for all business functions and territories. Power Grids is now operating as an independent business, in preparation for the handover to Hitachi, which is expected at the end of the second quarter of this year. Following the divest- ment, we intend to return the net cash proceeds to shareholders. With our new organizational structure, ABB is competitively positioned in markets where we can grow our business over the long term. We remain committed to delivering a sustainable dividend and this year the Board of Directors will propose a dividend of CHF 0.80 per share to shareholders at the Annual General Meeting on March 26. A technology leader in the digital transformation of industries We have a clear vision of the ABB that will emerge from our cultural transformation. Our company will be a technology leader in the digital transfor- mation of industries. It will be an exemplary corporate citizen that safeguards essential infra- structure, contributes to a more sustainable world, and delivers superior customer experience and financial performance through a talented, motivated workforce and innovation. To make this vision a reality, we have defined five clear priori- ties to provide guidance for our people and to A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 9 10 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N keep us focused on ABB’s role and the value it creates for its customers and stakeholders. 1. License to operate Our first priority is what we call our “license to operate” and it covers the fundamental require- ments of running a business in today’s digital world. First and foremost, we need a secure foundation on which to operate, both to protect our company and to maintain and build long-term, trust-based relationships with our partners. That foundation is built on taking responsibility for health, safety & environment (HSE) and integ- rity. To set ABB on a long-term path of growth, our company must be a safe place to work, our opera- tions and our offerings must be safe, cyber-secure and sustainable, and we must main- tain the highest standards of integrity and ethical business practices. In 2019, we made progress in securing our “license to operate”. We improved our safety performance by reducing the number of serious incidents and lost-time injuries’ cases compared with 2018. Tragically, we had two workplace fatalities in 2019 – one employee and one contractor – show- ing that we still have significant work to do. In 2018 and 2017, we had four fatalities in each of those years. ABB is committed to improving the sustainability of its customers’ and its own operations. Close to 60 percent of ABB’s global revenues now come from solutions that improve energy efficiency and reduce environmental impact, and we are working to increase that percentage in the years to come. We have made solid progress on all of our nine sustainability objectives, defined in 2014, and are on track to meet or exceed them by the target date of end-2020 (see page 22). We reached our greenhouse gas emissions (GHG) target one year earlier in 2019, reducing emissions from our own operations by 41 percent from a 2013 baseline. And our total injury frequency rate (TIFR) for 2019 was significantly lower than the target. On integ- rity, we strengthened our internal control framework and continued to ensure compliance with all regulatory and financial reporting requirements. 2. Customers In today’s competitive and fast-growing digital world, growth depends on getting closer to our customers. The more we understand their busi- nesses and operations, the better we are able to help them take advantage of new technologies and to partner with them for long-term mutual success. A key goal of our transformation has been to create a simpler, more agile and externally fo- cused ABB to better serve our customers. By empowering our four Businesses with full operational responsibility for all functions and territories, we have given them the freedom to serve their markets and customers to the best of their ability. A key achievement of the past year has been to develop our global account management organi- zation to strengthen our relationship with key customers and support us in gaining market share and securing large projects. Within the new organization, each Business is responsible for defined key accounts and works closely with the customers concerned to ensure that we deliver the best possible customer experience through the entire lifecycle. As we develop this customer-centric approach, we will apply best practices across the Businesses with the express aim of becoming the no. 1 choice for industrial customers. 3. People More than anything else, our strength at ABB is rooted in our people. We need to ensure, there- fore, that they are empowered and motivated to perform their best, and that ABB continues to attract and retain the best talent globally. In 2019, my priority as CEO was to initiate a dialogue with employees that would foster a culture of open- ness and collaboration, which in turn would allow us to harness the collective creativity and experi- ence of our talented global team. To enable this culture, we started with CEO web- casts for employees, followed by a global employee engagement survey and the launch of a new internal social channel in which everyone in ABB, from executives to production employees, has the opportunity to share their views, best practices and ideas for improvement. Our survey showed high levels of engagement among ABB employees and that people take pride in working for ABB. There was also a clear message that employees want a better understanding of where the company is heading. Today, I feel confident that we have established an ongoing dialogue across the company and that our senior leaders understand how people feel about working at ABB. Moreover, we are moving to a culture of greater collaboration where deci- sions and ideas are heard and acted upon on the basis of merit rather than on someone’s position in the organizational hierarchy. We are not there yet, but I am confident that we are moving in the right direction. Going forward, we will continue to provide our employees with attractive opportunities for personal and professional development, and to encourage inclusion, diversity and well-being in the workplace, as we foster an environment in which people have the confidence and are encour- aged to take risks and aim at delivering results for a sustainable high performance. A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 11 4. Technology & digital Alongside people, our other great strength at ABB continues to be our technology and our capacity for innovation. Today, thanks to our talented teams and our position at the center of an innova- tion ecosystem consisting of other leading global companies, as well as universities and startups, we are actively supporting the digital transforma- tion of industries in all markets in which we operate. In 2019, we launched several groundbreaking technologies that will strengthen our leadership in key markets and segments and which you can read more about in our business chapters starting on page 12. Here, I would like to highlight NeoGear, the first major innovation in low-voltage switchgear since the 1980s. NeoGear solves many of the issues encountered with current technolo- gies, namely busbar contact failures and human errors that can result in serious injuries. It allows for up to 25 percent space savings and can cut energy losses by up to 20 percent, further contrib- uting to sustainability. Also, with ABB Ability™ connectivity, NeoGear enables digital condition monitoring that can reduce operating costs by up to 30 percent. In 2019, we also reaffirmed our technology leader- ship in industrial robotics with the opening of our first research facility on the campus of the Texas Medical Center in Houston. The team in the new center will work with medical staff to develop non-surgical, medical robotics systems, with applications including logistics and next-generation automated laboratory technolo- gies. By using robots to automate repetitive and low-value tasks, such as preparing slides and loading centrifuges, we should be able to free medical professionals to focus on higher-skilled work and ultimately to help more people receive treatment. 5. Financial performance One of our key priorities is of course to generate long-term returns for our shareholders. In 2019, we demonstrated that, in the face of tough market conditions and a wide-ranging internal transformation, we were able to deliver top-line growth. Going forward, we will drive continuous improve- ment across our Businesses and business lines, with the aim of achieving an improved financial performance in 2020 and beyond. Overall, our approach will be to set ambitious yet realistic targets for growth, profit, return on capital and free cash flow, and we will hold ourselves fully accountable for results. — In the face of tough market conditions and a wide-ranging transformation, we delivered top-line growth. Looking ahead Having completed our organizational transforma- tion, our focus in 2020 will be on our operations: we will strive to deliver a competitive perfor- mance in an uncertain environment and to close the Power Grids transaction with Hitachi on schedule while ensuring full business continuity. I have been proud to lead this great company through the first phase of its transformation as CEO. I am delighted to welcome Björn Rosengren as our new CEO and to hand over the helm to him as of March 1, 2020. I feel confident that Björn is taking over an excellent team and a company that is primed for success. I am equally confident that, under his leadership, ABB will continue to go from strength to strength in the years ahead. On behalf of the Board of Directors and the Execu- tive Committee, I would like to thank you, our shareholders, for your trust and support during my time as CEO, and to thank our employees for their tremendous efforts and achievements in what has been an extremely challenging year. We truly have a world-class team. I look forward to working with Björn and the entire ABB team in 2020 as we continue to develop our company to drive the digital transformation of industries. Sincerely, Peter Voser Chairman and CEO 12 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N — E L EC T R I FI C AT I O N Connecting technology with society in a fast-changing field Meeting the growing global demand for electrification In our rapidly changing world, the electrification market is increasingly driven by the demands of urbanization and digitalization, and more voices are calling for solutions to address climate change. With expanding consumer energy de- mands and increasingly complex transport networks, the need for safe, smart and sustain- able electrification has never been greater. The global electrification market is expected to grow 3 percent annually to $200 billion by 2025. ABB’s Electrification Business is positioned to meet that demand, providing products, services and solutions throughout the electrical value chain. From the substation to the point of con- sumption, Electrification serves customers across a wide range of sectors, including build- ings, data centers, rail, wind and solar, power distribution, food and beverage, marine, oil and gas, and e-mobility. Disruptions will continue to transform our custom- ers’ expectations and the key end markets we serve, affecting how our customers buy and the way our channel partners sell. With our fast-growing portfo- lio of connected, digitally enabled solutions, the Electrification Business is ready to meet these challenges and help our customers adapt and thrive in this complex environment. How we serve the needs of our key customer segments For more than 130 years, we have provided inno- vative electrification technologies, giving customers impactful, value-generating solutions, from the earliest electric streetcars to the Inter- net of Things and the artificially intelligent applications of today. Electrification had approximately 53,000 employ- ees at the end of 2019, and generated $12.7 billion of revenue for the year, with innovations that enable a safer and more reliable electricity flow. In 2019, Electrification offered a full range of low-voltage and medium-voltage products across five market-leading business lines: • Smart Power: low-voltage breakers and switches, motor and power protection, and elec- tric vehicle charging infrastructure and services • Smart Buildings: miniature breakers, distribu- tion enclosures, wiring accessories and building automation • Distribution Solutions: medium- and low-voltage control and protection products, systems and switchgear, automation and services • Installation Products: wire and cable manage- ment, termination, fittings and other accesso- ries • Industrial Solutions: connecting equipment, software and services to protect, control and optimize assets within electrical infrastructures. Electrification delivers its solutions to customers through a global network of channel partners and end-customers. Most of its revenue is derived from sales through distributors, original equip- ment manufacturers (OEMs), engineering, procurement and construction contracting com- panies, system integrators, utilities and panel builders, with some direct sales to end-users (utilities, customers in industry, transport and infrastructure) and to other ABB Businesses. — “We are well positioned to meet the growing global demands from industries, public services and communities for low-carbon solu- tions. We continuously strive to push the boundaries of technol- ogy to create innovative solutions, and to bring safer, smarter and more sustainable electrification for our customers and end con- sumers alike.” Tarak Mehta, President, Electrification All of the solutions provided by the Business are developed with the pressing, long-term needs of society in mind. Electrification’s portfolio helps solve the challenges presented by rising energy demand, climate change and pollution, as well as urban congestion and changing lifestyles. The Business is a leader in e-mobility systems, data center technologies, smart buildings and renew- able energy systems, among many other technologies that are changing the world. A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 13 14 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N In the past year, the Electrification Business was recognized with several awards for its advanced offerings. The ABB Ability™ Electrical Distribution Control System was named “most valuable solu- tion of the year.” We received two Red Dot awards for outstanding design for the ABB-tacteo® sensor and ABB i-bus® KNX PEONIA® sensor. And Electrification’s Chief Technology Officer Amina Hamidi was presented with the Chief Technology Officer of the Year Europe 2019 award by Orgalim, the association representing Europe’s technology industries, in recognition of her leadership in driving European growth and prosperity through technology and innovation. Game-changing technologies from Electrification ABB NeoGear™, launched in June, is the most important innovation in low-voltage switchgear in more than 40 years. By applying laminated bus plate technology to conventional switchgear, NeoGear achieves a 92 percent reduction in busbar parts, space savings of up to 25 percent, up to 20 percent less energy loss, and up to a 30 percent reduction in operational cost. The design enables faster assembly, lower mainte- nance and increased lifetime. Tru-Break™, a switchgear module launched in September, is a revolutionary design for medium-voltage switchgear with solid dielectric technology. Designed to provide an added level of safety allowing linemen to visually verify the system has been disconnected. Its unique design is completely modular and retrofittable, allowing it to be added on existing switchgears. The Tmax XT range sets a new benchmark for Moulded Case Circuit Breakers, with its connec- tivity, intuitive design, fast installation and upgradeability via the ABB Marketplace. This cutting-edge platform technology shares the same logics, interfaces and features across the complete range. ABB’s solid-state circuit breaker makes electrical distribution systems more reliable and efficient and drives down maintenance costs while meet- ing the durability demands of next-generation electrical grids. These breakers are 100 times faster and more durable than conventional break- ers, resulting in 70 percent lower power losses, ensuring zero exposure to arc energy. Integrating the ABB Ability™ Electrical Distribu- tion Control System and the ABB M4M “made for measure” Network Analyzer has made it possible to monitor all makes of electric meters while optimizing power consumption. This solution is the first range of fully connected network analyz- ers available on the market. Welcome IP, a fully IP-based door entry package, now offers extension packages for access control and CCTV integration. The new ABB Zenith ATS portfolio combines Zenith technology from GEIS with ABB’s best-in-class TruONE automatic transfer switch. Together they maximize system reliability and provide advanced data connectivity and communications capabili- ties, while making installation and commissioning safer, easier and less expensive. ABB’s scalable GYBND “Give Your Buildings a New Dimension” portfolio integrates advanced digital technologies to reduce energy and maintenance costs for buildings. This portfolio of digitally enabled, low-voltage devices can achieve cost savings of up to 30 percent by making reliable predictions of system performance and schedul- ing proactive maintenance, thereby eliminating downtime. Integration of GEIS Since the acquisition of GEIS on June 30, 2018, ABB has completed almost one third of the inte- gration. The addition of GEIS strengthens ABB’s global position in electrification. Using a “best of both ABB and GEIS” approach, ABB has: • expanded its market access in North America; • accessed GEIS’s robust global installed base; • started combining ABB’s leading component technology and ABB Ability™ with GEIS’s equip- ment for a complete and more competitive of- fering to customers and partners; • developed strategic supply partnerships, yield- ing significant synergy savings. To date, 13,000 GEIS employees have been incor- porated into ABB’s organizational structure; product integrations and substitutions are ahead of schedule; consolidations and divestitures have been announced; and four facility expansions are under way as part of ABB’s growth investment in North America. As of 2020, Industrial Solutions has been fully integrated into Electrification’s four comprehen- sive business lines: Smart Power, Smart Buildings, Distribution Solutions and Installation Products. A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 15 — I N D U S T R I A L AU TO M AT I O N Bringing safe, smart and sustainable operations to process and hybrid industries Expanding the scope of automation to help transform industry Industry 4.0 and the industrial internet of things have arrived; process and hybrid industries are leveraging the latest wave of automation technol- ogies in order to remain competitive in the global marketplace. Driven by the growth of developing economies, by the need for better energy effi- ciency and true sustainability, and by calls for a higher level of workplace safety and product quality, safe and smart operations are of growing importance in operations worldwide. This shift toward advanced production solutions has been forecasted to expand the market for industrial automation technologies by around 3 percent annually over the next several years. Today’s total addressable market for these solu- tions amounts to $100 billion and will rise to about $115 billion by 2025. ABB’s Industrial Automation Business offers its customers in the process and hybrid industries the advantages of global execution and local proximity while serving them with a wide range of integrated automation, electrification and digita- lization solutions. These cover production processes, electrical and motion requirements, measurement and analytics, as well as marine and turbocharging solutions. The Business generates value for its customers with its leading technolo- gies, broad digital capabilities, deep industry expertise, extensive global footprint and the largest distributed control system installed base in the industry. How we serve the needs of our key customers segments The global no. 2 player in the market, ABB’s Indus- trial Automation Business is actively and continuously engaged with its customers throughout the asset lifecycle. Industrial Automa- tion’s portfolio of products, systems and services ranges from field devices through integration of industrial processes, assets and information to complete lifecycle management and Industry 4.0 solutions. Industrial Automation Collaborative Operations currently generates the highest organic business growth of any of ABB’s digital solutions, connecting people with data to opti- mize performance, improve safety and reliability, enhance efficiency and minimize environmental impacts from project startup through a plant’s entire lifecycle. Industrial Automation had approximately 22,300 employees at the end of 2019, and gener- ated $6.3 billion of revenue in 2019. From design and engineering, to complete project manage- ment and advanced services, the Business creates value for customers through its deep domain knowledge. Solutions include turnkey engineer- ing, control systems, and integrated safety technology, measurement products, lifecycle services, and industry-specific products, such as electric propulsion for ships, mine hoists, turbo- chargers and pulp and paper quality control equipment. Industrial Automation’s systems can link processes and information flows to allow customers to manage their manufacturing and business processes on the basis of real-time information. — “At the heart of our Business, we help our customers reduce their capital cost, project schedule and risk, and increase the safety, pro- ductivity and environmental sus- tainability of their operations, through our innovative and inte- grated automation, electrification and digitalization solutions and services.” Peter Terwiesch, President, Industrial Automation Industrial Automation offers its products and services either separately or as part of an inte- grated automation, electrification instrumentation solution. In the latter case, these solutions inte- grate products from ABB’s Electrification, Motion, Robotics & Discrete Automation and Power Grids Businesses. Industrial Automation offers and delivers its technologies, products, solutions and services primarily through its own sales force as well as through third-party channel partners. 16 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N Like ABB’s other Businesses, Industrial Automa- tion is proud to contribute to society by enabling the ongoing energy transition and reductions in emissions and environmental impact with auto- mation, integration and digital technologies that are driving energy efficiency, renewables integra- tion and electrification. The innovation pipeline from Industrial Automation ABB Collaborative Operations connects custom- ers’ production facilities and management sites with ABB’s Internet-of-Things applications and expertise. Asset and operational information is collected and analyzed 24/7 at ABB’s Collabora- tive Operations Centers to identify, categorize and prioritize actions. Clients can connect with ABB experts anytime, anywhere, to make the very best data-driven decisions. Collaborative Opera- tions solutions are being deployed by enterprises in a wide range of industries to improve asset availability, operational efficiency and increase profits. A gold medal winner in the German Innovation Awards and a Hermes Award Finalist, ABB’s non-invasive temperature sensor is the first temperature sensor of its kind, signaling a new era in temperature measurement. It pro- vides a simple, non-invasive means of measuring the temperature of an industrial process without sacrificing the accuracy and responsiveness of conventional invasive sensors. Eliminating the risk of leakage, it significantly enhances the safety of people, plants and the environment. Moreover, customers can save up to 75 percent in engineer- ing and installation costs as it takes away the need for inspections and has no impact on the process being measured. In May 2019, ABB opened a CO₂-neutral and energy self-sufficient factory in Lüdenscheid, Germany, powered by a solar plant that will deliver approximately 1,100 MWh of electricity per year. The facility uses the OPTIMAX® scalable energy management system to manage 100 percent of its power requirements, reducing carbon emis- sions by 630 tons per year. Following the completion of a 3,000-hour shallow water test, in 2019 ABB’s pioneering subsea power distribution and conversion technology system signals a new era for offshore oil and gas produc- tion. For the first time worldwide, energy companies will be able to access a reliable supply of up to 100 MW of electricity, over distances up to 600 km and down to 3,000 m underwater, at pressures that could shatter a brick. A single cable that requires little or no maintenance for up to 30 years, this solution makes oil and gas produc- tion feasible in distant and deep ocean environments. Remotely operated and increas- ingly autonomous subsea facilities powered by lower carbon energy are likely to become a reality in the near future, using Industrial Automation technology that enables cleaner, safer and more sustainable production. The ABB Ability™ drone-mounted mobile gas leak detection system improves the safety of gas distribution infrastructure, better safeguarding the environment and protecting company assets and revenue. Leaks in gas distribution and trans- mission pipelines present serious safety risks and result in lost revenue and profits. The ABB Ability™ mobile gas leak detection system is a digital solution that, for the first time, enables the de- ployment of drones to identify gas leakages. Compared to other leak detection systems, Industrial Automation’s solution enables the faster identification of leaks, requires less time to implement and costs less to operate, as it can cover a broad swath of difficult-to-reach areas. On the journey towards autonomous – in shipping At the end of 2018, ABB took an important step towards the development of more autonomous shipping systems with a groundbreaking remote control trial of a passenger ferry, piloted by a captain on shore. The trial, in Helsinki harbor, showed that as vessels become more electric, digital and connected, ABB is able to equip seafar- ers with solutions that augment their skillsets and enhance the overall safety of marine operations. Since its launch in 1990, Azipod® electric propul- sion has become the industry standard for a wide range of vessel segments ranging from smaller crafts to icebreakers capable of independently operating in the harshest conditions. In response to customer requests, ABB has filled the gap between the low and high-power range of Azipod® propulsors with the launch of a new series available in 7.5–14.5 MW. This new series allows ferry and roll-on/roll-off passenger (RoPax) operators to improve operational effi- ciency and reduce emissions. In addition to ferry and RoPax vessels, this new power range will also have applications for larger offshore construction vessels, midsize cruise ships and shuttle tankers. A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 17 18 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N — M OT I O N Keeping the world moving, while saving energy every day One-third of the world’s electricity is converted into motion by motors The process of turning electricity into motion plays a significant role in the lives of people everywhere. All over the world, hundreds of mil- lions of electric motors and drives power pumps, fans, elevators, escalators, trains on which our industries, homes and infrastructure depend. As market and technology leader in electric motors, generators, drives and power transmis- sion solutions, ABB’s Motion Business is forecasted to grow by ~3 percent annually over the next several years. At present, the total ad- dressable market for these technologies is $80 billion. Building on over 130 years of experience, our deep domain expertise and comprehensive offering allow us to deliver optimum motion solutions for a wide range of applications in all industrial segments. Using digital connectivity and ad- vanced data analytics, we are helping our customers improve the uptime, speed and yield of their operations. We partner with our customers through the entire project lifecycle, from design to deployment and operation. In this way, we can offer the best possible customer experience and support. Comprehensive solutions portfolio At the end of 2019, Motion had approximately 20,400 employees globally. The Business gener- ated $6.5 billion in revenue for the year. Key products and solutions include high-efficiency electric motors, synchronous motors, low- and high-voltage induction motors, low- and medium-voltage drives and drive systems, and digital asset management solutions that monitor the performance of and provide data on critical operating parameters. Services offered include design and project management, engineering, installation, training and lifecycle care, energy-efficiency appraisals, preventive mainte- nance and digital services such as remote monitoring and software tools. Like ABB’s other Businesses, Motion is proud to contribute to society by enabling the ongoing energy transition and major reductions in emis- sions and environmental impacts. The Motion Business is driving the low-carbon future for industries, cities and infrastructure, enabled by energy efficiency and emission-free energy pro- duction for the benefit of our customers and the world. — “Motion has the scale and cover- age to support our customers and partners around the world with in- telligent motion solutions. Through our domain expertise and comprehensive offering, we are enabling the highest possible level of energy efficiency – benefiting both our customers’ bottom lines and the environment.” Morten Wierod, President, Motion Innovative smart motion solutions Below are some of the key solutions that are helping Motion to maintain and advance its market and technology leadership: The ABB Ability™ Digital Powertrain is a suite of digital solutions including devices, software and services. Suitable for applications in the process industries, discrete manufacturing and infrastruc- ture, the Digital Powertrain connects drives, motors, pumps and bearings to take uptime and productivity to new heights. The data insights gained from the powertrain allow customers to be better connected to their assets and make better decisions, ensuring safe, reliable and efficient operations. Through its integrated, one-stop portal, the ABB Ability™ Digital Powertrain lets users view a comprehensive range of operational variables and asset health indicators. The ABB Ability™ Smart Sensor converts tradi- tional motors, pumps and mounted bearings into wireless smart devices. It measures key parame- ters from the surface of the equipment, which can then be used to gain meaningful information on the condition and performance of the equipment; this data enables users to rapidly identify ineffi- ciencies in their systems and to reduce risks related to operation and maintenance. By schedul- ing maintenance activities according to actual needs rather than generic timetables, operators A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 19 can extend the lifetime of their equipment, cut maintenance costs and reduce or prevent un- planned downtime from breakdowns. ABB’s new IEC Food Safe stainless steel motors for food and beverage plants can withstand high-pressure cleaning and maintain hygiene standards while reducing downtime. With smooth stainless-steel enclosures that are designed for applications that require frequent cleaning and sanitization, Motion’s full range of IEC Food Safe motors have earned the IP69 water-protection rating. The encapsulated winding enables the motors to last much longer than general-purpose products in tough wash-down conditions. ABB is pilot-testing the world’s first industrial artificial intelligence (AI) application using 5G wireless technology to support the assembly of drives at its plant in Helsinki, Finland. The solution is being implemented in partnership with mobile phone operator Telia and software engi- neering firm Atostek Oy, which specializes in industrial applications. The use of AI supports the plant’s workers by monitoring the assembly of the drives by camera and ensuring they are assem- bled correctly according to the customer order and applicable work instructions. The fast 5G con- nection provides workers with real-time feedback. By providing an easier alternative to following work instructions from a paper document, this AI application improves the quality of the facili- ty’s output. The ABB Order Tracking Tool for drives, motors and generators provides customers with real-time information throughout the ordering process. Today, it is considered a must for any modern business-to-consumer online store to provide its customers with continuous information on the ordering process. Our business-to-business customers expect and deserve the same level of transparency for their orders. As companies in every industrial sector transition to advanced, energy-efficient technologies and the digital solutions required to maximize their return on investment, the Motion Business is their partner of choice. 20 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N — R O B OT I C S & D I S C R E T E AU TO M AT I O N Pushing the boundaries of smart and flexible manufacturing The expanding scope of automation is changing the face of industry Around the world, ongoing advances in digitaliza- tion in manufacturing have the potential to create enormous benefits. Digitalization improves the quality of goods produced and provides our customers with the flexibility they need to shift from mass production to mass customization. It leads to new business models, including in ser- vices, and reduces risk. It enables networked and learning-capable systems. At ABB, digital innovation is part of our DNA. It was ABB that introduced the first commercial, microprocessor-controlled industrial robot in 1974. Since then, more than 400,000 ABB robots used in industries throughout the world have decisively changed manufacturing processes. The acquisition of B&R (Bernecker + Rainer Industrie-Elektronik GmbH) in 2017 made us equally strong in the field of machine and factory automation, providing customers in virtually every industry with complete solutions for automation, motion control, human-machine interfaces, flexible transportation systems and integrated safety technology. With good reason, we can say that ABB’s Robotics & Discrete Automation Business is at the forefront of the ongoing revolution in automation. and productivity for operations to meet the challenge of making smaller lots of a larger number of specific products in shorter cycles for today’s dynamic global markets, while also im- proving quality, productivity and reliability. Robots are also used in activities or environments which may be hazardous to employee health and safety, such as repetitive or strenuous lifting, dusty, hot or cold rooms, or painting booths. In the automotive industry, robot products and systems are used in areas such as press shop, body shop, paint shop, power train assembly, trim and final assembly. — “In addition to the trend towards individualized production, product cycles are getting shorter. New technologies not only make it pos- sible to customize production for individual consumers, but they mean you can manufacture goods more efficiently and improve the quality of our processes and products – all at the same time.” How we serve our key customer segments Sami Atiya, President, Robotics & Discrete Automation The Robotics & Discrete Automation Business combines ABB’s machine and factory automation solutions with a comprehensive robotics solutions and applications suite. In its overall market seg- ment, the Business is no. 2 globally and no. 1 in growth. In robotics, it is no. 2 globally and occupies the no. 1 position in the important Chinese market. In 2019, Robotics & Discrete Automation gener- ated $3.3 billion in revenue. The Business had approximately 10,100 employees at the end of the year. The total addressable market for the Busi- ness was estimated at $75 billion in 2019. Robotics & Discrete Automation offers a wide range of automation products, solutions and services such as industrial robots, software, programmable logical controllers, industrial PCs, servo motion control, track systems, software, application solutions, engineered solutions and related services. This offering provides flexibility Robotics solutions are used in a wide range of segments from metal fabrication, foundry, plas- tics, food and beverage, chemicals and pharmaceuticals, electronics and warehouse/ logistics center automation. Typical robotic applications include welding, material handling, machine tending, painting, picking, packing, palletizing and small parts assembly automation. Machine automation solutions are mainly used by machine builders for all types of machines, e.g. for plastics, metals, printing, packaging. The portfo- lio also includes software for engineering, simulation, commissioning, diagnostics and service. Sales are made both through direct sales forces and through third-party channel partners, such system integrators and machine builders. The proportion of direct sales compared to channel partner sales varies across different industries, product technologies and geographic markets. A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 21 Laying the ground for the factory of the future In September, ABB broke ground on a new robotics manufacturing and research facility in China, the world’s largest robotics market. The 67,000 square meter facility in Kangqiao, near Shanghai, is expected to open in the second half of 2021 and represents a total investment of $50 million. This investment will significantly expand the innova- tion and production capacity of the Robotics & Discrete Automation Business deploying the latest manufacturing processes, including machine learning and collaborative solutions. It will be the most advanced, automated and flexible factory in the robotics industry worldwide and will also host an onsite research and development center. The center will serve as an open innovation hub where ABB closely collaborates with its customers to co-develop automation solutions that are tailored to their individual needs. In October, ABB opened its first healthcare hub on the campus of the Texas Medical Center in Hous- ton. The research facility will introduce the use of collaborative robots in medical laboratories. The team there is working with medical staff to develop non-surgical, medical robotics systems, with applications including logistics and next-generation automated laboratory technolo- gies. Using robots to automate repetitive and low-value tasks, such as preparing slides and loading centrifuges, should enable medical pro- fessionals to focus on higher-skilled work, and ultimately help more people receive treatment. A dual-arm YuMi® collaborative robot was used in September to showcase how digital solutions can address the challenge of recycling in China. ABB’s AI waste separation prototype is a neural network of robots, computers and sensors that can classify and sort waste in the same way that a human brain does. Combining a vision system, artificial intelli- gence and machine learning with YuMi® and an IRB 1200 material-handling robot, a cloud-based dashboard presents images of waste to the YuMi® robot which learns the type of waste and sorts it into four categories. The trash is then moved down a conveyor belt where the IRB 1200 robot collects the different types for recycling. Over the years, the Robotics & Discrete Automa- tion Business has closely collaborated with customers to determine their specific needs. In doing so, it has adapted along with modern industry, developing sophisticated systems that are increasingly able to draw their own conclu- sions from all available data and then make autonomous operational decisions. With Robotics & Discrete Automation solutions, digitalization and the transition from automatic to autonomous systems are changing the face of manufacturing. They are laying the ground for the factory of the future, which will be fully digital, with robots working beside humans. Human experts and artificial intelligence applications will collaborate on analyzing and evaluating enormous volumes of data to provide comprehensive physi- cal and digital automation solutions enabling increased manufacturing productivity, efficiency and quality across the globe. 22 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N — S U S TA I N A B I L I T Y Setting the stage for new ambitions Sustainability, like innovation, is in the DNA of ABB. Our current sustainability framework, ad- opted in 2013, addresses leading technology, responsible operations and responsible relation- ships. It clearly articulates how ABB creates value across a wide range of stakeholder issues. Seven years later, the climate crisis has put the world under greater pressure than ever to develop and implement sustainable solutions on a much larger scale. Sustainability will remain at the center of our activities and our value proposition. ABB is already recognized as a leading contributor to a sustainable world, but we can do more. According to a report from the Business and Sustainable Development Commission (January 2017), key areas of activity for ABB – including smart building solutions, urban infrastructure, clean energy, energy efficiency and mobility systems – are projected to generate market opportunities valued at more than US$5 trillion by 2030. ABB’s business offering and sustainable practices help us capitalize on these opportuni- ties, improving safety and efficiency while reducing social and environmental impacts, for the benefit of our customers, employees and other stakeholders. In 2019, ABB underwent an extensive organiza- tional transformation, involving the planned divestment of the Power Grids Business and the simplification of our structure and business model. This represents a fitting juncture at which to develop new targets and measures for our Group’s approach to sustainability. To this end, we have launched a stakeholder engagement survey on the subject of sustainability, which will deliver its results in the first half of 2020. We are also working on defining science-based targets for greenhouse gas emissions. Once these projects are complete, we will announce our new, post-2020 ambitions and sustainability strategy in the second half of this year. Sustainability objectives ABB currently uses 11 measures to quantify its progress toward nine sustainability objectives, which were defined in 2014. The objectives are grouped into three key areas: • Leading technology • Responsible operations • Responsible relationships Each of the nine objectives is linked to ABB’s “license to operate” and its business success, and all contribute directly or indirectly to the 17 UN Sustainable Development Goals. Out of the 17 goals, we identified seven SDGs where ABB can make the most difference, either through our technology and solutions or through our high standards concerning integrity, ethical business practices and community engagement. We made good progress on our 11 measures in 2019 and remain on track to meet our targets by the end of 2020. We reached our GHG target one year earlier than targeted in 2019, reducing emissions from our own operations by 41% from the 2013 baseline. And the total injury frequency rate for 2019 was significantly lower than the <0.7 target. The 2019 Sustainability Report will be available from March 13, 2020, on: http://www. sustainabilityreport2019.abb.com Until then, visit our website: abb.com/sustainability 41% Reduction in GHG emissions (Scope 1&2) in 2019, compared to 2013 baseline 0.47 Total injury frequency rate (TIFR) in 2019 (goal: <0.7) A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 23 24 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N — Highlights 2019 — ABB commenced its transformation program to deliver a focused, agile and simplified business model and organizational structure: • Power Grids separation on track, including elimination of stranded costs • ABB-OS implementation on track; structure with four Businesses effective as of April 1; regional structures largely dismantled by year end — ABB strengthened and expanded its digital lead- ership: • 160+ ABB Ability™ solutions • Approx. 40% of orders stemmed from digitally enabled offering(1) — Key performance indicators: • Orders 0% (+1% comparable)(3), up in Electrifica- tion and Motion Businesses, lower in Industrial Automation and Robotics & Discrete Automa- tion; order backlog +5%(3) at year end • Revenues +1% (1% comparable)(3), moderate growth in Electrification and Motion; book-to-bill ratio(4) at 1.02x • Income from operations $1,938 million, −13%, also impacted by restructuring, Power Grids’ re- lated transaction and separation costs and di- vestment charges as well as a charge related to the planned sale of solar inverters business • Operational EBITA margin 11.1%(4), impacted by a combined 130 basis points due to stranded costs and non-core activities • ABB Ability™ solution sales pipeline(2) delivered • Income from discontinued operations (Power 2,800 agreements year-to-date • ABB Ability™ Marketplace launched with ~40 of- ferings in ~40 countries Grids) $438 million, reflecting higher restructur- ing, carve-out related tax and transaction costs • Basic EPS $0.67, −34%, reflecting tax impacts from the planned sale of both the solar inverters business and the Power Grids’ operation • Cash flow from operating activities $2.3 billion, −20%, incl. cash outflows for simplification pro- gram and Power Grids carve-out — The Board of Directors is proposing a CHF 0.80 dividend per share at the 2020 Annual General Meeting. (1) Management estimate for full-year 2019, includes ABB Ability™ solutions, software and related services, digitally enabled products. (2) Management estimate as at November 2019. Source: SFDC, excl. former B&R and Enterprise Software. (3) On a comparable basis, see the “Supplemental information” section of this annual report. (4) For non-GAAP measures, see the “Supplemental information” section of this annual report. A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 25 — Financial overview Key figures $ in millions, unless otherwise indicated Orders Order backlog (end December) Revenues Income from operations Operational EBITA(1) as % of operational revenues Income from continuing operations, net of tax Net income attributable to ABB Basic Earnings per share ($) Operational Earnings per share ($)(1) Dividend per share Cash flow from operating activities(3) Net debt (end December) FY 2019 28,588 13,324 27,978 1,938 3,107 11.1% 1,090 1,439 0.67 1.24 0.80 2,325 4,949 FY 2018 US$ Comparable(4) 28,590 13,084 27,662 2,226 3,005 10.9% 1,575 2,173 1.02 1.33 0.80 2,924 4,461 0% +2% +1% −13% +3% +0.2 pts −31% −34% −34%(2) −7%(2) −20% +1% +5% +1% +7%(5) −7%(2) Electrification $12.728 bn Motion $6.533 bn Industrial Automation $6.273 bn Robotics & Discrete Automation $3.314 bn Revenues 2019 by Business(6) Europe $10.004 bn Americas $8.919 bn AMEA $8.842 bn Revenues 2019 by region(6) (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. (2) EPS growth rates are computed using unrounded amounts. Comparable operational earnings per share is in constant currency (2014 exchange rates not adjusted for changes in the business portfolio). (3) Amount represents total for both continuing and discontinued operations. (4) Growth rates for orders, order backlog and revenues are on a comparable basis (local currency adjusted for acquisitions and divestitures). (5) Constant currency (not adjusted for portfolio changes). (6) Figures derived from ABB’s consolidated financial statements prepared in accordance with US GAAP, and exclude sales to other segments. 26 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N — Electrification global no. 2 — Industrial Automation global no. 2 • The Business offers low and medium voltage, • The Business specializes in process control, buildings and infrastructure electrification solu- tions. Typical customers include electrical dis- tributors, panel-builders and engineering, pro- curement and construction (EPCs). measurement and analytics and other industry specific solutions. Customers are concentrated in process industries. — Key performance indicators for full-year 2019: — Key performance indicators for full-year 2019: • Orders $13,050 million, +10% (+4% comparable)(1); order backlog $4,488 million, +9% at end-2019 • Revenues $12,728 million, +9% (+2% comparable)(1) • Income from operations $1,049 million, im- pacted by GEIS integration and solar inverters charge • Operational EBITA(2) $1,688 million, +4% • Operational EBITA margin(2) 13.3%, impacted mainly by GEIS integration • Orders $6,432 million, −4% (0% comparable)(1); order backlog $5,077 million, +2% at end-2019 • Revenues $6,273 million, −3% (0% comparable)(1) • Income from operations $700 million • Operational EBITA(2) $732 million, −20% • Operational EBITA margin(2) 11.7%, impacted by project revaluation in South Africa Americas $4.568 bn Europe $4.039 bn AMEA $3.665 bn Revenues 2019 by region(3) Europe $2.416 bn AMEA $2.153 bn Americas $1.582 bn Revenues 2019 by region(3) (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. (3) Figures derived from ABB’s consolidated financial statements prepared in accordance with US GAAP, and exclude sales to other segments. Year-on-year change is in parenthesis. A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 27 — Motion global no. 1 — Robotics & Discrete Automation global no. 2 • The business designs and manufactures electri- cal motors, generators, drives, and services, as well as offering integrated digital powertrain solutions. • The business offering provides flexibility and productivity for operations. Customers are con- centrated in discrete industries. • This Business is a unique combination of robot- ics and machine and factory automation. — Key performance indicators for full-year 2019: — Key performance indicators for full-year 2019: • Orders $6,782 million, +1% (+4% comparable)(1); order backlog $2,967 million, +9% at end-2019 • Revenues $6,533 million, +1% (+4% comparable)(1) • Income from operations $1,009 million • Operational EBITA(2) $1,082 million, +6% • Operational EBITA margin(2) 16.6%, supported by solid execution • Orders $3,260 million, −14% (−11% comparable)(1); order backlog $1,356 million, −5% at end-2019 • Revenues $3,314 million, −8% (−4% comparable)(1) • Income from operations $298 million • Operational EBITA(2) $393 million, −26% • Operational EBITA margin(2) 11.9%, impact by ad- verse mix in context of challenging environment for automotive and machine builders end-markets Americas $2.315 bn Europe $1.879 bn AMEA $1.827 bn Revenues 2019 by region(3) Europe $1.634 bn AMEA $1.157 bn Americas $0.453 bn Revenues 2019 by region(3) 28 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N — Shareholder returns and capital allocation — ABB’s capital allocation priorities are: • Funding organic growth, research and develop- ment (R&D) and capex at attractive returns • Paying a rising, sustainable dividend over time • Investing in value-creating acquisitions • Returning additional cash to shareholders — During 2019, ABB generated solid cash flow from operating activities of $2.3 billion for the full year. Free cash flow (FCF) to net income conversion was 104 percent(1). Cash flow from operating activities was $2,325 million for the full-year. Cash flow provided by operating activities from con- tinuing operations of $1,899 million was solid and included cash costs related to the ABB-OS simpli- fication program as well as Power Grids related transaction and separation costs of more than $200 million(2). Net working capital was 9.5 per- cent of revenues, compared to 9 percent at end of 2018. Favorable trade receivables, as well as lower inventories and cash tax outflows were partly offset by less cash inflow from trade payables. — The Board of Directors is proposing a CHF 0.80 dividend per share at the 2020 Annual General Meeting. Dividends C H F P E R S H A R E 0.80 0.76 0.72 0.68 0.64 0.60 0.56 0.52 0.48 0.44 0.40 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 ) 3 ( 9 1 0 2 Adjusted free cash flow and conversion rate 175% 150% 125% 100% 75% 4 bn 3 bn 2 bn 1 bn 0 bn 2015 2016 2017 2018 2019 Adjusted free cash flow (USD) % of net income (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. (2) Management estimate. (3) Proposed. A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 29 — ABB invested $762 million in capex(1), primarily for maintenance and including investments to im- prove performance at former GEIS manufacturing facilities. Non-order related R&D investment including digital expenses reached $1.3 billion in 2019 or approximately 4.5 percent of revenues for the year. The Group has introduced a new benchmark for the measurement of returns: return on capital employed (ROCE), which it will report hence- forth(2). The Group’s ROCE was 12.0 percent, reflecting stranded costs and acquisitions in prior years including GEIS and B&R. — Following the expected completion of the sale of 80.1 percent of our Power Grids business to Hitachi at the end of the second quarter of 2020, valuing the business at $11 billion, ABB intends to return the net cash proceeds from the divestment to shareholders. ABB intends to maintain the dividend level per share after the closing of the PG transaction and aims to maintain its “single A” credit rating in the long term. Return on Capital Employed Allocation of Capital % 14 13 12 11 10 9 2 0 1 6 – 2 0 1 9 U S D B N 10 8 6 4 2 0 2019 Organic investment(3) (capex, R&D) Returns to the shareholders Non-organic investment (1) Continuing operations only: A further $167 million capex investment was made in discontinued operations. (2) See the “Supplemental information” section of this annual report for definition. (3) Continuing operations only. 30 A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N — A S O F J A N U A R Y 1 , 2 0 2 0 P E T E R T E R W I E S C H President Industrial Automation Business S Y LV I A H I L L Chief Human Resources Officer P E T E R VO S E R Chairman of the Board Chief Executive Officer TA R A K M E H TA President Electrification Business S A M I AT I YA President Robotics & Discrete Automation Business A B B A N N U A L R E P O R T 2 0 1 9 0 1 I N T R O D U C T I O N 31 T I M O I H A M U O T I L A Chief Financial Officer M O R T E N W I E R O D President Motion Business M A R I A VA R S E L L O N A General Counsel D I A N E D E S A I N T V I C T O R Company Secretary C L A U D I O FA C C H I N President Power Grids business 02 Corporate governance report — 32 – 55 — 34 — 36 — 36 — 42 — 44 — 48 — 51 — 52 Chairman’s letter Summary of corporate governance approach Board of Directors Executive Committee Shares Shareholders Independent external auditors Other governance information 34 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T — Chairman’s letter Dear Shareholders, The year 2019 was one of wide-ranging change across ABB, with the result that today our company is fundamentally different to the ABB of one year ago. We have a new Chief Executive Officer (CEO), a smaller and streamlined Executive Committee (EC), and a simplified business model and organization. The Board of Directors has driven these changes to better position our company competitively in mar- kets where we can grow our business and deliver sustainable results over the long term. Transformation Our decision to divest our Power Grids business to Hitachi, announced in December 2018, opened up an opportunity to simplify our structure, reor- ganize our businesses and more closely match the way our customers operate. From our previous corporate-led organization, which was divided into divisions, functions and regions, we stream- lined our company into four vertically integrated Businesses and a lean corporate center, which is today less than 10 percent of the size it was a year ago. Power Grids has been carved out as a sepa- rate business, and is now operating as a largely independent, standalone company in preparation for the handover to Hitachi. CEO change In agreement with the Board of Directors, I took over from Ulrich Spiesshofer as CEO on April 17, 2019, with the clear understanding that the Board of Directors’ Governance and Nomination Com- mittee would seek a candidate with the right skills and qualities to lead ABB into the future. Among the key criteria for the role were: strategic indus- try leadership through technology, people and strategic thinking, and competitive operational performance drive. We were also looking for a CEO who has experience running a decentralized company and who is fully aligned with our leader- ship and culture model. After a thorough selection process, in which both internal and external candidates were considered, the Board of Directors unanimously appointed Björn Rosengren as CEO, effective March 1, 2020. Streamlined Executive Committee The transformation of our company into a simpler, leaner organization meant that we were able to streamline our EC from twelve members to eight. Today, alongside the CEO, we have four Business Presidents and three corporate officers on the EC. The regional presidents’ roles were discontinued during 2019. Power Grids President Claudio Fac- chin stepped down from the EC at the end of 2019. He is leading Power Grids as a standalone busi- ness, ahead of the closing of the divestment, ex- pected at the end of the second quarter 2020. As well as the structural changes on the EC, we appointed three new EC members in 2019. Morten Wierod was appointed President of our newly formed Motion Business, Sylvia Hill succeeded Jean-Christophe Deslarzes as Chief Human Re- sources Officer, and Maria Varsellona succeeded Diane de Saint Victor as General Counsel. Board of Directors In its annual review process, the Board of Direc- tors concluded that the composition of its mem- bers is aligned with the company’s strategic needs, business portfolio, geographic reach and culture. As a result, the Board decided not to pro- pose any changes to its membership for the up- coming term. The Board’s priority now is to focus on implementing the strategic agenda with the new executive team. Compensation policy Over the years, ABB has steadily increased the performance orientation of its compensation structure, with a special focus on variable com- pensation. For 2020, our focus has been revising our short-term incentive plan to achieve better alignment with the new ABB operating model and an enhanced focus on operational delivery. The new Annual Incentive Plan is designed to en- courage focus on a limited number of key Busi- ness or functional priorities. It has a common Group return measure to help create a greater fo- cus on profitability and the efficiency with which capital is used, and it has an individual compo- nent which for all EC members includes safety performance. CEO compensation With the change of CEO, we took the opportunity to review the compensation for the CEO position, with the result that the Compensation Committee has set the target total direct compensation for the new CEO nearly 22 percent lower than for the former CEO to more closely represent competitive market practice as it has evolved. A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 35 Company purpose In the next stage of our transformation, we will further strengthen our company culture for sus- tainable high performance. To that end, we en- hanced our dialogue with employees in 2019 through, among other means, an employee En- gagement Survey, in which our people sent a clear message that they want a better understanding of where the company is heading. In response, we are asking employees and other stakeholder groups how they perceive our company and what they think ABB should aspire to in the future. From their input, we will craft an overarching purpose that will guide our direction, our thinking and our everyday actions. We have no preconceived ideas about what our purpose should be, but we expect it to be at the core of our long-term business strategy and to include ABB’s sustainability agenda. We will inform you about the outcome in next year’s annual report. On behalf on the Board of Directors, I would like to thank you for your trust and support. Peter Voser Chairman of the Board of Directors Zurich, February 25, 2020 36 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T — 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 Trans- action Policy, which was prepared based on the Swiss Code of Best Practice for Corporate Gover- nance 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 available on ABB’s website at https://new.abb.com/about/ corporate-governance. It is the duty of ABB’s Board of Directors (the Board) to review and amend or propose amendments to those docu- ments from time to time to reflect the most re- cent developments and practices, as well as to en- sure 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 Zu- rich, Switzerland. Compensation governance and Board and EC compensation Information about ABB’s compensation gover- nance and Board and EC compensation and share- holdings is provided in the compensation report that can be found on pages 58 to 82 of this annual report. — Board of directors Board and Board committees (2019–2020 board term) Chairman: Peter R. Voser Matti Alahuhta Vice-Chairman: Jacob Wallenberg Gunnar Brock Board of Directors David Constable Frederico Fleury Curado Lars Förberg Jennifer Xin-Zhe Li Geraldine Matchett David Meline Satish Pai Finance, Audit and Compliance Committee David Meline (chairman) Gunnar Brock Geraldine Matchett Satish Pai Governance and Nomination Committee Compensation Committee Jacob Wallenberg (chairman) David Constable (chairman) Matti Alahuhta Lars Förberg Frederico Fleury Curado Jennifer Xin-Zhe Li A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 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 manage- ment and representation of ABB. The internal or- ganizational structure and the definition of the ar- eas 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 Governance Guidelines (available at https://new.abb.com/ about/events/corporate-governance). 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 shareholders in like circumstances. The Swiss Code of Obligations does not specify what standard of due care is required of the direc- tors of a corporate board. However, it is generally held by Swiss legal scholars and jurisprudence that the directors must have the requisite capabil- ity and skill to fulfill their function, and must de- vote the necessary time to the discharge of their duties. Moreover, the directors must exercise all due care that a prudent and diligent director would have taken in like circumstances. Finally, the directors are required to take actions in the best interests of the corporation and may not take any actions that may be harmful to the corporation. Although the Swiss Code of Obligations does not discuss specifically conflicts of interest for board members, the ABB Ltd Board Regulations & Cor- porate Governance Guidelines (available at https://new.abb.com/about/events/ corporate-governance) state that board members shall avoid entering into any situation 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 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 relevant and as appropriate or as the Chairman may re- quire and with a particular focus on strategic as- pects 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 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 as such term is defined in Form 20-F. Governance and Nomination Committee The GNC is responsible for (1) overseeing corpo- rate governance practices within ABB, (2) oversee- ing corporate social responsibility (including health, safety and environment as well as sustain- ability), (3) nominating candidates for the Board, the role of CEO and other positions on the Execu- tive Committee, and (4) succession planning and employment matters relating to the Board and 38 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T Members of the Board (2019–2020 board term): Board Experience Corporate Officer Experience 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 d r a o B B B A ) s r a e y ( e r u n e T 5 21 O E C O F C 6 2 5 4 3 2 2 4 5 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 Other Business Experience t n e m e g a n a M k s i R s n o i t a r e p O 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 e c n e i r e p x E l a b o G l / 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 e v i t u c e x E - n o N r e d n e G M No M Yes M Yes M Yes M Yes M Yes M Yes CN, CA F Yes UK, FR, CH F Yes US, CH M Yes IN M Yes t n e d n e p e d n I No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes the Executive Committee. The GNC is also respon- sible for maintaining an orientation program for new Board members and an ongoing education program for existing Board members. The GNC must comprise three or more indepen- dent directors. The Chairman of the Board (unless he is already a member) and, upon invitation by the committee’s chairman, the CEO or other 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. 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 com- mittee’s chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained. 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 (available at https://new.abb.com/about/events/ corporate-governance) do not provide for the re- tirement of directors based on their age. How- ever, an age limit for members of the Board is set forth in the ABB Ltd Board Regulations & Corpo- rate Governance Guidelines (although waivers are possible and subject to Board discretion) (avail- able at https://new.abb.com/about/events/ corporate-governance). If the office of the Chair- man of the Board of Directors or any position on the Compensation Committee becomes vacant during a Board term, the Board of Directors may appoint (shall appoint in the case of the Chairman of the Board) another individual from among its members to that position for the remainder of that term. The Board of Directors shall consist of no less than 7 and no more than 13 members. A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 39 Members of the Board (2019–2020 board term): Peter R. Voser has been a member and Chairman of ABB’s Board of Di- rectors since April 2015 and ABB’s Chief Executive Officer since April 2019. He is a member of the board of directors of IBM Corporation (U.S.). He is also a member of the board of directors of Temasek Holdings (Private) Limited (Singapore) as well as chairman of the board of PSA International Pte Ltd (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 mem- ber of ABB’s Board of Directors since June 1999 and Vice-Chairman since April 2015. He is the chairman of the board of Investor AB (Swe- den). He is vice-chairman of the boards of Tele- fonaktiebolaget 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 di- rectors 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 Investor AB and Patricia In- dustries (both Sweden). He was formerly presi- dent and chief executive officer 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 Fluor Corporation (U.S.). He was formerly the chief executive officer and president as well as a member of the board of directors of Sasol Limited (South Africa). He joined Sasol after more than 29 years with Fluor Corporation (U.S.). Mr. Constable was born in 1961 and is a Canadian citizen. Frederico Fleury Curado has been a member of ABB’s Board of Direc- tors since April 2016. He is the chief executive officer of Ultrapar Partic- ipações S.A. (Brazil) and a member of the board of directors of Transocean Ltd. (Swit- zerland). He was formerly the chief executive offi- cer 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 manag- ing partner of Cevian Capital. Mr. Förberg is the chairman of the Human Practice Foundation (Denmark). Mr. För- berg 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 co-chief executive officer (since February 2020), the chief financial officer and a member of the managing board of Royal DSM N.V. (The Netherlands). She was previ- ously chief financial officer of SGS Ltd (Switzer- land). Prior to joining SGS she worked as an audi- tor at Deloitte Ltd (Switzerland) and KPMG LLP (U.K.). Ms. Matchett was born in 1972 and is a Swiss, British and French citizen. 40 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T David Meline has been a member of ABB’s Board of Directors since April 2016. From 2014 through 2019, he was the chief financial officer 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. (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, 2019, none of the Board mem- bers 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 link (available at https://new.abb.com/about/ events/corporate-governance). Board meetings and attendance The Board and its committees have regularly scheduled meetings throughout the year. These meetings are supplemented by additional meet- ings (either in person or by conference call), as necessary. 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 meet- ing is sent out in advance to each Board member in order to allow each member time to study the covered matters prior to the meetings. Each board 2019 Board and Board Committee Meetings meeting has a private session without manage- ment or others being present. Decisions made at the Board meetings are recorded in written min- utes of the meetings. Some decisions are also taken by circular resolution. 2019 was an intensive year for the Board and its committees. The table below shows the number of meetings held during 2019 by the Board and its committees, their average duration, as well as the attendance of the individual Board members. The Board meetings shown include a strategic retreat attended by the members of the Board and the EC. Mandates of Board members outside the ABB Group No member of the Board may hold more than ten additional mandates of which no more than four may be in listed companies. Certain types of 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 subject to those limits. Additional details can be found in Article 38 of ABB’s Articles of Incorpora- tion (available at https://new.abb.com/about/ events/corporate-governance). Business relationships between ABB and its Board members This section describes important business rela- tionships between ABB and its Board members, or companies and organizations represented by them. This determination has been made based on ABB Ltd’s Related Party Transaction Policy. This policy is contained in the ABB Ltd Board Pre annual general meeting 2019 Post annual general meeting 2019 Meetings and attendance Mtg. Conf. Call Board Average duration (hours) Number of meetings Meetings attended: 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 7 2 2 2 2 2 2 2 2 2 2 2 2 1 3 3 3 3 3 3 3 3 3 3 3 3 GNC 1.5 2 2 2 2 2 CC 1.75 4 4 4 4 FACC 2.38 6 6 6 6 6 Board Mtg. Conf. Call 7 5 5 5 5 5 5 5 5 5 5 5 5 1 1 1 1 1 1 1 1 1 1 1 1 1 FACC 2.75 4 4 4 4 4 GNC 1.75 3 3 3 3 CC 2 3 3 3 3 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 41 Regulations & Corporate Governance Guidelines (available at https://new.abb.com/about/events/ corporate-governance). Fluor Corporation (Fluor) is an important cus- tomer of ABB. ABB supplies Fluor mainly through its Industrial Automation, Electrification and Power Grids businesses. David Constable is a di- rector of Fluor. Rio Tinto, including Rio Tinto plc and Rio Tinto Limited, is an important customer of ABB. ABB supplies Rio Tinto mainly through its Industrial Automation and Power Grids businesses. Da- vid Constable is a director of Rio Tinto plc and Rio Tinto Limited. IBM Corporation (IBM) is an important supplier to ABB. IBM supplies ABB primarily with IT related hardware, software and services. Peter Voser is a director of IBM. After reviewing the level of ABB’s business with Fluor and Rio Tinto and the level of purchases from IBM, the Board has determined that ABB’s business relationships with those companies are not un- usual in their nature or conditions and do not con- stitute material business relationships. As a result, the Board concluded that all members of the Board are considered to be independent directors, ex- cept for Peter Voser who was also CEO for most of 2019. This determination was made in accordance with ABB Ltd’s Related Party Transaction Policy which was prepared based on the Swiss Code of Best Practice for Corporate Governance and the in- dependence criteria set forth in the corporate gov- ernance rules of the New York Stock Exchange. Information and control systems of the Board vis-à-vis the Executive Committee Information from the Executive Committee In accordance with the ABB Board Regulations and Corporate Governance Guidelines (available at https://new.abb.com/about/events/ corporate-governance), the CEO reports regularly to the Board about ABB’s overall business and when circumstances require on any extraordinary events that may arise. This includes • Reports on financial results (including profit and loss, balance sheet and cash flows) • Changes in key members of management • Information that may affect the supervisory or monitoring function of the Board (including on matters of strategy and compliance) • Significant developments in legal matters. At each Board meeting, Board members are briefed by the Chairman, CEO, CFO and other EC members on ABB’s business performance and on material developments affecting ABB. Outside of Board meetings, Board members generally chan- nel any requests for information through the Chairman. Board members also obtain informa- tion through offsite retreats with the Executive Committee and visits to ABB sites. In addition, Board members obtain information through the Board committees in which they participate and which are also attended by relevant EC members and management representatives from human re- sources, finance, legal and the business. Internal Audit ABB has an Internal Audit team that provides in- dependent objective assurance and other ser- vices to help ensure that ABB operates in accor- dance with applicable laws as well as internal policies and procedures. Internal Audit reports to the FACC and to the CFO. The FACC reviews and approves the internal audit plan, and material changes to the plan. Investigations of potential fraud and inappropriate business conduct are an integral part of the internal audit process. De- pending on circumstances Internal Audit may act together with ABB’s Office of Special Investiga- tions which is part of ABB’s integrity function. In- ternal Audit reports on a regular basis its main observations and recommendations to the rele- vant members of the EC and to the FACC as appropriate. Risk Management ABB has an enterprise risk management program (ERM) in place which takes into account ABB’s size and complexity. ERM provides the EC and the Board with a comprehensive and holistic view of the risks facing the business. ERM involves man- aging the acceptance of risk to achieve the objec- tives of the business. The ERM process is typically cyclical in nature, conveying the idea of continu- ous refinement of the risk management approach in a dynamic business environment. Furthermore, ABB runs a mitigation process for the identified risks that is key to the success of this process. ERM assessments are both top down and bottom up. They cover strategic, financial, and opera- tional risks, both current and long term. Key risks identified and managed in 2019 were those re- lated to the transformation of the group (both the elimination of the regional matrix and the shift of most corporate resources into the businesses) as well as the activities related to the separation, and the preparation for the sale, of the Power Grids business. ERM results are reported to the FACC and the entire Board. This information be- comes part of the overall strategic and risk dis- cussions by the Board to help create value for stakeholders. 42 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T — Executive committee Composition of the Executive Committee (as of December 31, 2019) Peter R. Voser Chief Executive Officer C O R P O R AT E O F F I C E R S B U S I N E S S 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 Frank Duggan Europe Sylvia Hill Chief Human Resources Officer Peter Terwiesch Industrial Automation Chunyuan Gu Asia, Middle East and Africa Maria Varsellona General Counsel Morten Wierod Motion Sami Atiya Robotics & Discrete Automation Claudio Facchin Power Grids Executive Committee responsibilities and organization The Board has delegated the executive manage- ment of ABB to the CEO. The CEO and, under his direction, the other members of the Executive Committee are responsible for ABB’s overall busi- ness and affairs and day-to-day management. The CEO reports to the Board regularly, and whenever extraordinary circumstances so require, on the course of ABB’s business and financial perfor- mance and on all organizational and personnel matters, transactions and other issues material to the Group. Each member of the Executive Com- mittee is appointed and discharged by the Board. Members of the Executive Committee (as of December 31, 2019): Peter R. Voser was appointed Chief Executive Officer in April 2019 and is chairman of ABB’s Board of Direc- tors. Additional information can be found together with the other members of the Board of Directors. Timo Ihamuotila was appointed Chief Financial Officer and member of the Executive Committee in April 2017. He is a member of the board of directors of SoftwareONE AG (Switzerland). From 2009 to 2016, Mr. Ihamuotila was chief finan- cial officer and an executive vice president of the Nokia Corporation (Finland). From 1999 to 2009, he held various senior roles with Nokia. Mr. Ihamu- otila was born in 1966 and is a Finnish citizen. Sylvia Hill was appointed Chief Hu- man Resources Officer and mem- ber of the Executive Committee ef- fective June 2019. From 2014 until June 2019 she was ABB’s Head of Global HR Services and HR Transformation. From 2011 to 2014 Ms. Hill was the Head of HR for ABB’s Discrete Automation division. During 2005 to 2010 she was the Head of HR and Organization Health & Safety for ABB in France and for part of that time she was also the Head of HR for the Mediterranean region. From 1993 through 2005 she held various HR roles with ABB. Ms. Hill was born in 1960 and is a German citizen. Maria Varsellona was appointed General Counsel and member of the Executive Committee effective November 2019. She is a member of the board of directors of Nor- dea Bank Abp (Finland). From 2014 to 2019 she was the Chief Legal Officer of Nokia Corporation and from 2018 to 2019 she was also the president of Nokia Technologies. From 2013 to 2014 she was the General Counsel of Nokia Siemens Net- works. During the period from 2011 to 2013 Ms. Varsellona was the Group General Counsel of Tetra Pak and from 2009 to 2010 she was the A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 43 Group General Counsel of Sidel, both part of the Tetra Leval Group. From 2001 to 2009 she held various senior legal roles mainly with GE Oil & Gas. Ms. Varsellona was born in 1970 and is an Italian citizen. 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. Tarak Mehta was appointed Presi- dent of the Electrification Business effective April 2019 and has been a member of the Executive Commit- tee since October 2010. He had pre- viously been President of the Electrification Prod- ucts division since January 2016. From October 2010 through December 2015, he was President of the Low Voltage Products division. From 2007 to 2010, he was Head of ABB’s transformers busi- ness. Between 1998 and 2006, he held several management positions with ABB. Mr. Mehta was born in 1966 and is a U.S. citizen. Peter Terwiesch was appointed President of the Industrial Automa- tion Business (formerly the Indus- trial Automation division) effective January 2017 and has been a mem- ber of the Executive Committee since January 2015. He is a member of the board of directors of Metall Zug AG (Switzerland). He was the President of the Process Automation division from 2015 to 2016. From 2011 to 2014, 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. Morten Wierod was appointed President of the Motion Business and member of the Executive Com- mittee effective April 2019. From 2015 until April 2019 he was the Managing Director of the drives business unit in the Robotics and Motion division. During 2011 to 2015, Mr. Wierod was the Managing Director of the control products business unit in the Low Voltage Products division. Between 1998 to 2011, Mr. Wierod held various management roles with ABB. Mr. Wierod was born in 1972 and is a Norwe- gian citizen. Sami Atiya was appointed Presi- dent of the Robotics & Discrete Au- tomation Business effective April 2019 and has been a member of the Executive Committee since June 2016. He had previously been President of the Ro- botics and Motion division since January 2017. 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 Claudio Facchin was appointed President of the Power Grids busi- ness (formerly the Power Grids divi- sion) effective January 2016 and has been a member of the Execu- tive Committee since December 2013. From De- cember 2013 through December 2015, he was President of the Power Systems division. From 2010 to 2013, Mr. Facchin was Head of ABB’s North Asia region. From 2004 to 2009, Mr. Facchin was the Head of ABB’s substations global business unit and from 1995 to 2004, he held various man- agement 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. Between 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 Africa region and a member of the Executive Committee in July 2017. In addition, Mr. Gu was the Manag- ing Director of ABB China from 2014 to 2018. From 2012 to 2013, he was the Regional Division Head of ABB’s Discrete Automation and Motion division 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 manage- ment and technical roles in ABB’s robotics busi- ness in China and Sweden. Mr. Gu was born in 1958 and is a Swedish citizen. As separately announced, as of December 31, 2019, Claudio Facchin, Frank Duggan, and Chunyuan Gu stepped down from their roles on the Executive Committee. Effective as of March 1, 2020, Björn Rosengren has been appointed as Chief Executive Officer of ABB (press release available at https://new.abb.com/news/detail/29207/ abb-names-bjorn-rosengren-as-ceo). He was pre- viously the president and chief executive officer of Sandvik AB. Mr. Rosengren was born in 1959 and is a Swedish citizen. 44 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T Further information about the members of the Executive Committee can be found by clicking on the Executive Committee link (available at https://new.abb.com/about/events/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 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 subject to those limits. Additional details can be found in Article 38 of ABB’s Articles of Incorpora- tion (available at https://new.abb.com/about/ events/corporate-governance). 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, (available at https://new.abb.com/about/events/ corporate-governance). ABB has an unsecured syndicated $2 billion, re- volving credit facility. As of December 31, 2019, Nordea Bank Abp (Nordea) had committed to ap- proximately $105.7 million out of the $2 billion to- tal. In addition, ABB has regular banking business with Nordea. Maria Varsellona is a director of Nordea. After reviewing the banking commitments of Nor- dea, the Board has determined that ABB’s busi- ness relationships with Nordea are not unusual in their nature or conditions and do not constitute material business relationships. This determina- tion was made in accordance with ABB Ltd’s Re- lated 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. — Shares Share capital of ABB At December 31, 2019, ABB’s ordinary share capi- tal (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, 2019, ABB Ltd had a market capitalization based on out- standing shares (total number of outstanding shares: 2,133,501,111) of approximately CHF 50 billion ($51 billion, SEK 480 billion). The only con- solidated subsidiary in the ABB Group with listed shares is ABB India Limited, Bangalore, India, which is listed on the BSE Ltd. (Bombay Stock Ex- change) and the National Stock Exchange of India. At December 31, 2019, ABB Ltd, Switzerland, di- rectly or indirectly owned 75 percent of ABB India Limited, Bangalore, India, which at that time had a market capitalization of approximately INR 272 billion. Stock exchange listings (at December 31, 2019) Stock exchange SIX Swiss Exchange Security Ticker symbol ISIN code ABB Ltd, Zurich, share ABBN CH0012221716 NASDAQ OMX Stockholm Exchange ABB Ltd, Zurich, share ABB CH0012221716 New York Stock Exchange ABB Ltd, Zurich, ADS ABB US0003752047 BSE Ltd. (Bombay Stock Exchange) ABB India Limited, Bangalore, share ABB(1) INE117A01022 National Stock Exchange of India ABB India Limited, Bangalore, share ABB INE117A01022 (1) Also called Scrip ID. A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 45 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 2019, ABB paid a dividend of 0.80 Swiss francs per share relating to the year 2018. In 2018, ABB paid a dividend of 0.78 Swiss francs per share re- lating to the year 2017. In 2017, ABB paid a divi- dend of 0.76 Swiss francs per share relating to the year 2016. Except for the share cancellation described above, there were no other changes to ABB’s ordinary share capital during 2019, 2018 and 2017. 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 re- fer to “Note 19 Stockholders’ equity” to ABB’s Consolidated Financial Statements. Contingent share capital At December 31, 2019, ABB’s share capital may be increased by an amount not to exceed CHF 24,000,000 through the issuance of up to 200,000,000 fully paid registered shares with a par value of CHF 0.12 per share through the exercise of conversion rights and/or warrants granted in con- nection with the issuance on national or interna- tional capital markets of newly or already issued bonds or other financial market instruments. If this contingent share capital were fully issued this would increase the existing share capital by ap- proximately 9.2 percent. The contingent share cap- ital has not changed during the last three years. At December 31, 2019, ABB’s share capital may be increased by an amount not to exceed CHF 1,200,000 through the issuance of up to 10,000,000 fully paid registered shares with a par value of CHF 0.12 per share through the exercise of warrant rights granted to its shareholders. If this contingent share capital were fully issued this would increase the existing share capital by ap- proximately 0.5 percent. This contingent share capital has not changed during the last three years. The Board may grant warrant rights not taken up by shareholders for other purposes in the interest of ABB. The pre-emptive rights of the shareholders are excluded in connection with the issuance of con- vertible or warrant-bearing bonds or other finan- cial market instruments or the grant of warrant rights. The then current owners of conversion rights and/or warrants will be entitled to sub- scribe for new shares. The conditions of the con- version rights and/or warrants will be determined by the Board. The acquisition of shares through the exercise of warrants and each subsequent transfer of the shares will be subject to the restrictions of ABB’s Articles of Incorporation (see “Limitations on transferability of shares and nominee registra- tion” in Shareholders section below) (available at https://new.abb.com/about/events/ corporate-governance). In connection with the issuance of convertible or warrant-bearing bonds or other financial market instruments, the Board is authorized to restrict or deny the advance subscription rights of 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 markets. If the Board denies advance subscription rights, the convertible or warrant-bearing bonds or other financial market instruments will be is- sued at the relevant market conditions and the new shares will be issued pursuant to the relevant market conditions taking into account the share price and/or other comparable instruments having a market price. Conversion rights may be exercised during a maximum ten-year period, and warrants may be exercised during a maximum seven-year period, in each case from the date of the respec- tive issuance. The advance subscription rights of the shareholders may be granted indirectly. At December 31, 2019, 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. If this contin- gent share capital were fully issued this would in- crease the existing share capital by approximately 4.3 percent. This contingent share capital has not changed during the last three years. 46 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T The pre-emptive and advance subscription rights of ABB’s shareholders are excluded. The shares or rights to subscribe for shares will be issued to employees pursuant to one or more regulations to be issued by the Board, taking into account per- formance, functions, level of responsibility and profitability criteria. ABB may issue shares or sub- scription rights to employees at a price lower than that quoted on a stock exchange. The acqui- sition of shares within the context of employee share ownership and each subsequent transfer of the shares will be subject to the restrictions of ABB’s Articles of Incorporation (see “Limitations on transferability of shares and nominee registra- tion” in Shareholders section below). Authorized share capital At December 31, 2019, 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 May 2, 2021. If the authorized share capital were fully issued, this would increase the existing share capital by approximately 9.2 percent. Aside from renewal at the 2019 AGM, the authorized share capital has not changed during the last three years. 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 (available at https://new.abb.com/about/events/ corporate-governance). Share Developments ABB Ltd share price trend during 2019 During 2019, the price of ABB Ltd shares listed on the SIX Swiss Exchange increased 25 percent, while the Swiss Market Index increased 26 per- cent. The price of ABB Ltd shares on NASDAQ OMX Stockholm increased 32 percent, compared to the OMX 30 Index, which increased 26 percent. The price of ABB Ltd American Depositary Shares traded on the New York Stock Exchange increased 27 percent compared to the S&P 500 Index, which increased 29 percent. ABBN SW Equity Swiss Market Index Rebased — Source: Bloomberg Zurich CHF 24 23 22 21 20 19 18 17 9 1 0 2 n a J 9 1 0 2 b e F 9 1 0 2 r a M 9 1 0 2 r p A 9 1 0 2 y a M 9 1 0 2 n u J 9 1 0 2 l u J 9 1 0 2 g u A 9 1 0 2 p e S 9 1 0 2 t c O 9 1 0 2 v o N 9 1 0 2 c e D A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 47 ABB SS Equity OMX 30 Index Rebased Stockholm SEK 230 220 210 200 190 180 170 160 9 1 0 2 n a J 9 1 0 2 b e F 9 1 0 2 r a M 9 1 0 2 r p A 9 1 0 2 y a M 9 1 0 2 n u J 9 1 0 2 l u J 9 1 0 2 g u A 9 1 0 2 p e S 9 1 0 2 t c O 9 1 0 2 v o N 9 1 0 2 c e D ABB US Equity S&P 500 Index Rebased New York USD 26 24 22 20 18 16 9 1 0 2 n a J 9 1 0 2 b e F 9 1 0 2 r a M 9 1 0 2 r p A 9 1 0 2 y a M 9 1 0 2 n u J 9 1 0 2 l u J 9 1 0 2 g u A 9 1 0 2 p e S 9 1 0 2 t c O 9 1 0 2 v o N 9 1 0 2 c e D — Source: Bloomberg 2019 High Low Year-end Average daily traded number of shares, in millions SIX Swiss Exchange (CHF) NASDAQ OMX Stockholm (SEK) New York Stock Exchange (USD) 23.63 17.39 23.37 7.06 227.20 168.20 225.10 1.48 24.11 17.89 24.09 2.20 Dividends With respect to the year ended December 31, 2019, 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 2020 An- nual General Meeting. The proposal is in line with the company’s dividend policy to pay a rising, sus- tainable dividend over time. 48 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 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) Weighted-average number of shares outstanding (in millions) 2019 0.80(1) 0.12 1 0.67 6.34 1.09 123% 2,133 2018 0.80 0.12 1 1.02 6.54 1.37 80% 2017 0.78 0.12 1 1.04 6.93 1.78 77% 2,132 2,138 (1) Proposed by the Board of Directors and subject to approval by shareholders at the Annual General Meeting on March 26, 2020, 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. (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. — Shareholders Shareholder structure As of December 31, 2019, the total number of shareholders directly registered with ABB Ltd was approximately 109,000 and another 369,000 shareholders held shares indirectly through nominees. In total as of that date, ABB had approximately 478,000 shareholders. Significant shareholders Investor AB, Sweden, held 254,915,142 ABB shares as of December 31, 2019 (refer to Investor’s year-end 2019 report available at https://www.investorab. com/investors-media/reports-presentations/). This holding represents approximately 11.8 percent of ABB’s total share capital and voting rights as registered in the Commercial Register on December 31, 2019. The number of shares held by Investor AB does not include shares held by Mr. Jacob Wallenberg, the chairman of Investor AB and a director of ABB, in his individual capacity. Cevian Capital II GP Limited, Jersey, disclosed that as of September 8, 2017, it held 115,868,333 ABB shares (refer to https://www.six-exchange -regulation.com/en/home/publications/ significant-shareholders.html#notification- Id=TBH9800020). This holding represents approx- imately 5.34 percent of ABB’s total share capital and voting rights as registered in the Commercial Register on December 31, 2019. https://www.six-exchange-regulation.com/en/ home/publications/significant-shareholders. html#notificationId=TAH91000F4). This holding represents 3.36 percent of ABB’s total share capital and voting rights as registered in the Commercial Register on December 31, 2019. Artisan Partners Limited Partnership, U.S., disclosed that as per April 10, 2019 it held 65,721,454 ABB Ltd shares (refer to https://www. six-exchange-regulation.com/en/home/ publications/significant-shareholders. html#notificationId=TAJ4C00035). This position represents approximately 3.03 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register on December 31, 2019. At December 31, 2019, 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. Announcements related to disclosure notifica- tions made by shareholders during 2019 can be found via the search facility on the platform of the Disclosure Office of the SIX Swiss Exchange: https://www.six-exchange-regulation.com/en/ home/publications/significant-shareholders.html. BlackRock Inc., U.S., disclosed that as of August 31, 2017, it, together with its direct and indirect subsidiaries, held 72,900,737 ABB shares (refer to Under ABB’s Articles of Incorporation (available at https://new.abb.com/about/events/ corporate-governance), each registered share A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 49 represents one vote. Significant shareholders do not have different voting rights. To our knowl- edge, we are not directly or indirectly owned or controlled by any government or by any other cor- poration or person. Shareholders’ rights Shareholders have the right to receive dividends, to vote and to execute such other rights as granted under Swiss law and the Articles of Incor- poration (available at https://new.abb.com/ about/events/corporate-governance). 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 busi- ness days before the general meeting in order to be entitled to vote. Except for the cases described under “Limitations on transferability of shares and nominee registration” below, there are no voting rights restrictions limiting ABB’s share- holders’ rights. Powers of General Meeting The Ordinary General Meeting of Shareholders must be held each year within 6 months after the close of the fiscal year of the Company; the busi- ness report, the compensation report and the Audi- tors’ reports must be made available for inspection by the shareholders at the place of incorporation of the Company by no later than 20 days prior to the meeting. Each shareholder 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 Incorporation • Election of the members of the Board of Directors, the Chairman of the Board of Directors, the 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 Committee pursuant to Article 34 of the Articles of Incorporation • Granting discharge to the members of the Board of Directors and the persons entrusted with management • Passing resolutions as to all matters reserved to the authority of the General Meeting by law or under the Articles of Incorporation or that are submitted to the General Meeting by the Board of Directors, subject to Article 716a of the Swiss Code of Obligations. Resolutions and elections at General Meetings Shareholders’ resolutions at general meetings are approved with an absolute majority of the votes represented at the meeting, except for those mat- ters described in Article 704 of the Swiss Code of Obligations and for resolutions with respect to restrictions on the exercise of the right to vote and the removal of such restrictions, which all re- quire the approval of two-thirds of the votes rep- resented at the meeting. At December 31, 2019, 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 re- tain 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 50 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 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 2 trading days after the shareholders’ resolu- tion and the ex-date for dividends is normally 2 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 5 years after the due date accrue to ABB Ltd and are allocated to its other reserves. As ABB Ltd pays cash dividends, if any, in Swiss francs (subject to the exception for certain share- holders in Sweden described below), exchange rate fluctuations will affect the U.S. dollar amounts re- ceived by holders of ADSs upon conversion of those cash dividends by Citibank, N.A., the deposi- tary, in accordance with the Amended and Re- stated 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 2019. The limitation on the transfer- ability of shares may be removed by an amend- ment of ABB’s Articles of Incorporation by a shareholders’ resolution requiring two-thirds of the votes represented at the 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 re- cord date. The record date serves only to deter- mine the right to vote at a General Meeting. 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 135 of the Swiss Act on Financial Market Infrastructures and Mar- ket Conduct in Securities and Derivatives Trading. A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 51 — Independent external auditors Duration of the mandate and term of office of the auditor On May 2, 2019, shareholders at the Annual Gen- eral Meeting of ABB Ltd, approved the appoint- ment of KPMG AG (KPMG) to be the auditors of the Company for the 2019 financial year. KPMG are the auditors of ABB’s statutory and consolidated financial statements. KPMG, Swit- zerland, assumed the sole auditing mandate of the consolidated financial statements of the ABB Group beginning in the year ended Decem- ber 31, 2018. The auditor in charge and responsi- ble 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 Articles of Incorporation (available at https://new. abb.com/about/events/corporate-governance), the term of office of ABB’s auditors is one year. Information to the Board and the Finance, Audit and Compliance Committee Supervisory and control instruments vis-à-vis the auditors Our auditors, KPMG, attend each meeting of the FACC and each meeting includes a private session between the auditors and the FACC without the management being present. In 2019, the FACC had 10 meetings (either in person or via telephone call). On at least an annual basis, the FACC reviews and discusses with the external auditors all significant relationships that the auditors have with the Com- pany that could impair their independence. The FACC reviews the auditor engagement letter and the audit plan including discussion of scope, staff- ing, locations and general audit approach. The FACC also reviews and evaluates the auditors’ judg- ment on the quality and appropriateness of the company’s accounting principles as applied in the financial reporting. In addition, the FACC approves in advance any non-audit services to be performed by the auditors. At least annually, the FACC obtains and reviews a re- port by the auditors that includes discussion on: • the company’s internal control procedures • material issues, if any, raised by the most recent internal quality control review • critical accounting policies and practices of the company • all alternative accounting treatments of financial information that were discussed between the auditors and management as well as the related ramifications • material communications between the auditors and management such as any management letter or schedule of audit differences. Taking into account the opinions of management the FACC evaluates the qualifications, indepen- dence and performance of the auditors. The FACC reports the material elements of its supervision of the auditors to the Board and on an annual basis recommends to the Board the auditors to be pro- posed for election at the shareholders meeting. Audit and additional fees paid to the auditor The audit fees charged by KPMG for the legally prescribed audit amounted to $37.5 million in 2019. Audit services are defined as the standard audit work performed each fiscal year necessary to allow the auditors to issue an opinion on the consolidated financial statements of ABB and to issue an opinion on the local statutory financial statements. This classification may also include services that can be provided only by the auditors, such as pre- issuance reviews of quarterly financial results and comfort letters delivered to underwriters in con- nection with debt and equity offerings. In addition, KPMG charged $1.2 million for non-audit services during 2019. Non-audit ser- vices include primarily agreed-upon procedure re- ports, accounting consultations, audits of pen- sion and benefit plans, accounting advisory services, other attest services related to financial reporting that are not required by statute or regu- lation, income tax and indirect tax compliance services and tax advisory services. In accordance with the requirements of the U.S. Sarbanes-Oxley Act of 2002 and rules issued by the SEC, ABB has, on a global basis, a process for the review and pre-approval of audit and non-audit services to be performed by KPMG. 52 52 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T — 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 Man- agement Incentive Plan may be subject to acceler- ated 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 de- tailed description of these incentive plans, please refer to “Note 18 – Share-based payment arrange- ments” 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 Standards and concluded that its corporate governance practices are generally consistent with the Standards, with the following significant exceptions: • Swiss law requires that the external auditors be elected by the shareholders at the Annual General Meeting rather than by the audit committee or the board of directors. • The Standards require that all equity 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 committed to communicating in a timely and consistent way to shareholders, potential investors, financial ana- lysts, customers, suppliers, the media and other interested parties. ABB is required to disseminate material information pertaining to its businesses in a manner that complies with its obligations un- der 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, products and services, corporate governance and executive compensation. ABB also submits an an- nual report on Form 20-F to the SEC. In addition, ABB publishes its results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the stock exchanges on which its shares are listed and traded. Press releases re- lating to financial results and material events are also filed with the SEC on Form 6-K. An archive containing annual reports, Form 20-F reports, quarterly results releases and related presenta- tions can be found in the “Financial results and presentations” section at https://www.abb.com/ investorrelations. The quarterly results press re- leases contain unaudited financial information prepared in accordance with or reconciled to U.S. GAAP. To subscribe to important press releases, please click on the “Contacts and Services” and choose “Subscribe to updates” at https://www. abb.com/investorrelations. Ad-hoc notices can also be found in the press releases section at https://www.abb.com/news compensation plans and material revisions thereto be approved by the shareholders. Consistent with Swiss law such matters are ABB’s official means of communication is the Swiss Official Gazette of Commerce (www.shab.ch). The invitation to the Company’s A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 53 • ABB Code of Conduct • Addendum to the ABB Code of Conduct for Members of the Board of Directors and the Executive Committee • Comparison of ABB’s corporate governance practices to the New York Stock Exchange rules • Summary of differences of shareholder rights under Swedish and Swiss law applicable to ABB • CVs of the Board members • CVs of the Executive Committee members ABB’s corporate calendar can be found at https://new.abb.com/investorrelations/ calendar-events-and-publications/ financial-calendar Annual General Meeting is sent to registered shareholders by mail. Inquiries may also be made to ABB Investor Relations: Affolternstrasse 44 CH-8050 Zurich, Switzerland Telephone: +41 43 317 7111 Fax: +41 44 311 9817 Email: 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 (available at https://new.abb.com/about/ events/corporate-governance). • Articles of Incorporation • ABB Ltd Board Regulations & Corporate Governance Guidelines which includes: – Regulations of the Finance, Audit and Compli- ance Committee – Regulations of the Governance and Nomina- tion Committee – Regulations of the Compensation Committee – Related Party Transaction Policy 54 A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T ABB interest % Share capital in thousands Currency 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 AUTOMACAO LTDA, SOROCABA ABB Ltda., São Paulo ABB Bulgaria EOOD, Sofia ABB Electrification Canada ULC, Edmonton, Alberta ABB Inc., Saint-Laurent, Quebec ABB (China) Ltd., Beijing ABB Beijing Drive Systems Co. Ltd., Beijing ABB Electrical Machines Ltd., Shanghai ABB Engineering (Shanghai) Ltd., Shanghai 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 B + R Industrie-Elektronik GmbH, Bad Homburg 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) Country Australia Australia Austria Austria Brazil Brazil Bulgaria Canada Canada China China China China China China China China Czech Republic Denmark Egypt Egypt Estonia Finland France France Germany Germany Germany Germany Germany Germany Germany Hungary India India Italy Italy 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 90.00 100.00 100.00 100.00 100.00 66.52 90.00 100.00 100.00 100.00 100.00 100.00 100.00 99.83 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 131,218 505,312 35 1,240 37,780 854,784 65,110 —(1) —(1) 235,000 5,000 14,400 40,000 6,500 15,800 29,500 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 7,500 358 1,535 3,000 190,000 75.00 423,817 100.00 100.00 110,000 22,000 ABB K.K., Tokyo ABB Ltd., Seoul Japan 100.00 1,000,000 Korea, Republic of 100.00 23,670,000 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 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 Electrical Industries Co. Ltd., Riyadh ABB Holdings Pte. Ltd., Singapore ABB Pte. Ltd., Singapore Mexico Mexico Mexico Netherlands Netherlands Netherlands Netherlands Norway Norway Poland Poland Poland Puerto Rico Russian Federation 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.93 99.93 99.93 100.00 100.00 315,134 633,368 667,686 9,200 1,000 20 119 134,550 240,000 24 328,125 245,461 — 5,686 Saudi Arabia 65.00 181,000 Singapore Singapore 100.00 100.00 32,797 28,842 AUD AUD EUR EUR BRL BRL BGN CAD CAD USD USD USD USD CNY USD USD USD CZK DKK EGP USD EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR HUF INR INR EUR EUR JPY KRW MXN MXN MXN EUR USD EUR EUR NOK NOK PLN PLN PLN USD RUB SAR SGD SGD A B B A N N U A L R E P O R T 2 0 1 9 0 2 C O R P O R AT E G O v E R N A N C E R E P O R T 55 Company name/location Country ABB interest % Share capital in thousands Currency ABB Holdings (Pty) Ltd., Modderfontein South Africa 100.00 4,050 ABB South Africa (Pty) Ltd., Modderfontein South Africa Asea Brown Boveri S.A., Madrid ABB AB, Västerås ABB Norden Holding AB, Västerås ABB Power Grids Sweden AB, Västerås ABB Asea Brown Boveri Ltd, Zurich ABB Capital AG, Zürich ABB Information Systems Ltd., Zurich ABB Investment Holding 2 GmbH, Zurich ABB Management Holding Ltd, 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 Enterprise Software Inc., Atlanta, GA 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. Spain Sweden Sweden Sweden 74.91 100.00 100.00 1 33,318 200,000 100.00 2,344,783 100.00 400,000 Switzerland 100.00 2,768,000 Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100 500 20 1,051 571 55,000 10,000 Thailand 100.00 1,034,000 Turkey 99.99 United Arab Emirates 49.00(2) United Kingdom United Kingdom United States United States United States United States United States United States United States United States United States United States 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 13,410 5,000 226,014 120,000 1 1 2 1 1 — 1 — — — ZAR ZAR EUR SEK SEK SEK CHF CHF CHF CHF CHF CHF CHF CHF THB TRY AED GBP GBP USD USD USD USD USD USD USD USD USD USD 03 Compensation report — 56 – 83 — 58 — 61 — 83 Letter from the Chairman of the Compensation Committee Compensation report Report of the statutory auditor on the compensation report 58 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T — 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 (‘the Report’) for 2019. Our Committee’s focus remains to ensure that the compensation structure at ABB drives value cre- ation for our shareholders, a motivating package for our executives and strives for best-practice corporate governance standards. I appreciated the opportunity to meet with many of our shareholders to discuss compensation mat- ters last year. During these meetings we discussed changes that could be made to our compensation structure to increase its shareholder alignment, market competitiveness and performance driven culture. Furthermore, we discussed ways in which we could simplify the presentation of the Report to create greater clarity for you, our stakeholders. As such, we have made changes to our com- pensation structure, with a particular focus on the short-term incentive (STI) plan, and have restructured the Report to clearly differentiate between our compensation policies and their implementation. Compensation policy changes Over recent years, ABB has steadily increased the performance orientation of its compensa- tion structure, with a special focus on variable compensation. The main consideration in making these changes has been to provide a performance linkage in every pay component while ensuring that total compensation levels remain market competitive. These changes have been carefully phased to allow for the same principles to be cas- caded throughout the organization. In this context, and in the light of feedback from shareholders and other stakeholders, our STI structure has been revised for 2020. The result is a better alignment with the new ABB operating model and an enhanced focus on operational delivery. measure (ROCE) to help create a greater focus on profitability and the efficiency with which capi- tal is used, tailored measures to better align with Business or functional priorities and an individu- al component which, for all Executive Committee (EC) members, will include safety performance. Note that, for 2020, the limited number of mea- sures applied to the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) will feature a free cash flow metric that includes the impact of non-operational charges, in order to reflect full accountability for cash performance and greater shareholder alignment. This AIP approach complements the recent re- design of the Long Term Incentive Plan (LTIP), where the previous two-component LTIP was merged into a single performance share grant, designed to make it simpler and completely performance-oriented. The LTIP has two equal- ly weighted performance measures, namely an average Earnings Per Share (EPS) measure in line with our Company strategy, and a relative Total Shareholder Return (TSR) measure to bring in the market competition perspective. For LTIP grants made as from 2019, the applica- tion of malus and clawback has been expanded from illegal activities to also cover a serious finan- cial misstatement of the Group’s accounts. This is designed to give the Board greater discretion to adjust the vesting of awards in line with Business and shareholder interests, and is more closely aligned to market practice. The Committee was also given the ability to suspend the payment of awards if it is likely that the Board could deter- mine that the malus or clawback provisions may potentially apply (e.g. if the employee is subject to an external investigation), in line with leading market practice. As a reminder, ABB’s executive shareholding re- quirement, already one of the highest in the mar- ket, was also recently strengthened to require our EC members to retain any shares vesting from our LTIPs until their respective requirement is met. The new plan, called the Annual Incentive Plan (AIP), is designed to create focus on key prior- ities. This will be achieved with a limited num- ber of measures linked to specific Business or functional needs. It has a common Group return Finally, we have taken the opportunity to review the compensation package for the CEO position, and adjusted the target short-term opportunity from 150 percent to 100 percent of annual base salary, and target long-term opportunity from A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 59 200 percent to 150 percent of annual base salary, to more closely represent competitive market practice. The revised compensation structure for the EC from 2020, its purpose and links to our strategy, are set out in the table below. Compensation structure Purpose and link to strategy Fixed compensation annual base salary and benefits Compensates EC members for the role Short-term incentive Long-term incentive Wealth at Risk/ Share Ownership 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 Aligns individual’s personal wealth at risk directly to the ABB share price Operation Cash salary, benefits in kind, and pension contribution Annual awards, payable in cash after a 1-year performance period Annual awards in shares which may vest after 3 years subject to performance conditions Individuals required to hold ABB shares Opportunity level (as % of annual base salary) Based on scope of responsibilities, individual experience and skillset Target: 100% Maximum: 150% CEO Target at grant: 150% Vesting: 0–300% EC Target at grant: 100% Vesting: 0–200% 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 annual base salary takes into account the executive’s performance in the preceding year and potential for the future All: Group ROCE (20–25%); Business/function measures, which may include, for example: Revenue, Op. EBITA %, Op. net income, OFCF (55–60%); All: individual objectives (20%) Relative TSR (50%) Average EPS (50%) Direct link to ABB share price Compensation policy implementation in 2019 and 2020 CEO compensation The Committee considered very carefully the com- pensation packages for both the newly appointed CEO, Björn Rosengren, and the interim CEO, Peter Voser, following the departure of the former CEO, Ulrich Spiesshofer, in 2019. The Committee has set the target total direct compensation for the newly appointed CEO nearly 22 percent lower than for the former CEO. This is derived by a reduction in target short-term and target long-term incentive opportunity, to more closely represent competitive market practice. The interim CEO, Peter Voser, receives a monthly payment equivalent to the same annual base salary and annual target STI as the former CEO. He does not receive any long-term incentive (LTI) grants or benefits, except legally required pension and social security contributions. This compensation is in addition to his fees as Chair- man, given he is currently performing both roles. Other appointments and departures The terms of departure from ABB of other EC members, including the General Counsel (GC) and Chief Human Resources Officer (CHRO), were as per their respective contractual arrangements. The Total Target Direct Compensation (TTDC) of replacement roles onto the EC in 2019 has, in each case, been lower than their respective predecessors. Compensation outcomes There were no changes in the fees for Board members for the roles they perform. The aggre- gate Board compensation for the 2019–2020 term was in line with the amount approved at the 2019 Annual General Meeting. Aggregate EC compensation was 29 percent higher in 2019 than in 2018, mainly influenced by the change in EC composition, which led to over- lapping payments for the CEO, CHRO and GC and replacement cash and share awards to the incom- ing GC. The terms of departure of the former CEO, Ulrich Spiesshofer, were as per his contractual arrangements. Further details are set out in the Implementation section of the Report. Four of the eleven EC members received a salary adjustment in 2019, which ranged from 1.9 percent to 11.1 percent, the latter being for an exceptional performance and market adjustment. 60 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T The STI in 2019, formulated to drive the achieve- ment of challenging annual performance targets, reflected an average achievement award of 94.7 percent for the EC, compared to 85.1 percent in 2018. The range of outcomes from individ- ual objectives ranged from 58.6 percent to 111.3 percent of target, reflecting the differen- tial achievement levels against the performance targets. The 2016 grant under the Long-Term Incentive Plan (LTIP) vested in 2019. The performance component, measured against demanding EPS targets, vested at 85 percent (out of a maximum of 200 percent), while the net income component vested fully, resulting in a weighted achievement of 92.5 percent of the target award. Disclosure and governance During the reporting year, our Committee lis- tened carefully to ideas and suggestions from our shareholders, and the main themes of this feed- back have been used to continue the evolution of ABB’s compensation system as described above, and to increase the clarity of our disclosures in the Report. In terms of disclosures, we have provided an overview of the compensation structure and its links to our strategy in this letter and we have also restructured the Report to clearly differentiate between our compensation policies and their implementation. Under the new Executive Committee Compensa- tion Policy, we have updated the description of our benchmarking comparators in the Compet- itive positioning of compensation section, and have outlined the changes to the compensation structure for the new CEO, the new approaches adopted for our STI plan, and the changes to our LTIPs. The new Implementation of Executive Compensation Policy section includes an exhibit with an enhanced tabular presentation of the STI outcomes, an advance disclosure on the STI measures for the CEO, the terms of appointment of the new CEO, and the terms of departure of the former CEO. During 2019, in addition to reviewing the terms of appointment and departure for members of the EC, the Compensation Committee performed its regular activities, including recommending performance targets to the Board which impact variable compensation, recommending the compensation of ABB’s Board, CEO and EC mem- bers, formulating the compensation report, and preparing the “say-on-pay” vote at the Annual General Meeting (AGM). You will find further information on our activities and on ABB’s com- pensation system and governance in the following pages. At the AGM in March 2020, you will be asked to vote on the maximum aggregate compensation for the Board for its 2020–2021 term and on the maximum aggregate compensation for the EC for 2021. As signaled in last year’s Report, the number of EC members has decreased due to the elimination of the legacy matrix structure, which has led to a reduction in the maximum aggregate compensation requested for approval by share- holders. This compensation report will also be submitted for a non-binding, consultative vote by shareholders. We encourage and pursue an open and regular dialogue with all of our stakeholders. Your con- structive input is highly valued and appreciated as we continue 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 sup- portive feedback regarding our compensation framework. David E. Constable Chairman of the Compensation Committee Zurich, February 25, 2020 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 61 — Compensation report Compensation governance Shareholder engagement ABB’s Articles of Incorporation, approved by its shareholders, contain provisions on compensa- tion which govern and outline the principles of compensation relating to our Board and EC. They can be found on ABB’s Corporate governance web- site 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 Directors who are elected individually by the shareholders at the Annual General Meeting (AGM) for a period 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): Compensation 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 compensation 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 approve the maximum aggregate amount of compensation of the Board for the following Board term and of the EC for the following financial year. 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 members Shareholding requirements CEO and EC members Maximum aggregate compensation amount Board Individual compensation Board members Compensation report Proposal Recommendation Approval • 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 maximum approved aggregate amount shall be available as a supplementary amount to cover the compensation 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 new Compensation Policy sections of this Report describe the compensation policies and programs as well as the governance framework related to the compensation of the Board and EC. The new Compensation Implementation sections of this Report provide details of the compensa- tion paid to the members of the Board and of the EC in the prior calendar year. The compensation report is prepared in accor- dance with the Ordinance against Excessive Remuneration in Listed Stock Corporations (Ordinance), the Directive on Information relating to Corporate Governance of the SIX Exchange Regulation, the rules of the stock markets of Sweden and the United States where ABB’s shares are also listed, and the principles of the Swiss Code of Best Practice for Corporate Governance of economiesuisse. Authority levels in compensation matters The CC acts in an advisory capacity while the Board retains the decision authority on com- pensation matters, except for the maximum aggregate compensation 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. CEO CC Board AGM Consultative vote 62 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Activities of the CC in 2019 The CC meets as often as business requires but at least four times a year. In 2019, 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 section titled “Board of Directors – Meetings and attendance” of the Corporate Governance Report. 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. The CC retains independent, external advi- sors for compensation matters. In 2019, PricewaterhouseCoopers (PwC) were mandated to provide services related to executive compen- sation matters. Apart from its CC advisory role, PwC also provides human resources, tax and advisory services to ABB. The CEO, the CHRO and the Head of Performance and Reward also attend all or 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. Exec- utives do not attend the meetings or the parts of the meetings in which their own compensation and/or performance are being discussed. Exhibit 2: CC activities during 2019 EC Compensation Review of benchmark data and recommendations on individual compensation for EC members Review of the share ownership of EC members Review and approval of compensation for new and departing EC members (including foregone benefits) Performance – relating to past performance cycle Assessment of STI for 2018 Assessment of achievement of performance targets for LTIP awards vesting in 2019 Performance – relating to forthcoming performance cycle Setting of STI targets for 2019 and 2020 Setting of performance targets for LTIP awards granted in 2019 Review impact of Power Grids joint venture on LTIP targets Updates on achievement against performance targets for 2019 STI and unvested LTIP awards Compliance Review of the LTIP rules Review of feedback from Investor Engagement meetings Regulatory and market updates 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 Board compensation policy Overview 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 respon- sibilities, 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 (i.e. Credit Suisse Group, Geberit, Givaudan, Lafarge Holcim, Nestlé, Novartis, Richemont, Roche, SGS, Swatch, Swiss Re, Swisscom and UBS). 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 accordance with Swiss law, Board members may not receive ‘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 receive all of their compensation in shares. The number of shares delivered is calculated prior to each semi-annual payment by dividing the mon- etary amount to which the Board members are entitled by the average closing price of the ABB share over a predefined 30-day period. The shares are subject to a three-year restriction period during which they cannot be sold, transferred or pledged. Any restricted shares are unblocked when the Board member leaves the Board. A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 63 Structure of Board compensation The structure of Board compensation for the term of office from the 2019 AGM to the 2020 AGM is described in Exhibit 3 below. Shareholdings of Board members The members of the Board collectively owned less than 1 percent of ABB’s total shares outstanding at December 31, 2019. Exhibit 25 in the section “Compensation and share ownership tables” below, shows the number of ABB shares held by each Board member at December 31, 2019 and 2018. Except as described in this Exhibit, no member of the Board and no person closely linked to a member of the Board held any shares of ABB or options in ABB shares. In 2019, ABB did not pay any fees or compensa- tion to the members of the Board for services rendered to ABB other than those disclosed in this Report. Except as disclosed in the section titled “Board of Directors – Business relationships between ABB and its Board members” above, 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 2019, no payment was made to any former Board member. Executive Committee compensation policy Overview ABB’s compensation system reflects its commit- ment to attract, motivate and retain people with the talent necessary to strengthen ABB’s position as a pioneering technology leader in electrifica- tion, industrial automation, motion, robotics & discrete automation, and power grids, serving customers in utilities, industry and transport & infrastructure globally. The compensation system is designed to provide competitive compensation and to encourage executives and employees to deliver outstanding results and create sustainable shareholder value without taking excessive risks. The compensation system balances: • fixed and variable compensation; • short-term and long-term incentives; • the recognition of Group, business and individual performance. Exhibit 3: Structure of Board compensation (and current fees) 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) Board term fee (CHF) 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 addi- tional 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 2019 and for the term of office from the 2019 AGM to the 2020 AGM are disclosed in Exhibits 23 and 24, respectively, in the section “Compensation and share ownership tables”. Implementation of Board compensation policy At the 2019 AGM, the shareholders approved a maximum aggregate compensation amount of CHF 4.70 million for the 2019–2020 Board term, the same as was approved for the previous Board term. The compensation agreed to be paid for that period amounts to CHF 4.67 million, unchanged from the amount paid for the previous Board term. The Board compensation is therefore within the amount approved by the shareholders. See Exhibit 4 below and Exhibit 24 in the section “Compensation and share ownership tables”. The Board compensation paid during the calendar year 2019 was slightly higher than the compen- sation paid during 2018. This was a result of the smaller Board size in the first part of 2018. See Exhibit 23 in the section “Compensation and share ownership tables”. Exhibit 4: Board compensation (in CHF) Board term Board of Directors 2019–2020 2018–2019 Number of members Total compensation 11 11 4,670,000 4,670,000 Maximum aggregate compensation amount approved at AGM 4,700,000 4,700,000 64 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Exhibit 5: Structure of EC compensation as from 2020 Fixed compensation – annual base salary Compensation structure and benefits Short-term incentive Long-term incentive Purpose and link to strategy Compensates EC members for the role 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 Operation Cash salary, benefits in kind, and pension contribution Annual awards, payable in cash after a 1-year performance period Opportunity level (as % of annual base salary) Based on scope of responsibilities, individual experience and skillset Target: 100% Maximum: 150% Annual awards in shares which may vest after 3 years subject to performance conditions CEO Target at grant: 150% Vesting: 0–300% EC Target at grant: 100% Vesting: 0–200% Wealth at Risk/ Share Ownership Aligns individual’s personal wealth at risk directly to the ABB share price Individuals required to hold ABB shares CEO wealth at risk: 500% (net) EC wealth at risk: 400% (net) Time period Delivered in year 1 year 3 years Total EC tenure Relative TSR (50%) Average EPS (50%) Direct link to ABB share price Performance measures Changes to annual base salary takes into account the executive’s performance in the preceding year and potential for the future All: Group ROCE (20–25%); Business/function measures, which may include, for example: Revenue, Op. EBITA %, Op. net income, OFCF (55–60%); All: individual objectives (20%) Exhibit 6: Compensation components under various scenarios e v i t n e c n i m r e t - t r o h s d n a d e x i F e v i t n e c n i m r e t - g n o L Minimum Target Maximum 100% 100% 100% Annual base salary and benefits Short-term incentive award 0% 150% 100% 100% 87.5% 112.5% Conditional grant allocation(1) Annual 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%(2). 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. (2) This is not applicable to the CEO. 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. A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 65 Compensation structure – overview The structure for EC members consists of an annual base salary, a STI based on annual per- formance targets, a LTI based on three-year performance targets, and benefits. This structure is linked to our strategy and, as illustrated in Exhibits 5 and 6, a significant por- tion of total compensation depends on variable pay components which require the achievement of challenging performance targets. From 2020, the STI opportunity for the CEO has been aligned to the rest of the EC, moving from a target of 150 percent and a maximum of 225 per- cent of annual base salary in 2019, to a target of 100 percent and a maximum of 150 percent of annual base salary in 2020. In addition, to better align with competitive market practice, the LTI opportunity has been moved from a target of 200 percent and a maximum of 400 percent of annual base salary in 2019 to a target of 150 per- cent and a maximum of 300 percent of annual base salary in 2020. Competitive positioning of compensation The Board considers competitive market data when setting the compensation policy for the EC. This led to the downward adjustment of the target and maximum compensation for the CEO position from 2020 as described above. It is also one of several factors in positioning the target compensation for individual EC members which include: • market value of the role (external benchmarking); • individual profile of the incumbent in terms of experience and skills; • individual performance and potential; • affordability for the Company. The primary source of competitive market data used to assess the EC compensation is the gen- eral Pan-European Market. The EC compensation is benchmarked between the median to upper quartile of competitive market data. Compari- sons are also made against Swiss and U.S. peers, as well as a global industry peer group (see Exhibit 7). Exhibit 7: Compensation benchmarking Reference Composition Rationale Main benchmark General Pan-European Market Continuity and stability of data points 399 largest European companies, of the FT Europe 500 listing. Represents companies in 20 countries and 16 different industries. The market cap of the companies represent a range from EUR 5 billion to EUR 217 billion References to stress-test main benchmark Global industry group Peer companies(1) selected based on business, geographic presence and size Swiss market SMI and SMIM companies that are included in Hay’s General Pan-European Market data(2) U.S. market U.S. peers of similar size and industry(3) Specific peer group to benchmark compensa- tion design Comparison with other multinational Swiss com- panies Comparison with other multinational U.S. compa- nies (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. (2) Credit Suisse Group, Geberit, Givaudan, Julius Baer, Lafarge Holcim, Nestlé, Novartis, Richemont, Roche, SGS, Swatch, Swiss Re, Swisscom and UBS. (3) 3M, Boeing, Caterpillar, Danaher, Deer & Co., Eaton, Emerson Electric, General Dynamics, General Electric, Honeywell, Johnson Controls, Lockheed Martin and United Technologies. Compensation elements – overview Fixed compensation – annual base salary and benefits Purpose and link to strategy • Compensates the EC members for the role. Operation • Fixed annual base salary and benefits. • Benefits consist mainly of retirement, insurance and healthcare plans that are designed to provide a reasonable level of support for the employees and their dependents in case of retirement, disability or death. Benefit plans vary in line with the local competitive and legal environment and are, at a minimum, in accordance with the legal requirements of the respective country. • 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. 66 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Opportunity level • Annual base salary based on the scope of responsibilities, individual experience and skill set. • The monetary value of benefits is disclosed in Exhibit 26: EC compensation in 2019. Performance measures • When considering changes in annual base salary, the executive’s performance during the preceding year against individual objectives as well as potential for the future are taken into account. Short-term incentive Purpose and link to strategy • The STI is designed to reward EC members for the Group’s results, the results of their business or function and their individual performance over a time horizon of one year. Operation • Annual cash awards based on performance assessment over the given year. Opportunity levels Exhibit 8: Opportunity level (% of annual base salary) CEO(1) EC Target Maximum 100% 100% 150% 150% (1) From 2020, the STI opportunity for the CEO has been aligned to the rest of the EC, lowering the target from 150 percent and the maximum from 225 percent of annual base salary in 2019, in order to more closely represent competitive market practice. Performance measures • The STI structure has been revised for 2020 in the light of feedback from shareholders and other stakeholders, the new ABB operating model, and to further increase the focus on operational delivery and underpin our performance culture. • The new Plan, called the 2020 Annual Incentive Plan (AIP), is designed to create focus on key priorities, with a maximum of five measures, compared to up to twelve measures under the prior plan. • All members of the EC have a common Group return measure (ROCE), with a 20 percent to 25 percent weighting. This is to help create a greater focus on profitability and the efficiency with which capital is used. • Up to three measures will be linked to specific business or functional needs, rather than having largely common measures for all EC members. • The remaining measure, with a 20 percent weighting, will be an individual component informed by a limited number of KPIs which, for all EC members, will include safety performance. • For each performance measure, a target is set corresponding to the expected level of performance that will generate a target (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 threshold, target and Exhibit 9: 2020 Annual Incentive Plan for CEO – Measures and Weightings Measure Weighting (total 100%) Description Link to Strategy Group ROCE % 25.00% Group Revenues 10.00% Group Operational EBITA % 25.00% Group FCF (Free cash flow) 20.00% Individual Measure 20.00% Operational EBITA after tax divided by the average of the period’s opening and closing Capital employed, adjusted (as needed) to reflect impacts from significant acquisitions/ divestments occurring during the same period) Introduction of ROCE reflects the strong focus on delivering high return on capital employed in both business operations and corporate portfolio management Revenues 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 – Operating segment and geographic data” 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 Cash generated by the Company that can either be distributed to the shareholders (e.g. as dividends or share buy-backs), used to reduce debt (e.g. pay back bank loans or repurchase bonds) or spent on acquisitions Linked to a maximum of three KPIs, which will include safety improvement targets for the Total Recordable Incident Frequency Rate (TRIFR). This is defined as the number of recordable incidents (fatal, serious injury, lost time, restricted work day case, medical treatment incidents and occupational diseases) × 200,000 / work hours (employees + contractors) Focus on value enhancing revenue streams and therefore decreasing the weighting on Group Revenues compared to 2019 Increased weighting on Group Operational EBITA to focus on strategic execution and improving margin, resulting in a strong bottom line Operating cash flow has been replaced with free cash flow to better focus on cash available to return to shareholders Reflecting importance of safety agenda in keeping with the commitment to achieve excellence in health, safety and the environment at ABB A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 67 the cap are determined by linear interpolations between these points. • An illustration of the measures to be applied to the CEO for 2020 is set out in Exhibit 9. Note that the definition of free cash flow includes the impact of non-operational charges to reflect full accountability for cash performance and greater shareholder alignment. This principle will also be applied to the CFO. Also note that outcomes may be subject to appropriate adjustments (e.g. formulaic safety outcomes may be adjusted to reflect overall safety performance). Long-term incentive 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. Operation • Annual Conditional Grant under the LTIP. • Reference grant values are defined as a percentage of annual base salary. Exhibit 10: Reference grant value (% of annual base salary) CEO EC EPS measure TSR measure 75% 50% 75% 50% Total 150% 100% • The reference value for the grant size for EC members as a pool may be increased or decreased by the Board by up to 12.5 percent. This does not apply to the CEO. • The number of shares to be granted is determined by dividing the reference value by the average 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 conditions, 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 performance measures section below). • Delivery is 65 percent in shares and the remainder 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. This means that the Board of Directors may decide not to pay any unpaid or unvested incentive compensation (malus), or may seek to recover incentive compensation that has been paid in the past (clawback). • For awards from 2019, malus and clawback is expanded from illegal activities to cover a serious financial misstatement of the Group’s accounts. This to give the Board greater discretion to adjust the vesting of awards in line with business and shareholder interests and is more closely aligned to market practice. • The Committee also has the ability to suspend the payment of awards if it is likely that the Board determines that the malus or clawback provisions may potentially apply (e.g. if the employee is subject to an external investigation), in line with leading market practice. Performance measures TSR • Achievement against this measure is determined by ABB’s relative TSR performance against a defined peer group. • The constituents of the peer group and the appropriate 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 evaluation is performed by an independent third party. EPS • Achievement against this measure is determined by ABB’s average EPS over a three-year period. • The average EPS result is calculated from the EPS for each of the three relevant years, divided by three. • EPS is defined as ‘Diluted earnings per share attributable to ABB shareholders, calculated using Income from continuing operations, net of taxes, unless the Board elects to calculate using Net Income for a particular year’. • Appropriate threshold (zero), target (100 percent) and maximum (200 percent) award points are reviewed by the CC on an annual basis. • Performance target points are set using an ‘outside-in’ view, taking into account the growth expectations, risk profile, investment levels and profitability levels that are typical for the industry. • 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. 68 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Exhibit 11: Share ownership requirement CEO 5 × annual base salary, net of tax Base salaries Pension benefits Other benefits Other EC members 4 × annual base salary, net of tax Total fixed 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 components – namely personal share ownership and unvested shares arising from the Company’s share grants (e.g. LTIPs). Share ownership program • EC members are required to retain all shares vested from the Company’s LTIP program 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 11 below). • These shareholding requirements are significantly above market practice and result in a wealth at risk for each EC member which is aligned with shareholder interests. • Only shares owned by an EC member and the member’s spouse are included in the share ownership calculation. Vested and unvested stock options are not considered for this purpose. • The CC reviews the status of EC share ownership on an annual basis. It also reviews the required shareholding amounts annually, based on salary and expected share price developments. • 5 out of 11 EC members have achieved and exceeded their share ownership requirement. 3 EC members have just been newly appointed to the EC in 2019. See Exhibits 30 and 31 for further details. Notice period, severance provisions and non-competition clauses Operation • Employment contracts for EC members include a notice period of 12 months, during which they are entitled to their annual base salary, benefits and STI. In accordance with Swiss law and ABB’s Articles of Incorporation, the contracts for the EC members do not allow for any severance payment. • 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. Implementation of 2019 executive compensation policy Overview EC members received total compensation of CHF 51.4 million in 2019 compared with CHF 39.8 million in 2018, as summarized in Exhib- it 12 below and presented in detail in Exhibits 26 and 27. The increase in total compensation in 2019 was principally due to the change of 3 EC members (the CEO, the GC and the CHRO) plus the addition of one EC member to lead the Motion Business, which was spun off from the former Robotics divi- sion. Further details are provided in the footnote to Exhibit 13 below. Exhibit 12: Total compensation of EC members (in CHF millions) 2019 12.1 5.5 6.9 24.5 12.7 12.6 1.6 26.9 51.4 2018 9.9 4.7 5.5 20.1 9.1 10.6 0.0 19.7 39.8 Short-term incentive (fair value at grant) Long-term incentive Replacement share grant Total variable compensation Total compensation For an overview of compensation by individual and component, please refer to Exhibit 26 and Exhibit 27 in “Compensation and share ownership tables” below. At the 2018 AGM, the shareholders approved a maximum aggregate compensation amount of CHF 52 million for the EC for the year 2019. The EC compensation for 2019 amounted to CHF 51.4 million and is within the approved amount. See Exhibit 13 below. Exhibit 13: EC compensation (in CHF) Executive Committee Number of members Calendar year 2019 11 2018 11 Total compensation 51,355,121(1) 39,773,211 Maximum aggregate compensation amount approved at AGM 52,000,000 52,000,000 (1) This amount includes CHF 1.6 million for the grant fair value of the replacement share grant provided to the incoming GC and CHF 0.5 million representing 10 months of a lost STI award, to compensate for benefits foregone from her previous employer. It also includes another CHF 8.7 million representing the additional cost related to the overlap in EC positions due the departure of 3 EC members plus the addition of one EC member to lead the Motion Business. Excluding these effects, the total would have been CHF 40.6 million. Overall positioning of compensation The ratio of fixed to variable components in any given year depends on the performance of the A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 69 Company and individual EC members against predefined performance objectives. In 2019, the outgoing CEO’s variable compensa- tion was 52 percent of his total compensation (previous year: 61 percent) which is the direct result of the absence of an LTI grant. For the other EC members the variable compensation repre- sented an average of 45 percent (previous year: 46 percent). Changes to CEO compensation structure The compensation structure and levels for the CEO were changed during 2019, to reflect the appointment of an interim CEO, and will change again in 2020 to reflect the newly appointed CEO. This is summarized in Exhibit 14. The interim CEO, Peter Voser, receives a monthly payment equivalent to the same annual base salary and annual target STI as the former CEO. He does not receive any LTI grants or benefits, except legally required pension and social secu- rity contributions, as specified in Exhibit 26. This compensation is in addition to his fees as Chair- man, given he is currently performing both roles. Exhibit 14: CEO Total Annual Direct Compensation overview (in CHF) Annual Total Direct Compensation at target level Annual Total Direct Compensation at maximum opportunity level Annual Base Salary (ABS) Ulrich Spiesshofer Peter Voser(1) Björn Rosengren(2) 7,582,500 4,212,500 5,950,000 12,216,250 4,212,500 9,350,000 1,685,000 1,685,000 1,700,000 Short-term Incentive (STI) Target STI 2,527,500 2,527,500 1,700,000 Target STI as % of ABS Maximum STI opportunity Maximum STI opportunity as a % of ABS 150% 150%(3) 100% 3,791,250 N/A 2,550,000 225% N/A 150% Long-term Incentive (LTI) Target LTI 3,370,000 N/A 2,550,000 Target LTI as % of ABS Maximum LTI opportunity Maximum LTI opportunity as a % of ABS 200% N/A 150% 6,740,000 N/A 5,100,000 400% N/A 300% (1) In addition to the compensation for the interim CEO position, Peter Voser received payments related to his Board membership. See Exhibit 23. (2) Björn Rosengren will receive, at the time joining ABB, a one-time replacement share grant representing 149,054 ABB shares, to compensate for his foregone Sandvik shares. (3) STI is guaranteed at target level and paid monthly. Terms of appointment for Chief Executive Officer As noted in the Compensation Committee Chair- man’s letter, the compensation package for the incoming CEO, Björn Rosengren, constitutes a 21.5 percent reduction in TTDC compared to that of Ulrich Spiesshofer. This is driven by reducing the target STI from 150 percent to 100 percent of annual base salary and the target LTI from 200 percent to 150 percent of annual base salary. In addition, the Company will not be required to provide compensation for any contractually agreed one year non-compete period, following his employment with the Company. He will receive standard EC benefits, including membership in the ABB Global Retirement Sav- ings Plan. He will receive standard relocation support commensurate with a senior executive transfer to Switzerland, including temporary accommodation. There will be no ongoing hous- ing allowance payments, again consistent with senior executives in Switzerland. The Company will replace his forfeited, unvested LTI awards from 2017 to 2019, with a one-time replacement share grant, representing 149,054 ABB shares. The first tranche of this award, representing 130,150 ABB shares, will vest two years after grant and the second tranche of the award, representing 18,904 shares, will vest three years after grant. This award is subject to certain forfeiture clauses (e.g. employee giving notice of termination before vesting of awards). Terms of appointment for other Executive Committee members The President, Motion Business, Morten Wierod, was appointed to the EC on April 1, 2019, with an annual base salary of CHF 700,000, a target short-term and long-term incentive each of 100 percent of annual base salary, leading to a TTDC of CHF 2,100,000. He is eligible for standard EC benefits. The CHRO, Sylvia Hill, was appointed to the EC on June 1, 2019, with an annual base salary of CHF 700,000, a target short-term and long-term incentive each of 100 percent of annual base salary, leading to a TTDC of CHF 2,100,000. This represents a reduction in TTDC compared to the prior incumbent. She is eligible for standard EC benefits. The GC, Maria Varsellona, was appointed to the EC on November 1, 2019, with an annual base salary of CHF 800,000, a target short-term and long-term incentive each of 100 percent of annual base salary, leading to a TTDC of CHF 2,400,000. This represents a reduction in TTDC compared to the prior incumbent. She is eligible for standard 70 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T EC benefits and received standard relocation support commensurate with a senior executive transfer to Switzerland, including temporary accommodation. Maria Varsellona is eligible to receive compensa- tion of CHF 0.5 million for 10 months of forfeited STI, representing the time served with her former employer in 2019, payable at the time of payment of the STI award to other EC members in 2020. This payment is subject to forfeiture clauses (e.g. employee giving notice of termination within 12 months of starting employment with ABB). The Company has replaced her forfeited unvested LTI awards from her former employer, with a one-time ABB share grant representing a value of CHF 1.6 million. The foregone LTI awards have been valued applying a discount factor of 42 per- cent. The award will vest in two equal tranches, the first two years, and the second three years after the date of grant. Each tranche is subject to certain forfeiture clauses (e.g. employee giving notice of termination before vesting of awards). Compensation elements – overview Annual base salary In 2019, four out of eleven EC members received an adjustment of annual base salary, which ranged from 1.9 percent to 11.1 percent, the latter being for an exceptional performance and market adjustment. 2019 Short-term incentive – design STI awards were set in 2019 under the previous Incentive Plan. This has been redesigned for 2020, as described in the Executive Committee Com- pensation Policy. Awards for all EC members were subject to the achievement of common Group objectives, as set out in Exhibit 15. These Group objectives were complemented by individual objectives by EC member. For Busi- ness and Regional Presidents, the majority were quantifiable objectives based on financial and operational metrics for their area of responsibil- ity; for the CEO and Corporate Officers, they are typically strategic objectives set by the Board. Examples of quantitative individual measures included items such as Business or Regional Rev- enue, Operational EBITA Margin, Operating cash flow, Demand Orders and safety. Qualitative indi- vidual metrics include items such as the creation of the new ABB operating model, internal controls and functional effectiveness. For each performance objective (Group and Individual), a target was set corresponding to the expected 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), were 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 16. The majority of objectives for all EC members are quantitative in nature. Exhibit 15: Group objectives and weighting in 2019 Objective Revenues Weighting Description 25% Income realized from executing and fulfilling customer orders, before any costs or expenses are deducted Operational EBITA margin 15% Operational EBITA margin is Operational EBITA (as defined in “Note 23 – Operating segment and geographic data” 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 Operating cash flow (OCF) Operational net income (ONC) Cost savings 30% Operating cash flow is defined as the net cash provided by operating activities, reversing the cash impact of interest, taxes and restructuring-related activities 15% 15% Operational net income is calculated as net income attributable to ABB after adjustments(1) 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, related and implementation cost, non-operational pension cost (credit), changes in obligations related to divested businesses, changes in pre-acquisition estimates, gains and losses from sale of businesses (including fair value adjustment on assets and liabilities held for sale), acquisition- and divestment-related expenses and integration costs, certain other non-operational items and foreign exchange/commodity timing differ- ences in income from operations, as well as certain other non-operational amounts recorded within Provision for taxes. A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 71 Exhibit 16: Weighting and composition of objectives for EC members for 2019 Exhibit 17: ‘At a Glance’ STI 2019 outcomes (rounded, with 2018 comparisons) Group objectives Individual objectives CEO 80% 20% Typical composition of objectives: Qualitative Quantitative 20% 80% (1) CFO, CHRO and GC. Business and Region Presidents Corporate Officers(1) 2019 (% of target) 2018 (% of target) 35% 65% 10% 90% Group Objectives 35% Revenues Op EBITA % 65% 35% 65% Operational Cash Flow Operational Net Income Cost savings Overall Group Result EC Individual Objectives 89% 83% 93% 79% 149% 97% 99% 81% 57% 83% 150% 86% 2019 Short-term incentive – outcomes In 2019, the achievement against most objectives were below the challenging targets set by the Board. The award under the Revenue measure, with a weighting of 25 percent, amounted to 89.1 percent of target (2018: 99.3 percent). The award under Operating cash flow, with a weighting of 30 percent, was 93.1 percent of target, an improvement against 2018, where the award amounted to 56.6 percent of target. Operational EBITA margin and Operational net income, both with a weighting of 15 percent, led to awards of 82.8 percent and 79.4 percent, respectively, compared to the prior year of 81.1 percent and 82.6 percent, respectively. The Group continues to deliver very strong oper- ational Cost savings, which were above target. The Cost savings parameter, weighted at 15 per- cent, achieved a 149.0 percent award (2018: 150.0 percent). The combined achievement of these perfor- mance measures resulted in a 96.9 percent (2018: 85.5 percent) achievement level at the Group level in 2019. With respect to individual/team objectives for each EC member, the achievement ranges between 58.6 percent to 111.3 percent of target, reflecting the financial results of their respective areas of responsibility as well as their achievements on operational performance, strategic initiatives and leadership performance. This compared to a range of 35.5 percent to 112.0 percent in 2018. The overall average award of STI for the entire EC was 94.7 percent of target (2018: 85.1 per- cent) with a range from 72.0 percent (lowest achievement) to 106.2 percent of target (high- est achievement). This compared to a range of 52.3 percent to 102.4 percent in 2018. These outcomes are summarized in Exhibit 17. Range of outcomes 58.6%–111.3% 35.5%–112.0% Average 93% 88% Combined Overall Group Result and EC Individual Objectives Range of outcomes 72.0%–106.2% 52.3%–102.4% Overall Average 95% 85% 2019 Long-term incentive The estimated value at grant of the share-based grants to EC members under the 2019 LTIP award was CHF 12.6 million, compared with CHF 10.6 mil- lion in 2018. The 2019 LTIP comprises of two equally weighted performance factors, a three year average EPS and relative TSR, designed to be fully aligned with our strategy, which focuses on EPS delivery and attractive shareholder returns, both on an abso- lute and relative basis. The companies approved by the Board to deter- mine ABB’s relative TSR performance for the 2019 LTIP were: 3M, Danaher, Eaton, Emerson Electric, Honeywell, United Technologies, General Electric, Rockwell, Rolls Royce, Schneider Electric, Siemens, ThyssenKrupp, Legrand, Yokogawa and Mitsubishi Electric. These were selected to pro- vide an appropriate and very challenging set of peers, and influenced the payment point setting accordingly (see Exhibit 18). The 2019 LTIP award curves are also illustrated in Exhibit 18. The EPS performance target for vesting LTIP awards will be retrospectively disclosed in future ABB compensation reports. 2016 LTIP outcome The 2016 LTIP, which vested in 2019, was com- prised of two measures – P1 (net income) and P2 (cumulative weighted EPS) measures. The net income measure fully vested at 100 per- cent, same as in previous year. The cumulative weighted EPS measure vested at 85 percent (previous year: 61 percent) out of a potential 200 percent. 72 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Exhibit 18: 2019 LTIP Targets EPS award curve for the 2019 LTIP ) t e g r a t f o % ( d r a w A 200% 100% 0% Capped award Threshold Point (Target Point −25%) Target Point Maximum Point (Target Point +25%) 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 2019 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. Historical vesting outcomes The historical vesting percentages for the prior five years are shown in Exhibit 19 below. Exhibit 19: LTIP historical actual vesting percentages(1) Plan Year of Award 2012 2013 2014 2015 2016 80.4% 77.2% 74.8% 80.5% 92.5% 57.4% 55.1% 53.4% 53.7% 61.7% Vesting in % of target award Vesting in % of maximum potential award (1) Average of P1 and P2 components. Shareholdings of EC members The EC members owned collectively less than 1 percent of ABB’s total shares outstanding at December 31, 2019. At December 31, 2019, members of the EC held ABB shares and conditional rights to receive shares, as shown in Exhibit 30 in the section “Compensation and share ownership tables” below. Their holdings at December 31, 2018, are shown in Exhibit 31 in the section “Compensation and share ownership tables” below. Members of the EC cannot participate in the Management 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” in our Consolidated Financial Statements. Except as described in Exhibits 30 and 31, no member of the EC and no person closely linked to a member of the EC held any shares of ABB or options on ABB shares at December 31, 2019 and 2018. Other compensation Members of the EC are eligible to participate in the Employee Share Acquisition Plan (ESAP), a savings plan based on stock options, which is open to employees around the world. Four mem- bers of the EC participated in the 16th annual launch of the plan in 2019. EC members who participated will, upon vesting, each be entitled to acquire up to 480 ABB shares at CHF 20.78 per share, the market share price at the start of the 2019 launch. A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 73 For a more detailed description of the ESAP, please refer to “Note 18 – Share-based payment arrangements” in our Consolidated Financial Statements. In 2019, ABB did not pay any fees or compen- sation to the members of the EC for services rendered to ABB other than those disclosed in this compensation report. Except as disclosed in the section titled “Board of Directors – Business relations between ABB and its EC members” in the Corporate Governance Report, ABB did not pay any additional fees or compensation in 2019 to persons closely linked to a member of the EC for services rendered to ABB. Terms of departure for former Chief Executive Officer The terms of departure of the former CEO, Ulrich Spiesshofer, were as per his existing contractual arrangements. He continues to receive annual base salary and benefits during his 12 months’ notice period until April 30, 2020. He will receive a STI payment for 2019, and a pro-rata payment until the end of his notice period in 2020, based on the average STI award percentages achieved in 2017 and 2018, at the time it is paid to the Company’s EC members. As per his contract, Ulrich Spiesshofer is subject to non-competition obligations, which will be effective from the end of his notice period, i.e. from May 1, 2020 to April 30, 2021. During this time, he will receive 12 monthly payments equiva- lent to his last annual base salary and the average of STI award percentages made in 2017 and 2018. Outstanding and unvested LTI grants made for the years 2017–2019 will vest, according to the normal vesting schedule, subject to achievement against the relevant performance conditions. The indicative total costs are summarized in Exhibit 20. Exhibit 20: Indicative cost of departure arrangements for former CEO (in CHF) Notice Period May 1, 2019 – April 30, 2020 1,685,000 2,249,475 2,967,911 Non-compete Period May 1, 2020 – April 30, 2021 1,685,000 2,249,475 N/A 6,902,386 3,934,475 639,222 1,033,613 8,575,221 N/A 540,000 4,474,475 ABS STI LTI Grant Total Direct Compensation Pension Other Benefits(1) Total Compensation (1) These are indicative values mainly representing mandatory social security payments and school fees. Actual figures which will be disclosed in future ABB compensation reports may deviate, depending on the final value of the LTIP at vesting. In 2021 and 2022 there will also be additional charges representing mandatory social security payments related to the vesting of the LTIP 2018 and 2019. Note all numbers are indicative. Terms of departure for other Executive Committee members The terms of retirement from ABB of Greg Scheu, President, The Americas, on October 31, 2019, were as per his contractual arrangements. As previously advised, Frank Duggan, President, Europe, and Chunyuan Gu, President, AMEA, and Claudio Facchin, President, Power Grids business stepped down from the EC on December 31, 2019, to take other positions within ABB. The terms of departure from ABB of Jean-Christophe Deslarzes, CHRO on February 29, 2020, and Diane de Saint Victor on March 31, 2020, will be as per their contractual arrangements. Compensation of former EC members In 2019, certain former EC members received con- tractual compensation for the period after leaving the EC, as shown in Exhibit 26, footnote (5). Votes on compensation at the 2020 AGM As illustrated in Exhibit 21, the Board’s proposals to shareholders at the 2020 AGM will relate to Board compensation for the 2020–2021 term of office and EC compensation for the calendar year 2021. There will also be a non-binding vote on the 2019 compensation report. 74 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Exhibit 21: Shareholders will have three separate votes on compensation at the 2020 AGM 2019 2020 2021 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 2020–2021 term of office Binding vote on maximum aggregate EC compensation for 2021 Non-binding vote on 2019 compensation report May AGM March AGM March AGM Compensation Period Date of vote In determining the proposed maximum aggregate EC compensation, the Board takes into consider- ation the criteria illustrated in Exhibit 22 below. Given the variable nature of a major portion of the compensation components, the proposed maximum aggregate EC compensation will almost always be higher than the actual com- pensation paid or awarded, as it must cover the potential maximum value of each component of compensation. Exhibit 22: Overview of key factors affecting the determination of maximum aggregate EC compensation 2019 2020 2021(1) Aggregate EC compensation in CHF (millions) 51.4 52.2(2) 52 55.5 xx Actual Target Maximum (approved at 2018 AGM) Maximum (approved at 2019 AGM) Maximum (to be requested at 2020 AGM) Assumptions Short-term incentive award percentage(3) Adjustment of LTIP grant size Number of EC members 95% 0% 11 100% 150% 150% 0% 11 +12.5%(4) +12.5%(3) 11 12 150% +12.5%(3) 9 (1) Numbers will be provided in the AGM invitation. (2) The 2019 target amount was higher than the maximum approved, as it included CHF 8.7 million representing the additional cost related to overlapping EC positions, due the departure of three EC members, plus an additional EC member to lead the Motion Business. It also included CHF 1.6 million for the grant fair value of the replacement share grant provided to the incoming GC and CHF 0.5 million representing 10 months of a lost STI award, to compensate for benefits foregone from her previous employer. (3) For full description, see section “Executive Committee compensation”. (4) This 12.5 percent applied on the entire LTIP for EC members only and is not applicable to the CEO. A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 75 Compensation and share ownership tables Exhibit 23: Board compensation in 2019 and 2018 (audited) Paid in 2019 Paid in 2018 November Board term 2019–2020 May Board term 2018–2019 November Board term 2018–2019 May Board term 2017–2018 – s e r a h s n i d e l t t e S s e r a h s f o r e b m u n ) 2 ( d e v i e c e r ) 1 ( h s a c n i d e l t t e S – s e r a h s n i d e l t t e S s e r a h s f o r e b m u n ) 2 ( d e v i e c e r ) 1 ( h s a c n i d e l t t e S n o i t a s n e p m o c l a t o T ) 3 ( 9 1 0 2 n i d i a p – s e r a h s n i d e l t t e S s e r a h s f o r e b m u n ) 2 ( d e v i e c e r ) 1 ( h s a c n i d e l t t e S – s e r a h s n i d e l t t e S s e r a h s f o r e b m u n ) 2 ( d e v i e c e r ) 1 ( h s a c n i d e l t t e S CHF CHF CHF CHF CHF n o i t a s n e p m o c l a t o T ) 3 ( 8 1 0 2 n i d i a p CHF Name Peter Voser, Chairman(4) — 29,156 — 29,943 1,200,000 — 24,777 — 25,133 1,200,000 Jacob Wallenberg(5) 112,500 4,397 112,500 4,515 450,000 112,500 3,737 112,500 Matti Alahuhta(6) Gunnar Brock(7) — 6,384 80,000 3,210 320,000 80,000 2,657 80,000 — 6,584 82,500 3,311 330,000 82,500 2,740 — — 165,000 David Constable(8) 87,500 3,420 87,500 3,511 350,000 87,500 2,906 87,500 Frederico Curado(9) — 5,934 80,000 2,973 320,000 80,000 2,457 80,000 Lars Förberg(10) Louis R. Hughes(11) — 7,755 — — — — 7,970 320,000 — 6,590 — — — — — 100,000 Jennifer Xin-Zhe Li(12) 80,000 2,892 80,000 2,973 320,000 80,000 2,454 Geraldine Matchett(13) 82,500 4,213 82,500 4,326 330,000 82,500 3,380 — — David Meline(14) 100,000 3,908 100,000 4,013 400,000 100,000 3,321 82,500 Satish Pai(15) Ying Yeh(16) Total 82,500 2,983 82,500 3,066 330,000 82,500 2,535 82,500 — — — — — — — 80,000 2,281 160,000 545,000 77,626 787,500 69,811 4,670,000 787,500 57,554 705,000 54,481 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, in 2018 and 2019 the Company paid CHF 288,408 and CHF 270,993, respec- tively, in related mandatory social security payments. (4) Chairman of the ABB Ltd Board for the 2017–2018, 2018–2019 and 2019–2020 board terms and Chairman of the Governance and Nomination Committee for the 2017–2018 and the 2018–2019 board terms; is receiving 100 percent of his compensation in the form of ABB shares. (5) Vice-Chairman of the ABB Ltd Board for the 2017–2018, 2018–2019 and 2019–2020 board terms; Chairman of the Governance and Nomina- tion Committee for the 2019–2020 board term and member of that committee for the 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 and Nomination Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; received 50 percent of his compensation in the form of ABB shares for the 2017–2018 and 2018–2019 board terms and is receiving 100 percent of his compensation in shares for the 2019–2020 board term. (7) Member of the Finance, Audit and Compliance Committee for the 2018–2019 and 2019–2020 board terms; received 50 percent of his compensation in shares for the 2018–2019 board term and is receiving 100 percent of his compensation in the form of ABB shares for the 2019–2020 board term. (8) Chairman of the Compensation Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; is receiving 50 percent of his compensation in the form of ABB shares. (9) Member of the Compensation Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; received 50 percent of his compensa- tion in the form of ABB shares for the 2017–2018 and 2018–2019 board terms and is receiving 100 percent of his compensation in shares for the 2019–2020 board term. (10) Member of the Governance and Nomination Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; is receiving 100 percent of his compensation in the form of ABB shares. (11) Did not stand for re-election at the ABB Ltd 2018 AGM; Chairman of the Finance, Audit and Compliance Committee for the 2017–2018 board term; received 50 percent of his compensation in the form of ABB shares. (12) Member of the Compensation Committee for the 2018–2019 and 2019–2020 board term; is receiving 50 percent of her compensation in the form of ABB shares. (13) Member of the Finance, Audit and Compliance Committee for the 2018–2019 and 2019–2020 board terms; is receiving 50 percent of her compensation in the form of ABB shares. (14) Chairman of the Finance, Audit and Compliance Committee for 2018–2019 and 2019–2020 board terms and member of that committee for the 2017–2018 board term; is receiving 50 percent of his compensation in the form of ABB shares. (15) Member of the Finance, Audit and Compliance Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; is receiving 50 percent of his compensation in the form of ABB shares. (16) Did not stand for re-election at the ABB Ltd 2018 AGM; member of the Compensation Committee for the 2017–2018 board term; received 50 percent of her compensation in the form of ABB shares. 3,789 2,694 450,000 320,000 2,947 2,495 6,690 3,099 — — 2,779 2,574 350,000 320,000 320,000 200,000 160,000 165,000 365,000 330,000 76 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Exhibit 24: Board compensation for the Board terms 2019–2020 and 2018–2019 (audited) Name Specific Board Roles Board term 2019–2020 Board term 2018–2019 CHF CHF Peter Voser Chairman of the Board, Chairman of GNC (Board term 2018–2019) 1,200,000 1,200,000 Jacob Wallenberg(1) Vice-Chairman of the Board, Chairman of GNC (Board term 2019–2020) 450,000 450,000 Matti Alahuhta Member GNC Gunnar Brock Member FACC David Constable Chairman CC Frederico Curado Member CC Lars Förberg Member GNC Jennifer Xin-Zhe Li Member CC Geraldine Matchett Member FACC David Meline Chairman of FACC Satish Pai Total Member FACC (1) Member of GNC for the 2018–2019 Board term. Key: CC: Compensation Committee FACC: Finance, Audit & Compliance Committee GNC: Governance & Nomination Committee 320,000 320,000 330,000 330,000 350,000 350,000 320,000 320,000 320,000 320,000 320,000 320,000 330,000 330,000 400,000 400,000 330,000 330,000 4,670,000 4,670,000 Exhibit 25: 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 Jennifer Xin-Zhe Li Geraldine Matchett David Meline(2) Satish Pai Total (1) Includes 2,000 shares held by spouse. (2) Includes 3,150 shares held by spouse. December 31, 2019 December 31, 2018 Total number of shares held 260,175 226,021 51,466 14,635 27,581 21,298 35,499 8,319 11,919 25,463 19,047 701,423 201,076 217,109 41,872 4,740 20,650 12,391 19,774 2,454 3,380 17,542 12,998 553,986 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 77 Exhibit 26: EC compensation in 2019 (audited) Cash Compensation ) 1 ( e v i t n e c n i m r e t - t r o h S s t i f e n e b n o i s n e P ) 2 ( s t i f e n e b r e h t O d e s a b - h s a c l a t o T 9 1 0 2 ) 3 ( n o i t a s n e p m o c y r a l a s e s a B 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 ) 4 ( 9 1 0 2 n i P I T L e h t r e d n u s t n a r g t n e m e c a p e r l f o e u l a v d e t a m i t s E 9 1 0 2 n i t n a r g d e s a b - e r a h s l a n o i t i d n o c . l c n i ( l a t o T 9 1 0 2 ) 5 ( ) s t n a r g d e s a b e r a h s CHF CHF CHF CHF CHF CHF CHF CHF Name Peter Voser (CEO as of April 17, 2019) — 3,438,366 — 3,824,929 1,187,167 1,780,739 149,772 320,688 3,438,366 — Timo Ihamuotila 945,005 960,450 500,830 581,983 2,988,268 836,661 Sylvia Hill (EC member as of June 1, 2019) Maria Varsellona (EC member as of November 1, 2019)(6) Frank Duggan(7) Chunyuan Gu(8) Sami Atiya Tarak Mehta Claudio Facchin Peter Terwiesch Morten Wierod (EC member as of April 1, 2019) Total current Executive Committee members at December 31, 2019 Ulrich Spiesshofer (EC member until April 16, 2019) Jean-Christophe Deslarzes (EC member until May 31, 2019) Diane de Saint Victor (EC member until October 31, 2019) Greg Scheu (EC member until October 31, 2019)(9) Total departing Executive Committee members 408,334 433,650 268,643 198,236 1,308,863 616,494 — 1,925,357 133,335 133,333 40,619 472,088 779,375 822,328 1,624,386 3,226,089 667,708 707,103 363,173 552,220 2,290,204 704,559 685,847 685,963 263,125 708,252 2,343,187 616,494 786,676 602,400 467,214 528,033 2,384,323 845,459 860,004 747,340 478,990 570,644 2,656,978 757,396 810,006 583,200 469,271 404,865 2,267,342 713,355 795,009 668,800 460,453 389,694 2,313,956 704,559 — 2,994,763 — 2,959,681 — 3,229,782 — 3,414,374 — 2,980,697 — 3,018,515 525,000 516,600 304,632 200,336 1,546,568 616,494 — 2,163,062 7,804,091 7,819,578 3,766,722 4,927,039 24,317,430 7,233,799 1,624,386 33,175,615 1,685,010 2,249,475 639,222 979,554 5,553,261 2,967,911 — 8,521,172 940,007 998,280 513,258 522,119 2,973,664 827,846 — 3,801,510 1,000,001 1,062,000 298,242 246,441 2,606,684 880,685 — 3,487,369 661,604 557,123 228,298 199,474 1,646,499 722,956 — 2,369,455 4,286,622 4,866,878 1,679,020 1,947,588 12,780,108 5,399,398 — 18,179,506 Total 12,090,713 12,686,456 5,445,742 6,874,627 37,097,538 12,633,197 1,624,386 51,355,121 (1) Represents accrued STI for the year 2019, which will be paid in 2020, after the publication of ABB’s financial results. The STI is linked to the objectives defined in each EC member’s scorecard. Upon full achievement of these objectives, the STI of the EC members represents 100 percent of their respective annual base salary. The STI of the former CEO, Ulrich Spiesshofer, corresponds to the contractually agreed average of the year 2017 and 2018 STI award. Peter Voser received his STI payment monthly at target achievement level. Greg Scheu received a pro-rata STI payment for his 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. Other benefits for Peter Voser include mandatory social security payments only. (3) Prepared on an accrual basis. (4) On the day of vesting (May 16, 2022), 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 the price of ABB shares on the grant date, adjusted for expected foregone dividends during the vesting period. (5) Payments totaling CHF 216,069 were made in 2019 on behalf of certain other former EC members, mainly representing mandatory social security payments. (6) In addition to the replacement share grant, Maria Varsellona will receive compensation in the amount of CHF 445,939 for 10 months of foregone STI payments from her previous employer, which is shown under other benefits. (7) Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR. The Company purchased EUR with AED to meet this obligation. All AED amounts were converted into Swiss francs using a rate of CHF 0.2635992 per AED. (8) Chunyuan Gu received for the period January to February 2019, 100 percent of his compensation in CNY and for the period March to December 2019, 100 percent of his base salary in HKD. All CNY amounts were converted into Swiss francs using a rate of CHF 0.1391052 per CNY and all HKD amounts were converted into Swiss francs using a rate of CHF 0.12434741 per HKD. (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 0.9682 per USD. 78 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Exhibit 27: EC compensation in 2018 (audited) Cash Compensation ) 1 ( e v i t n e c n i m r e t - t r o h S y r a l a s e s a B s t i f e n e b n o i s n e P ) 2 ( s t i f e n e b r e h t O d e s a b - h s a c l a t o T 8 1 0 2 ) 3 ( n o i t a s n e p m o c 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 ) 4 ( 8 1 0 2 n i P I T L e h t r e d n u s t n a r g l a n o i t i d n o c . l c n i ( l a t o T 8 1 0 2 ) 5 ( ) s t n a r g d e s a b e r a h s CHF CHF CHF CHF CHF CHF CHF 1,685,010 2,082,660 631,775 989,918 5,389,363 3,153,750 8,543,113 920,012 810,520 487,435 502,703 2,720,670 819,965 3,540,635 Name Ulrich Spiesshofer Timo Ihamuotila 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 2,964,461 806,634 713,065 291,077 118,426 1,929,202 559,393 2,488,595 715,357 688,888 263,125 499,338 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 STI for the year 2018 for all current EC members, which will be paid in 2019, after the publication of ABB’s financial results. The STI is linked to the objectives defined in each EC member’s scorecard. Upon full achievement of these objectives, the STI of the CEO corresponds to 150 percent of his annual base salary, while for each other EC member it represents 100 percent of their respective annual 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 accrual 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 258,585 were made in 2018 on behalf of certain other former EC members, mainly representing mandatory social security payments. (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. A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 79 Exhibit 28: LTIP grants in 2019 (audited) ) 3 ( , ) 2 ( P I T L e h t f o h c n u a l 9 1 0 2 e h t f o r o t c a f 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 e c n a m r o f r e p S P E e h t r e d n u s t n a r g CHF s e r a h s f o r e b m u n e c n e r e f e R e c n a m r o f r e p R S T e h t r e d n u h c n u a l 9 1 0 2 e h t f o r o t c a f ) 1 ( P I T L e h t f o ) 3 ( , ) 2 ( P I T L e h t f o h c n u a l 9 1 0 2 e h t f o r o t c a f 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 e c n a m r o f r e p R S T e h t r e d n u s t n a r g CHF 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 h c n u a l 9 1 0 2 e h t r e d n u ) 2 ( , ) 1 ( P I T L e h t f o 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 ( 9 1 0 2 n i P I T L e h t r e d n u s t n a r g CHF s e r a h s f o r e b m u n e c n e r e f e R e c n a m r o f r e p S P E e h t r e d n u h c n u a l 9 1 0 2 e h t f o r o t c a f ) 1 ( P I T L e h t f o Name Timo Ihamuotila(4) 24,535 418,322 24,536 418,339 49,071 836,661 Sylvia Hill (EC member as of June 1, 2019) Maria Varsellona (EC member as of November 1, 2019) Frank Duggan(4) Chunyuan Gu Sami Atiya Tarak Mehta Claudio Facchin Peter Terwiesch(4) Morten Wierod (EC member as of April 1, 2019)(4) Total current Executive Committee members at December 31, 2019 Ulrich Spiesshofer (EC member until April 16, 2019) Jean-Christophe Deslarzes (EC member until May 31, 2019) Diane de Saint Victor (EC member until October 31, 2019) Greg Scheu (EC member until October 31, 2019) Total departing Executive Committee members 18,079 308,247 18,079 308,247 36,158 616,494 20,661 20,661 18,079 24,793 22,211 20,919 20,661 411,154 352,271 308,247 422,721 378,698 356,669 352,271 20,662 20,662 18,079 24,794 22,211 20,920 20,662 411,174 352,288 308,247 422,738 378,698 356,686 352,288 41,323 41,323 36,158 49,587 44,422 41,839 41,323 822,328 704,559 616,494 845,459 757,396 713,355 704,559 18,079 308,247 18,079 308,247 36,158 616,494 208,678 3,616,847 208,684 3,616,952 417,362 7,233,799 87,035 1,483,947 87,036 1,483,964 174,071 2,967,911 24,277 413,923 24,277 413,923 48,554 827,846 25,826 440,334 25,827 440,351 51,653 880,685 21,201 361,478 21,201 361,478 42,402 722,956 158,339 2,699,682 158,341 2,699,716 316,680 5,399,398 Total 367,017 6,316,529 367,025 6,316,668 734,042 12,633,197 (1) Vesting date May 16, 2022. (2) The valuation method of the share grant has been adjusted to reflect best practice, according to which, it is not recommended to use a Monte Carlo simulation at the time of grant to determine the fair value of a share grant. In response to that, 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 adjusted for expected foregone dividends during the vesting period. Applying the 2019 valuation method to the 2018 LTIP grant, would lead to a CHF 1.4 million lower grant fair value for 2018, representing a reduction from CHF 10.6 million to CHF 9.2 million. (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. (4) In addition to the above awards, four members of the EC participated in the 16th launch of the ESAP in 2019, which will allow them to save over a 12-month period and, in November 2020, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP will be entitled to acquire up to 480 ABB shares at an exercise price of CHF 20.78 per share. 80 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Exhibit 29: LTIP grants in 2018 (audited) 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 r o t c a f e c n a m r o f r e p S P E e h t r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s e l a t o T ) 3 ( , ) 2 ( P I T L e h t f o h c n u a l 8 1 0 2 e h t f o 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 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 r o t c a f e c n a m r o f r e p R S 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 f o e u l a v d e t a m i t s e l a t o T ) 3 ( , ) 2 ( P I T L e h t f o h c n u a l 8 1 0 2 e h t f o CHF ) 2 ( , ) 1 ( P I T L e h t f o h c n u a l 8 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 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 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 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 239,627 5,512,384 239,631 5,046,634 479,258 10,559,018 (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. (4) 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. A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 81 Exhibit 30: EC shareholding overview at December 31, 2019 (audited as part of the financial statement stand-alone audit) Total number of shares held at Decem- ber 31, 2019 Vested at December 31, 2019 s n o i t p o d e t s e v f o r e b m u N I P M e h t r e d n u d l e h — Name Timo Ihamuotila 64,572 Unvested at December 31, 2019 s n o i t p o d e t s e v n u f o r e b m u N I P M e h t r e d n u d l e h 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 s e r a h s f o r e b m u n e c n e r e f e R 9 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 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 t n a r g e r a h s t n e m e c a p e R l l ) 4 ( 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 2020/2021) (vesting 2020) (vesting 2021) (vesting 2022) (vesting 2020) (vesting 2021/2022) — 41,000 37,217 49,071 76,628 2,265 743,750 584,375 — 269,846 45,577 24,435 212,869 163,219 122,242 — — — — — — — 1,064 398,440 — — — — — — — — — — 34,984 31,196 34,735 34,494 39,076 37,147 — — 31,756 33,981 23,301 34,790 26,214 37,379 36,158 41,323 41,323 36,158 49,587 44,422 41,839 41,323 — 15,292 36,158 — — — — — — — — — — — 80,019 — — — — — — — Sylvia Hill (EC member as of June 1, 2019) Maria Varsellona (EC member as of November 1, 2019) Frank Duggan Chunyuan Gu Sami Atiya Tarak Mehta Claudio Facchin Peter Terwiesch Morten Wierod (EC member as of April 1, 2019) Total Executive Committee members at December 31, 2019(5) 906,089 1,142,190 584,375 252,632 239,930 417,362 76,628 80,019 (1) It is expected that upon vesting, the LTIP 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. (2) It is expected that the LTIP 2018 and 2019 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. (3) 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. (4) It is expected that the replacement share grants will be settled 65 percent in shares and 35 percent in cash. However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. (5) Departing Executive Committee members are not included in this table. 82 A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T Exhibit 31: 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 509,970 22,000 172,487 569,132 224,941 146,130 28,722 — 183,328 131,987 92,811 Unvested at December 31, 2018 r e d n u e b a r e v i l l e d s e r a h s f o r e b m u n e c n e r e f e R e c n a m r o f r e p 6 1 0 2 e h t d n a 1 P ( s t n e n o p m o c ) 1 ( P I T L e h t f o ) 2 P r e d n u e b a r e v i l l e d s e r a h s f o r e b m u n e c n e r e f e R e c n a m r o f r e p 7 1 0 2 e h t d n a 1 P ( s t n e n o p m o c ) 1 ( P I T L e h t f o ) 2 P r e d n u e b a r e v i l l e d s e r a h s e c n a m r o f r e p 8 1 0 2 e h t f o r e b m u n e c n e r e f e R ) 2 ( P I T L e h t f o ) R S T d n a S P E ( s r o t c a f (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 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 at December 31, 2018 2,081,508 572,892 521,750 479,258 119,200 (1) 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. (2) 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. (3) 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. A B B A N N U A L R E P O R T 2 0 1 9 0 3 C O M P E N S AT I O N R E P O R T 83 Report of the Statutory Auditor To theGeneral MeetingofABB Ltd, ZurichWehave audited the accompanyingcompensationreport of ABB Ltd for the year ended December 31, 2019. 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 75to 80of the compensationreport.Responsibility of the Board of DirectorsThe Board of Directors is responsible for the preparation and overall fair presentation of the compensationreport 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 compensationsystem and defining individual compensationpackages.Auditor's ResponsibilityOur responsibility is to express an opinion on the accompanying compensationreport. 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 compensationreport complies withSwiss law and articles 14 –16 of the Ordinance.An audit involves performing procedures to obtain audit evidence on the disclosures made in the compensationreport 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 compensationreport, 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 compensationreport.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.OpinionIn our opinion, the compensationreport for the year ended December 31, 2019of ABBLtd complies with Swiss law and articles 14–16 of the Ordinance.KPMG AGHans-Dieter KraussDouglasMullinsLicensed Audit ExpertAuditor in ChargeZurich,February 25,2020KPMG AG, Räffelstrasse 28, PO Box, CH-8036 ZurichKPMG 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.04 2019 Financial review of ABB Group — 84 – 216 — 86 — 136 2019 Operating and financial review and prospects Consolidated Financial Statements of ABB Group 86 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — About ABB ABB is a technology leader that is driving the digi- tal transformation of industries. With a history of innovation spanning more than 130 years, ABB has four, customer-focused, globally leading Busi- nesses: Electrification, Industrial Automation, Motion, and Robotics & Discrete Automation, supported by the ABB Ability™ digital platform. We plan to divest 80.1 percent of ABB’s Power Grids business to Hitachi in 2020. ABB has ap- proximately 144,000 employees. — History of the ABB Group The ABB Group was formed in 1988 through a merger between Asea AB and BBC Brown Boveri AG. Initially founded in 1883, Asea AB was a major participant in the introduction of electricity into Swedish homes and businesses and in the develop- ment 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 hold- ing company and a single class of shares. ABB Ltd was incorporated on March 5, 1999, under the laws of Switzerland. In June 1999, ABB Ltd became the holding company for the entire ABB Group. This was accomplished by having ABB Ltd issue shares to the shareholders of ABB AG and ABB AB, the two companies that formerly owned the ABB Group. The ABB Ltd shares were exchanged for the shares of those two companies, which, as a result of the share exchange and certain related 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 company through our four Busi- nesses. For a breakdown of our consolidated revenues (i) by Business (ii) by geographic region (iii) by end-customer markets and (iv) by product type, see “Item 5. Operating and Financial Review and Prospects – Analysis of Results of Operations – Revenues” and “Note 23 – Operating segment and geographic data”. We also operate our Power Grids business, which is reported as discontinued operations in the Consolidated Financial State- ments (see “Discontinued operations” section below). Our principal corporate offices are located at Af- folternstrasse 44, CH-8050 Zurich, Switzerland, telephone number +41 43 317 71 11. Our agent for U.S. federal securities law purposes is ABB Hold- ings Inc., located at 305 Gregson Drive, Cary, North Carolina 27511. Our internet address is www.abb.com. The United States Securities and Exchange Commission (SEC) maintains a website at www.sec.gov which contains in electronic form each of the reports and other information that we have filed electronically with the SEC. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 87 — Employees A breakdown of our employees by geographic re- gion is as follows: December 31, Europe The Americas 2019 2018 2017 68,400 68,300 63,000 35,200 35,600 28,800 Asia, Middle East and Africa 40,800 42,700 43,000 Total 144,400 146,600 134,800 — Our markets The proportion of our employees that are repre- sented by labor unions or are subject to collective bargaining agreements varies based on the labor practices of each country in which we operate. ABB is a technology leader that is driving the digi- tal transformation of industries, combining elec- trification, automation and robotics and digitali- zation solutions for industrial customers. We operate in attractive, growing markets with a fo- cus on fast-growth segments including software and digital solutions, data centers, EV charging, robotics and machine and factory automation. We believe that our portfolio is well positioned to benefit from secular growth drivers, including ur- banization, aging populations, the electrification of transport, the Internet of Things and other data and digitalization trends. Approximately 40 percent of our orders are for digitally enabled products and services (including ABB Ability™ solutions, software and related ser- vices, digitally enabled products). As the end-markets we serve are still at an early stage of digitalization, including food and beverage, rail, buildings, oil and gas, chemicals, marine, utilities, and other discrete markets, we expect the de- mand for digitally enabled solutions from our cus- tomers to grow significantly in the coming years. ABB Ability™ is our unified, cross-industry digital portfolio, extending from device to edge to cloud on an open architecture platform. ABB Ability™ provides over 160 solutions (excluding the Power Grids business) utilizing the latest software tech- nologies, including artificial intelligence and ma- chine learning, to improve productivity and effi- ciency, 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. We also have a leading offering in connected services, for example re- mote monitoring services for robots, motors and machinery and remote control solutions for build- ings, EV charging networks and offshore plat- forms. Some of the more specialized offerings ad- dress energy management for data centers and navigation optimization and automation for mari- time shipping fleets. Utilities Market Following the agreement to divest the Power Grids business to Hitachi, which we announced on December 17, 2018, the exposure to utility cus- tomers for our continuing operations has de- creased significantly. In 2019, ABB was focused on delivering solutions in the distribution and renew- ables segments within the sector, even while con- tinuing to service conventional power generation customers with our control and automation solu- tions. Our continuing operations are not active in the high-voltage transmission segment. As a pro- portion of revenues, utility customers accounted for 15 percent in 2019. Conventional power generation markets were challenged in 2019, with select investments fo- cused in service activities as utilities looked to prolong asset-lives. Renewables investments grew, while capital expenditure in the distribution segment also increased owing to the increased scale of output from renewables assets. Industry Market We serve production facilities and factories all around the world from process to discrete indus- tries with a comprehensive automation portfolio including robotics. Automation and digitalized solutions that achieve improved safety, uptime, energy efficiency and productivity are the in- tended hallmarks of our offerings in this customer 88 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P segment. As a proportion of revenues, industrial customers accounted for 56 percent in 2019. Investments in 2019 in robotics and machinery au- tomation solutions were challenged by weak con- sumer demand for traditional automotive vehi- cles, a subdued consumer electronics market, and a tough machine builders market. Demand for new EV manufacturing lines and in service areas such as intra-logistics was not able to offset the headwinds from the aforementioned markets. Process industries, including pulp and paper, oil and gas and mining invested more in 2019 than in the prior year, investing predominantly in service and productivity improvements. Transport & Infrastructure Market Our expertise provides efficient, reliable and sus- tainable solutions for transport & infrastructure customers. We believe our offerings are key to 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 and smart buildings. As a proportion of revenues, transport & infrastructure customers accounted for 29 percent in 2019. Demand in transport & infrastructure markets was solid in 2019. Demand for building automa- tion solutions and from data center customers was strong over the year, with ABB successful in offering bundled solutions to hyperscale and co-location customers in particular. Buildings de- mand was robust. Activity in rail for electrifica- tion and traction solutions grew well, while activ- ity in specialty vessels, particularly cruise ships, was healthy. EV charging markets accelerated sharply during 2019. We received multiple orders from customers for EV charging infrastructure, including for our high-voltage direct-current (DC) fast-charging station, the Terra HP. As of December 31, 2019, we have more than 11,000 installed fast-chargers in 76 countries. Since April 1, 2019, we reorganized the composi- tions of our businesses and commenced serving our customers through four Businesses. Develop- ments in these Businesses are discussed in more detail below. Revenue figures presented in this Business section are before intersegment eliminations. — Businesses Electrification Business Overview The Electrification Business provides products, services and connected solutions throughout the electrical value chain from the substation to the point of consumption across the world. The inno- vations from this business enable safer and more reliable electricity flow, with a full range of low- and medium-voltage products and solutions for intelligent protection and connection as well as pre-engineered packaged services and solutions tailored to customers’ needs. The portfolio in- cludes modular substation packages, distribution automation products, switchgear, circuit break- ers, measuring and sensing devices, control prod- ucts, solar power solutions, EV charging infra- structure, wiring accessories, and enclosures and cabling systems, including KNX systems (the rec- ognized global standard for home and building control) and data communication networks. The Business delivers products to customers through a global network of channel partners and end-customers. Most of the Business’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 businesses. The Electrification Business had approximately 53,000 employees on December 31, 2019, and generated $12.7 billion of revenues in 2019. Customers The Electrification Business serves a wide range of customers, including buildings, data centers, rail, wind and solar, distribution utilities, food and beverage, marine, oil and gas, and e-mobility. Products and Services The Smart Power business offers low-voltage sys- tem orientated products that protect, control and connect people, plants and systems. ABB offers solutions to restore power rapidly in case of a fault and helps provide optimum protection for people and electrical installations. The product A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 89 offering includes molded-case and air-circuit breakers, safety switches used for power distri- bution in factories and buildings, switchgear sys- tems for short circuit and overload protection as well as cabling and connection components. It also offers power protection solutions such as un- interruptible power supply (UPS) solutions, status transfer switches and power distribution units. In addition, the business offers a range of contac- tors, proximity sensors, safety products for in- dustrial protection, limit switches, along with electronic relays and overload relays. The Smart Buildings 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 custom- ers to improve power quality and control, reduce outage time and enhance operational reliability and efficiency. The business offers products and services that largely serve the power distribution sector, often providing the 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 in- door 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 ser- vice 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 solu- tions. During 2019, we reached an agreement to sell our solar inverters business to FIMER S.p.A. and the completion of the sale is expected to be in the first quarter of 2020. The Electrification Business remains fully committed to supporting the renewables industry with its leading energy protection, control and integration products and solutions. The Industrial Solutions business includes the ac- quired GEIS business and offers product solu- tions, such as switchboards, panelboards, UPS and arc prevention technologies and engineered 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 in the transport & infrastructure sector, as well as other ABB businesses. The proportion of direct sales compared to channel partner sales varies among the different industries, product technologies and geographic markets. The business is focused on creating demand to support its channel sales, with a range of promotional activities and sup- port services including configuration and digital solutions. `````Competition The Electrification Business’s principal competi- tors vary by product group and include Eaton, Legrand, Schneider Electric, Siemens, Hubbell, Rittal and Chint. Capital Expenditures The Electrification Business’s capital expendi- tures for property, plant and equipment totaled $279 million in 2019, compared to $244 million and $218 million in 2018 and 2017, respectively. In- vestments in 2019 were primarily related to foot- print changes, equipment replacement and 90 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P upgrades. Geographically, in 2019, Europe repre- sented 49 percent of the capital expenditures, fol- lowed by the Americas (36 percent) and Asia, Mid- dle East and Africa (15 percent). Industrial Automation Business Overview The Industrial Automation Business offers cus- tomers in process and hybrid industries a broad range of industry-specific integrated automation, electrification and digital solutions that are de- signed to optimize the productivity, energy effi- ciency and safety of their industrial processes and operations, based on deep domain knowledge and expertise of each end market. The solutions include turnkey engineering, control technologies, software and lifecycle services, measurement and analytics products, marine and turbocharging of- ferings, Human Machine Interfaces (HMI) and in- tegrated safety technology. The systems can link various process and information flows allowing customers to manage and control their entire manufacturing and business process based on real-time facility or plant information. Addition- ally, the systems and solutions enable customers to increase production efficiency, optimize their assets and reduce environmental impact. The Industrial Automation Business’s offerings are available as separately sold products or as part of a total automation, electrification and/or instrumentation solution. For overall solutions, In- dustrial Automation integrates products and solutions from the Electrification, Motion, and Ro- botics & Discrete Automation Businesses as well as our Power Grids business. The Business’s offer- ing is sold primarily through its direct sales force as well as third-party channels. The Business had approximately 22,300 employ- ees as of December 31, 2019, and generated reve- nues of $6.3 billion in 2019. Customers The Industrial Automation Business’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 automation, electrifica- tion, instrumentation and digitalization offerings that deliver value mainly through lower capital costs, increased plant availability, lower life-cycle costs and lower project risks. 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 action- able insights that optimize performance in real time. From the well head to the refinery, ABB Ability™ solutions aim to connect people with data to optimize performance, improve reli- ability, enhance efficiency and minimize environ- mental 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’s added value is deep industry expertise coupled with the ability to integrate both automation and electri- cal, resulting in faster start-up times, increased facility productivity and reduced overall capital and operating 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 inte- grated electric equipment, drives, motors, high power rectifiers and equipment for automation and supervisory control within a variety of areas including mineral handling, mining operations, aluminum smelting, hot and cold steel applica- tions and cement production. In the pharmaceuti- cals and fine chemicals areas, the Business offers applications to support manufacturing, packag- ing, quality control and compliance with regula- tory agencies. The offering for the pulp and paper industries includes control systems, quality con- trol systems, drive systems, on-line sensors, actu- ators and field instruments. The Business 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, our technologies are designed to help optimize performance, improve reliability, enhance effi- ciency and minimize environmental impact throughout the plant life cycle. The Business also serves the water industry, including applications such as pumping stations and desalination plants. The Business serves the marine and ports indus- try through its leading solutions for specialty ves- sels, as well as container and bulk cargo handling. For the shipping industry, the Business offers an extensive portfolio of integrated marine systems and solutions that improve the flexibility, reliabil- ity and energy efficiency of vessels. By coupling power, automation and marine software, proven fuel-efficient technologies and services that en- sure maximum vessel uptime, ABB is well posi- tioned to help improve the profitability of a cus- tomer’s business throughout the entire life cycle A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 91 of a fleet. The Business designs, engineers, builds, supplies and commissions automation and elec- trical systems for marine power generation, power distribution and electric propulsion, as well as turbochargers to improve efficiency. With ABB Ability™’s Collaborative Operations Centers around the world and marine software solutions, owners and operators can run their fleets at lower fuel and maintenance cost, while improving crew, passenger, and cargo safety and overall produc- tivity of their operations. In addition, the Business delivers automation and electrical systems for container and bulk cargo handling, from ship to gate. These systems and services help terminal operators meet the challenge of larger ships, taller cranes and bigger volumes per call, and make terminal operations safer, greener and more productive. The Business serves the hybrid and discrete mar- ket, focusing primarily on plastics, food and bev- erage, packaging and data centers. The Business combines state-of-the-art technology with ad- vanced engineering 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 providers focused on product- and software-based, open-architecture solutions for machine and factory automation worldwide. The Business offers an extensive portfolio of products and software from stand-alone basic control to integrated collaborative systems for complex or critical processes. Solutions such as Distributed Control System (DCS) 800xA, pro- vides a scalable extended automation system for process and production control, safety, and pro- duction monitoring. Freelance, another solution, is a full-fledged, easy-to-use DCS for small to me- dium size applications. The Programmable Logic Controller (PLC) automation portfolio offers a scalable range for small, middle and high-end ap- plications. Components for basic automation solutions, process and safety controllers, field in- terfaces, panels, process recorders and HMI are available through our Compact Product Suite of- fering. The product portfolio is complemented by services such as Automation Sentinel, a subscription-based life-cycle management pro- gram that provides services to maintain and con- tinually advance and enhance ABB Ability™ control systems (e.g. cyber security patches) and thus al- lows it to manage a customer’s life-cycle costs. The ABB Ability™ Advanced Services offering portfolio provides individual software-based ser- vices to continuously improve automation and processes. The Business also offers Manufactur- ing Execution Systems that enable agility and transparency for production processes by synchronizing and orchestrating a flow across in- dividual 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. The Business manufactures and maintains tur- bochargers for diesel and gas engines having power levels ranging from 500 kilowatts to over 80 megawatts. The Business provides engine builders and application operators with advanced turbocharging solutions for efficient and flexible application operations and in compliance with the most stringent environmental requirements. Sales and Marketing The Industrial Automation Business primarily uses its direct sales force as well as third-party channel partners, such as distributors, system in- tegrators and OEMs. The majority of revenues are derived through the Business’s own direct sales channels. Competition The Industrial Automation Business’s principal competitors vary by industry or product group. Competitors include: Emerson, Honeywell, Val- met, Rockwell Automation, Beckhoff, Schneider Electric, Siemens, Voith, and Yokogawa Electric Corporation. Capital Expenditures The Industrial Automation Business’s capital ex- penditures for property, plant and equipment to- taled $64 million in 2019, compared to $58 million and $54 million in 2018 and 2017, respectively. Principal investments in 2019 were in Turbocharg- ing and the Measurement and Analytics business lines. Geographically, in 2019, Europe represented 70 percent of the capital expenditures, followed by the Americas (19 percent) and Asia, Middle East and Africa (11 percent). Motion Business Overview The Motion Business provides pioneering technol- ogy, products, solutions and related services to industrial customers to increase energy effi- ciency, improve safety and reliability, and 92 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P maintain precise control over processes. The port- folio includes motors, generators and drives for a wide range of applications in all industrial sectors. mining companies, hybrid and batch manufactur- ers such as food and beverage companies, trans- portation equipment manufacturers, discrete manufacturing companies, logistics, utilities as well as customers in the automotive industry. The Motion Business had approximately 20,400 employees as of December 31, 2019, and gener- ated around $6.5 billion of revenue in 2019. Products and Services The Motors and Generators business line supplies a comprehensive range of electrical motors, gen- erators, and mechanical power transmission products. The range of electrical motors includes high efficiency motors that conform to leading environmental and Minimum Energy Performance Standards (MEPS). Efficiency is an important se- lection criterion for customers, because electric motors account for nearly two-thirds of the elec- tricity consumed by industrial plants. The busi- ness line manufactures synchronous motors for the most demanding applications and a full range of low- and high-voltage induction motors, for both IEC (International Electrotechnical Commis- sion) and NEMA (National Electrical Manufactur- ers Association) standards. The business line of- fers digitalized asset management solutions that monitor motor performance and provide vital in- telligence on key operating parameters. These products and solutions are designed to help cus- tomers improve uptime, extend motor lifetimes, and increase productivity while becoming or re- maining digitally connected. The Drives business line 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, and printing and textile machines. They are used in industries such as building automa- tion, marine, power, transportation, food and bev- erage, metals, mining, and oil and gas. The busi- ness line also supplies traction converters (propulsion converters and auxiliary converters) for the transportation industry and wind converters. The Motion Business offers services that comple- ment its products and solutions, including design and project management, engineering, installa- tion, training and life cycle care, energy efficiency appraisals, preventive maintenance and digital services such as remote monitoring and software tools. Customers The Motion Business serves a wide range of cus- tomers, including OEMs, process industries such as pulp and paper, oil and gas, and metals and Sales and Marketing Sales are made both through direct sales forces and through channel partners, such as distribu- tors and wholesalers, as well as installers, ma- chine builders and OEMs, and system integrators. The proportion of direct sales compared to chan- nel partner sales varies among the different in- dustries, product technologies and geographic markets. Competition The principal competitors of the Motion Busi- ness include Siemens, Toshiba, WEG Industries, SEW-EURODRIVE and Danfoss. Capital Expenditures Capital expenditures in the Motion Business for property, plant and equipment totaled $110 mil- lion in 2019, compared to $93 million and $89 mil- lion in 2018 and 2017, respectively. Principal in- vestments in 2019 were primarily related to equipment replacement, footprint adjustments and automation upgrades. Geographically, in 2019, Europe represented 44 percent of the capi- tal expenditures, followed by the Americas (36 percent) and Asia, Middle East and Africa (20 percent). Robotics & Discrete Automation Business Overview The Robotics & Discrete Automation Business provides robotics, and machine and factory auto- mation from single products to complete systems including services. Revenues are generated both from direct sales to end users as well as from indirect sales mainly through system integrators and machine builders. The Robotics & Discrete Automation Business had approximately 10,100 employees as of Decem- ber 31, 2019, and generated $3.3 billion of reve- nues in 2019. Products and Services The Robotics business offers a wide range of products, solutions and services such as indus- trial robots, software, application solutions, engi- neered solutions and related services. This offer- ing provides flexibility and productivity for operations to meet the challenge of making A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 93 smaller lots of a larger number of specific prod- ucts in shorter cycles for today’s dynamic global markets, while also improving quality, productiv- ity and reliability. Robots are also used in activi- ties or environments which may be hazardous to employee health and safety, such as repetitive or strenuous lifting, dusty, hot or cold rooms, or painting booths. In the automotive industry, ro- bot products and systems are used in areas such as press shop, body shop, paint shop, power train assembly, trim and final assembly. Robotics solu- tions are used in a wide range of segments from metal fabrication, foundry, plastics, food and bev- erage, chemicals and pharmaceuticals, electron- ics and warehouse/logistics center automation. Typical robotic applications in general industry in- clude welding, material handling, machine tend- ing, painting, picking, packing, palletizing and small parts assembly automation. The Machine and Factory Automation business of- fers automation products and solutions such as programmable logical controllers, industrial PCs, servo motion control systems and track systems. The range of solutions are mainly used by machine builders for various types of series machines, e.g. for plastics, metals, printing and packaging. Customers Robotics & Discrete Automation serves a wide range of customers. The main customers are ac- tive in industries such as automotive, machine building, metalworking, electronics, food and beverage and logistics. They include end-users such as manufacturers, system integrators and machine builders. Sales and Marketing Sales are made both through direct sales forces as well as through third-party channel partners, such as system integrators and machine builders. The proportion of direct sales compared to chan- nel partner sales varies among the different in- dustries, product technologies and geographic markets. Competition The principal competitors of the Robotics & Dis- crete Automation Business vary by offering and include companies such as Fanuc, Kuka, Yaskawa, Kawasaki, Dürr, Stäubli, Universal Robots, Rock- well Automation and Siemens. Capital Expenditures The Robotics & Discrete Automation Business’s capital expenditures for property, plant and equipment totaled $59 million in 2019, compared to $74 million and $43 million in 2018 and 2017, re- spectively. Principal investments in 2019 were pri- marily related to production capacity, upgrades and equipment replacement. Geographically, in 2019, Europe represented 78 percent of the capi- tal expenditures, followed by Asia, Middle East and Africa (17 percent) and the Americas (5 percent). Corporate and Other Corporate and Other includes headquarters, cen- tral research and development, real estate activi- ties, Corporate Treasury Operations, Global Busi- ness Services (GBS) and other minor business activities. The remaining activities of certain EPC projects which we are completing and are in a wind-down phase are also reported in Corporate and Other. In addition, we have classified the his- torical 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 and gas industry. Corporate headquarters and stewardship activi- ties include the operations of our corporate head- quarters in Zurich, Switzerland, as well as corporate-related activities in various countries. These activities cover staff functions with group-wide responsibilities, such as accounting and financial reporting, corporate finance and taxes, planning and controlling, internal audit, le- gal and integrity, compliance, risk management and insurance, corporate communications, infor- mation systems, investor relations and human resources. Corporate research and development primarily covers our research activities, as our development activities are organized under our Businesses. 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 Businesses in advancing relevant technolo- gies and in developing cross-business technology platforms. We have corporate research centers in seven countries (China, India, Germany, Poland, Sweden, Switzerland and the U.S.). GBS operates shared service centers globally through a network of five hubs and consists of both expert and transactional services in the ar- eas of human resources, finance, information ser- vices, legal, real estate, procurement and logis- tics, customer contact centers, global travel services and other ancillary activities. GBS also staffs and maintains front offices in most countries. 94 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P A significant portion of the costs for GBS and other shared corporate overhead costs are allo- cated to the operating businesses. 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 and are considered “stranded costs”. Corporate and Other had approximately 4,200 employees at December 31, 2019. — Discontinued operations In December 2018, the Company announced an agreement to divest 80.1 percent of its Power Grids business to Hitachi valuing the business at $11 billion. As a result, the Power Grids business is reported as discontinued operations in the Con- solidated Financial Statements for all years pre- sented. See “Note 3 – Basis of presentation and assets held for sale” to our Consolidated Financial Statements. Power Grids business The Power Grids business is a global leader and aspires to be the partner of choice for enabling a stronger, smarter and greener grid. The Power Grids business provides product, systems, soft- ware and service solutions across the power value chain that are designed to help meet growing de- mand for electricity with minimum environmental impact. These solutions support utility, industry and transport & infrastructure customers to plan, build, operate and maintain their power infra- structure. They are designed to facilitate the safe, reliable and efficient integration, transmission and distribution of bulk and distributed energy generated from conventional and renewable sources. The Power Grids business has a worldwide cus- tomer base, with a balanced geographic spread of revenues across the Americas, Europe, and Asia, Middle East and Africa. The business also has a globally diversified manufacturing, engi- neering, and research and development footprint to serve customers in the most efficient manner. Direct sales account for the majority of total reve- nues generated by the business while external channel partners such as EPCs, wholesalers, dis- tributors and OEMs account for the rest. Products and Services The Grid Automation operation is at the forefront of digitalizing and automating the power grid. It supplies substation automation products, sys- tems and services. It also provides Supervisory Control and Data Acquisition (SCADA) systems for transmission and distribution networks as well as a range of wireless, fiber optic and powerline carrier-based telecommunication technologies for mission-critical applications. The operation offers grid-edge and microgrid solutions that are being increasingly deployed for remote and par- tially grid-connected applications. Its comprehen- sive enterprise software portfolio provides solu- tions for managing and optimizing assets, operations, logistics, financials and HR, reducing operating costs and improving productivity for customers. The Grid Integration operation is among the world’s leading providers of integration and transmission solutions such as High Voltage Di- rect Current (HVDC), a technology pioneered by ABB and now playing a key role around the world in integrating renewables and transmitting elec- tricity efficiently and reliably over ever-increasing distances with minimal losses. Another key part of the portfolio is the Flexible Alternating Current Transmission Systems (FACTS) business, which comprises Static Var Compensation (SVC) and static compensator (STATCOM) technologies to address stability and power quality issues. The Grid Integration operation’s portfolio also in- cludes a range of high-power semiconductors, a core technology for power electronics deployed in HVDC, FACTS and rail applications. The Grid Inte- gration operation is also among the world’s lead- ing providers of transmission and distribution substations and associated life-cycle services. These substations are used in utility and non-utility applications including rail, data cen- ters and various industries. Battery energy stor- age solutions and shore-to-ship power supply are also part of the customer offering. 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 technologies. 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 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 95 that facilitate power quality, instrument trans- formers and other substation components. portfolio, equipping them with sensor-based technologies to facilitate asset optimization and enable smarter grids. The Transformers operation supplies transform- ers that are an integral component found across the power value chain, enabling the reliable, effi- cient and safe conversion of voltages levels. The product range includes dry- and liquid-distribution transformers, traction trans- formers for rail applications and special applica- tion transformers plus related components, for example, insulation kits, bushings and other transformer accessories. The business is also leading the way in digitalization of its transformer The Power Grids business also has an extensive portfolio of service offerings across the value chain. This is a growing focus area, leveraging the significant installed base. The portfolio includes spare parts, condition monitoring and mainte- nance services, on- and off-site repairs as well as retrofits and upgrades. Advanced software-based monitoring and advisory services further enhance the portfolio and support the increasing digitali- zation of grids. — Simplification of business model and structure In December 2018, as part of our ABB-OS pro- gram, we announced our intention to simplify our organizational structure through the discontinua- tion of the legacy matrix, country and regional structures, including regional Executive Commit- tee roles. These changes were completed by Janu- ary 1, 2020, and, effective January 1, 2020, the Ex- ecutive Committee has been streamlined to reflect this new structure. In addition, effective April 1, 2019, we changed the composition and operating model of our operat- ing Businesses. Our new organization provides each Business with full operational ownership of products, support functions, research and devel- opment, and geographic territories. The Busi- nesses are the single interface to customers, max- imizing proximity and speed. Corporate activities will focus on Group strategy, portfolio and perfor- mance management, capital allocation, core tech- nologies and the ABB Ability™ platform, providing a common framework across the group. In line with the simplification, as of April 1, 2019, we operate four customer-focused, entrepreneur- ial Businesses: Electrification, Industrial Automa- tion, Motion and Robotics & Discrete Automation. — Capital expenditures Total capital expenditures for property, plant and equipment and intangible assets (excluding intan- gibles acquired through business combinations) amounted to $762 million, $772 million and $752 million in 2019, 2018 and 2017, respectively. In 2019, 2018 and 2017, capital expenditures were 21 percent, 16 percent and 10 percent lower, re- spectively, than depreciation and amortization. Excluding acquisition-related amortization, capi- tal expenditures were 9 percent, 20 percent and 24 percent higher, respectively, than depreciation and amortization. Capital expenditures in 2019 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 2019 were driven primarily by up- grades and maintenance of existing production facilities, mainly in the U.S., Switzerland, Germany, Italy, Finland, Sweden and Austria. Expenditures in Austria included amounts for a state-of-the-art innovation and training campus, which is planned to become one of our largest research and devel- opment centers. Capital expenditures in emerg- ing markets were highest in China, India and Po- land. Capital expenditures in emerging markets 96 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P were made primarily to increase production ca- pacity by investing in new or expanded facilities. We started construction of an advanced, auto- mated and flexible robotics factory in China, which is designed to combine our connected digi- tal technologies, state-of-the-art collaborative ro- botics and innovative artificial intelligence re- search. The share of emerging markets capital expenditures as a percentage of total capital ex- penditures in 2019, 2018 and 2017 was 27 percent, 31 percent and 28 percent, respectively. At December 31, 2019, construction in progress for property, plant and equipment was $500 mil- lion, mainly in the U.S., Switzerland, Finland, Germany, Austria and Sweden. At December 31, 2018, construction in progress for property, plant and equipment was $464 million, mainly in the U.S., China, Sweden, Finland and Germany while 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. Our capital expenditures relate primarily to prop- erty, plant and equipment. For 2020, we estimate the expenditures for property, plant and equip- ment will be lower than our annual depreciation and amortization charge, excluding acquisition-related amortization. — 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 take advantage of opportunities to leverage the scale of ABB on a global, business and/or business line level, as appropriate, to optimize the efficiency of our supply networks in a sustainable manner. Our supply chain management organization’s ac- tivities and objectives include: • 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 enterprise resource planning (ERP) systems, • strengthen ABB’s supply chain network by implementing an effective product category management structure and extensive competency-based training, and • monitor and develop our supply base to ensure 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 mate- rial costs over the last few years. While we expect global commodity prices to remain highly volatile, we expect to offset some market volatility through the use of long-term contracts and global sourcing. We seek to mitigate the majority of our exposure to commodity price risk by entering into hedges. For example, we manage copper, silver and alumi- num price risk using principally swap contracts based on prices for these commodities quoted on leading exchanges. ABB’s hedging policy is de- signed to safeguard margins by minimizing price volatility and providing a stable cost base during order execution. In addition to using hedging to reduce our exposure to fluctuations in raw materi- als 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 2019 supply chain management personnel in our businesses, and in the countries in which we operate, along with the category teams, continued to focus on value chain optimi- zation 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 section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. We initiated conflict minerals processes in 2013 and have continuously aimed at improving and tailoring the processes to our value chain. We continue to work with our A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 97 suppliers and customers, to enable us to comply with the rules and disclosure obligations. Further information on ABB’s Conflict Minerals policy and supplier requirements can be found under “Mate- rial Compliance” at new.abb.com/about/ supplying. — Patents and trademarks While we are not materially dependent on any one of our intellectual properties, as a technology-driven company, we believe that intel- lectual property rights are crucial to protect the assets of our business. Over the past ten years, we have continued to substantially add new applica- tions to our existing first patent filings, and we in- tend to continue our aggressive approach to seek- ing patent protection. As of December 31, 2019, we have approximately 33,500 patent applications and registrations, of which approximately 8,500 are pending applications. These patents include more than 3,800 utility model and design applica- tions and registrations, of which approximately 400 are pending applications. In 2019, we filed more than 1,400 patent, utility model and design applications for more than 1,500 new inventions. Based on our existing intellectual property strat- egy, we believe that we have adequate control over our core technologies. The “ABB” trademarks and logo are protected in all of the countries in which we operate. We aggressively defend our intellec- tual property rights to safeguard the reputation associated with the ABB technology and brand. While these intellectual property rights are funda- mental to all of our businesses, there is no depen- dency of the business on any single patent, utility model or design application. — Management overview The combined impact of the Energy and Fourth In- dustrial Revolution is profoundly influencing how we power the world, produce goods, work, live in cities and move in a sustainable way. On December 17, 2018, we announced an agreed sale of our Power Grids business, expanding our existing partnership with Hitachi Ltd (Hitachi). We also announced our new strategy, with ABB pro- posing fundamental actions to focus, simplify and lead the digital transformation of industries, for enhanced customer value and shareholder re- turns. To deliver on our ambitions, we are intro- ducing a new operating model, ABB Operating System (ABB-OS). ABB-OS provides a common framework across the Group, governing manage- ment processes, such as market validation, bud- geting and portfolio management, in order to fa- cilitate clear decision making and a balanced approach to value creation. Our new, simplified, operating model also positions the Businesses to be the single interface to customers, maximizing proximity and speed. Each Business is intended to have full entrepreneurial ownership of operations, functions, research and development, and territo- ries. Significant amounts of company resources and management effort were dedicated to both of these areas in 2019. We plan 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. Our 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 100 percent, and • Basic EPS growth above revenue growth. In 2019, we successfully began implementing our new strategy. Power Grids separation Significant work was undertaken during 2019 to separate the Power Grids business from ABB. By 98 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P December 31, 2019, the new Power Grids legal structure was substantially complete, allowing the business to commence operations within a stand-alone consolidated business. In addition, the transfer of resources from ABB to the Power Grids business progressed significantly. Overall, the separation of the Power Grids business is pro- ceeding as planned and the divestment is on schedule with closing expected at the end of the second quarter of 2020. New operating model, ABB-OS Since April 1, 2019, we have been operating through four customer-focused Businesses: Electrification, Industrial Automation, Motion, and Robotics & Discrete Automation. In par- ticular, ABB has integrated group sales and the vast majority of other centrally managed functional activities into the Businesses, trans- ferred country resources to the Businesses and worked to streamline the corporate cen- ter. At the end of 2019, regional structures were dismantled and the new operating model was fully effective as of January 1, 2020. We reached the run-rate savings targeted for 2019 and continue to target annualized net savings of approximately $500 million in the medium term from our new operating model. ABB continuing operations headcount was 113,900 at the begin- ning of the year and 110,000 at the end of 2019, partly also reflecting stranded cost elimination. Continuous improvement plans are now in place within each Business and fully integrated into the annual planning process to support delivery of this objective. Business progress During 2019, the Group performed with resilience in the context of a tougher market environment, slightly improving revenues and gross margin while undertaking an extensive transformation. Orders and revenues were higher in the Electrifi- cation and Motion Businesses while they de- creased in the Industrial Automation and Robot- ics & Discrete Automation Businesses. These developments reflect some easing in global eco- nomic growth in 2019, while more substantial headwinds in discrete markets, particularly auto- motive and machine builders, resulted in larger declines in orders and revenues in the Robotics & Discrete Automation Business. During 2019, the order backlog increased 2 percent. The performance of our Businesses was mixed during 2019 with increases in segment profit (Op- erational EBITA) in both the Electrification and Motion Businesses and decreases in the other two Businesses. Group profitability was supported by solid execution in the Motion Business, lower losses in non-core businesses and reductions in costs in Corporate, including $72 million of stranded corporate costs, and some realized sav- ings from the ABB-OS simplification program. Group profitability was hampered by some spe- cific headwinds in other businesses. In the Electri- fication Business, this included dilutive impact of including a full year of the GEIS business, which was acquired in June 2018 as well as a large loss recorded in connection with the planned divest- ment of the solar inverters business. In the Indus- trial Automation Business, the segment profit was impacted specifically by operational chal- lenges in the Kusile power generation project in South Africa as well as adverse mix. The segment profit of the Robotics & Discrete Automation Business was impacted by lower volumes and ad- verse mix stemming from the downturn in its key end-markets. Within the Electrification Business, the integra- tion of GEIS progressed well. ABB aims to deliver approximately $200 million of annual cost syner- gies by 2022, of which approximately 80 percent is anticipated to come from product and technol- ogy portfolio harmonization and footprint optimi- zation. To support this transformation, we plan to expend approximately $480 million for the GEIS business through 2022. By the end of 2019, the 13,000 employees from GEIS had been transi- tioned into ABB, while product substitutions were proceeding ahead of plan with 100 new products planned for commercial launch in 2020. In North America, 13 facilities have been designated for closure while 4 facilities have been identified for expansion. Agreements for a number of divestments and ac- quisitions were secured in 2019 to strengthen our portfolio. Of note, the Electrification Business an- nounced in July 2019 an agreement to divest the solar inverters business to FIMER S.p.A (Italy). The transaction will enable the Electrification Busi- ness to focus its business portfolio on other growth markets. In December 2019, the Electrifi- cation Business completed the divestment of two Shanghai-based joint ventures, acquired in 2018 as part of the GEIS transaction, reducing the com- plexity of the Electrification Business in China. In October 2019, we also announced the planned ac- quisition of a majority stake in Shanghai Charge- dot New Energy Technology Co., Ltd, a leading Chinese e-mobility solution provider. The acquisi- tion will extend our relationships with leading Chinese EV manufacturers and broaden our e-mobility portfolio with hardware and software developed specifically for local requirements. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 99 We also continued to make organic growth invest- ments in a disciplined manner, prioritizing re- search and development and sales expenditure while reducing administrative costs. Total non-order related research and development was $1.2 billion in 2019, or approximately 4 percent of revenues. Organic investment highlights from 2019 include the opening of the Robotics busi- ness’s first dedicated healthcare research center at the Texas Medical Center in Houston, United States. This laboratory will focus on developing non-surgical medical robotics systems. The Mo- tion Business unveiled a semi-autonomous pro- duction plant in Baden, Switzerland, that makes energy storage systems for railways, e-buses/ trolleybuses and e-trucks, incorporating latest battery technologies that allow diesel engines to be efficiently converted to hybrid. ABB continued to expand its digital ecosystem, announcing several important partnerships over the year, including entering a global software partnership with Dassault Systèmes, a world-leading provider of 3D and digital twin software, and the establishment of a global alli- ance with Ericsson, the Swedish networking and telecommunications company, focused on explor- ing future 5G technologies. We also partnered with Huawei, the Chinese information and com- munication technology provider, for the industrial cloud in China. Partnerships help ensure ABB Ability™ solutions consistently utilize latest high-tech developments, maximizing the value proposition of digital solutions for our customers. Capital allocation The Board of Directors is proposing a dividend of 0.80 Swiss francs per share at the 2020 Annual General Meeting. Our sustained capital allocation priorities are unchanged: • funding organic growth, research and development, and capital expenditures at attractive 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 at the end of the second quarter of 2020, valu- ing the business at $11 billion, we intend to com- mence a share buyback program returning to shareholders approximately $7.6–7.8 billion of proceeds from the divestment. We intend to main- tain the level of dividend per share after the di- vestment and aim to maintain our “single A” credit rating long term. Short-term outlook Macroeconomic indicators suggest weaker growth in Europe and the U.S., while China’s stabi- lizing trend might be impacted by the novel coro- navirus outbreak. The global economy remains af- fected by geopolitical uncertainties. The end-markets we operate in are showing resil- ience, with headwinds in some markets, particu- larly the automotive, machine builders, and con- ventional power generation sectors. Foreign exchange translation effects are expected to con- tinue to influence our results. — 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, liabili- ties, 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: fair value of assets and liabilities assumed in business combinations; determination of corporate costs directly attributable to discontinued operations; 100 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P loss contingencies associated with litigation or threatened litigation and other claims and inqui- ries, environmental damages, product warranties, self-insurance reserves, regulatory and other pro- ceedings; calculation of pension and postretire- ment benefits and the fair value of pension plan assets; valuation allowances for deferred tax as- sets and amounts recorded for uncertain tax posi- tions; assumptions used to determine impairment of long-lived assets and in testing goodwill for impairment; inventory obsolescence and net real- izable value; the allowance for doubtful accounts; and the percentage-of-completion of projects as well as the amount of variable consideration the Company expects to be entitled to. Where appro- priate, we base our estimates on historical experi- ence and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates and assumptions. We deem an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur 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 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, the rights and commitments of both par- ties, and has been approved. By analyzing the type, terms and conditions of each contract or ar- rangement with a customer, we determine which revenue recognition method applies. We offer arrangements with multiple perfor- mance 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 delivery and/or performance may occur at different points in time or over different periods of time. Goods and services under such arrange- ments are evaluated to determine whether they form distinct performance obligations and should be accounted for as separate revenue transac- tions. We allocate the sales price to each distinct performance obligation based on the stand-alone selling price of each product or service 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 In- ternational Commercial shipping terms (as promulgated by the International Chamber of Commerce) in our sales of products to third party customers, 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 auto- mation 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, subcontractor and project-related overhead A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 101 costs as well as estimates of the amount of vari- able consideration to which we expect to be enti- tled. As a consequence, there is a risk that total contract costs or the amount of variable consider- ation will either exceed or be lower than, respec- tively, those we originally estimated (based on all information reasonably available to us) and the margin will decrease or the contract may become unprofitable. This risk increases if the duration of a contract increases because there is a higher probability that the circumstances upon which we originally developed our estimates will change, re- sulting in increased costs that we may not re- cover. 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, re- corded revenue and costs to date reflect the cur- rent estimates of the stage of completion of each project. Additionally, losses on such contracts are recognized in the period when they are identified and are based upon the anticipated excess of con- tract 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 credited to customers for achieving defined vol- ume levels. Taxes assessed by a governmental authority that are directly imposed on revenue-producing trans- actions between us and our customers, such as sales, use, value-added and some excise taxes, are excluded from revenues. As a result of the above policies, judgment in the selection and application of revenue recognition methods must be made. Contingencies As more fully described in “Item 8. Financial Infor- mation – Legal Proceedings” and in “Note 15 – Commitments and contingencies” to our Consoli- dated Financial Statements, we are subject to proceedings, litigation or threatened litigation and other claims and inquiries related to environ- mental, labor, product, regulatory, tax (other than income tax) and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue, of- ten with assistance from both internal and exter- nal legal counsel and technical experts. The re- quired amount of a provision for a contingency of any type may change in the future due to new de- velopments 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. Pension and other postretirement benefits As more fully described in “Note 17 – Employee benefits” to our Consolidated Financial 102 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P Statements, we have a number of defined benefit pension and other postretirement plans and rec- ognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in our Consolidated Balance Sheets. We measure such a plan’s assets and obligations that determine its funded status as of the end of the year. Significant differences between assumptions and actual experience, or significant changes in as- sumptions, may materially affect the pension ob- ligations. The effects of actual results differing 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 recognized 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 benefit pension plans by $419 million while a 0.25 percentage point increase in the discount rate would have decreased the PBO related to our defined benefit pension plans by $414 million. The expected return on plan assets is reviewed regularly and considered for adjustment annually based upon the target asset allocations and represents the long-term return expected to be achieved. Decreases in the expected return on plan assets result in an increase to pension costs. Holding all other assumptions constant, an in- crease or decrease of 0.25 percentage points in the expected long-term rate of asset return would have decreased or increased, respectively, the net periodic benefit cost in 2019 by $24 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, 2019, our defined benefit pension plans (in both continuing and discontinued operations) were $1,751 million underfunded compared to an underfunding of $1,677 million at December 31, 2018. Our other postretirement plans were under- funded by $110 million and $120 million at Decem- ber 31, 2019 and 2018, 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 6.3 percent per annum for 2020, 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 rec- onciled from the weighted-average global tax rate (rather than from the Swiss domestic stat- utory 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 juris- dictions”) and has already been subject to corpo- rate income tax in those foreign jurisdictions is, to a large extent, tax exempt in Switzerland. There- fore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries. There is no requirement in Switzerland for a parent company of a group to file a tax return of the group determining domes- tic and foreign pre-tax income and as our con- solidated income from continuing operations is predominantly earned outside of Switzerland, cor- porate income tax in foreign jurisdictions largely determines our global weighted-average tax rate. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 103 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 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 indefinitely 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 as- sets 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 con- nection with a business combination are initially estimated at the acquisition date. We re-evaluate these items quarterly, based upon facts and cir- cumstances that existed at the acquisition date with any adjustments to our preliminary esti- mates being recorded to goodwill provided that we are within the twelve-month measurement pe- riod. Subsequent to the measurement period or our final determination of the tax allowance’s or 104 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P contingency’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 Consoli- dated Income Statements and could have a mate- rial impact on our results of operations and finan- cial position. The fair values assigned to the intangible assets acquired are described in “Note 4 – Acquisitions and business divestments” as well as “Note 11 – Goodwill and other intangi- bles 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. 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 based on the pres- ent 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 car- rying value. Where the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. However, if the carrying value of the net assets assigned to the reporting unit 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, unless re- lated to a discontinued operation, in which case the losses would be recorded in “Income from dis- continued operations, net of tax”. In 2019, 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. Our reporting units are the same as our Busi- nesses for the Electrification, Motion and Robot- ics & Discrete Automation Businesses. For the In- dustrial Automation Business, we determined the reporting units to be one level below the Busi- ness, as the different products produced or ser- vices provided by this business do not share suffi- ciently similar economic characteristics to aggregate into a single reporting unit. In 2018, we performed a quantitative impairment test for all of the reporting units applicable at that time. The test reflected assumptions and forecasts resulting from our strategic plan for the period from 2019 to 2023. We concluded that the estimated fair values for each of our reporting units exceeded their respective carrying values and that none of the reporting units were impaired. 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 fair value of the reporting unit include the projected level of busi- ness operations, the weighted-average cost of The projected future cash flows used in the 2018 fair value calculation for all reporting units, except for the Machine and Factory Automation business within the Industrial Automation Business, were based on approved business plans for the report- ing units which covered a period of five years plus a calculated terminal value. The after-tax weighted-average cost of capital of 8 percent was based on variables such as the risk-free rate de- rived from the yield of 10-year U.S. treasury bonds as well as an ABB-specific risk premium. The ter- minal value growth rate was assumed to be 1 per- cent. The mid-term tax rate used in the test was 27 percent. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 105 For Machine and Factory Automation, which in- cludes the acquisition in 2017 of B&R, the pro- jected future cash flows used in the 2018 fair value calculation were based on an approved busi- ness plan which covered a period of eight years plus a calculated 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 ac- quisition process. The terminal value growth rate was assumed to be 3 percent and the after tax weighted-average cost of capital was 9.4 percent. The mid-term tax rate used in the test was 25 per- cent which is based on tax rates in countries where the business is primarily operating. 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. Through the use of sensitivity analysis, the assumptions used in the fair value calculation were stressed to determine the impact on the fair value of the re- porting 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. 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. 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. 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, products and solutions of our busi- nesses that are of strategic importance to our fu- ture growth. In 2019, we invested $1,198 million, or approximately 4.3 percent of our 2019 consoli- dated revenues, on research and development ac- tivities in our continuing operations. We also had expenditures of $50 million, or approximately 0.2 percent of our 2019 consolidated revenues, on order-related development activities. These are customer- and project-specific development efforts that we undertake to develop or adapt equipment and systems to the unique needs of our customers in connection with specific orders or projects. In addition to continuous product development, and order-related engineering work, we develop platforms for technology applications in our busi- nesses in our research and development laborato- ries, which operate on a global basis, such as our ABB Ability™ platform. Through active manage- ment of our investment in research and develop- ment, we seek to maintain a balance between 106 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P short-term and long-term research and develop- ment programs and optimize our return on investment. venture arm ABB Technology Ventures and our start-up collaboration arm SynerLeap. 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 multiple universities and research institutions to build research networks and foster new technologies. We believe these collaborations shorten the amount of time required to turn basic ideas into viable products, and they additionally help us to recruit and train new personnel. We have built numerous university collaborations in the U.S., Europe and Asia, including long-term, strategic relationships with Carnegie Mellon Uni- versity, North Carolina State University, Virginia Polytechnic Institute and State University, Massa- chusetts Institute of Technology, Imperial College London, ETH Zurich, Royal Institute of Technology (KTH) Stockholm, Cambridge University, Dresden University of Technology, Huazhong University of Science & Technology (HUST), Zhejiang University and Xi’an Jiaotong University (XJTU). We are further leveraging our ecosystem to en- hance our innovation efforts and gain speed with strategic partners by investing and collaborating with start-ups worldwide via our corporate Our collaborative research and development proj- ects include research on artificial intelligence, ma- terials, sensors, micro-engineered mechanical systems, robotics, controls, manufacturing, dis- tributed 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, wireless communication processes as well as ad- vanced artificial intelligence solutions are de- signed to improve efficiency in plants and facto- ries around the world, including our own. — Acquisitions and divestments Acquisitions There were no acquisitions in 2019. During 2018 and 2017, ABB paid $2,638 million and $1,992 mil- lion to purchase three and four businesses, re- spectively. The amounts exclude increases in in- vestments 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 U.S., provides technologies that distribute and control electricity and support the commercial, data center, health care, mining, renewable energy, oil and gas, water and telecom- munications sectors. At the time of the acquisi- tion, GEIS had approximately 13,500 employees. The principal acquisition in 2017 was Bernecker + Rainer Industrie-Elektronik GmbH (B&R), a world- wide provider of product- and software-based, open-architecture solutions for machine and fac- tory automation. At the time of the acquisition, B&R employed more than 3,000 people, including about 1,000 research and development, and appli- cation engineers, and operated across 70 coun- tries in the machine and factory automation mar- ket segment. Divestments In 2019, we recorded net gains (including transac- tion costs) of $55 million, primarily due to the di- vestment of two businesses in China. There were no significant divestments in 2018. On March 1, 2017, we divested our high-voltage ca- ble system business. Total cash proceeds from all business divestments during 2017 amounted to $605 million, net of transaction costs and cash disposed. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 107 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 at the end of the second quarter of 2020, following the receipt of customary regula- tory 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 discontinued operations and the as- sets and liabilities are reflected as held-for-sale for all periods presented. For more information on our discontinued operations, see “Note 3 – Ba- sis of presentation and assets held for sale” to our Consolidated Financial Statements. Planned divestment of solar inverters business During 2019, ABB reached an agreement to sell its solar inverters business to FIMER S.p.A. (Italy) for no consideration. Under the agreement ABB is ob- ligated to transfer cash on the closing date and make additional cash payments to the purchaser through to 2025. As a result, in 2019, we recorded a loss, of $421 million in “Other income (expense), net”, representing the excess of the carrying value over the estimated fair value of this business. The carrying value at December 31, 2019, includes a loss arising from the cumulative translation ad- justment of $99 million. The assets and liabilities of this business are included within assets and lia- bilities held for sale in our Consolidated Balance Sheet as at December 31, 2019. For more informa- tion on assets held for sale, see “Note 3 – Basis of presentation and assets held for sale” to our Con- solidated Financial Statements. — Exchange rates We report our financial results in U.S. dollars. Due to our global operations, a significant amount of our revenues, expenses, assets and liabilities are denominated in other currencies. As a conse- quence, movements in exchange rates between currencies may affect: (i) our profitability, (ii) the comparability of our results between periods and (iii) the reported carrying value of our assets and liabilities. We translate non-USD denominated results of 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, 2019, 2018 and 2017, were as follows: Exchange rates into $ 2019 2018 2017 EUR 1.00 CHF 1.00 1.12 1.03 1.15 1.02 1.20 1.02 The average exchange rates between the USD and the EUR and the USD and the CHF for the years ended December 31, 2019, 2018 and 2017, were as follows: Exchange rates into $ 2019 2018 2017 EUR 1.00 CHF 1.00 1.12 1.01 1.18 1.02 1.13 1.02 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. 108 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P In 2019, approximately 74 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 2019, approximately 72 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 cost of sales and selling, general and administra- tive expenses were reported in the following currencies: • Euro, approximately 21 percent, and • Chinese renminbi, approximately 12 percent. We also incur expenses other than cost of sales and selling, general and administrative expenses in various currencies. The results of operations and financial position of our subsidiaries outside of the United States are generally accounted for in the currencies of the countries in which those subsidiaries are located. We refer to these currencies as “local currencies”. Local currency financial information is then 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 varia- tions in local currency results by using a constant foreign exchange rate for all periods under com- parison. Differences in our results of operations in local currencies as compared to our results of operations in USD are caused exclusively by changes in currency exchange rates. While we consider our results of operations as measured in local currencies to be a significant 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. — 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 re- ported 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. The undiscounted value of future revenues we expect to generate from our orders at any point in time is represented by our order backlog. 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 larger orders result in reve- nues in periods after the order is booked. Conse- quently, the level of orders generally cannot be used to accurately predict future revenues or op- erating performance. Orders that have been placed can often be cancelled, delayed or modi- fied by the customer. These actions can reduce or delay any future revenues from the order or may result in the elimination of the order. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 109 — Transactions with affiliates and associates In the normal course of our business, we purchase products from, sell products to and engage in other transactions with entities in which we hold an equity interest. The amounts involved in these transactions are not material to ABB Ltd. Also, in the normal course of our business, we engage in transactions with businesses that we have di- vested. We believe that the terms of the transac- tions we conduct with these companies are nego- tiated on an arm’s length basis. — Performance measures We evaluate the performance of our Businesses 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, related and implementation costs, • 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 (including fair value adjustment on assets and liabilities held for sale), • 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, costs for planned divestment of the Power Grids business, certain asset write downs/impair- ments, non-operational gains, as well as other items which are determined by management on a case-by-case basis. See “Note 23 – Operating segment and geo- graphic data” to our Consolidated Financial State- ments for a reconciliation of the total Operational EBITA to income from continuing operations be- fore taxes. 110 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — Analysis of results of operations Orders and order backlog were as follows: Orders and order backlog: ($ in millions) Orders 2019 2018 2017 28,588 28,590 25,034 Order backlog at December 31, 13,324 13,084 12,491 Our consolidated results from operations were as follows: A more detailed discussion of the orders, reve- nues, income from operations and Operational EBITA for our Businesses follows in the sections of “Business analysis” below entitled “Electrifica- tion”, “Industrial Automation”, “Motion”, “Robot- ics & Discrete Automation”, and “Corporate and Other”. Orders and revenues of our businesses in- clude intersegment transactions which are elimi- nated in the “Corporate and Other” line in the ta- bles below. Income statement data: ($ in millions, except per share data in $) Revenues Cost of sales Gross profit Selling, general and administrative expenses Non-order related research and development expenses 2019 2018 2017 27,978 27,662 25,196 (19,072) (19,118) (17,350) 8,906 8,544 7,846 Orders % Change ($ in millions) 2019 2018 2017 2019 Electrification 13,050 11,867 10,143 10% (5,447) (5,295) (4,765) Industrial Automation 6,432 6,697 6,113 (4)% (1,198) (1,147) (1,013) Motion 6,782 6,725 5,966 1% 2018 17% 10% 13% Other income (expense), net (323) 124 162 Income from operations 1,938 2,226 2,230 Net interest and other finance expense Non-operational pension (cost) credit (148) (190) (161) 72 83 33 Corporate and Other Robotics & Discrete Automation Operating Businesses 3,260 3,808 2,977 (14)% 28% 29,524 29,097 25,199 1% 15% Provision for taxes (772) (544) (583) Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income Net income attributable to noncontrolling interests 1,090 1,575 1,519 438 723 846 1,528 2,298 2,365 (89) (125) (152) Net income attributable to ABB 1,439 2,173 2,213 Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 1,043 1,514 1,441 396 659 772 1,439 2,173 2,213 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 0.49 0.71 0.67 0.19 0.67 0.31 1.02 0.36 1.04 Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 0.49 0.71 0.67 0.19 0.67 0.31 1.02 0.36 1.03 Non-core and divested businesses Intersegment eliminations and other (91) 364 643 n.a. (43)% (845) (871) (808) Total 28,588 28,590 25,034 n.a. 0% n.a. 14% In 2019, total orders remained stable compared to 2018 (increased 4 percent in local currencies). To- tal orders reflects the moderate organic growth in the Electrification and Motion Businesses, damp- ened by lower orders in the Industrial Automation and Robotics & Discrete Automation Businesses. Order declines were most significant in the Ro- botics & Discrete Automation Business as several of its primary industry sectors reduced order lev- els. Changes in the business portfolio, mainly from the inclusion of GEIS for a full year in 2019, positively impacted total orders by approximately 3 percent. For additional information about Busi- ness order performance in all periods, refer to the relevant sections of “Business analysis” below. In 2018, total orders increased 14 percent (14 per- cent in local currencies). Orders grew organically in all Businesses with the most significant growth in the Motion Business, while the Industrial Auto- mation Business also received strong order levels in the Marine & Ports business line. Orders in- creased approximately 6 percent due to changes A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 111 in the business portfolio including GEIS, acquired at end June 2018 and a full year of contribution from B&R, acquired in July 2017. 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: Korea and South Africa. Growth in the Americas included a 12 percent impact due to acquisitions, including GEIS and B&R. In Europe, these acquisi- tions had a positive impact of 4 percent while the impact in Asia, Middle East and Africa was 2 percent. Order backlog % Change December 31, % Change ($ in millions) 2019 2018 2017 2019 2018 ($ in millions) 2019 2018 2017 2019 Europe 10,509 10,725 9,202 The Americas 9,057 8,243 7,006 (2)% 10% 17% 18% Electrification 4,488 4,113 3,098 9% Industrial Automation 5,077 4,986 5,171 9,022 9,622 8,826 (6)% 9% Motion 2,967 2,740 2,674 Asia, Middle East and Africa 2018 33% (4)% 2% 2% 8% Total 28,588 28,590 25,034 0% 14% Orders in 2019 grew in the Americas but de- creased in Asia, Middle East and Africa and in Eu- rope. In the Americas orders increased 10 percent (11 percent in local currencies). Orders increased in Chile, Brazil, Argentina, Canada, Mexico, Peru and the United States. In Asia, Middle East and Af- rica orders declined 6 percent (4 percent in local currencies), negatively impacted by the Motion and Robotics & Discrete Automation Businesses. Orders were higher in Qatar, Singapore, Japan, Australia and South Korea while they declined in China, India, Saudi Arabia, the United Arab Emir- ates and South Africa. In Europe orders declined 2 percent (increased 4 percent in local currencies). Orders in local currencies increased in the Indus- trial Automation and Motion Businesses. Orders declined in Norway, the United Kingdom, Switzer- land, Finland, Italy and Sweden. Orders remained flat in Switzerland while they increased in France, Denmark, Germany, the Netherlands, Russia and Spain. Growth in the Americas included a 10 per- cent increase due to changes in the business port- folio, primarily due to the inclusion of GEIS for a full year. In Europe, these changes had a positive impact of 2 percent while these changes had a negative impact of 3 percent in Asia, Middle East and Africa. Orders in 2018 increased in all regions. In Europe orders grew 17 percent (14 percent in local curren- cies) and grew in all of the Businesses. In local cur- rencies, orders increased in Finland, Switzerland, Germany, 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 & Discrete Automation Business. Orders were higher in China, Japan, Egypt, Malaysia and India while they declined in Saudi Arabia, South Robotics & Discrete Automation Operating Businesses 1,356 1,438 1,279 (6)% 12% 13,888 13,277 12,222 5% 9% Corporate and Other Non-core and divested businesses Intersegment eliminations 192 555 1,055 (65)% (47)% (756) (748) (786) Total 13,324 13,084 12,491 n.a. 2% n.a. 5% Consolidated order backlog increased 2 percent (2 percent in local currencies) from December 31, 2018, to December 31, 2019. Order backlog in- creased in the Electrification Business, supported by order growth in all regions, especially in Asia, Middle East and Africa as well as in Europe. Order backlog also increased in the Motion Business driven by higher order intake in Europe mainly from Germany, Spain, Russia, Finland and France. Order backlog in the Industrial Automation Busi- ness increased slightly due to the order intake in the system business and in Turbocharging. Order backlog declined in the Robotics & Discrete Auto- mation Business as a result of the weak order in- take in the Robotics business. 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 Business due to the acquisition of GEIS in June 2018 and in the Motion and Robotics & Discrete Automation Businesses. In the Industrial Automation Business, 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 im- pact on order backlog from divestments and ac- quisitions was an increase of 4 percent. 112 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P Revenues % Change ($ in millions) 2019 2018 2017 2019 Electrification 12,728 11,686 10,094 9% Industrial Automation 6,273 6,500 6,472 (3)% Motion 6,533 6,463 5,877 1% 2018 16% 0% 10% Robotics & Discrete Automation Operating Businesses 3,314 3,611 2,957 (8)% 22% 28,848 28,260 25,400 2% 11% Corporate and Other 37 273 661 (86)% (59)% Non-core and divested businesses Intersegment eliminations and other (907) (871) (865) Total 27,978 27,662 25,196 n.a. 1% n.a. 10% In 2019, revenues increased 1 percent (5 percent in local currencies). Revenues were higher in the Electrification and Motion Businesses while reve- nues decreased in the Industrial Automation and Robotics & Discrete Automation Businesses. In the Electrification Business, higher revenues were mainly attributable to the inclusion of a full year of revenues from GEIS. The revenue decrease in the Robotics & Discrete Automation Business was due to weakness in automotive-related sectors and weak book-and-bill business. For additional information about the Business revenues perfor- mance in all periods, please refer to “Business analysis” below. Revenues in 2018 increased 10 percent (9 percent in local currencies) with growth in all Businesses except Industrial Automation, reflecting the trend in orders during 2018. In Electrification, the in- crease in revenues was mainly attributable to the acquisition of GEIS in June 2018. The increase in revenues in the Robotics & Discrete Automation Business was mainly attributable to the inclusion of a full year of revenues for B&R which was ac- quired in July 2017. 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) 2019 2018 2017 2019 2018 Europe 10,097 10,129 9,142 The Americas 8,955 8,042 6,870 0% 11% Asia, Middle East and Africa 8,926 9,491 9,184 (6)% Total 27,978 27,662 25,196 1% 11% 17% 3% 10% In 2019, revenue growth was mixed across the re- gions. In Europe, revenues remained flat (in- creased 6 percent in local currencies) with higher local currency revenues in the Electrification, Mo- tion and Robotics & Discrete Automation Busi- nesses and lower revenues in the Industrial Auto- mation Business. Revenues increased in the Netherlands, Spain, Poland, Switzerland and Bel- gium, while they were lower in Finland, Turkey, It- aly, Germany and Sweden. Revenues in the Ameri- cas increased 11 percent (13 percent in local currencies) largely due to the impact of including GEIS for a full year. Revenues were higher in the U.S., Mexico, Canada, Peru and Chile. In Asia, Mid- dle East and Africa, revenues decreased 6 percent (3 percent in local currencies) due to lower reve- nues in the Robotics and Energy Industries busi- ness lines. Revenues declined in Saudi Arabia, South Korea, South Africa, India and China but in- creased in Australia, Japan and Singapore. In 2018, revenues increased in all regions. In Eu- rope, revenues increased 11 percent (9 percent in local currencies) reflecting growth in the Motion Business as well as the Electrification Business, which benefited from the acquisition of GEIS. Rev- enues grew in the Robotics & Discrete Automation Business which benefited from the inclusion of a full year of revenues from B&R. In local currencies, revenues declined in Sweden, Norway and the United Kingdom, while revenues increased in Switzerland, Spain and Poland. Revenues in the Americas increased 17 percent (19 percent in local currencies), 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 percent (3 percent in local currencies). In local currencies, revenues declined in Saudi Arabia, Qa- tar and South Korea while revenues increased in China, India, 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. In 2019, cost of sales was steady (increased 3 per- cent in local currencies) at $19,072 million and the gross margin improved by 0.9 percent as cost of sales as a percentage of revenues decreased from 69.1 percent in 2018 to 68.2 percent in 2019. Gross margins improved in the Electrification Business, despite the dilutive impacts of the GEIS business and were also higher in the Motion Business. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 113 Margins were lower in the Industrial Automation and Robotics & Discrete Automation Businesses. Lower losses in Non-core businesses also reduced cost of sales. Continued price-erosion was lower than in 2018 and we had some positive impacts from changes in commodity prices. We also bene- fited from the results of supply chain and opera- tional excellence initiatives. In 2018, cost of sales increased 10 percent (10 per- cent in local currencies) to $19,118 million, a similar increase as Revenues. Growth was due to the ac- quisition of GEIS, a full year of inclusion of B&R and growth in the Motion Business. Cost of sales as a percentage of revenues increased slightly from 68.9 percent in 2017 to 69.1 percent in 2018, due to the impact of the lower gross margin business in the acquired GEIS business, the impact of higher commodity prices and certain project-related charges in the non-core EPC business. Cost of sales benefited from continued efforts to gener- ate savings from supply chain and operational ex- cellence programs. Selling, general and administrative expenses The components of selling, general and adminis- trative expenses were as follows: ($ in millions, unless otherwise stated) Selling expenses 2019 2018 2017 3,383 3,228 2,864 Selling expenses as a percentage of orders received 11.8% 11.3% 11.4% 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 2,064 2,067 1,901 7.4% 7.5% 7.5% 5,447 5,295 4,765 19.5% 19.1% 18.9% 19.3% 18.8% 19.0% In 2019, general and administrative expenses re- mained at the same level as in 2018 (increased 3 percent in local currencies). As a percentage of revenues, general and administrative expenses decreased to 7.4 percent from 7.5 percent in 2018. General and administrative expenses were im- pacted by approximately $240 million of restruc- turing and implementation expenses for the OS program and additional general and adminis- trative expenses from the integration of the ac- quired GEIS business. General and administrative expenses were also impacted by the costs associated with the planned divestment of the Power Grids business. General and administrative expenses in 2019 benefited from a $72 million re- duction of stranded corporate costs compared to 2018. Stranded costs are overhead and other man- agement costs which could previously be allo- cated to the Power Grids business. 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 2017, general and admin- istrative expenses increased driven by the contin- uation of a series of strategic initiatives and addi- tional general and administrative expenses from the acquired B&R and GEIS businesses. General and administrative expenses in 2018 includes $297 million of stranded corporate costs com- pared with $286 million in 2017. In 2019, selling expenses increased 5 percent com- pared to 2018 (8 percent in local currencies) and includes $27 million of restructuring and imple- mentation expenses for the OS program. We also increased investments in sales efforts in selective businesses including Machine and Factory Auto- mation, Process Industries, Installation Products, Measurement & Analytics and Drives and also had higher selling expenses from the impact of includ- ing a full year of the acquired GEIS business. These factors resulted in increasing selling ex- penses as a percentage of orders received from 11.3 percent to 11.8 percent. In 2018, selling expenses increased 13 percent compared to 2017 (12 percent in local currencies) primarily driven by extended sales activities in se- lective businesses like Robotics, Drives and Mo- tors & Generators and additional selling expenses from the acquired B&R and GEIS businesses. Sell- ing expenses as a percentage of orders received decreased from 11.4 percent to 11.3 percent on higher orders received. In 2019, selling, general and administrative ex- penses increased 3 percent compared to 2018 (6 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses increased from 18.8 percent to 19.3 percent mainly from the impact of the higher selling expenses described above. In 2018, selling, general and administrative ex- penses increased 11 percent compared to 2017 (10 percent in local currencies) and as a percent- age of the average of orders and revenues, selling, 114 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P general and administrative expenses decreased from 19.0 percent to 18.8 percent mainly from the impact of the higher average orders and revenues. Non-order related research and development expenses In 2019, non-order related research and develop- ment expenses increased 4 percent (9 percent in local currencies) compared to 2018 driven by a continued focus on investments in promising key technologies. 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 areas. Non-order related research and development ex- penses as a percentage of revenues increased in 2019 to 4.3 percent, after increasing to 4.1 percent in 2018 from 4.0 percent in 2017. Other income (expense), net ($ in millions) 2019 2018 2017 Restructuring and restructuring- related expenses(1) Net gain from sale of property, plant and equipment Asset impairments (69) (37) (35) 51 (61) 57 (36) 37 (27) Fair value adjustment on assets and liabilities held for sale (421) — business which was classified as held for sale in June 2019. See “Note 3 – Basis of presentation and assets held for sale” to our Consolidated Financial Statements for additional information. Partially offsetting this was a gain of $92 million due to a favorable resolution of an uncertain purchase price adjustment relating to the acquisition of GEIS. See “Note 4 – Acquisitions and business di- vestments” to our Consolidated Financial State- ments for additional information. In 2018, “Other income (expense), net” was an in- come of $124 million, lower than in 2017. The pri- mary reason was that 2017 included a significant gain on sale of the Cables business. Partially off- setting this was that 2018 included lower costs for legal claims (recorded within other expense) and a currency-related gain on a substantial liqui- dation of a foreign subsidiary. Income from operations ($ in millions) 2019 2018 2017 2019 2018 Electrification 1,049 1,290 1,352 (19)% (5)% % Change Industrial Automation Motion Robotics & Discrete Automation Operating Businesses Corporate and Other Intersegment elimination 700 1,009 853 924 829 (18)% 707 9% 3% 31% 298 456 387 (35)% 18% 3,056 3,523 3,276 (13)% 8% (1,113) (1,302) (1,052) n.a. n.a. Favorable resolution of an uncertain purchase price adjustment Net gain (loss) from sale of businesses Gain on liquidation of foreign subsidiary Income from equity-accounted companies and other income (expense), net Total (1) Excluding asset impairments — — 252 — 92 55 — — 57 31 Total 1,938 2,226 2,230 (13)% (5) 5 6 n.a. n.a. 0% In 2019 and 2018, changes in income from opera- tions were a result of the factors discussed above and in the divisional analysis below. 30 (323) 52 124 (65) 162 Net interest and other finance expense “Other income (expense), net” primarily includes certain restructuring and restructuring-related expenses, gains and losses from sale of busi- nesses and sale of property, plant and equipment, recognized asset impairments, our share of in- come or loss from equity-accounted companies as well as other losses. In 2019, “Other income (expense), net” was a loss of $323 million, while it was a gain of $124 million in 2018. In 2019, the amount includes the impact of recording a loss of $421 million for a fair value adjustment to the net assets of the solar inverters Net interest and other finance expense consists of “Interest and dividend income” offset by “Inter- est and other finance expense”. “Interest and other finance expense” includes in- terest expense on our debt, the amortization of upfront transaction costs associated with long-term debt and committed credit facilities, commitment fees on credit facilities, foreign ex- change gains and losses on financial items and gains and losses on marketable securities. In ad- dition, interest accrued relating to uncertain tax positions is included within interest expense. “In- terest and other finance expense” excludes A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 115 interest expense which has been allocated to dis- continued operations. ($ in millions) 2019 2018 2017 Interest and dividend income 67 72 73 Interest and other finance expense Net interest and other finance expense (215) (262) (234) (148) (190) (161) In 2019, “Interest and other finance expense” de- creased compared to 2018 primarily due to lower foreign exchange losses compared to 2018 as well as lower effective interest rates on outstanding long-term debt. In 2018, “Interest and other finance expense” in- creased compared to 2017 primarily due to an in- crease in average outstanding commercial paper borrowings and the interest expense associated with the bonds issued in 2018. Non-operational pension (cost) credit The Non-operational pension credit of $72 million in 2019 was lower than the $83 million recorded in 2018 primarily due to a smaller pension asset base used in the computation of the expected re- turn on assets and in increase in the settlement charges, partially offset by the change in ap- proach used to calculate the interest cost as de- scribed in “Note 17 – Employee benefits” to our Consolidated Financial Statements. 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 computa- tion of the expected return on plan assets. approximately 2 percent. In connection with this loss, we also recorded a change in a valuation al- lowance which increased the effective tax rate by approximately 6 percent. During 2019, the effec- tive tax rate also increased further due to impacts relating to the planned divestment of the Power Grids business, primarily including non-deductible expenses, taxes payable due to the reorganization of the business in connection with the planned sale, changes to valuation allow- ances and additional taxes for unremitted earn- ings. Additionally, the effective tax rate also in- creased due to changes in valuation allowances and changes in taxes due to interpretation of tax law and double tax treaty agreements by compe- tent tax authorities. See “Note 3 – Basis of presen- tation and assets held for sale” to our Consoli- dated Financial Statements for additional information. 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. Income from continuing operations, net of tax As a result of the factors discussed above, income from continuing operations, net of tax, decreased by $485 million to $1,090 million in 2019 com- pared to 2018, and increased by $56 million to $1,575 million in 2018 compared to 2017. Provision for taxes Income from discontinued operations, net of tax ($ in millions) 2019 2018 2017 Income from continuing operations before taxes Provision for taxes 1,862 2,119 2,102 (772) (544) (583) Income from discontinued operations, net of tax, was $438 million, $723 million and $846 million for 2019, 2018 and 2017, respectively. Effective tax rate for the year 41.5% 25.7% 27.7% In 2019, the effective tax rate increased from 25.7 percent to 41.5 percent. The distribution of income within the group resulted in a lower weighted-average global tax rate, including the impact of recording a loss for the planned sale of the solar inverters business which reduced the weighted-average global tax rate by 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 estate properties which were previously reported within Corporate and Other. The divestment is ex- pected to be completed at the end of the second quarter of 2020, following the receipt of custom- ary regulatory approvals. As this divestment 116 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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 discontinued operations for all peri- ods presented. In addition, consistent with the presentation of the business as discontinued op- erations, during 2019, we have not recorded de- preciation or amortization on the property, plant and equipment, and intangible assets reported as discontinued operations. In 2018 and 2017, re- spectively, a total of $258 million and $265 million of depreciation and amortization expense was re- corded for such assets. Income from discontinued operations excludes certain costs which were previously allocated to the Power Grids business as these costs were not directly attributable to the business. As a result, $225 million, $297 million and $286 million, for 2019, 2018 and 2017, respectively, of allocated overhead and other management costs (stranded corporate costs), which were previously able to be included in the measure of segment profit for the Power Grids business are now reported as part of Corporate and Other. In 2019 and 2018, income from discontinued operations, before taxes, in- cluded $28 million and $18 million, respectively, for costs incurred to execute the transaction. Income from discontinued operations for 2019, 2018 and 2017 included income from operations of $605 million, $951 million and $1,119 million, re- spectively. In addition, in 2019, 2018 and 2017 we recorded $167 million, $228 million and $273 mil- lion, respectively, as provision for taxes within discontinued operations. For additional information on the planned divest- ment and discontinued operations see “Note 3 – Basis of presentation and assets held for sale” 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 $734 mil- lion to $1,439 million in 2019 compared to 2018, and decreased by $40 million to $2,173 million in 2018 compared to 2017. Earnings per share attributable to ABB shareholders (in $) 2019 2018 2017 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 0.49 0.71 0.67 0.19 0.67 0.31 1.02 0.36 1.04 0.49 0.71 0.67 0.19 0.67 0.31 1.02 0.36 1.03 Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earn- ings per share is calculated by dividing income by the weighted-average number of shares out- standing during the year, assuming that all poten- tially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise: outstand- ing written call options and outstanding options and shares granted subject to certain conditions under our share-based payment arrangements. See “Note 20 – Earnings per share” to our Consoli- dated Financial Statements. — Business analysis Electrification Business The financial results of our Electrification Busi- ness, including the operations of GEIS which was acquired in June 2018, were as follows: % Change ($ in millions) 2019 2018 2017 2019 2018 Orders 13,050 11,867 10,143 10% 17% Order backlog at December 31, Revenues Income from operations 4,488 4,113 3,098 12,728 11,686 10,094 9% 9% 33% 16% 1,049 1,290 1,352 (19)% (5)% Operational EBITA 1,688 1,626 1,510 4% 8% A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 117 Orders Approximately two-thirds of the Business’s orders are for products with short delivery times; orders are usually recorded and delivered within a three-month period and thus are generally con- sidered as short-cycle. The remainder of orders is comprised of smaller projects that require longer lead times, as well as larger solutions requiring engineering and installation. Approximately half of the Business’s orders are received via third-party distributors; as a consequence, end-customer market data is based partially on management estimates. In 2019, orders increased 10 percent (14 percent in local currencies) with broad-based growth across regions and business lines. The increase in orders was mostly due to acquisitions, primarily as GEIS was included in 2019 for a full year. The order growth was driven mainly by systems and long-cycle businesses, with utilities, oil and gas, renewables, electric vehicle infrastructure and data centers demand contributing strongly to the order intake. Construction demand overall re- mained positive with signs of easing in some key markets, particularly in terms of residential devel- opments. Demand from transport & infrastruc- ture remained positive with strong demand for electric vehicle infrastructure and continued in- vestment in rail infrastructure. Data centers con- tinued to be an attractive market with key invest- ments in hyperscale and co-location developments. The oil and gas and distribution utilities sectors showed signs of recovery with large project orders in the second half of the year. In 2018, orders increased 17 percent (16 percent in local currencies) with growth across business lines and regions. The increase in orders was posi- tively impacted by 12 percent due to acquisitions, primarily GEIS. Orders for products grew stronger than the orders for systems. Construction de- mand was robust, driven by continued investment in residential and commercial buildings. Trans- port & infrastructure demand was positive with continued investment in rail infrastructure and strong demand for electric vehicles infrastruc- ture. Demand for data centers was also strong and resulted in the award of a few significant or- ders. 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. The geographic distribution of orders for our Electrification Business was as follows: (in %) Europe The Americas Asia, Middle East and Africa Total 2019 2018 2017 33 36 31 35 32 33 37 27 36 100 100 100 In 2019, orders grew in all regions. The relative share of orders from the Americas increased due to strong order growth in the United States driven mainly by the impact of including GEIS for a full year, which has a significant portion of its opera- tions in the United States. Although the share of orders from Europe decreased compared with the previous year, orders in Europe developed posi- tively with order growth led by Germany, Nether- lands and Finland. The relative share of orders from Asia, Middle East and Africa decreased slightly compared with 2018, despite an order in- crease in the region supported by sustained growth in China and India. 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 fol- lowing the acquisition of GEIS. Although the share of orders from Europe decreased slightly com- pared with the previous year, orders in Europe de- veloped positively with order growth in key mar- kets such as Germany and Italy compensating for lower order volumes in Turkey. Order growth in Asia, Middle East and Africa was supported by growth in China, Taiwan and Egypt, whereas or- ders from Saudi Arabia and Qatar were signifi- cantly lower than in 2017. Order backlog In 2019, the order backlog increased 9 percent (9 percent in local currencies) mainly reflecting growth for long-cycle businesses in the Distribu- tion Solutions business. The majority of this order backlog is planned to be converted to revenues during 2020. 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. Revenues In 2019, revenues increased 9 percent (12 percent in local currencies). The inclusion of GEIS for a full year contributed 10 percentage points of the reve- nue growth. Revenues in local currencies grew 118 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P across all business lines, with long-cycle busi- nesses such as the electric vehicle charging infra- structure business and Solar growing at a higher pace than our short-cycle product businesses. Rev- enues developed positively in most end-customer sectors, with strong growth in e-mobility, renew- ables and data centers. Growth in the transporta- tion sectors was driven particularly by invest- ments in urban transport. Revenues also grew in industries such as oil and gas, whereas the con- struction sector benefited from continued public investments in hospitals and education facilities. 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 mar- kets including construction, specifically non-residential construction, and industries such as oil and gas. Revenue growth from the distribu- tor channel was strong. There was significant rev- enue growth in our electric vehicle charging infra- structure business, although the business remains a small portion of total revenues. Reve- nues from the medium-voltage systems business decreased, negatively impacted by longer lead times for the conversion of orders into revenues. Revenues decreased in Solar, reflecting a lower opening order backlog and the impact of contin- ued price pressure across the Solar business. The geographic distribution of revenues for our Electrification Business was as follows: (in %) Europe The Americas Asia, Middle East and Africa Total 2019 2018 2017 33 37 30 35 32 33 37 27 36 100 100 100 In 2019, the relative share of revenues from the Americas increased primarily due to the impact of the inclusion of GEIS for a full year, which has a sig- nificant portion of its operations in the United States. Although the share of revenues from Eu- rope decreased compared with the previous year, orders in Europe developed positively supported by growth in the Netherlands, Switzerland and Ger- many. Revenues from Asia, Middle East and Africa decreased compared with 2018 reflecting a lower level of revenues particularly from South Korea. In 2018, the relative share of revenues from the Americas increased primarily due to the impact of the acquisition of GEIS. Although the relative share of revenues from Europe decreased, reve- nues 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, revenues for this re- gion were steady as a positive revenue develop- ment in China and Egypt offset lower revenue vol- umes from Saudi Arabia and Qatar. Income from operations In 2019, income from operations decreased 19 percent, mainly reflecting a loss of $421 million recognized to record the solar inverters business at fair value. During 2019, we announced an agree- ment to sell the solar inverters business to FIMER S.p.A. At December 31, 2019, this business is pre- sented as held-for-sale and completion of the sale is expected in the first quarter of 2020. The loss from this sale was partly offset by gains from sales of businesses of $42 million. We also recog- nized a gain of $92 million relating to the receipt of cash from General Electric for a favorable reso- lution of an uncertainty with respect to the price paid to acquire GEIS. In 2019, we had $49 million lower acquisition-related expenses and post-acquisition integration costs compared to 2018, whereas restructuring and related expenses were $14 million higher than the previous year. Pricing actions across the product businesses and the benefits from savings from ongoing re- structuring and cost savings programs had a pos- itive impact on the operating margin. In addition, the Business recorded lower warranty costs in the solar inverters business than in 2018, and also benefited from slightly lower commodity prices. These positives were partly offset by pricing pres- sures in the Distribution Solutions and Solar busi- nesses. Changes in foreign currencies, including the impacts from FX/commodity timing differ- ences summarized in the table below, negatively affected income from operations by 1 percent. 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 savings from ongoing restructuring and cost savings pro- grams had a positive impact on the operating mar- gin. The Business realized a gain of $81 million on the sale of a business. These benefits were offset by the negative impact of higher commodity prices and pricing pressures for distribution solutions and Solar. The Business also recorded significant warranty costs for certain solar inverters. In addi- tion, restructuring, related and implementation costs in 2018 of $98 million were $70 million higher than in 2017, reflecting manufacturing footprint changes as well as organizational simplification. Acquisition-related amortization was 8 percent higher than in 2017, mainly due to the GEIS acquisi- tion. Changes in foreign currencies, including the A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 119 impacts from FX/commodity timing differences summarized in the table below, negatively affected income from operations by 2 percent. Operational EBITA The reconciliation of Income from operations to Operational EBITA for the Electrification Business was as follows: ($ in millions) 2019 2018 2017 Income from operations 1,049 1,290 1,352 Acquisition-related amortization 115 106 Restructuring, related and implementation costs(1) Changes in pre-acquisition estimates Gains and losses from sale of businesses Fair value adjustment on assets and liabilities held for sale Favorable resolution of an uncertain purchase price adjustment Acquisition- and divestment-related expenses and integration costs Certain other non-operational items FX/commodity timing differences in income from operations 112 22 98 19 (42) (81) 421 (92) — — 119 168 3 (2) 98 28 8 — — — 23 21 Orders Orders in 2019 decreased 4 percent (flat in local currencies) primarily reflecting the impact of se- lective large capital expenditure projects in oil and gas, and mining which continued to be at low levels. The underlying base business continued to be strong as investment in maintenance activi- ties, digitalization upgrades and other discretion- ary projects improved, in particular for oil and gas, chemical and process industry customers. Orders were steady in almost all industries with the exception of conventional power generation which was depressed as seen in the order levels for Energy Industries and Turbocharging. Orders in 2018 increased 10 percent (8 percent in local currencies) and was supported by selective demand for cruise ships and specialty vessels. Large capital expenditure projects in some end-markets like oil and gas, and mining contin- ued to be selective and at low levels. In 2018, de- mand for Measurement and Analytics products was quite strong. Demand for ABB Ability™ solu- tions and services contributed to positive order momentum. (19) 28 (20) The geographic distribution of orders for our In- dustrial Automation Business was as follows: Operational EBITA 1,688 1,626 1,510 (1) Amount in 2017 also includes the incremental implementation costs in relation to the White Collar Productivity program. In 2019, Operational EBITA increased 4 percent (8 percent excluding the impacts from changes in foreign currencies) compared to 2018, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. 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. Industrial Automation Business The financial results of our Industrial Automation Business were as follows: % Change ($ in millions) 2019 2018 2017 2019 2018 Orders 6,432 6,697 6,113 (4)% 10% Order backlog at December 31, Revenues Income from operations Operational EBITA 5,077 4,986 5,171 2% (4)% 6,273 6,500 6,472 (3)% 0% 700 732 853 914 829 (18)% 902 (20)% 3% 1% (in %) Europe The Americas Asia, Middle East and Africa Total 2019 2018 2017 40 25 35 42 23 35 40 24 36 100 100 100 In 2019, orders decreased slightly in Europe re- flecting the larger orders in 2018 from the cruise ship sector and resulted in a reduction in the share of orders in Europe. The share of orders in the Americas increased slightly, supported by positive development in Marine and Ports busi- ness in the U.S., as well as the Process Industries business in South America. In Asia, Middle East and Africa, the share of orders remained stable as a result of large capital expenditures for specialty vessels and strong demand in China. In 2018, orders from all regions increased. In Eu- rope, the share of orders increased due to strong demand for cruise and specialty vessels. Orders in the Americas grew but the share of orders de- creased as Europe had significant increases. In Asia, Middle East and Africa, growth was steady but lower than the other regions, thus reducing this region’s share. Order backlog The order backlog at the end of 2019 was 2 per- cent higher (2 percent higher in local currencies) than at the end of 2018. The backlog continued to 120 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P benefit from orders for specialty vessels which are executed over multiple years. In addition, the Business continued to see recovery in demand for oil and gas, chemical and the Process Industries as well as strong demand for shorter cycle prod- ucts. Demand for conventional power generation was depressed putting negative pressure on the positive order backlog development. The order backlog at the end of 2018 was 4 per- cent lower (1 percent higher in local currencies) than at the end of 2017. The local currency in- crease reflects the benefit from orders for cruise and specialty vessels which are executed over multiple years. Revenues In 2019, revenues decreased 3 percent (flat in local currencies). Process Industries realized high reve- nue levels benefiting from strong book-and-bill business and good execution of the order back- log. This was offset by lower revenues across other businesses predominantly in Energy Indus- tries and Turbocharging driven by weaknesses in the conventional power generation market. En- ergy Industries were also impacted by the project-related challenges in the Kusile power generation project in South Africa. In 2018, revenues were steady (steady in local cur- rencies). The majority of the business lines re- corded higher revenues, especially the Process In- dustries, Measurement and Analytics and Turbocharging business lines. Revenues were lower in the Energy Industries business line. During the year, the Business realized higher reve- nues from book-and-bill business and good exe- cution of the backlog. Notwithstanding, the lower order backlog at the beginning of 2018 dampened revenue growth. The geographic distribution of revenues for our Industrial Automation Business was as follows: (in %) Europe The Americas Asia, Middle East and Africa Total 2019 2018 2017 40 25 35 39 23 38 39 21 40 100 100 100 In 2019, revenues were higher in the Americas, slightly weaker in Europe and grew strongly in Asia, Middle East and Africa. Despite revenue de- clines in Europe across most business lines, the share of revenues in Europe increased slightly. In the Americas, the share of revenues grew benefit- ing from strong book-and-bill business and higher execution from the order backlog compared to a year ago. Revenues in the U.S. grew primarily on strong development in Process Industries and Marine and Ports. In Asia, Middle East and Africa, weaker revenues were impacted by slower growth in Energy Industries and Turbocharging. The Pro- cess Industries business was lower in China and South Korea while the Marine and Ports business declined in the United Arab Emirates. Revenues in the Energy Industries business were negatively impacted by project-related challenges in the Ku- sile power generation project in South Africa. In 2018, revenues improved in the Americas, bene- fiting from a selective market recovery in Process Industries. The share of revenues from Europe was steady. The Americas increased their share of revenues benefiting from an upturn in mining as well as continued demand for Measurement and Analytics and Turbocharging products. The share of revenues from Asia, Middle East and Africa was lower as the region recorded lower revenue growth compared to the other regions, impacted by the lower opening backlog and lower book-and-bill orders. Income from operations In 2019, income from operations decreased 18 percent compared to 2018 on weaker sales vol- umes in the Turbocharging business and losses resulting from project-related challenges in the Kusile power generation project in South Africa. Income from operations was also impacted by le- gal costs relating to challenges in certain proj- ects, unfavorable business mix as well as invest- ments in growth. These impacts could not be offset by the positive results of ongoing business rationalization efforts and other cost saving mea- sures. The impact from changes in foreign curren- cies, including the impact from changes in the FX/ commodity timing differences summarized in the table below, negatively impacted income from op- erations by 2 percent. In 2018, income from operations increased 3 per- cent compared to 2017, benefiting from an im- proved revenue mix, ongoing progress in the Busi- ness’s rationalization efforts and benefits realized 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, nega- tively impacted income from operations by 4 percent. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 121 Operational EBITA The reconciliation of Income from operations to Operational EBITA for the Industrial Automation Business was as follows: ($ in millions) 2019 2018 2017 Income from operations Acquisition-related amortization Restructuring, related and implementation costs(1) Gains and losses from sale of businesses Acquisition- and divestment-related expenses and integration costs Certain other non-operational items FX/commodity timing differences in income from operations 700 4 21 — — 2 5 Operational EBITA 732 853 829 6 35 3 4 3 7 85 (2) 9 — such as mining and metals, minerals, and pulp and paper. In 2018, orders increased 13 percent (12 percent in local currencies). Order growth was driven by de- mand from process industries such as oil, gas, mining and metals as well as demand from dis- crete industries such as food and beverage. The Business noted rising demand from light indus- tries for smaller-sized drives and motor solutions as well as solid significant order intake for trac- tion solutions from the rail industry. The geographic distribution of orders for our Mo- tion Business was as follows: (1) Amount in 2017 also includes the incremental implementation costs in relation to the White Collar Productivity program. Asia, Middle East and Africa Total 10 914 (26) 902 (in %) Europe The Americas 2019 2018 2017 35 36 29 34 37 29 33 39 28 100 100 100 In 2019, Operational EBITA decreased 20 percent (18 percent excluding the impacts from changes in foreign currencies) compared to 2018. 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. In 2018, Operational EBITA increased 1 percent (1 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. Motion Business The financial results of our Motion Business were as follows: ($ in millions) 2019 2018 2017 2019 2018 Orders 6,782 6,725 5,966 1% 13% % Change Order backlog at December 31, Revenues Income from operations 2,967 2,740 2,674 6,533 6,463 5,877 Operational EBITA 1,082 1,023 1,009 924 707 838 8% 1% 9% 6% 2% 10% 31% 22% In 2019, Europe increased its relative share of or- ders on growth across the main countries includ- ing Germany, Italy and Spain. The Asia, Middle East and Africa share remained stable with good performance in China which was partly offset by other markets. The Americas share of orders de- clined as a result of slight decrease of the orders in the United States. In 2018, orders grew in all regions. The relative share of orders from Asia, Middle East and Africa increased on double-digit growth in China and In- dia. The European market performed well with or- der growth across the majority of countries in- cluding Germany, Italy and Switzerland. The relative share of orders from the Americas de- clined despite solid growth in the United States. Order backlog The order backlog in 2019 increased 8 percent (9 percent in local currencies) compared to 2018. The order backlog increased in all business lines, reflecting strong long-cycle order growth in 2019. The order backlog in 2018 increased 2 percent (7 percent in local currencies) compared to 2017. The backlog improved in all business lines on strong order growth in 2018. Orders In 2019, orders increased 1 percent (4 percent in local currencies). Order growth was driven by in- creased demand from process industries such as oil, gas and chemicals as well as rising demand from transport & infrastructure sectors with rail, water and waste water, and wind growing strongly. The Business experienced a slightly slower demand from traditional heavy industries Revenues In 2019, revenues grew 1 percent (4 percent in lo- cal currencies) compared to 2018. Revenue growth was driven by Drives while revenues in Motors & Generators decreased slightly. The revenue in- crease was driven by strong execution of the or- der backlog as well as book-and-bill business. Ser- vice revenues continued to improve as the Business continued to leverage its installed base 122 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P and increased customer demand for ABB Ability™ solutions. In 2018, revenues increased 10 percent (10 percent in local currencies) compared to 2017. Revenues grew in all business lines driven by steady execu- tion of the order backlog as well as book-and-bill business. Service revenues improved as the Busi- ness leveraged its installed base with increased customer demand for ABB Ability™ solutions. The geographic distribution of revenues for our Motion Business was as follows: assets were fully amortized in early 2018. These positive effects were partly offset by the effects of higher 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. Operational EBITA The reconciliation of Income from operations to Operational EBITA for the Motion Business was as follows: ($ in millions) 2019 2018 2017 2019 2018 2017 Income from operations 1,009 (in %) Europe The Americas Asia, Middle East and Africa Total 33 36 31 33 38 29 33 39 28 100 100 100 In 2019, revenue growth in Asia, Middle East and Africa is reflected in the increase in the relative share of revenues from this region as revenues grew in China, India and Japan. The share of reve- nues from Europe remained stable despite reve- nue growth across many countries including Ger- many and France. Revenues from the Americas declined as revenues were lower in the U.S., lower- ing the relative market share of the region com- pared to 2018. In 2018, revenues were higher in all regions. The rel- ative 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 reve- nues including moderate growth in the U.S. Income from operations In 2019, income from operations increased 9 per- cent compared to 2018 driven by higher sales vol- umes, continued cost discipline and operational performance. In 2019, the Business also benefited from lower restructuring and restructuring-related expenses. Changes in for- eign currencies, including the impacts from FX/ commodity timing differences summarized in the table below, negatively impacted income from op- erations by 3 percent. In 2018, income from operations increased 31 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 Acquisition-related amortization Restructuring, related and implementation costs(1) Gains and losses from sale of businesses Acquisition- and divestment-related expenses and integration costs Certain other non-operational items FX/commodity timing differences in income from operations 924 61 17 4 2 10 53 12 — — 14 (6) 5 707 64 63 — — — 4 Operational EBITA 1,082 1,023 838 (1) Amount in 2017 also includes the incremental implementation costs in relation to the White Collar Productivity program. In 2019, Operational EBITA increased 6 percent (9 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 2018, Operational EBITA increased 22 percent (21 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. Robotics & Discrete Automation Business The financial results of our Robotics & Discrete Automation Business were as follows: % Change ($ in millions) 2019 2018 2017 2019 2018 Orders 3,260 3,808 2,977 (14)% 28% Order backlog at December 31, Revenues Income from operations Operational EBITA 1,356 1,438 1,279 (6)% 3,314 3,611 2,957 (8)% 298 393 456 528 387 (35)% 473 (26)% 12% 22% 18% 12% A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 123 2019 2018 2017 Asia, Middle East and Africa (in %) Europe The Americas Total 2019 2018 2017 51 14 35 49 13 38 43 18 39 100 100 100 Orders In 2019, orders decreased 14 percent (11 percent in local currencies). Demand was weakened by headwinds in traditional automotive and automotive-related sectors as well as in the ma- chine builders and electronics markets. Demand for warehouse automation was strong in 2019. The Business continued to benefit from a large or- der intake for robot systems from certain parts of the automotive sector, including for new electric vehicle manufacturing lines, although on lower levels than in 2018. In 2018, orders grew 28 percent (25 percent in lo- cal currencies), primarily due to the impact of in- cluding B&R for a full year in 2018 which contrib- uted 15 percent to order growth. Order growth was also driven by demand from discrete indus- tries such as automotive and food and beverage as well as machine builders. The Business also benefited from solid order intake for robot sys- tems from the automotive sector. The geographic distribution of orders for our Ro- botics & Discrete Automation Business was as follows: (in %) Europe The Americas Asia, Middle East and Africa Total 53 14 33 49 13 38 45 16 39 100 100 100 In 2019, orders decreased in all regions. The rela- tive share of orders from Asia, Middle East and Af- rica decreased due to weak demand in China which then resulted in an increase in the relative share of orders from both the Americas and Europe. In 2018, orders grew in all regions. The relative share of orders from Europe increased, reflecting the impact of including B&R for a full year in 2018. The relative share of orders from Asia, Middle East and Africa remained steady due to strong growth in China. The relative share of orders from the Americas decreased. Order backlog The order backlog in 2019 decreased 6 percent (5 percent in local currencies) compared to 2018. The backlog decrease reflected the reduced order intake in all businesses due to a decline in market demand in 2019. The order backlog in 2018 increased 12 percent (18 percent in local currencies) compared to 2017. The backlog improved in all businesses on strong order growth in 2018. Revenues In 2019, revenues decreased 8 percent (4 percent in local currencies) compared to 2018. Revenues decreased in all businesses due to lower volumes from book-and-bill business, partially offset by steady execution of the order backlog. Service revenues decreased, driven by weak demand from automotive and automotive-related sectors. In 2018, revenues increased 22 percent (20 per- cent in local currencies) compared to 2017, par- tially due to the impact of including B&R for a full year in 2018 which contributed 14 percent to the revenue increase. Revenues grew in all businesses driven by steady execution of the order backlog as well as book-and-bill business. Service reve- nues continued to improve as the Business lever- aged its installed based and increased customer demand for ABB Ability™ solutions. The geographic distribution of revenues for our Robotics & Discrete Automation Business was as follows: In 2019, revenues decreased in all regions. The rel- ative share of revenues from Asia, Middle East and Africa decreased due to weak demand in China which resulted in a shift in the relative share of revenues to both the Americas and Europe. In 2018, revenues were higher in all regions. The relative share of revenues from Europe increased, reflecting the impact of including B&R for a full year in 2018. The relative share of revenues from Asia, Middle East and Africa remained steady fol- lowing strong growth in China. The relative share of revenues from the Americas decreased. Income from operations In 2019, income from operations decreased 35 percent compared to 2018, driven by lower sales volumes, an adverse change in the revenue mix, partially offset by benefits of cost reduction measures. Acquisition-related amortization was slightly lower than 2018. Changes in foreign cur- rencies, including the impacts from FX/commod- ity timing differences summarized in the table be- low, negatively impacted income from operations by 4 percent. In 2018, income from operations increased 18 per- cent compared to 2017. Of this increase, B&R con- tributed approximately 17 percent which included both the inclusion of the operations for a full year 124 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P as well as the negative comparative impact in 2017 of purchase price adjustments (primarily for inventories) which reduced income in 2017. Re- structuring and restructuring-related expenses were slightly higher in 2018 than in 2017, nega- tively impacting income from operations. Acquisition-related amortization was higher as certain acquired intangible assets were fully amortized in 2017. There was no significant im- pact on income from operations due to changes in foreign currencies. Operational EBITA The reconciliation of Income from operations to Operational EBITA for the Robotics & Discrete Au- tomation Business was as follows: ($ in millions) 2019 2018 2017 Income from operations Acquisition-related amortization Restructuring, related and implementation costs(1) Changes in pre-acquisition estimates Acquisition- and divestment-related expenses and integration costs Certain other non-operational items FX/commodity timing differences in income from operations 298 77 12 — 1 4 1 Operational EBITA 393 456 82 4 (11) — 1 387 42 1 — 45 1 (4) 528 (3) 473 (1) Amount in 2017 also includes the incremental implementation costs in relation to the White Collar Productivity program. In 2019, Operational EBITA decreased 26 percent (22 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 2018, Operational EBITA increased 12 percent (10 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. The acquisi- tion of B&R increased Operational EBITA by 5 per- cent after consideration of the related adjust- ments in the table above relating to that business. Corporate and Other Net loss from operations for Corporate and Other was as follows: ($ in millions) 2019 2018 2017 Corporate headquarters and stewardship Stranded corporate costs Corporate research and development Costs for planned divestment of Power Grids OS program costs Corporate real estate Net gain (loss) from sale of businesses White Collar Productivity program costs Other corporate costs (407) (225) (496) (430) (297) (286) (155) (170) (128) (141) (83) 60 — (11) 75 — — 45 13 (17) 250 — (11) — (107) (70) (92) Divested businesses and other non-core activities (164) (316) (304) Total Corporate and Other (1,113) (1,302) (1,052) In 2019, the net loss from operations within Cor- porate and Other decreased by $189 million to $1,113 million. This reflected corporate cost de- creases offset by costs for current strategic proj- ects while the losses incurred within the non-core businesses decreased significantly. Costs were lower for corporate headquarters and steward- ship costs and corporate research and develop- ment expenses while the amount recorded for stranded corporate costs also decreased. In 2019, we incurred restructuring and implementation costs for the OS program and also incurred costs relating to the planned divestment of the Power Grids business. 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 for the increase 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 ca- bles business. In addition, lower White Collar Pro- ductivity costs were offset by an increase in cor- porate headquarters and stewardship costs. In 2019, corporate headquarters and stewardship costs declined by $89 million to $407 million from $496 million, benefiting from savings generated from results of the OS restructuring program ef- forts. Costs were lower for communications and information technology and also reflected the benefits of a reduction in country-level general management costs. In 2018, corporate headquar- ters 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. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 125 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 is presented as dis- continued operations. These allocated costs do not qualify for being reported as costs within the discontinued operation. During 2019, we reduced the amount of stranded corporate costs by elimi- nating certain costs and transferring certain pre- viously centralized functions directly to the Power Grids business. At the end of 2018, we announced the OS program and the implementation of the program in 2019 resulted in higher costs than were incurred in 2018. As of December 31, 2017, we had incurred substantially all costs related to the White Collar Productivity program which we executed from 2015 through 2017. In 2017, costs incurred in con- nection with this program amounted to $107 mil- lion, including program implementation costs. The program costs relate mainly to employee sev- erance and both external and internal costs relat- ing to the execution of the program. For further information on the OS Program and the White Col- lar Productivity program see “Restructuring and other cost savings initiatives” below. Corporate real estate primarily includes income from property rentals and gains from the sale of real estate properties. In 2019, 2018 and 2017, in- come from operations in Corporate real estate in- cluded gains from the sale of real estate proper- ties of $48 million, $49 million and $28 million, respectively. Other corporate costs consist of operational costs of our Corporate Treasury Operations and certain other charges such as costs and penalties associated with legal cases, environmental ex- penses and impairment charges related to investments. 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 and gas industry were divested to an unconsolidated joint venture at the end of 2017. In addition, in 2018 and 2019, we transferred certain projects in our EPC busi- ness for turnkey electrical AC substations 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 certain legacy EPC and other contracts. In 2019, Divested businesses and other non-core activities reflects challenges in winding down sev- eral legacy projects as well as charges for certain retained liabilities of divested businesses. In 2019, we recorded additional losses for legacy substa- tions, plant electrification EPC contracts and the full train retrofit business, which were driven by additional project cost overruns. We also incurred certain customer credit-related losses and a con- tract termination loss resulting from an unfavor- able legal decision. In 2018, the amount primarily reflects losses in- curred in legacy substations and plant electrifica- tion 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 re- corded for certain retained liabilities associated with the divested 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 electrifi- cation EPC contracts driven by cost overruns, credit losses and contractual costs for delayed project completion. At December 31, 2019, 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. Restructuring and other cost savings initiatives OS program In December 2018, ABB announced a two-year re- structuring program with the objective of simpli- fying its business model and structure through the implementation of a new organizational struc- ture driven by its Businesses. The program in- cludes the elimination of the country and regional structures within the current matrix organization, including the elimination of the three regional Ex- ecutive Committee roles. The Businesses will each be responsible for both their customer-facing ac- tivities and business support functions, while the remaining Group-level corporate activities will primarily focus on Group strategy, portfolio and performance management, capital allocation, core technologies and the ABB Ability™ platform. Over the course of the program, we will execute a number of restructuring activities across all oper- ating segments and functions. The following 126 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P table outlines the cumulative amount of costs in- curred to date and the total amount of costs ex- pected under the program: in cost of sales, selling, general and administra- tive expenses and non-order related research and development expenses. (1) Amounts in the table above have been recast to reflect the Industrial Automation 65 154 160 350 ($ in millions) Electrification Costs incurred in(1) ($ in millions) 2019 2018 Cumulative costs in- curred up to December 31, 2019(1) Total expected costs(1) Electrification 18 Industrial Automation Motion Robotics & Discrete Automation Corporate and Other Total 3 6 8 54 89 32 21 1 — 11 65 50 24 7 80 40 50 8 20 reorganization of the Company’s operating segments in 2019. See “Note 23 – Operating segment and geographic data” to our Consolidated Financial Statements. By the completion of the program, we estimate that we will achieve a run-rate cost savings of ap- proximately $500 million, impacting all Busi- nesses and Corporate and Other. These cost sav- ings are expected to mainly impact cost of sales, selling, general and administrative expenses, and non-order related research and development ex- penses, and are planned to be achieved during 2021. In 2019, we achieved cost savings of approx- imately $160 million in line with the target set for the program. For details of the nature of the costs incurred and the impact on the Consolidated Financial State- ments, see “Note 22 – Restructuring and related expenses” to our Consolidated Financial Statements. The majority of the remaining cash payments, pri- marily for employee severance benefits, are ex- pected to occur in 2020 and 2021. We expect that our cash provided by operating activities will be sufficient to cover any expenditures for this re- structuring program. 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 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 as well as the cumulative amount of costs in- curred under the program: Cumulative costs incurred up to December 31, 2017(1) Net costs incurred in 2017(1) (17) (23) (10) (4) (32) (86) 72 106 42 14 91 325 Motion Robotics & Discrete Automation Corporate and Other Total (1) Amounts in the table above have been recast to reflect the re- organization 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 Businesses as well as for corporate functions. In 2017, a change in estimate of $118 million was recorded to adjust the amount of our estimated li- ability for restructuring which was recorded in 2016 and 2015. This change in estimate 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. For details of the nature of the costs incurred and their impact on the Consolidated Financial State- ments, see ‘‘Note 22 – Restructuring and related expenses’’ to our Consolidated Financial Statements. Other restructuring-related activities and cost savings initiatives In 2019, 2018 and 2017, we also executed other restructuring-related and cost savings measures to sustainably reduce our costs and protect our profitability. Costs associated with these other measures amounted to $114 million, $116 million and $181 million in 2019, 2018 and 2017, respectively. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 127 — 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 2019, 2018 and 2017, our financial position benefited from positive cash flow from operating activities (both from continuing and discontinued operations) of $2,325 million, $2,924 million and $3,799 million, respectively. Our net debt is shown in the table below: ($ 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, 2019 2018 2,287 2,031 6,772 6,587 (3,544) (3,445) (566) (712) 4,949 4,461 Net debt at December 31, 2019, increased $488 million compared to December 31, 2018, as cash flows from operating activities during 2019 of $2,325 million was more than offset by cash outflows for the dividend payment to our share- holders ($1,675 million) and net purchases of property, plant and equipment and intangible as- sets ($839 million for both continuing and discon- tinued operations). We also made payments of dividends to noncontrolling shareholders totaling $90 million. In addition, net debt decreased by $32 million due to movements in foreign exchange rates. See “Financial position”, “Investing activi- ties” and “Financing activities” for further details. Our Corporate Treasury Operations is responsible for providing a range of treasury management services to our group companies, including in- vesting cash in excess of current business require- ments. At December 31, 2019 and 2018, the pro- portion of our aggregate “Cash and equivalents” and “Marketable securities and short-term invest- ments” managed by our Corporate Treasury Oper- ations amounted to approximately 34 percent and 38 percent, respectively. Throughout 2019 and 2018, 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 the first quarter of 2019, we also continued to place limited funds in con- nection with reverse repurchase agreements. We actively monitor credit risk in our investment portfolio and derivative portfolio. Credit risk ex- posures are controlled in accordance with policies approved by our senior management to identify, measure, monitor and control credit risks. We have minimum rating requirements for our coun- terparts and closely monitor developments in the credit markets making appropriate changes to our investment policy as deemed necessary. In ad- dition to minimum rating criteria, we have strict investment parameters and specific approved in- struments as well as restrictions on the types of investments we make. These parameters are closely monitored on an ongoing basis and amended as we consider necessary. Our cash is held in various currencies around the world. Approximately 22 percent of our cash and cash equivalents held at December 31, 2019, was in U.S. dollars, while other significant amounts were held in Chinese renminbi (24 percent), euro (15 percent) and Indian rupee (8 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 12 months. See “Disclosures 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. 128 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P Debt and interest rates Total outstanding debt was as follows: ($ in millions) December 31, 2019 2018 Short-term debt and current maturities of long-term debt 2,287 2,031 Long-term debt: Bonds Other long-term debt Total debt 6,587 6,411 185 176 9,059 8,618 The increase in short-term debt in 2019 was due to the reclassification to short-term of the USD 300 million 2.8% Notes, the issuance of EUR 1,000 million floating rate notes, an increase in outstanding commercial paper of $244 million mostly offset by the repayment at maturity of the EUR 1,250 million 2.625% instruments. Commer- cial paper outstanding was $706 million at De- cember 31, 2019, compared to $464 million out- standing at December 31, 2018. At December 31, 2019, Long-term debt increased $185 million compared to the end of 2018 due pri- marily to the issuance in 2019 of two new long-term notes with net proceeds totaling $449 million partially offset by the reclassifica- tion to short-term debt of the USD 300 million notes discussed above. Our debt has been obtained in a range of curren- cies and maturities and with 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, at December 31, 2019, the ef- fective average interest rate on our floating rate long-term debt (including current maturities) of $2,221 million and our fixed rate long-term debt (including current maturities) of $6,000 million was 1.1 percent and 2.4 percent, respectively. This compares with an effective rate of 1.1 percent for floating rate long-term debt of $3,106 million and 3.6 percent for fixed rate long-term debt of $4,951 million at December 31, 2018. 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 In December 2019, we replaced our $2 billion mul- ticurrency revolving credit facility, maturing in 2021, with a new $2 billion multicurrency revolving credit facility, maturing in 2024. In 2020 and 2021, we have the option to extend the maturity of the new facility to 2025 and 2026, respectively. No amount was drawn under either of the com- mitted credit facilities at December 31, 2019 and 2018. The replacement facility is for general cor- porate purposes and contains cross-default clauses whereby an event of default would occur if we were to default on indebtedness, as defined in the facility, at or above a specified threshold. The credit facility does not contain financial 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, 2019, 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, 2019, $706 million was outstand- ing under the $2 billion program in the United States, compared to $292 million outstanding at December 31, 2018. At December 31, 2019, no amount was outstand- ing under the $2 billion Euro-commercial paper program compared to $172 million outstanding at December 31, 2018. European program for the issuance of debt The European program for the issuance of debt allows the issuance of up to the equivalent of $8 billion in certain debt instruments. The terms of the program do not obligate any third party to extend credit to us and the terms and possibility of issuing any debt under the program are deter- mined with respect to, and as of the date of issu- ance of, each debt instrument. During 2017, we is- sued EUR 750 million 0.75% Notes, due 2024. At December 31, 2019, two bonds (principal amount of EUR 700 million, due in 2023 and principal amount of EUR 750 million, due in 2024) having a combined carrying amount of $1,658 million, were A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 129 outstanding under the program. At December 31, 2018, in addition to these two bonds, one addi- tional bond (principal amount of EUR 1,250 mil- lion due in 2019) was outstanding and the com- bined carrying amount of the three bonds was $3,100 million. 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, 2019 and 2018, 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, Malaysia, Russian Federation, South Africa, South Korea, Taiwan (Chinese Taipei), Thai- land, Turkey and Viet Nam. Funds, other than reg- ular dividends, fees or loan repayments, cannot be readily transferred offshore from these coun- tries and are therefore deposited and used for working capital needs in those countries. In addi- tion, there are certain countries where, for tax reasons, it is not considered optimal to transfer the cash offshore. As a consequence, these funds are not available within our Corporate Treasury Operations to meet short-term cash obligations outside the relevant country. The above described funds are reported as cash in our Consolidated Balance Sheets, but we do not consider these funds immediately available for the repayment of debt outside the respective countries where the cash is situated, including those described above. At December 31, 2019 and 2018, the balance of “Cash and equivalents” and “Marketable securi- ties and other short-term investments” under such limitations (either regulatory or sub-optimal from a tax perspective) totaled approximately $1,843 million and $1,796 million, respectively. During 2019, we continued to direct our subsidiar- ies in countries with restrictions to place such cash with our core banks or investment grade banks, in order to minimize credit risk on such cash positions. We continue to closely monitor the situation to ensure bank counterparty risks are minimized. — Financial position Balance sheets December 31, ($ in millions) 2019 2018 % Change Current assets Cash and equivalents 3,544 3,445 3% Marketable securities and short-term investments 566 712 (21)% Receivables, net Contract assets Inventories, net Prepaid expenses Other current assets Assets held for sale and in discontinued operations 6,434 6,386 1,025 1,082 4,184 4,284 191 674 176 616 9,840 5,164 Total current assets 26,458 21,865 1% (5)% (2)% 9% 9% 91% 21% 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 2019. The reduction primarily re- flects lower amounts placed in reverse repurchase agreements (see “Note 5 – Cash and equivalents, marketable securities and short -term invest- ments” to our Consolidated Financial Statements). Contract assets decreased 5 percent (4 percent in local currencies). The decrease reflects lower amounts in the non-core businesses and the Ro- botics & Discrete Automation Business. This was partially offset by higher levels in the Industrial Automation Business. Inventories, net, decreased 2 percent (1 percent in local currencies). The decrease primarily reflects 130 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P the impact of the reclassification to held for sale of the inventory in the solar inverters business which decreased inventory by 3 percent. Current assets held for sale and in discontin- ued operations increased to $9,840 million from $5,164 million due to the reclassification from non-current assets to current assets of the non-current assets in the Power Grids busi- ness, which is reported as discontinued opera- tions. This reclassification reflects that this business is expected to be divested within the next 12 months. For the details of the assets of the Power Grids business see “Note 3 – Basis of presentation and assets held for sale” to our Consolidated Financial Statements. ($ in millions) 2019 2018 % Change December 31, Current liabilities Accounts payable, trade 4,353 4,424 Contract liabilities 1,719 1,707 Short-term debt and current maturities of long-term debt Current operating leases Provisions for warranties 2,287 2,031 305 816 — 948 Other provisions 1,375 1,372 Other current liabilities 3,761 3,780 Liabilities held for sale and in discontinued operations 5,650 4,185 Total current liabilities 20,266 18,447 (2)% 1% 13% n.a. (14)% 0% (1)% 35% 10% Accounts payable, trade, decreased 2 percent (1 percent in local currencies) primarily reflecting the impact of reclassifying payables of the solar inverters business to liabilities held for sale, which decreased Accounts payable, trade, by 2 percent. The increase in Short-term debt and current matur- ities of long-term debt was primarily due a net in- crease in the balance for the U.S. and Euro commer- cial paper programs of $242 million, the amount outstanding for the newly-issued EUR 1,000 million floating-rate notes of $1,122 million and the reclas- sification to short-term debt and current matur- ities of long-term debt of the USD 300 million Notes. This was mostly offset by the repayment in 2019 of the EUR 1,250 million Instruments ($1,431 million at December 31, 2018). Current operating leases includes the portion of the operating lease liabilities that are due to be paid in the next 12 months. The amount in 2019 re- flects the adoption of a new accounting standard on leases. For a description of the adoption of the new accounting standard and summary of operat- ing lease liabilities, see “Note 2 – Significant ac- counting policies” and “Note 14 – Leases” to our Consolidated Financial Statements. Provisions for warranties decreased 14 percent (13 percent in local currencies). The decrease was mainly due to the reclassification of the solar in- verters business to held for sale which resulted in a decrease of 11 percent. The remaining decrease was due to cash payments for warranties exceed- ing the expense recognized in the period. For de- tails on the change in the Provision for warranties, see “Note 15 – Commitments and contingencies” to our Consolidated Financial Statements. Current liabilities held for sale and in discontinued operations increased to $5,650 million from $4,185 million due to the reclassification from non-current liabilities to current liabilities of the non-current liabilities in the Power Grids busi- ness, which is reported as discontinued opera- tions. For the details of the liabilities of the Power Grids business see “Note 3 – Basis of presentation and assets held for sale” to our Consolidated Fi- nancial Statements. ($ in millions) 2019 2018 % Change December 31, Non-current assets Property, plant and equipment, net Operating lease right-of-use assets Goodwill 3,972 4,133 (4)% 994 — 10,825 10,764 n.a. 1% Other intangible assets, net 2,252 2,607 (14)% Prepaid pension and other employee benefits Investments in equity- accounted companies Deferred taxes Other non-current assets Assets held for sale and in discontinued operations 133 33 910 531 83 87 1,006 469 — 3,427 Total non-current assets 19,650 22,576 60% (62)% (10)% 13% n.a. (13)% In 2019, Property, plant and equipment, net de- creased 4 percent (3 percent in local currencies) partly due to the reclassification of the assets of the solar inverters business to held for sale. In 2019, Goodwill increased 1 percent (1 percent in local currencies). The local increase was due to ad- justments recorded to the purchase price of GEIS before the end of the measurement period. Other intangible assets, net decreased 14 percent (14 percent in local currencies) due to the amorti- zation recorded during the year. For additional in- formation on goodwill and other intangible assets see “Note 11 – Goodwill and other intangibles as- sets” to our Consolidated Financial Statements. In 2019, Deferred taxes, decreased 10 percent (7 percent in local currencies). For details on de- ferred tax assets (see “Note 16 – Income taxes” to our Consolidated Financial Statements). A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 131 ($ in millions) 2019 2018 % Change December 31, Non-current liabilities Long-term debt Non-current operating leases Pension and other employee benefits Deferred taxes 6,772 6,587 717 — 1,793 1,828 911 927 Other non-current liabilities 1,669 1,689 Liabilities held for sale and in discontinued operations — 429 Total non-current liabilities 11,862 11,460 3% n.a. (2)% (2)% (1)% n.a. 4% Long-term debt increased 3 percent. During 2019, we issued two CHF-denominated bonds having a value of $463 million at December 31, 2019. This was mostly offset by the reclassification to Short-term debt and current maturities of long-term debt of the USD 300 million Notes. There were no significant impacts from changes in foreign currency rates on Long-term debt. For additional information on Long-term debt, see “Liquidity and Capital Resources – Debt and inter- est rates”. Non-current operating leases includes the portion of the operating lease liabilities that are due to be paid in more than 12 months. The amount in 2019 reflects the adoption of a new accounting stan- dard on leases as described above. For a breakdown of Other non-current liabilities, see “Note 13 – Other provisions, other current lia- bilities and other non-current liabilities” to our Consolidated Financial Statements. Cash flows The Consolidated Statements of Cash Flows are shown on a continuing operations basis, with the effects of discontinued operations shown in ag- gregate for each major cash flow activity. The Consolidated Statements of Cash Flows can be summarized as follows: ($ in millions) 2019 2018 2017 Net cash provided by operating activities 2,325 2,924 3,799 Net cash used in investing activities Net cash used in financing activities (815) (3,085) (1,450) (1,383) (789) (1,735) Effects of exchange rate changes on cash and equivalents (28) (131) 268 Net change in cash and equivalents 99 (1,081) 882 Operating activities ($ in millions) Net income 2019 2018 2017 1,528 2,298 2,365 Less: Income from discontinued operations, net of tax (438) (723) (846) Depreciation and amortization 961 916 836 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 220 (189) (406) (372) 50 639 1,899 2,352 2,588 426 572 1,211 Cash flows from operating activities of continu- ing operations in 2019 provided net cash of $1,899 million, a decrease of 19 percent from 2018 mainly due to a lower cash effective net income (net income adjusted for depreciation, amortiza- tion and other non-cash items) which includes the impacts of the costs associated with the planned divestment of the Power Grids business as well as the OS restructuring program. The amount in 2019 also includes the impacts of net cash out- flows for an increase in working capital. The higher amount in 2018 also reflected the impacts from extending payment terms with suppliers and the changes in our supplier payment process, which resulted in an increase in trade payables and this impact was not repeated in 2019. The cash flows from operating activities in 2019 was also lower due to the timing of cash payments for accrued liabilities. This was partially offset by more favorable timing of income tax payments which negatively impacted cash flows from oper- ating activities in 2018. 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 was offset by a lower improvement in working capital. Cash flow impacts from changes in working capital showed the impact of extending payment terms with suppliers and the changes in our supplier payment process. Payables and inventory also in- creased due to higher inventories to support growth. In addition, the timing of tax payments, including income taxes and value-added taxes, negatively impacted cash provided by operating activities. Cash flows from operating activities of discontin- ued operations in 2019 decreased to $426 million from $572 million in 2018. The primary reason was lower net income from discontinued operations in 2019, mostly offset by more favorable changes in 132 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P working capital in 2019 compared to 2018, includ- ing the impacts in 2018 of the timing of cash col- lections on large projects and other receivables. 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 net income from discontinued opera- tions as well as negative impacts from the timing of cash collections on large projects and other re- ceivables. The amount reported for cash flows from operating activities of discontinued opera- tions benefits directly from the allocation of stranded costs to continuing operations. were slightly higher in 2018 with higher spending on information technology as well as large invest- ments in the U.S. and China. We also had higher capital expenditures in Austria with large invest- ments in the B&R business. In addition, changes in the impacts from derivative cash flows classified as investing activities increased cash used in in- vesting activities by $93 million. These cash flows primarily result from the maturity and settlement of derivatives that are in place to hedge foreign currency exposures on internal subsidiary funding and the amount of the settlement results from movements in foreign currency exchange rates throughout the year. 2019 (748) 2018 2017 (322) (666) (762) (772) (752) The following presents purchases of property, plant and equipment and intangibles by signifi- cant asset category: ($ in millions) 2019 2018 2017 Construction in progress 536 523 520 (22) (2,664) (2,011) Purchase of machinery and equipment 749 567 1,443 Purchase of land and buildings 80 82 160 100 72 61 Purchase of intangible assets Purchases of property, plant and equipment and intangible assets 156 152 125 26 44 28 69 32 75 762 772 752 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 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 69 113 607 (76) (23) (30) (32) 63 37 (651) (2,908) (1,118) (164) (177) (332) Net cash used in investing activities for continu- ing operations in 2019 was $651 million, com- pared to $2,908 million in 2018. The decrease in 2019 was due to the higher amounts for acquisi- tions of businesses in 2018 (primarily GEIS). This was offset partially by lower net sales of market- able securities and short-term investments and slightly lower purchases of property, plant and equipment in 2019 compared to 2018. 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 the higher amounts used to fund acquisi- tions of businesses. In addition, cash used in in- vesting activities was higher in 2018 as 2017 in- cluded the positive cash flows resulting from reducing investments in marketable securities and short-term investments. Purchases of prop- erty, plant and equipment and intangible assets In 2019, we reduced the level of our excess liquid- ity invested in marketable securities and short-term investments with net cash inflows of $81 million. In 2018 and 2017, we decreased the amount of our excess liquidity invested in market- able securities and short-term investments as funds were needed for acquisitions of businesses. In 2018 and 2017, the net decrease in investments during the year resulted in inflows of $405 million and $877 million, respectively. Marketable securi- ties and short-term investments at December 31, 2019 and 2018, consisted primarily of money mar- ket funds, and U.S. Government and other corpo- rate bonds. The balance at December 31, 2018, also included amounts placed in reverse repur- chase agreements. In 2019, there were no significant business acqui- sitions or divestments while in 2018, acquisitions of businesses primarily represents the purchase of GEIS, which was acquired in June. In 2017, ac- quisitions of businesses primarily represents the purchase of B&R, which was acquired in July, while proceeds from sales of businesses primarily rep- resents the divestment of the high-voltage cables and cable accessories businesses. Cash used in investing activities from discontin- ued operations primarily represents net pur- chases of property, plant and equipment. The higher amount in 2017 was due to cash paid for acquisition of a business. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 133 Financing activities ($ in millions) 2019 2018 2017 Net changes in debt with maturities of 90 days or less Increase in debt Repayment of debt Delivery of shares 164 221 2,406 1,914 204 920 (2,156) (830) (1,000) 10 42 163 Purchase of treasury stock — (250) (251) Dividends paid (1,675) (1,717) (1,635) both the USD 500 million 1.625% Notes and the AUD 400 million 4.25% Notes (in total equivalent to $803 million at dates of repayment). In 2018 and 2017, “Purchase of treasury stock” re- flects the cash paid to purchase 10 million of our own shares on the open market in each period. (90) 13 (86) (35) (83) (6) Disclosures about contractual obligations and commitments Dividends paid to noncontrolling shareholders Other financing activities Net cash used in financing activities – continuing operations Net cash used in financing activities – discontinued operations (1,328) (741) (1,688) (55) (48) (47) Our financing cash flow activities primarily in- clude debt transactions (both from the issuance of debt securities and borrowings directly from banks), share transactions and payments of dis- tributions to controlling and noncontrolling shareholders. Net cash used in financing activi- ties for discontinued operations represents pri- marily distributions paid to noncontrolling share- holders of certain subsidiaries classified in discontinued operations. The contractual obligations presented in the table below represent our estimates of future pay- ments under fixed contractual obligations and commitments. These amounts may differ from those reported in our Consolidated Balance Sheet at December 31, 2019. Changes in our business needs, cancellation provisions and changes in in- terest rates, as well as actions by third parties and other factors, may cause these estimates to change. Therefore, our actual payments in future periods may vary from those presented below. The following table summarizes certain of our contractual obligations and principal and interest payments under our debt instruments, leases and purchase obligations at December 31, 2019: In 2019, 2018 and 2017, the net inflow for debt with maturities of 90 days or less related primar- ily to net increases of commercial paper borrowings. ($ in millions) Total Payments due by period Less than 1 year 1–3 years 3–5 years More than 5 years In 2019, the increase in debt was due primarily to the issuance of the following: CHF 280 million 0.3% Notes due 2024, CHF 170 million 1.0% Notes due 2029 and EUR 1,000 million floating rate notes due 2020. In 2018, the increase in debt was due primar- ily 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 2019 and 2018, the increase also in- cluded $774 million and $316 million, respectively, for commercial paper borrowings having an origi- nal 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. During 2019, $2,156 million of debt was repaid, reflecting primarily the repayment at maturity of the EUR 1,250 million 2.625% Instruments as well as repayments at maturity of $606 million in commercial paper borrowings having an original maturity of more than 90 days. During 2018, the CHF 350 million 1.50% bonds (equivalent to $350 million on the date of repayment) were repaid as well as repayments at maturity of $316 million in commercial paper borrowings. During 2017, $1,000 million of debt was repaid, reflecting primarily the repayment at maturity of Long-term debt obligations Interest payments related to long-term debt obligations Operating lease obligations(1) Finance lease obligations(1) Purchase obligations 8,019 1,433 2,532 2,373 1,681 1,952 179 343 199 1,231 1,125 308 377 209 231 233 37 66 2,380 2,043 332 46 5 84 — Total 13,709 4,000 3,650 2,832 3,227 (1) Lease obligations represent total cash payments to be made in the future, and include an implied interest expense, being the difference between undiscounted cash flows and discounted cash flows, of $103 million and $61 million, for operating and finance leases, respectively, as well as including executory costs of $1 million for finance leases. See “Note 14 – Leases” to our Consolidated Financial Statements. 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 Con- solidated Financial Statements due to the im- pacts of fair value hedge accounting adjustments and premiums or discounts on certain debt. In 134 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P addition, finance lease obligations are shown sep- arately in the table above while they are combined with long-term debt amounts in our Consolidated Balance 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 $1,294 million unrecognized tax benefits (net of deferred tax assets) at Decem- ber 31, 2019, it is expected that $76 million will be paid within less than a year. However, we cannot make a reasonably reliable estimate as to the re- lated future payments for the remaining amount. Off-balance sheet arrangements Commercial commitments We disclose the maximum potential exposure of certain guarantees, as well as possible recourse provisions that may allow us to recover from third parties amounts paid out under such guarantees. The maximum potential exposure does not allow any discounting of our assessment of actual expo- sure under the guarantees. The information below reflects our maximum potential exposure under the guarantees, which is higher than our assess- ment of the expected exposure. Guarantees The following table provides quantitative data regarding our third-party guarantees. The maxi- mum potential payments represent a worst-case scenario, and do not reflect our expected outcomes. December 31, ($ in millions) Performance guarantees Financial guarantees Indemnification guarantees Total Maximum potential payments(1) 2019 2018 1,860 1,584 10 64 10 64 1,934 1,658 (1) Maximum potential payments include amounts in both continu- ing 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, 2019 and 2018, 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, 2019 and 2018, the total outstand- ing performance bonds aggregated to $6.8 billion and $7.4 billion, respectively, of which $3.7 billion and $4.3 billion, respectively, relate to discontin- ued operations. There have been no significant amounts reimbursed to financial institutions un- der these types of arrangements in 2019, 2018 and 2017. For additional descriptions of our performance, financial and indemnification guarantees see “Note 15 – Commitments and contingencies” to our Consolidated Financial Statements. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 135 — E M P T Y PAG E A D D E D I N T E N T I O N A L LY 136 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — Consolidated Financial Statements of ABB Group A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 137 — Report of management on internal control over financial reporting The Board of Directors and Management of ABB Ltd and its consolidated subsidiaries (“ABB”) are responsible for establishing and maintaining adequate internal control over financial reporting. ABB’s internal control over financial reporting is designed to provide reasonable assurance 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 control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with ABB’s policies and procedures may deteriorate. Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management has con- cluded that ABB’s internal control over financial reporting was effective as of December 31, 2019. KPMG AG, the independent registered public ac- counting firm who audited the Company’s consol- idated financial statements, has issued an opinion on the effectiveness of ABB’s internal control over financial reporting as of December 31, 2019, which is included on pages 142–143 of this annual report. Peter Voser Chairman of the Board of Directors and Chief Executive Officer Timo Ihamuotila Chief Financial Officer Management conducted an assessment of the ef- fectiveness of internal control over financial re- porting based on the criteria established in Zurich, February 25, 2020 138 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P Report of the Statutory Auditor To the General Meeting of ABB Ltd, Zurich Report of the Statutory Auditor on 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 sheets as of December 31, 2019 and 2018, and the related consolidated income statements, statements of comprehensive income, cash flows and changes in stockholders’ equity for each of the years in the two-year period ended December 31, 2019, and the related notes (pages 145 to 216). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in accordance with U.S. Generally Accepted Accounting Principles, and comply with Swiss law. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Group has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Codification (ASC), 842 Leases. 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 and fair presentation 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 audits 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 audits 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. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 139 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of estimated costs to complete related to revenue recognition for long-term fixed price contracts Evaluation of unrecognized tax benefits related to transfer pricing Evaluation of estimated costs to complete related to revenue recognition for long-term fixed price contracts As discussed in Note 2 to the consolidated financial statements, the Group has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Codification (ASC), 842 Leases. Critical Audit Matter How the matter was addressed As discussed in Note 2 to the consolidated financial statements, revenues from the sale of customized products, including long-term fixed price contracts for integrated automation and electrification systems and solutions are generally recognized on an over time basis using the percentage of completion method of accounting. We identified the evaluation of estimated costs to complete related to revenue recognition of long- term fixed price contracts using the percentage- of-completion method of accounting as a critical audit matter. In particular, a high degree of subjective auditor judgment was required to evaluate the Group’s estimates regarding the amount of future direct materials, labor and subcontract costs, and indirect costs to complete the contracts. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Group’s long-term fixed price contract revenue recognition process, including controls over the development of estimates regarding the amount of future direct materials, labor and subcontract costs, and indirect costs. We assessed the Group’s historical ability to accurately estimate costs to complete by comparing historical estimates to actual results for a sample of contracts. We evaluated the estimate of remaining costs to be incurred for a sample of contracts by assessing progress to date and the nature and complexity of work to be performed through interviewing project managers and inspecting correspondence, if any, between the Group and the customer and/or subcontractors. For further information on revenue recognition on long-term projects refer to the following: — Note 2 “Significant accounting policies” Report of the Statutory Auditor To the General Meeting of ABB Ltd, Zurich Report of the Statutory Auditor on 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 sheets as of December 31, 2019 and 2018, and the related consolidated income statements, statements of comprehensive income, cash flows and changes in stockholders’ equity for each of the years in the two-year period ended December 31, 2019, and the related notes (pages 145 to 216). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in accordance with U.S. Generally Accepted Accounting Principles, and comply with Swiss law. Change in Accounting Principle 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 and fair presentation 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 audits 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 audits 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. 140 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P Evaluation of unrecognized tax benefits related to transfer pricing Critical Audit Matter Our response As discussed in Note 2 to the consolidated financial statements, the Group operates across multiple tax jurisdictions, is exposed to numerous tax laws and is regularly subject to tax audits by local tax authorities. Unrecognized tax benefits related to transfer pricing are recorded by the Group based on management’s assessment of the technical merits of tax filings and considering applicable tax laws of the relevant jurisdictions. The unrecognized tax benefits related to transfer pricing represent a portion of the Group’s total unrecognized tax benefits related to various matters. We identified the evaluation of unrecognized tax benefits related to transfer pricing as a critical audit matter as a high degree of subjective auditor judgment and specialized skills was required in assessing the Group’s interpretation of international tax practice and developments in relation to intragroup charges and intragroup sales of goods and services and the Group’s ability to estimate the ultimate resolution of the tax positions. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Group’s unrecognized tax benefits process, including controls related to the Group’s interpretation of international tax practice and developments in relation to intragroup charges and intragroup sale of goods and services and the estimate of the related unrecognized tax benefits. We tested the identified costs that have a higher likelihood of being challenged by tax authorities associated with intragroup arrangements and potential price adjustments for intragroup sales of goods and services. We involved our tax professionals with specialized skills and knowledge, who assisted in evaluating (i) the Group’s historical ability to accurately estimate the unrecognized tax benefits related to transfer pricing by comparing historical tax positions to subsequent settlements (ii) transfer pricing documentation and methodology for compliance with applicable laws and regulations by reviewing the documentation and relevant agreements, (iii) the impact of new information or changes in international tax practice and developments on historical tax positions, and (iv) performing an independent assessment of unrecognized tax benefits relating to the Group’s intragroup sales of goods and services and comparing the results to the Group’s assessment. For further information on unrecognized tax benefits refer to the following: — Note 2 “Significant accounting policies” — Note 16 “Income taxes” Other Matter The consolidated financial statements of the Group for the year ended December 31, 2017 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 and except for Note 23 for which the date is February 25, 2020. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 141 Evaluation of unrecognized tax benefits related to transfer pricing Critical Audit Matter Our response As discussed in Note 2 to the consolidated The primary procedures we performed to address financial statements, the Group operates across this critical audit matter included the following. We multiple tax jurisdictions, is exposed to numerous tested certain internal controls over the Group’s tax laws and is regularly subject to tax audits by unrecognized tax benefits process, including local tax authorities. Unrecognized tax benefits controls related to the Group’s interpretation of related to transfer pricing are recorded by the international tax practice and developments in Group based on management’s assessment of relation to intragroup charges and intragroup sale the technical merits of tax filings and considering of goods and services and the estimate of the applicable tax laws of the relevant jurisdictions. related unrecognized tax benefits. We tested the The unrecognized tax benefits related to transfer identified costs that have a higher likelihood of pricing represent a portion of the Group’s total being challenged by tax authorities associated unrecognized tax benefits related to various with intragroup arrangements and potential price matters. adjustments for intragroup sales of goods and services. We involved our tax professionals with We identified the evaluation of unrecognized tax specialized skills and knowledge, who assisted in benefits related to transfer pricing as a critical evaluating (i) the Group’s historical ability to audit matter as a high degree of subjective auditor accurately estimate the unrecognized tax benefits judgment and specialized skills was required in related to transfer pricing by comparing historical assessing the Group’s interpretation of tax positions to subsequent settlements (ii) international tax practice and developments in transfer pricing documentation and methodology relation to intragroup charges and intragroup for compliance with applicable laws and sales of goods and services and the Group’s regulations by reviewing the documentation and ability to estimate the ultimate resolution of the tax relevant agreements, (iii) the impact of new positions. information or changes in international tax practice and developments on historical tax positions, and (iv) performing an independent assessment of unrecognized tax benefits relating to the Group’s intragroup sales of goods and services and comparing the results to the Group’s assessment. For further information on unrecognized tax benefits refer to the following: — Note 2 “Significant accounting policies” — Note 16 “Income taxes” Other Matter The consolidated financial statements of the Group for the year ended December 31, 2017 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 and except for Note 23 for which the date is February 25, 2020. Report on Other Legal and Regulatory RequirementsWe 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 ofthe 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 andExchange Commission and the PCAOB, and we have fulfilledour other ethical responsibilities in accordance with these requirements.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 preparationof consolidated financial statements according to the instructions of the Board of Directors.We recommend that the consolidated financial statements submitted to you be approved.We have also audited, in accordance with the standards of the PCAOB, the Group’s internal control over financial reporting as of December 31, 2019, 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 February 25, 2020,expressed an unqualified opinion on the effectiveness of the Group’s internal control over financial reporting.We have served as the Group’s auditor since 2018.KPMG AGHans-Dieter KraussDouglas MullinsLicensed Audit ExpertAuditor in ChargeZurich,SwitzerlandFebruary 25, 2020KPMG AG, Räffelstrasse 28, PO Box, CH-8036 ZurichKPMG 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 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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, 2019, 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 the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, 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 sheets as of December 31, 2019 and 2018, and the related consolidated income statements, statements of comprehensive income, cash flows and changes in stockholders’ equity for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2020 expressed an unqualified opinion on those consolidated financial statements. 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. 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 audits provide 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. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 143 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, 2019, 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 the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, 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 sheets as of December 31, 2019 and 2018, and the related consolidated income statements, statements of comprehensive income, cash flows and changes in stockholders’ equity for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2020 expressed an unqualified opinion on those consolidated financial statements. 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. 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 audits provide 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 detectmisstatements. 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 AGHans-Dieter KraussDouglas MullinsLicensed Audit ExpertAuditor in ChargeZurich, SwitzerlandFebruary25, 2020KPMG AG, Räffelstrasse 28, PO Box, CH-8036 ZurichKPMG AG is a subsidiary of KPMG Holding AG, which is amember of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.144 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of ABB Ltd Opinion on the Financial Statements We have audited the accompanying consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity for the year ended December 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 results of operations and cash flows for the year 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 management. Our responsibility is to express an opinion on the Company’s financial statements 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. that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit 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 audit provides 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 period, as to which the date is March 27, 2019, and We conducted our audit in accordance with the standards of the PCAOB. Those standards require Except for Note 23 for the aforementioned period, as to which the date is February 25, 2020. — 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. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 145 — 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 2019 22,554 5,424 27,978 2018 22,366 5,296 27,662 2017 20,438 4,758 25,196 (15,811) (15,961) (14,485) (3,261) (3,157) (2,865) (19,072) (19,118) (17,350) 8,906 (5,447) (1,198) 8,544 (5,295) (1,147) 7,846 (4,765) (1,013) (323) 1,938 67 (215) 72 1,862 (772) 1,090 438 1,528 (89) 1,439 1,043 396 1,439 0.49 0.19 0.67 0.49 0.19 0.67 124 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 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 2,133 2,135 2,132 2,139 2,138 2,148 Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements 04 Financial review of ABB Group 146 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — 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) 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 (gains) losses from pension settlements included in net income Changes attributable to divestments 2019 1,528 2018 2,298 2017 2,365 (130) — (2) (132) 14 — 14 6 (220) (28) 68 32 — (627) (31) 12 (646) (4) 1 (3) (7) (352) (24) 69 19 — 912 — 12 924 1 — 1 (16) (139) 6 63 9 6 Pension and other postretirement plan adjustments (142) (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 Total other comprehensive income (loss), net of tax Total comprehensive income, net of tax Comprehensive income attributable to noncontrolling interests, net of tax Total comprehensive income, net of tax, attributable to ABB Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements 20 (9) — 11 (49) 21 — (28) (249) (972) 1,279 (83) 1,196 1,326 (110) 1,216 38 (22) (3) 13 867 3,232 (177) 3,055 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 147 — 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 and in discontinued operations Total current assets Property, plant and equipment, net Operating lease right-of-use assets 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 and in discontinued operations Total assets Accounts payable, trade Contract liabilities Short-term debt and current maturities of long-term debt Current operating leases Provisions for warranties Other provisions Other current liabilities Current liabilities held for sale and in discontinued operations Total current liabilities Long-term debt Non-current operating leases Pension and other employee benefits Deferred taxes Other non-current liabilities Non-current liabilities held for sale and in discontinued operations Total liabilities Commitments and contingencies Stockholders’ equity: Common stock, CHF 0.12 par value (2,168,148,264 issued shares at December 31, 2019 and 2018) Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost (34,647,153 and 36,185,858 shares at December 31, 2019 and 2018, 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 2019 3,544 566 6,434 1,025 4,184 191 674 9,840 26,458 3,972 994 10,825 2,252 133 33 910 531 — 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 46,108 44,441 4,353 1,719 2,287 305 816 1,375 3,761 5,650 4,424 1,707 2,031 — 948 1,372 3,780 4,185 20,266 18,447 6,772 717 1,793 911 1,669 — 6,587 — 1,828 927 1,689 429 32,128 29,907 188 73 19,640 (5,590) (785) 13,526 454 13,980 46,108 188 56 19,839 (5,311) (820) 13,952 582 14,534 44,441 148 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — ABB Ltd Consolidated Statements of Cash Flows Year ended December 31 ($ in millions) 2019 2018 2017 Operating activities: Net income Less: Income from discontinued operations, net of tax 1,528 (438) 2,298 (723) 2,365 (846) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred taxes Net loss from derivatives and foreign exchange Net gain from sale of property, plant and equipment Net gain from sale of businesses Fair value adjustment on assets and liabilities held for sale Share-based payment arrangements Other Changes in operating assets and liabilities: Trade receivables, net Contract assets and liabilities Inventories, net Accounts payable, trade 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 961 (83) 1 (51) (55) 421 46 (59) (202) 128 (182) 130 (76) (36) (3) (131) 1,899 426 2,325 (748) (762) (22) 749 80 82 69 (76) (23) (651) (164) (815) 916 (142) 93 (57) (57) — 50 (76) (144) (18) (336) 454 252 87 (102) (143) 2,352 572 2,924 (322) (772) 836 (199) 29 (37) (252) — 49 4 (178) 6 (66) 474 99 (4) 202 106 2,588 1,211 3,799 (666) (752) (2,664) (2,011) 567 160 72 113 (30) (32) 1,443 100 61 607 63 37 (2,908) (1,118) (177) (332) (3,085) (1,450) A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 149 Year ended December 31 ($ in millions) 2019 2018 2017 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 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 164 2,406 (2,156) 10 — 221 1,914 (830) 42 (250) 204 920 (1,000) 163 (251) (1,675) (1,717) (1,635) (90) 13 (1,328) (55) (1,383) (28) 99 3,445 3,544 (86) (35) (741) (48) (789) (131) (1,081) 4,526 3,445 (83) (6) (1,688) (47) (1,735) 268 882 3,644 4,526 284 1,005 243 1,026 205 894 150 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — ABB Ltd Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2019, 2018 and 2017 ($ in millions) Balance at January 1, 2017 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 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 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 Adoption of accounting standard update 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 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 Fair value adjustment to noncontrolling interests recognized in business combination Changes in noncontrolling interests in connection with divestments Dividends to noncontrolling shareholders Dividends paid to shareholders Share-based payment arrangements Delivery of shares Call options Balance at December 31, 2019 Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements Common stock 192 Additional paid-in capital 24 Accumulated other comprehensive loss Treasury stock stockholders’ equity interests Total ABB Non-controlling Total stockholders’ (5,187) (1,559) 13,395 17 58 (27) (46) 4 29 (4) 60 (35) 5 56 (17) 55 (24) 4 73 (4) 188 188 188 Retained earnings 19,925 2,213 (1,622) (922) 19,594 (192) 2,173 (1,736) 19,839 36 1,439 (1,675) 899 1 (71) 13 (4,345) (9) (631) (3) (295) (28) (5,311) (36) (126) (142) 14 11 2,213 899 1 (71) 13 3,055 17 — 58 — (1,622) (251) 163 4 14,819 (201) 2,173 (631) (3) (295) (28) 1,216 (4) — — 60 42 5 — (1,736) (249) 13,952 1,439 (126) (142) 14 11 1,196 (17) (1,675) — — — 55 10 4 953 (251) 209 (647) (249) 77 (820) 34 (785) 502 152 25 177 (14) (134) 530 125 (15) 110 (19) 107 (146) 582 89 (6) 83 12 (44) (55) (122) equity 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) (249) 60 42 5 — 14,534 1,528 (132) (142) 14 11 1,279 (5) (44) (55) (122) (1,675) 55 10 4 19,640 (5,590) 13,526 454 13,980 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 151 — ABB Ltd Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2019, 2018 and 2017 ($ in millions) Balance at January 1, 2017 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 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 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 Adoption of accounting standard update Comprehensive income: Net income Total comprehensive income Changes in noncontrolling interests Dividends to noncontrolling shareholders Dividends paid to shareholders Share-based payment arrangements Delivery of shares Call options Balance at December 31, 2019 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 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 Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized expense related to pensions and other postretirement plans, net of tax Change in derivatives qualifying as cash flow hedges, net of tax Fair value adjustment to noncontrolling interests recognized in business combination Changes in noncontrolling interests in connection with divestments (4) 188 188 17 58 (27) (46) 4 29 (4) 60 (35) 5 56 (17) 55 (24) 4 73 Common stock 192 Additional paid-in capital 24 Accumulated other comprehensive loss (5,187) Treasury stock (1,559) Retained earnings 19,925 2,213 899 1 (71) 13 (4,345) (9) (631) (3) (295) (28) (5,311) (36) (126) 14 (142) 11 (1,622) (922) 19,594 (192) 2,173 (1,736) 19,839 36 1,439 (1,675) Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements 188 19,640 (5,590) 953 (251) 209 (647) (249) 77 (820) 34 (785) Total ABB stockholders’ equity Non-controlling interests Total stockholders’ equity 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 — 1,439 (126) 14 (142) 11 1,196 (17) — — — (1,675) 55 10 4 502 152 25 177 (14) (134) 530 125 (15) 110 (19) 107 (146) 582 89 (6) 83 12 (44) (55) (122) 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 — 1,528 (132) 14 (142) 11 1,279 (5) (44) (55) (122) (1,675) 55 10 4 13,526 454 13,980 152 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — Notes to the Consolidated Financial Statements — Note 1 The Company ABB Ltd and its subsidiaries (collectively, the Company) together form a technology leader that is driving the digital transformation of industries with its four customer-focused, globally leading businesses. — 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. The 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 expense 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). A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 153 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. These 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, • 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, • estimates used to record expected costs for employee severance in connection with restructuring programs, • assumptions used in the calculation of pension and postretirement benefits and the fair value of pension plan assets, • estimates to determine valuation allowances for deferred tax assets and amounts recorded for uncertain tax positions, • growth rates, discount rates and other assumptions used to determine impairment of long-lived assets and in testing goodwill for impairment, • assumptions used in determining inventory obsolescence and net realizable value, • assessment of the allowance for doubtful accounts, and • 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. 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. 154 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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 customer’s 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 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. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 155 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 instruments 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 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 156 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P contracts. Under this method, progress of contracts is measured by actual costs incurred in relation to the Company’s best estimate of total 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. Sales commissions are expensed immediately when the amortization period for the costs to obtain the contract is less than a year. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 157 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 2019, the reporting units were the same as the operating segments for Electrification, Motion and Robotics & Discrete Automation, 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 using an income approach based on the present value of future cash flows, applying a discount rate that represents the Company’s weighted-average cost of capital, 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 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 158 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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 When developing 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 Consolidated Balance Sheets 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. In January 2019, the Company adopted a new lease accounting standard. Prior to the adoption of the new accounting standard, lease transactions where substantially all risks and rewards incident to ownership were transferred from the lessor to the lessee were accounted for as capital leases. All other leases were accounted for as operating leases. The periodic rent expense for operating leases was recorded on a straight-line basis over the life of the lease term. Amounts due under capital leases were recorded as a liability. The value of the assets under capital leases were recorded as property, plant and equipment. Depreciation and amortization of assets recorded under capital leases was included in depreciation and amortization expense. Under the new lease accounting standard, the Company evaluates if a contract contains a lease at inception of the contract. A contract is or contains a lease if it conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. To determine this, the Company assesses whether, throughout the period of use, it has both the right to obtain substantially all of the economic benefits from use of the identified asset and A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 159 the right to direct the use of the identified asset. Leases are classified as either finance or operating, with the classification determining the pattern of expense recognition in the Consolidated Income Statements. Lease expense for operating leases continues to be recorded on a straight-line basis over the lease term. Lease expense for finance leases is separated between amortization of right-of-use assets and lease interest expense. In many cases, the Company’s leases include one or more options to renew, with renewal terms that can extend up to 5 years. The exercise of lease renewal options is at the Company’s discretion. Renewal periods are included in the expected lease term if they are reasonably certain of being exercised by the Company. Certain leases also include options to purchase the leased property. None of the Company’s lease agreements contain material residual value guarantees or material restrictions or covenants. Long-term leases (leases with terms greater than 12 months) are recorded in the Consolidated Balance Sheets at the commencement date of the lease based on the present value of the minimum lease payments. The present value of the lease payments is determined by using the interest rate implicit in the lease if available. As most of the Company’s leases do not provide an implicit rate, the Company’s incremental borrowing rate is used for most leases and is determined for portfolios of leases based on the remaining lease term, currency of the lease, and the internal credit rating of the subsidiary which entered into the lease. Short-term leases (leases with an initial lease term of 12 months or less and where it is reasonably certain that the property will not be leased for a term greater than 12 months) are not recorded in the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term. The majority of short-term leases relate to real estate and machinery. Assets under operating lease are included in “Operating lease right-of-use assets”. Operating lease liabilities are reported both as current and non-current operating lease liabilities. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Assets under finance lease are included in “Property, plant and equipment, net” while finance lease liabilities are included in “Long-term debt” (including “Current maturities of long-term debt” as applicable). Lease and non-lease components for leases other than real estate are not accounted for separately. 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 160 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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”. Current income tax relating to certain items is recognized directly in “Accumulated other comprehensive loss” and not in earnings. In general, the Company applies the individual items approach when releasing income tax effects from “Accumulated other comprehensive loss”. 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 comprise outstanding written call options, outstanding options and shares granted subject to certain conditions under the Company’s share-based payment arrangements. See further discussion related to earnings per share in Note 20 and of potentially dilutive securities in Note 18. Share-based payment arrangements The Company has various share-based payment arrangements for its employees, which are described more fully in Note 18. Such arrangements are accounted for under the fair value method. For awards that are equity-settled, total compensation is measured at grant date, based on the fair value of the award at that date, and recorded in earnings over the period the employees are required to render service. For awards that are cash-settled, compensation is initially measured at grant date and subsequently 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 debt and equity 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. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 161 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). 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 162 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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”. 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. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 163 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 Leases In January 2019, the Company adopted a new accounting standard that requires lessees to recognize lease assets and corresponding lease liabilities on the balance sheet for all leases with terms of more than 12 months with several practical expedients. The new accounting standard continues 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 12 months and to not separate lease and non-lease components for leases other than real estate. The Company has adopted the standard on a modified retrospective basis and has therefore recorded a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. It has elected to apply the package of practical expedients which permits the Company to not reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. While the adoption of this standard only had an insignificant impact on the Company’s results of operations and cash flows, total assets and total liabilities increased by $1,344 million and $1,360 million, respectively, of which $148 million and $153 million, respectively, relate to assets and liabilities held for sale. Comparable information has not been restated to reflect the adoption of this new standard and continues to be measured and reported under the accounting standard in effect for those periods presented. Derivatives and Hedging – Targeted improvements to accounting for hedging activities In January 2019, the Company adopted an accounting standard update 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 was applied on a modified retrospective basis for cash flow and net investment hedges and prospectively for the amended presentation and disclosure guidance but did not have a significant impact on the consolidated financial statements. Reclassification of certain tax effects from accumulated other comprehensive income In January 2019, the Company adopted an accounting standard update 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. The updated guidance was applied in the period of adoption and resulted in a reclassification of $36 million from Accumulated other comprehensive loss to retained earnings. Applicable for future periods 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. Additional related updates with targeted improvements and clarifications were issued subsequently. 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. Measurement of expected credit losses will be based on 164 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P historical experience, current conditions, and reasonable and supportable forecasts. The update also requires additional disclosures related to estimates and judgments used to measure credit losses. 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. For financial assets carried at amortized cost a cumulative-effect adjustment for the changes in the allowances for credit losses will be recognized in retained earnings on the consolidated balance sheet as of January 1, 2020. The Company does not expect the update to have a significant impact 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. 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 will adopt this update as of January 1, 2020, and does not believe that this update will have a significant impact on its consolidated financial statements. Simplifying the accounting for income taxes In December 2019, an accounting standard update was issued which simplifies the accounting for income taxes by removing certain exceptions to the general principles in this topic. The amendments also improve consistent application of existing guidance by clarifying certain aspects. This update is effective for the Company for annual and interim periods beginning January 1, 2021, with early adoption in any interim period permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company is currently evaluating the impact of this update on its consolidated financial statements. — Note 3 Basis of presentation and assets held for sale 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 $11 billion. The business also includes certain real estate properties which were previously reported within Corporate and Other as the Company primarily manages real estate assets centrally as corporate assets. As a result, this business, along with the related real estate assets previously included in Corporate and Other, have been reported as discontinued operations. The divestment is expected to be completed at the end of the second quarter of 2020, following the receipt of customary regulatory approvals as well as the completion of certain legal entity reorganizations expected to be completed before the sale. As this planned divestment represents a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations for this business have been presented as discontinued operations and the assets and liabilities are reflected as held-for-sale for all periods presented. In addition, amounts relating to stranded corporate costs have been separately disclosed as a component of Corporate and Other (see Note 23). Stranded costs represent overhead and other management costs which were previously included in the measure of segment profit (Operational EBITA) for the former Power Grids operating segment but are not directly attributable to the discontinued operation and thus do not qualify to be recorded as part of income from discontinued operations. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 165 Operating results of the discontinued operations are summarized as follows: ($ 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 2019 9,037 2018 9,698 (6,983) (7,378) 2017 10,028 (7,501) 2,054 (1,394) 2,320 2,527 (1,326) (1,376) 660 (61) 5 605 (167) 438 994 (55) 12 951 (228) 723 1,152 (42) 9 1,119 (273) 846 Of the total Income from discontinued operations before taxes in the table above, $566 million, $874 million and $1,034 million in 2019, 2018 and 2017, 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, $225 million, $297 million and $286 million, for 2019, 2018 and 2017, 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 the table above, Net interest and other finance expense in 2019, 2018 and 2017 includes $44 million, $43 million and $33 million, respectively, of interest expense which has been recorded on an allocated basis in accordance with the Company’s accounting policy election. In addition, as required by U.S.GAAP, subsequent to December 17, 2018, the Company has not recorded depreciation or amortization on the property, plant and equipment and intangible assets reported as discontinued operations. In 2018 and 2017, respectively, a total of $258 million and $265 million of depreciation and amortization expense was recorded for such assets. In 2019 and 2018, Income from discontinued operations before taxes includes $28 million and $18 million, respectively, for costs incurred to execute the transaction. Included in the reported Total revenues of the Company for 2019, 2018 and 2017 are revenues for sales from the Company’s operating segments to the Power Grids business of $213 million, $243 million and $263 million, respectively, which represent intercompany transactions that, prior to Power Grids being classified as a discontinued operation, were eliminated in the Company’s Consolidated Financial Statements (see Note 23). 166 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P The major components of the assets and liabilities which are classified as held for sale and in discontinued operations in the Company’s Consolidated Balance Sheets are summarized as follows: December 31, ($ in millions) Receivables, net Contract assets Inventories, net Property, plant and equipment, net Goodwill Other current assets Current assets held for sale and in discontinued operations Property, plant and equipment, net Goodwill Other non-current assets Non-current assets held for sale and in discontinued operations Accounts payable, trade Contract liabilities Pension and other employee benefits Other current liabilities Current liabilities held for sale and in discontinued operations Pension and other employee benefits Other non-current liabilities Non-current liabilities held for sale and in discontinued operations 2019 2,541 1,243 1,667 1,754 1,631 1,004 9,840 — — — — 1,722 1,121 419 1,984 5,246 — — — 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 Planned business divestments classified as held for sale The Company classifies its long-lived assets or disposal groups to be sold as held for sale in the period in which all of the held for sale criteria are met. The Company initially measures a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any resulting loss is recognized in the period in which the held for sale criteria are met, while gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. The Company assesses the fair value of a long-lived asset or disposal group less any costs to sell at each reporting period and until the asset or disposal group is no longer classified as held for sale. During 2019, the Company reached an agreement to sell its solar inverters business to FIMER S.p.A. for no consideration. Under the agreement the Company is obligated to transfer cash on the closing date and make additional cash payments to the purchaser through 2025. At December 31, 2019, a total of EUR 266 million ($299 million) is estimated to be due to the buyer. As a result, in 2019, the Company recorded a loss, of $421 million in “Other income (expense), net”, representing the excess of the carrying value over the estimated fair value of this business. The carrying value at December 31, 2019, includes a loss arising from the cumulative translation adjustment of $99 million. The fair value is based on the estimated current market values using Level 3 inputs, considering the agreed-upon sale terms with the buyer. The solar inverters business, which includes the solar inverter business acquired as part of the Power-One acquisition in 2013, is part of the Company’s Electrification operating segment. The estimated loss is based on current exchange rates and net assets of the business. Any changes to these factors through to the closing date of the transaction will result in adjustments to the loss recognized on the planned sale. The divestment is expected to be completed in the first quarter of 2020. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 167 As this planned divestment does not qualify as a discontinued operation, the results of operations for this business are included in the Company’s continuing operations for all periods presented. The assets and liabilities of this business are shown as assets and liabilities held for sale in the Company’s Consolidated Balance Sheet at December 31, 2019. The carrying amounts of the major classes of assets and liabilities held for sale relating to this planned divestment are as follows: December 31, ($ in millions) Assets Receivables, net Inventories, net Property, plant and equipment, net Other intangible assets, net Other assets Valuation allowance on assets held for sale Current assets held for sale Liabilities Accounts payable, trade Contract liabilities Provisions for warranties Other liabilities Fair value adjustment on disposal group Current liabilities held for sale 2019 70 127 69 27 26 (319) — 86 59 108 49 102 404 Including the above loss of $421 million in 2019, Income from continuing operations before taxes includes net losses of $490 million, from the solar inverters business. In 2018, net losses of $94 million from this business were included in Income from continuing operations before taxes. Reclassifications and other changes Changes in presentation and disclosure relating to the adoption of new accounting pronouncements Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost In January 2018, the Company adopted an accounting standard update which changes how employers that sponsor defined benefit pension plans and other postretirement plans present net periodic benefit cost in the income statement. As a result, the Company now presents the total Non-operational pension cost/credit as a total outside of income from operations. The components of Non-operational pension cost/credit are summarized in Note 17. The amounts disclosed for 2017 were previously included as a component of income from operations. — Note 4 Acquisitions and business divestments Acquisitions Acquisitions were as follows: ($ 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 2019 — 92 — 2018 2,638 1,472 3 2017 1,992 1,267 4 (1) Excluding changes in cost- and equity-accounted companies. (2) Recorded as goodwill (see Note 11). Includes adjustments of $92 million in 2019 arising during the measurement period of acquisitions, primarily reflecting changes in the valuation of net working capital, deferred tax liabilities and intangible assets acquired. 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). 168 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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. The purchase price allocation relating to the GEIS acquisition was finalized during the second quarter of 2019 and resulted in $92 million of net measurement period adjustments, increasing goodwill, primarily related to changes in the valuation of net working capital, deferred tax liabilities and intangible assets acquired. In addition, in November 2019, the Company recognized a gain of $92 million relating to the receipt of cash from General Electric for a favorable resolution of an uncertainty with respect to the price paid to acquire GEIS. This occurred after the end of the measurement period and as a result, the Company recorded a gain in “Other income (expense), net”. On July 6, 2017, the Company acquired the shares of B&R, a worldwide provider of product- and software-based, open-architecture solutions for machine and factory automation. This acquisition closes a gap in the Company’s industrial automation portfolio and consequently the goodwill acquired represents the future benefits associated with product portfolio expansion. The final allocation of purchase consideration for GEIS and the aggregate allocation of the purchase consideration for business acquisitions in 2017, was as follows: ($ 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) GEIS 2017 Weighted- average useful life 7 years 20 years 10 years Allocated amounts Weighted- average useful life Allocated amounts(1) 92 178 135 7 years 12 years 13 years 32 13 years 437 373 — (45) 405 (19) 1,534 (63) 2,622 412 264 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 amount of goodwill which is tax deductible is $769 million. (4) Primarily relates to the acquisition of B&R in 2017. Cash acquired in the GEIS acquisition totaled $192 million. The Company’s Consolidated Income Statement for 2018, includes total revenues of $1,317 million and net income of $1 million in respect of GEIS since the date of acquisition. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 169 The unaudited pro forma financial information in the table below summarizes the combined pro forma results of the Company and GEIS for 2018 and 2017, as if GEIS had been acquired on January 1, 2017. ($ 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) 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 2018 (10) 26 (4) (5) 44 (15) (5) 31 2017 (20) (26) (8) (12) 20 (62) 33 (75) Business divestments In 2019, the Company recorded net gains (including transactions costs) of $55 million, primarily due to the divestment of two businesses in China. 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 $94 million in 2017 for changes in the amounts recorded for these obligations. In addition, the Company has provided certain performance guarantees to third parties which guarantee the performance of the buyer under existing contracts with customers as well as for certain capital expenditures of the divested business (see Note 15). In 2018, there were no significant amounts recognized from divestments of consolidated businesses. 170 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — Note 5 Cash and equivalents, marketable securities and short- term investments Current assets Cash and equivalents and marketable securities and short-term investments consisted of the following: December 31, 2019 ($ in millions) Cost basis Changes in fair value recorded in net income Cash Time deposits Equity securities 2,111 1,433 294 3,838 Changes in fair value recorded in other comprehensive income Debt securities available-for-sale: – U.S. government obligations – Corporate Total 191 61 252 4,090 Gross unrealized gains Gross unrealized losses Fair value Cash and equivalents Marketable securities and short- term in- vestments 2,111 1,433 304 3,848 197 65 262 2,111 1,433 3,544 — 4,110 3,544 — (1) (1) (1) 304 304 197 65 262 566 10 10 7 4 11 21 December 31, 2018 ($ in millions) Cost basis Changes in fair value recorded in net income Cash Time deposits Other short-term investments Equity securities 1,983 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 Cash and equivalents Marketable securities and short- term in- vestments 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) Included in Other short-term investments at December 31, 2018, are receivables of $206 million, representing reverse repurchase agreements. Contractual maturities Contractual maturities of debt securities consisted of the following: December 31, 2019 ($ in millions) One to five years Six to ten years Due after ten years Total Available-for-sale Cost basis Fair value 125 74 53 252 126 77 59 262 At December 31, 2019 and 2018, the Company pledged $66 million and $68 million, respectively, of available-for-sale marketable securities as collateral for issued letters of credit and other security arrangements. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 171 — 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. Equity risk The Company is exposed to fluctuations in the fair value of its warrant appreciation rights (WARs) issued under its MIP (Management Incentive Plan) (see Note 18). 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. 172 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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, 2019 15,015 924 5,188 2018 2017 13,612 16,261 733 3,300 899 5,706 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 derivatives (whether designated as hedges or not), on a net basis, to reflect the Company’s requirements for these commodities: Type of derivative Copper swaps Silver swaps Aluminum swaps Unit metric tonnes ounces metric tonnes Total notional amounts at December 31, 2019 2018 2017 42,494 46,143 28,976 2,508,770 2,861,294 1,966,729 8,388 9,491 1,869 Equity derivatives At December 31, 2019, 2018 and 2017, the Company held 40 million, 41 million and 37 million cash-settled call options indexed to ABB Ltd shares (conversion ratio 5:1) with a total fair value of $26 million, $6 million and $42 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, 2019, 2018 and 2017, “Accumulated other comprehensive loss” included net unrealized losses of $5 million, $16 million and net unrealized gains of $12 million, respectively, net of tax, on derivatives designated as cash flow hedges. Of the amount at December 31, 2019, net losses of $2 million are expected to be reclassified to earnings in 2020. At December 31, 2019, the longest maturity of a derivative classified as a cash flow hedge was 49 months. In 2019, 2018 and 2017, the amounts of gains or losses, net of tax, reclassified into earnings due to the discontinuance of cash flow hedge accounting and the amount of ineffectiveness in cash flow hedge relationships directly recognized in earnings were not significant. The pre-tax effects of derivative instruments, designated and qualifying as cash flow hedges, on “Accumulated other comprehensive loss” (OCI) and the Consolidated Income Statements in 2019, 2018 and 2017, were not significant. Fair value hedges To reduce its interest rate exposure arising primarily from its debt issuance activities, the Company uses interest rate swaps. Where such instruments are designated as fair value hedges, the changes in the fair value of these instruments, as well as the changes in fair value of the risk component of the underlying debt being hedged, are recorded as offsetting gains and losses in “Interest and other finance expense”. Hedge ineffectiveness of instruments designated as fair value hedges in 2019, 2018 and 2017, was not significant. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 173 The effect of Interest rate contracts, designated and qualifying as fair value hedges, on the Consolidated Income Statements was as follows: ($ in millions) Gains (losses) recognized in Interest and other finance expense: – on derivatives designated as fair value hedges – on hedged item 2019 2018 2017 38 (38) (4) 5 (23) 27 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. The gains (losses) recognized in the Consolidated Income Statements on derivatives not designated in hedging relationships were as follows: Gains (losses) recognized in income ($ in millions) Type of derivative not designated as a hedge Location Foreign exchange contracts Total revenues Total cost of sales SG&A expenses(1) Non-order related research and development Interest and other finance expense Embedded foreign exchange contracts Total revenues Commodity contracts Other Total Total cost of sales SG&A expenses(1) Total cost of sales Interest and other finance expense (1) SG&A expenses represent “Selling, general and administrative expenses”. 2019 (7) (64) 2 1 (122) 17 (6) — 12 — (167) 2018 (121) 46 10 (1) 40 58 (4) 2 (33) 3 — 2017 92 (41) (18) — 22 7 (2) 5 31 (2) 94 The fair values of derivatives included in the Consolidated Balance Sheets were as follows: ($ in millions) Derivatives designated as hedging instruments: Foreign exchange 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, 2019 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” — — 11 11 85 17 7 109 120 — 72 14 86 14 — 3 18 104 2 — — 2 127 2 12 141 143 6 — — 6 14 — 3 17 23 174 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P ($ 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, 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 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, 2019 and 2018, 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, 2019 and 2018, information related to these offsetting arrangements was as follows: December 31, 2019 ($ in millions) Type of agreement or similar arrangement Derivatives Total December 31, 2019 ($ in millions) Type of agreement or similar arrangement Derivatives Total December 31, 2018 ($ in millions) Type of agreement or similar arrangement Derivatives Reverse repurchase agreements Total December 31, 2018 ($ 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 214 214 (102) (102) — — — — 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 151 151 (102) (102) — — — — 49 49 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 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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, 2019 ($ 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 — 197 — — — 197 — — — 304 — 65 120 104 593 143 23 166 — — — — — — — — — 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 — — — — — — — — — Total fair value 304 197 65 120 104 790 143 23 166 Total fair value 203 214 88 143 63 711 192 37 229 During 2019, 2018 and 2017 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”: 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. • Derivatives: The fair values of derivative instruments are determined using quoted prices of identical instruments from an active market, if available (Level 1 inputs). If quoted prices are not available, price quotes for similar instruments, appropriately adjusted, or present value techniques, based on available market data, or option pricing models are used. Cash-settled call options hedging the Company’s WAR liability are valued based on bid prices of the equivalent listed warrant. The fair values obtained using price quotes for similar instruments or valuation techniques represent a Level 2 input unless significant unobservable inputs are used. 176 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P Non-recurring fair value measures In June 2019, the Company adjusted the carrying value of the solar inverters business which is classified as held for sale (see Note 3). The fair value is based on the estimated current market values using Level 3 inputs, considering the agreed-upon sale terms with the buyer. There were no other significant non-recurring fair value measurements during 2019 and 2018. 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, 2019 ($ in millions) Assets Cash and equivalents (excluding securities with original maturities up to 3 months): Cash Time deposits Other non-current assets: Loans granted Restricted cash and cash deposits Liabilities Short-term debt and current maturities of long-term debt (excluding finance lease obligations) Long-term debt (excluding finance lease obligations) 2,270 6,618 1,534 6,267 December 31, 2018 ($ in millions) Assets Cash and equivalents (excluding securities with original maturities up to 3 months): Cash Time deposits 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 Carrying value Level 1 Level 2 Level 3 Total fair value 2,111 1,433 30 37 2,111 — — 37 — 1,433 31 — 736 692 — — — — — — 2,111 1,433 31 37 2,270 6,959 Carrying value Level 1 Level 2 Level 3 Total fair value 1,983 1,462 1,983 — — 1,462 1 206 30 39 — — — 39 1 206 31 — 528 707 — — — — — — — — 1,983 1,462 1 206 31 39 2,008 6,546 Short-term debt and current maturities of long-term debt (excluding finance lease obligations) Long-term debt (excluding finance lease obligations) 2,008 6,457 1,480 5,839 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). • Short-term debt and current maturities of long-term debt (excluding finance 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 finance lease obligations, approximate their fair values. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 177 • Long-term debt (excluding finance 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 2019 5,967 695 (228) 6,434 2018 5,970 635 (219) 6,386 “Trade receivables” in the table above includes contractual retention amounts billed to customers of $151 million and $176 million at December 31, 2019 and 2018, respectively. Management expects that the substantial majority of related contracts will be completed and the substantial majority of the billed amounts retained by the customer will be collected. Of the retention amounts outstanding at December 31, 2019, 76 percent and 17 percent are expected to be collected in 2020 and 2021, respectively. “Other receivables” in the table above consists of value added tax, claims, rental deposits and other non-trade receivables. The reconciliation of changes in the allowance for doubtful accounts is as follows: ($ in millions) Balance at January 1, Additions Deductions Exchange rate differences Balance at December 31, 2019 2018 2017 219 93 (81) (3) 228 202 126 (93) (16) 219 202 61 (74) 13 202 The following table provides information about Contract assets and Contract liabilities: ($ in millions) Contract assets Contract liabilities 2019 1,025 1,719 2018 1,082 1,707 2017 1,141 1,792 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. 178 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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, 2019/2018 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, 2019/2018 2019 2018 Contract assets Contract liabilities Contract assets Contract liabilities (1,158) 1,255 (879) 518 (786) (633) The Company considers its order backlog to represent its unsatisfied performance obligations. At December 31, 2019, the Company had unsatisfied performance obligations totaling $13,324 million and, of this amount, the Company expects to fulfill approximately 75 percent of the obligations in 2020, approximately 14 percent of the obligations in 2021 and the balance thereafter. — Note 9 Inventories, net “Inventories, net” consisted of the following: December 31, ($ in millions) Raw materials Work in process Finished goods Advances to suppliers Total — 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 2019 1,760 819 1,499 106 4,184 2018 1,823 837 1,525 99 4,284 2019 3,568 5,620 500 9,688 (5,716) 3,972 2018 3,573 5,624 464 9,661 (5,528) 4,133 Assets under finance leases included in “Property, plant and equipment, net” were as follows: December 31, ($ in millions) Land and buildings Machinery and equipment Accumulated depreciation Total 2019 2018 142 62 204 (99) 105 171 69 240 (122) 118 In 2019, 2018 and 2017 depreciation, including depreciation of assets under finance leases, was $616 million, $578 million and $549 million, respectively. In 2019, 2018 and 2017 there were no significant impairments of property, plant or equipment. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 179 — Note 11 Goodwill and other intangibles assets The changes in “Goodwill” below have been recast to reflect the reorganization in 2019 of the Company’s operating segments as outlined in Note 23: ($ in millions) Cost at January 1, 2018 Accumulated impairment charges Balance at January 1, 2018 Goodwill acquired during the year Goodwill allocated to disposals Exchange rate differences and other Balance at December 31, 2018 Goodwill acquired during the year(1) Goodwill allocated to disposals Exchange rate differences and other Electrification Industrial Automation Motion Robotics & Discrete Automation Corporate and Other 2,969 — 2,969 1,442 (31) (104) 4,276 92 (18) 22 1,631 2,470 — — 1,631 2,470 — — (15) 1,616 — — (1) — — (29) 2,441 — — (5) 2,445 — 2,445 30 — (65) 2,410 — — (29) 2,381 39 (18) 21 — — — 21 — — — 21 Total 9,554 (18) 9,536 1,472 (31) (213) 10,764 92 (18) (13) 10,825 Balance at December 31, 2019 4,372 1,615 2,436 (1) Amount consists of adjustments arising during the twelve-month measurement period subsequent to the respective acquisition date (see Note 4). In 2018, goodwill acquired primarily relates to GEIS, acquired in June 2018, which has been allocated to the Electrification Business. Intangible assets other than goodwill consisted of the following: December 31, ($ in millions) Capitalized software for internal use Capitalized software for sale Intangibles other than software: Customer-related Technology-related Marketing-related Other Total 2019 2018 Gross carrying amount Accumu- lated amor- tization Net carrying amount Gross carrying amount Accumu- lated amor- tization Net carrying amount 790 29 (628) (29) 162 — 2,513 1,056 501 59 (1,005) 1,508 (722) (286) (26) 334 215 33 779 30 2,609 1,131 483 67 (586) (30) (909) (701) (240) (26) 193 — 1,700 430 243 41 4,948 (2,696) 2,252 5,099 (2,492) 2,607 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 2019 42 2018 139 — — — — 42 214 87 122 34 596 180 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P The additions of $42 million in 2019 were not related to business combinations. Included in the additions of $596 million in 2018 were the following intangible assets other than goodwill related to business combinations: ($ in millions) Capitalized software for internal use Intangibles other than software: Customer-related Technology-related Marketing-related Other Total 2018 Amount acquired 65 214 87 122 34 522 Weighted-average useful life 2 years 14 years 7 years 13 years 13 years Amortization expense of intangible assets other than goodwill consisted of the following: ($ in millions) Capitalized software for internal use Intangibles other than software Total 2019 2018 2017 74 271 345 59 279 338 50 237 287 In 2019, 2018 and 2017, impairment charges on intangible assets other than goodwill were not significant. At December 31, 2019, future amortization expense of intangible assets other than goodwill is estimated to be: ($ in millions) 2020 2021 2022 2023 2024 Thereafter Total — Note 12 Debt 337 301 253 233 211 917 2,252 The Company’s total debt at December 31, 2019 and 2018, amounted to $9,059 million and $8,618 million, respectively. Short-term debt and current maturities of long-term debt The Company’s “Short-term debt and current maturities of long-term debt” consisted of the following: December 31, ($ in millions) Short-term debt (weighted-average interest rate of 2.8% and 2.3%, respectively) Current maturities of long-term debt (weighted-average nominal interest rate of 0.7% and 2.7%, respectively) Total 2019 2018 838 561 1,449 2,287 1,470 2,031 Short-term debt primarily represents short-term loans from various banks and issued commercial paper. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 181 At December 31, 2019, the Company had in place two commercial paper programs: a $2 billion Euro-commercial paper program for the issuance of commercial paper in a variety of currencies, and a $2 billion commercial paper program for the private placement of U.S. dollar denominated commercial paper in the United States. At December 31, 2018, $172 million was outstanding under the $2 billion Euro-commercial paper program. No amount was outstanding under this program at December 31, 2019. At December 31, 2019 and 2018, $706 million and $292 million, respectively, was outstanding under the $2 billion program in the United States. In addition, in December 2019, the Company replaced its $2 billion multicurrency revolving credit facility, maturing in 2021, with a new $2 billion 5-year multicurrency credit facility maturing in 2024. The new credit facility provides an option in 2020 and 2021 to extend the maturity to 2025 and 2026, respectively. The facility is for general corporate purposes. Interest costs on drawings under the facility are LIBOR or EURIBOR (depending on the currency of the drawings) plus a margin of 0.175 percent, while commitment fees (payable on the unused portion of the facility) amount to 35 percent of the margin, which represents commitment fees of 0.06125 percent per annum. Utilization fees, payable on drawings, amount to 0.075 percent per annum on drawings up to one-third of the facility, 0.15 percent per annum on drawings in excess of one-third but less than or equal to two-thirds of the facility, or 0.30 percent per annum on drawings over two-thirds of the facility. The facility contains cross-default clauses whereby an event of default would occur if the Company were to default on indebtedness as defined in the facility, at or above a specified threshold. No amount was drawn at December 31, 2019 and 2018, under either the new or the old facility. The old facility was terminated in December 2019. Long-term debt The Company raises long-term debt in various currencies, maturities and on various interest rate terms. For certain of its debt obligations, the Company utilizes derivative instruments to modify its interest rate exposure. In particular, the Company uses interest rate swaps to effectively convert certain fixed-rate long-term debt into floating rate obligations. The carrying value of debt, designated as being hedged by fair value hedges, is adjusted for changes in the fair value of the risk component of the debt being hedged. The following table summarizes the Company’s long-term debt considering the effect of interest rate swaps. Consequently, a fixed-rate debt subject to a fixed-to-floating interest rate swap is included as a floating rate debt in the table below: December 31, ($ in millions, except % data) Floating rate Fixed rate Current portion of long-term debt Total 2019 Nominal rate Effective rate 1.5% 2.8% 1.1% 2.4% 0.7% 0.6% Balance 2,221 6,000 8,221 (1,449) 6,772 Balance 3,106 4,951 8,057 (1,470) 6,587 2018 Nominal rate Effective rate 1.7% 3.6% 1.1% 3.6% 2.7% 2.7% At December 31, 2019, the principal amounts of long-term debt repayable (excluding finance lease obligations) at maturity were as follows: ($ in millions) 2020 2021 2022 2023 2024 Thereafter Total 1,433 1,273 1,259 1,237 1,136 1,681 8,019 182 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P Details of the Company’s outstanding bonds were as follows: December 31, (in millions) Bonds: 2.625% EUR Instruments, due 2019 2.8% USD Notes, due 2020 Floating EUR 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 0.3% CHF Notes, due 2024 3.8% USD Notes, due 2028 1.0% CHF Notes, due 2029 4.375% USD Notes, due 2042 Total 2019 2018 Nominal outstanding Carrying value(1) Nominal outstanding Carrying value(1) USD EUR USD CHF USD USD USD EUR EUR CHF USD CHF USD 300 1,000 650 350 250 1,250 450 700 750 280 750 170 750 $ $ $ $ $ $ $ $ $ $ $ $ $ 300 1,122 648 373 260 1,267 448 799 859 288 746 175 724 $ 8,009 EUR 1,250 USD 300 USD CHF USD USD USD EUR EUR 650 350 250 1,250 450 700 750 $ $ $ $ $ $ $ $ $ 1,431 299 646 373 265 1,242 448 807 862 USD 750 $ 746 USD 750 $ $ 723 7,842 (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 2019, the Company repaid at maturity its 2.625% EUR Instruments. The 2.625% EUR Instruments paid fixed rate interest annually in arrears. The 2.8% USD Notes, due 2020, pay interest semi-annually in arrears at a fixed rate of 2.8 percent per annum. In April 2019, the Company issued 18-month floating rate notes with an aggregate principal of EUR 1,000 million, due in October 2020. These notes pay interest quarterly in arrears at a variable interest rate of 35 basis points above the 3-month EURIBOR, with a floor rate of zero. The aggregate net proceeds amounted to EUR 1,002 million (equivalent to approximately $1,129 million on date of issuance). 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 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 183 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 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. 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. 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 interests annually in arrears. The Company recorded aggregate net proceeds, after underwriting discount and other fees, of CHF 449 million (equivalent to approximately $449 million on date of issuance). 184 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P The Company’s various debt instruments contain cross-default clauses which would allow the bondholders to demand repayment if the Company were to default on any borrowing at or above a specified threshold. Furthermore, all such bonds constitute unsecured obligations of the Company and rank pari passu with other debt obligations. In addition to the bonds described above, included in long-term debt at December 31, 2019 and 2018, are finance lease obligations, bank borrowings of subsidiaries and other long-term debt, none of which is individually significant. — Note 13 Other provisions, other current liabilities and other non-current liabilities “Other provisions” consisted of the following: December 31, ($ in millions) Contract-related provisions Restructuring and restructuring-related provisions Provisions for contractual penalties and compliance and litigation matters Provision for insurance-related reserves Other Total “Other current liabilities” consisted of the following: December 31, ($ in millions) Employee-related liabilities Accrued expenses Non-trade payables Income taxes payable Accrued customer rebates Other tax liabilities Derivative liabilities (see Note 6) Accrued interest Pension and other employee benefits Deferred income 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 Employee-related liabilities Environmental provisions Derivative liabilities (see Note 6) Deferred income Other Total 2019 2018 607 234 209 168 157 590 277 209 166 130 1,375 1,372 2019 1,396 2018 1,506 592 442 355 287 282 143 44 36 25 159 3,761 2019 1,218 112 72 48 23 7 189 1,669 546 477 260 299 277 192 73 34 36 80 3,780 2018 1,111 132 74 56 37 12 267 1,689 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 185 — Note 14 Leases The Company’s lease obligations primarily relate to real estate, machinery and equipment. Prior to the adoption of the new lease standard in 2019, rent expense was $364 million and $385 million in 2018 and 2017, respectively. Sublease income received by the Company on leased assets was $7 million and $11 million in 2018 and 2017, respectively. Under the new accounting standard, adopted in January 2019, the components of lease expense were as follows: ($ in millions) Finance lease cost: Amortization of right-of-use assets Interest on lease liabilities Variable lease cost(1) Short-term lease cost Sub-lease income Total lease expense 2019 Machinery and equipment Land and buildings 13 1 — 19 (2) 20 2 5 29 — Total 33 3 5 48 (2) 299 157 456 (1) Primarily relates to variable payments that are tied to the consumer price index and are therefore included in the measurement of the right-of-use asset or lease liability. The following table presents supplemental cash flow information related to leases: ($ in millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases Operating cash flows from finance leases Financing cash flows from finance leases Right-of-use assets obtained in exchange for new liabilities: Under operating leases Under finance leases 2019 Machinery and equipment Land and buildings 252 1 8 153 23 96 2 12 52 18 Total 348 3 20 205 41 At December 31, 2019, the future net minimum lease payments for operating and finance leases and the related present value of the net minimum lease payments consisted of the following: ($ in millions) 2020 2021 2022 2023 2024 Thereafter Total minimum lease payments Less amount representing estimated executory costs included in total minimum lease payments Net minimum lease payments Difference between undiscounted cash flows and discounted cash flows Present value of minimum lease payments Operating Leases Finance Leases Land and buildings Machinery and equipment Land and buildings Machinery and equipment 222 178 137 105 86 226 954 — 954 (98) 856 86 41 21 10 8 5 171 — 171 (5) 166 23 24 23 20 21 84 195 (1) 194 (59) 135 14 11 8 4 1 — 38 — 38 (2) 36 186 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P The following table presents certain information related to lease terms and discount rates for leases as of December 31, 2019: ($ in millions) Weighted-average remaining term (months) Weighted-average discount rate Operating Leases Finance Leases Land and buildings Machinery and equipment Land and buildings Machinery and equipment 78 3.0% 29 2.2% 110 8.2% 33 2.8% 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 finance lease payments included in “Short-term debt and current maturities of long-term debt” and “Long-term debt” in the Consolidated Balance Sheets at December 31, 2019, amounts to $17 million and $154 million, respectively. — 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 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. Although the Company believes that there may be an unfavorable outcome in one or more of these compliance-related matters, at this time it is not possible for the Company to make an informed judgment about the possible financial impact. 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, 2019 and 2018, the Company had aggregate liabilities of $157 million and $221 million, respectively, included in “Other provisions” and “Other non-current liabilities”, for the above regulatory, A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 187 compliance and legal contingencies, and none of the individual liabilities recognized was significant. As it is not possible to make an informed judgment on, or reasonably predict, the outcome of certain matters and as it is not possible, based on information currently available to management, to estimate the maximum potential liability on other matters, there could be material adverse outcomes beyond the amounts accrued. Guarantees General The following table provides quantitative data regarding the Company’s third-party guarantees. The maximum potential payments represent a “worst-case scenario”, and do not reflect management’s expected outcomes. December 31, ($ in millions) Performance guarantees Financial guarantees Indemnification guarantees Total Maximum potential payments(1) 2019 1,860 10 64 2018 1,584 10 64 1,934 1,658 (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, 2019 and 2018, 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 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, 2019 and 2018, the maximum potential payable under these guarantees amounts to $898 million and $771 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, 2019 and 2018, the total outstanding performance bonds aggregated to $6.8 billion and $7.4 billion, respectively, of which $3.7 billion and $4.3 billion, respectively, relate to discontinued operations. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2019, 2018 and 2017. Product and order-related contingencies The Company calculates its provision for product warranties based on historical claims experience and specific review of certain contracts. 188 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P The reconciliation of the “Provisions for warranties”, including guarantees of product performance, was as follows: ($ in millions) Balance at January 1, Net change in warranties due to acquisitions, divestments and liabilities held for sale(1) Claims paid in cash or in kind Net increase in provision for changes in estimates, warranties issued and warranties expired Exchange rate differences Balance at December 31, 2019 948 (88) (310) 276 (10) 816 2018 909 41 (307) 341 (36) 948 2017 815 30 (243) 234 73 909 (1) Includes adjustments to the initial purchase price allocation recorded during the measurement period. 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 $92 million, were recorded in “Cost of sales of products” in 2018. As these costs relate to a divested business, in accordance with the definition of the Company’s primary measure of segment performance, Operational EBITA (see Note 23), the costs have been excluded from this measure. The warranty liability has been recorded based on the information currently available and is subject to change in the future. Related party transactions The Company conducts business with certain companies where members of the Company’s Board of Directors or Executive Committee act, or in recent years have acted, as directors or senior executives. The Company’s Board of Directors has determined that the Company’s business relationships with those companies do not constitute material business relationships. This determination was made in accordance with the Company’s related party transaction policy which was prepared based on the Swiss Code of Best Practice and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 189 — Note 16 Income taxes “Provision for taxes” consisted of the following: ($ in millions) Current taxes Deferred taxes Tax expense from continuing operations Tax expense from discontinued operations 2019 855 (83) 772 167 2018 686 (142) 544 228 2017 782 (199) 583 273 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 requirement in Switzerland for any parent company of a group to file a tax return of the consolidated group determining domestic and foreign pre-tax income. As the Company’s consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines the weighted-average global tax rate of the Company. 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 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 Other, net Tax expense from continuing operations Effective tax rate for the year 2019 1,862 18.3% 2018 2,119 22.2% 341 (7) 198 63 44 133 772 470 (43) 41 1 86 (11) 544 2017 2,102 23.6% 497 (114) 763 (747) 58 126 583 41.5% 25.7% 27.7% The allocation of consolidated income from continued operations, which is predominantly earned outside of Switzerland, impacts the “weighted-average global tax rate”. In 2019, based on the enacted tax rates in the applicable jurisdictions, the loss recorded for the planned sale of the solar inverters business reduced the weighted-average global tax rate by approximately 2 percent. 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. In 2019, the amount was not significant. In 2019, “Changes in valuation allowance, net” includes adjustments to the valuation allowance in certain jurisdictions where the Company updated its assessment that it was more likely than not that such deferred tax assets would be realized. In 2019, the Company recorded an increase of $158 million 190 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P to the valuation allowance in certain operations in North America including an amount to provide for certain deferred tax assets arising in 2019. 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 2019, “Effects of changes in tax laws and (enacted) tax rates” primarily reflects a change in tax law applicable to a country in Europe. The benefit was mostly offset by a related change in the valuation allowance, resulting in a net benefit of $17 million. 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. This benefit was also offset by a related change in the 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. In 2019, 2018 and 2017, “Non-deductible expenses” includes $44 million, $86 million and $58 million, respectively, in relation to items that were deducted for financial accounting purposes but were not tax deductible, such as interest expense, local taxes on productive activities, disallowed meals and entertainment expenses and other similar items. In 2019 and 2017, “Other, net” in the table above included net charges of $91 million and $148 million, respectively, related to the interpretation for tax law and double tax treaty agreements by competent tax authorities while in 2018, “Other, net” included a net benefit of $22 million. Deferred income tax assets and liabilities (excluding amounts held for sale and in discontinued operations) consisted of the following: December 31, ($ in millions) Deferred tax assets: Unused tax losses and credits Provisions and other accrued liabilities Pension Inventories Intangibles 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) 2019 2018 507 650 592 463 972 300 3,484 (1,632) 1,852 (244) (679) (538) (39) (353) 600 769 476 253 1,031 122 3,251 (1,535) 1,716 (202) (770) (153) (67) (445) (1,853) (1,637) (1) 79 910 (911) (1) 1,006 (927) 79 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 $1,632 million and $1,535 million, at December 31, 2019 and 2018, respectively. “Unused tax losses and credits” at December 31, 2019 and 2018, in the table above, included $126 million and $145 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. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 191 The valuation allowance at December 31, 2019, 2018 and 2017 was $1,632 million, $1,535 million and $1,303 million, respectively. At December 31, 2019 and 2018, deferred tax liabilities totaling $353 million and $445 million, respectively, have been provided for primarily in respect of withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on unremitted earnings which will be payable in foreign jurisdictions on the repatriation of earnings to Switzerland. Income which has been generated outside of Switzerland and has already been subject to corporate income tax in such foreign jurisdictions is, to a large extent, tax exempt in Switzerland. Therefore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries. Certain countries levy withholding taxes on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. In 2019 and 2018, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow utilization of benefits. At December 31, 2019 and 2018, foreign subsidiary retained earnings subject to withholding taxes upon distribution of approximately $100 million and $100 million, respectively, were considered as indefinitely reinvested, as these funds are used for financing current operations as well as business growth through working capital and capital expenditure in those countries and, consequently, no deferred tax liability was recorded. At December 31, 2019, net operating loss carry-forwards of $1,999 million and tax credits of $78 million were available to reduce future taxes of certain subsidiaries. Of these amounts, $1,203 million of loss carry-forwards and $52 million of tax credits will expire in varying amounts through 2039, while the remainder will not expire. The largest amount of these carry-forwards related to the Company’s Europe operations. Unrecognized tax benefits consisted of the following: ($ in millions) Classification as unrecognized tax items on January 1, 2017 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 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, 2019, which would, if recognized, affect the effective tax rate Unrecognized tax benefits Penalties and interest related to unrecognized tax benefits 760 115 (76) 223 (23) (75) 101 1,025 8 35 (99) 126 (44) (66) (24) 961 11 202 (82) 163 (57) (83) (9) 1,106 172 103 (37) — (2) (12) 18 242 — 37 14 5 (17) (31) (11) 239 7 85 (63) 6 (8) (28) (5) 233 Total 932 218 (113) 223 (25) (87) 119 1,267 8 72 (85) 131 (61) (97) (35) 1,200 18 287 (145) 169 (65) (111) (14) 1,339 192 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P In 2019, 2018 and 2017, the “Increase relating to current year tax positions” included a total of $163 million, $111 million and $193 million, respectively, in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. In 2019, the “Increase relating to prior year tax positions” is predominantly related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. At December 31, 2019, the Company expected the resolution, within the next twelve months, of unrecognized tax benefits related to pending court cases amounting to $76 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, 2019, the earliest significant open tax years that remained subject to examination were the following: Region Europe The Americas Asia, Middle East and Africa Year 2011 2016 2010 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 193 — Note 17 Employee benefits 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. Obligations and funded status of the plans The change in benefit obligation, change in fair value of plan assets, and funded status recognized in the Consolidated Balance Sheets were as follows: Defined pension benefits Other postretirement benefits Switzerland International International ($ in millions) Benefit obligations at January 1, Service cost Interest cost Contributions by plan participants 2019 3,993 76 15 75 2018 4,055 92 30 69 2019 7,429 113 174 19 2018 7,892 122 198 16 2019 120 1 4 — Benefit payments (244) (239) (404) (318) (10) 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 — 323 — 70 4,308 3,879 320 91 75 10 6 (4) (26) 3,993 4,020 (41) 89 69 (21) 617 9 (58) 7,878 5,866 689 115 19 Benefit payments (244) (239) (404) Plan assets of businesses acquired (divested) Plan amendments and other Exchange rate differences Fair value of plan assets at December 31, Funded status — underfunded — — 68 4,189 (119) 7 — (26) 3,879 (114) (12) — (27) 6,246 60 (92) (119) (330) 7,429 6,514 (184) 152 16 (318) 39 (94) (259) 5,866 (1,632) (1,563) (110) (120) 2018 132 1 4 — (11) 8 (12) — (2) 120 — — 11 — — (1) (5) 1 110 — — 10 — (10) (11) — — — — — — — — 194 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P The amounts recognized in “Accumulated other comprehensive loss” and “Noncontrolling interests” were: Defined pension benefits Other postretirement benefits December 31, ($ in millions) 2019 2018 2017 2019 2018 2017 Net actuarial (loss) gain Prior service credit (2,777) (2,628) (2,321) 62 74 99 Amount recognized in OCI(1) and NCI(2) (2,715) (2,554) (2,222) Taxes associated with amount recognized in OCI and NCI Amount recognized in OCI and NCI, net of tax(3) 571 535 503 (2,144) (2,019) (1,719) 28 13 41 — 41 30 23 53 — 53 20 27 47 — 47 (1) OCI represents “Accumulated other comprehensive loss”. (2) NCI represents “Noncontrolling interests”. (3) NCI, net of tax, amounted to $0 million, $(1) million, and $0 million at December 31, 2019, 2018 and 2017. In addition, the following amounts were recognized in the Company’s Consolidated Balance Sheets: Defined pension benefits Other postretirement benefits Switzerland International International 2019 62 (78) (103) (119) 2018 24 — (138) (114) 2019 71 (295) (1,408) (1,632) 2018 59 (19) (1,603) (1,563) 2019 — (14) (96) (110) 2018 — (11) (109) (120) (78) (93) (277) (120) (5) — ($ in millions) Overfunded plans Underfunded plans – current Underfunded plans – non-current Funded status – underfunded Amounts reported as assets and liabilities held for sale December 31, ($ in millions) Non-current assets Overfunded pension plans Other employee-related benefits Pension and other employee benefits December 31, ($ in millions) Current liabilities Underfunded pension plans Underfunded other postretirement benefit plans Other employee-related benefits Pension and other employee benefits 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 2019 2018 132 1 133 83 1 84 2019 2018 (374) (14) (72) (460) (424) (19) (11) (10) (40) (4) 2019 2018 (1,510) (1,741) (96) (186) (109) (246) (1,792) (2,096) — (266) A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 195 The accumulated benefit obligation (ABO) for all defined benefit pension plans was $11,981 million and $11,249 million at December 31, 2019 and 2018, respectively. The projected benefit obligation (PBO), ABO and fair value of plan assets, for pension plans with a PBO in excess of fair value of plan assets or ABO in excess of fair value of plan assets, was: December 31, ($ in millions) 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 2019 3,769 3,769 3,588 2018 3,482 3,482 3,344 2019 7,346 7,156 5,643 2018 6,897 6,743 5,275 2019 3,769 3,769 3,588 2018 3,482 3,482 3,344 2019 7,228 7,054 5,537 2018 6,872 6,724 5,254 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 ($ in millions) 2019 2018 2017 2019 2018 2017 2019 2018 2017 Operational pension cost: Service cost Operational pension cost Non-operational pension cost (credit): 76 76 92 92 106 106 113 113 122 122 122 122 Interest cost 15 30 41 174 198 208 Expected return on plan assets (112) (117) (112) (276) (305) (295) Amortization of prior service cost (credit) Amortization of net actuarial loss Curtailments, settlements and special termination benefits (14) — 11 (15) — — 10 — — Non-operational pension cost (credit) (100) (102) (61) 2 108 27 35 1 92 23 9 1 91 16 21 Net periodic benefit cost (24) (10) 45 148 131 143 1 1 4 — (5) (3) (10) (14) (13) 1 1 4 — (5) (1) — (2) (1) 1 1 5 — (5) (1) (1) (2) (1) 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 $47 million, $45 million and $55 million in 2019, 2018 and 2017, 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 Defined pension benefits Other postretirement benefits Switzerland International International 2019 2018 2019 2018 2019 2018 0.2 — — 1.0 0.8 — — 1.0 2.0 2.2 1.3 1.6 2.8 2.4 1.4 1.6 2.8 0.2 — — 3.9 0.2 — — 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. 196 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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 resulted in a net decrease in the service and interest components for benefit cost in 2019. Previously, the Company calculated 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. 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 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 2019 2018 2017 2019 2018 2017 2019 2018 2017 0.8 3.0 — 1.0 0.8 1.1 2.8 2.6 2.9 3.9 3.2 3.3 3.0 — 1.0 3.0 — 1.0 4.9 2.4 1.6 4.9 2.5 1.7 5.0 2.5 1.7 — 0.2 — — — — — — — The “Expected long-term rate of return on plan assets” is derived for each benefit plan by considering the expected future long-term return assumption for each individual asset class. A single long-term return assumption is then derived for each plan based upon the plan’s target asset allocation. The Company maintains other postretirement benefit plans, which are generally contributory with participants’ contributions adjusted annually. The assumptions used were: December 31, Health care cost trend rate assumed for next year Rate to which the trend rate is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate trend rate 2019 6.3% 5.0% 2028 2018 6.7% 5.0% 2028 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 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 197 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 Total Target Switzerland International 19 54 22 5 100 19 64 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, 2019, is 3.8 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, 2019 and 2018, plan assets include ABB Ltd’s shares (as well as an insignificant amount of the Company’s debt instruments) with a total value of $10 million and $8 million, respectively. The fair values of the Company’s pension plan assets by asset class are presented below. For further information on the fair value hierarchy and an overview of the Company’s valuation techniques applied, see the “Fair value measures” section of Note 2. December 31, 2019 ($ 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 224 — — 521 — — — — 101 — — — 7 1,687 339 1,013 3,738 805 — 123 152 — — 26 — 23 — — 31 — 1,433 — — 211 1 — 231 1,710 339 1,534 3,769 805 1,433 123 253 211 1 26 846 7,890 1,699 10,435 198 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P December 31, 2018 ($ 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 (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) 2019 2018 2019 2018 2019 2018 Total contributions to defined benefit pension and other postretirement benefit plans Of which, discretionary contributions to defined benefit pension plans 91 2 89 — 115 8 152 25 10 — 11 — In 2019, 2018 and 2017, total contributions included non-cash contributions totaling $13 million, $31 million and $31 million, respectively, of available-for-sale debt securities to certain of the Company’s pension plans. The Company expects to contribute approximately $356 million, including $167 million in discretionary contributions, to its defined benefit pension plans in 2020. Of these discretionary contributions $156 million are expected to be non-cash contributions. The Company expects to contribute approximately $10 million to its other postretirement benefit plans in 2020. The Company also contributes to a number of defined contribution plans. The aggregate expense for these plans was $245 million, $245 million and $233 million in 2019, 2018 and 2017, respectively. Contributions to multi-employer plans were not significant in 2019, 2018 and 2017. Defined contribution expense includes $55 million, $59 million and $61 million in 2019, 2018 and 2017, respectively, related to discontinued operations. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 199 Estimated future benefit payments The expected future cash flows to be paid by the Company’s plans in respect of pension and other postretirement benefit plans at December 31, 2019, are as follows: ($ in millions) Switzerland International International Defined pension benefits Other postretirement benefits 2020 2021 2022 2023 2024 Years 2025–2029 335 254 239 226 215 961 341 347 346 343 344 1,727 10 9 9 9 8 34 — 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 $46 million, $50 million and $49 million in 2019, 2018 and 2017, 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 2019, 2018 and 2017 was not significant. At December 31, 2019, 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, 35 million shares held by the Company as treasury stock at December 31, 2019, 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 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 200 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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 2019 19% 4.7% 6 years -0.9% 2018 17% 3.1% 2017 19% 4.7% 6 years 6 years -0.1% -0.1% 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, 2019 Granted Forfeited Expired Outstanding at December 31, 2019 Vested and expected to vest at December 31, 2019 Exercisable at December 31, 2019 444.9 63.5 (9.9) (81.0) 417.6 413.6 239.6 89.0 12.7 (2.0) (16.2) 83.5 82.7 47.9 21.54 19.00 22.87 21.50 21.13 21.15 20.78 3.0 3.0 1.8 189 185 124 (1) Information presented reflects the number of ABB Ltd shares that can be received upon exercise, as options have a conversion ratio of 5:1. (2) Information presented reflects the exercise price per ABB Ltd share. (3) Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price of each option in Swiss francs. At December 31, 2019, there was $39 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 2.0 years. The weighted-average grant-date fair value (per option) of options granted during 2019, 2018 and 2017 was 0.34 Swiss francs, 0.46 Swiss francs and 0.47 Swiss francs, respectively. In 2018 and 2017, the aggregate intrinsic value (on the date of exercise) of options exercised was $13 million and $38 million, respectively, while the amount in 2019 was not significant. Presented below is a summary, by launch, related to options outstanding at December 31, 2019: Exercise price (in Swiss francs)(1) Number of options (in millions) Number of shares (in millions)(2) Weighted-average remaining contractual term (in years) 21.00 19.50 21.50 22.50 23.50 19.00 Total number of options and shares 72.3 78.1 72.7 66.1 65.0 63.4 417.6 14.5 15.6 14.5 13.2 13.0 12.7 83.5 0.7 1.6 2.7 3.6 4.7 5.7 3.0 (1) Information presented reflects the exercise price per share of ABB Ltd. (2) Information presented reflects the number of shares of ABB Ltd that can be received upon exercise. WARs As each WAR gives the holder the right to receive cash equal to the market price of the equivalent listed warrant on date of exercise, the Company records a liability based upon the fair value of outstanding WARs at each period end, accreted on a straight-line basis over the three-year vesting period. In “Selling, general and administrative expenses”, the Company recorded income of $14 million in 2018 and an expense of $19 million in 2017, as a result of changes in both the fair value and vested portion of the outstanding WARs. The amount in 2019 was not significant. To hedge its exposure to fluctuations in the A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 201 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 “Selling, general and administrative expenses”, the Company recorded an expense of $18 million in 2018 and income of $15 million in 2017, related to the cash-settled call options. The amount in 2019 was not significant. The aggregate fair value of outstanding WARs was $26 million and $6 million at December 31, 2019 and 2018, 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, 2019 Granted Exercised Forfeited Expired Outstanding at December 31, 2019 Exercisable at December 31, 2019 Number of WARs 41.2 10.9 (8.9) (0.3) (3.0) 39.9 11.5 The aggregate fair value at date of grant of WARs granted in 2019, 2018 and 2017 was not significant. In 2018 and 2017, share-based liabilities of $6 million and $10 million, respectively, were paid upon exercise of WARs by participants. The amount in 2019 is not significant. ESAP The employee share acquisition plan (ESAP) is an employee stock-option plan with a savings feature. Employees save over a twelve-month period, by way of regular payroll deductions. At the end of the savings period, employees choose whether to exercise their stock options using their savings plus interest, if any, to buy ABB Ltd shares (American Depositary Shares (ADS) in the case of employees in the United States and Canada – each ADS representing one registered share of the Company) at the exercise price set at the grant date, or have their savings returned with any interest. The savings are accumulated in bank accounts held by a third-party trustee on behalf of the participants and earn interest, where applicable. Employees can withdraw from the ESAP at any time during the savings period and will be entitled to a refund of their accumulated savings. The fair value of each option is estimated on the date of grant using the same option valuation model as described under the MIP, using the assumptions noted in the table below. The expected term of the option granted has been determined to be the contractual one-year life of each option, at the end of which the options vest and the participants are required to decide whether to exercise their options or have their savings returned with interest. The risk-free rate is based on one-year Swiss franc interest rates, reflecting the one-year contractual life of the options. In estimating forfeitures, the Company has used the data from previous ESAP launches. Expected volatility Dividend yield Expected term Risk-free interest rate 2019 18% 4.1% 1 year -0.7% 2018 19% 4.1% 1 year -0.6% 2017 17% 3.1% 1 year -0.6% 202 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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, 2019 Granted Forfeited Exercised(4) Not exercised (savings returned plus interest) Outstanding at December 31, 2019 Vested and expected to vest at December 31, 2019 Exercisable at December 31, 2019 3.6 2.3 (0.3) (0.5) (2.8) 2.3 2.2 — 20.38 20.78 20.38 20.38 20.38 20.78 20.78 — 0.8 0.8 — 6.0 5.7 — (1) Includes shares represented by ADS. (2) Information presented for ADS is based on equivalent Swiss franc denominated awards. (3) Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price of each option in Swiss francs. (4) The cash received upon exercise was approximately $10 million. The shares were delivered out of treasury stock. The exercise prices per ABB Ltd share and per ADS of 20.78 Swiss francs and $21.17, respectively, for the 2019 grant, 20.38 Swiss francs and $20.37, respectively, for the 2018 grant, and 26.26 Swiss francs and $26.24, respectively, for the 2017 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, 2019, 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 2019, 2018 and 2017 was 1.05 Swiss francs, 1.10 Swiss francs and 1.37 Swiss francs, respectively. The total intrinsic value (on the date of exercise) of options exercised in 2017 was $17 million, while in 2019 and 2018 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 2019 and 2018 LTIP launches are 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. For the relative total shareholder return component of the 2019 and 2018 LTIP launches, 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). A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 203 For the earnings per share performance component of the 2019 and 2018 LTIP launches, 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 LTIP launch, 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 2019 and 2018 LTIP launches, 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 LTIP launch, an Eligible Participant receives 70 percent of the shares that have vested in the form of shares and 30 percent of the value of the shares that have vested in cash, with the possibility to elect to also receive the 30 percent portion in shares rather than in cash. 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, 2019 Granted Vested Forfeited Nonvested at December 31, 2019 Number of Shares Conditionally Granted (in millions) Weighted-average grant-date fair value per share (Swiss francs) 1.3 1.1 (1.1) (0.3) 1.0 21.61 15.94 18.49 19.68 19.26 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”. At December 31, 2019, total unrecognized compensation cost related to equity-settled awards under the LTIP was not significant. The compensation cost recorded in 2019, 2018 and 2017 for cash-settled awards was not significant. The aggregate fair value, at the dates of grant, of shares granted in 2019, 2018 and 2017 was $18 million, $19 million and $22 million, respectively. The total grant-date fair value of shares that vested during 2019, 2018 and 2017 was $21 million, $17 million and $22 million, respectively. The weighted-average grant-date fair value (per share) of shares granted during 2019, 2018 and 2017 was 15.94 Swiss francs, 21.97 Swiss francs and 22.13 Swiss francs, respectively. For the relative total shareholder return component of the 2019 and 2018 LTIP launches, 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, 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 earnings per share component of the LTIP launches, the fair value of 204 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 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, 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 2019, 2018 and 2017 was not significant. — Note 19 Stockholders’ equity At both December 31, 2019 and 2018, 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 May 2019, shareholders approved the proposal of the Board of Directors to distribute a total of 0.80 Swiss francs per share. The approved dividend distribution amounted to $1,675 million and was paid in May 2019. At the 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. 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 a $4 billion share buyback program (executed between September 2014 and September 2016). 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. 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, 2019, such call options representing 11.8 million shares and with strike prices ranging from 19.00 to 23.50 Swiss francs (weighted-average strike price of 21.11 Swiss francs) were held by the bank. The call options expire in periods ranging from August 2020 to August 2025. However, only 3.9 million of these instruments, with strike prices ranging from 19.50 to 23.50 Swiss francs (weighted-average strike price of 20.69 Swiss francs), could be exercised at December 31, 2019, under the terms of the agreement with the bank. In addition to the above, at December 31, 2019, the Company had further outstanding obligations to deliver: • 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 14.5 million shares relating to the options granted under the 2016 launch of the MIP, with a strike price of 21.50 Swiss francs, vested in August 2019 and expiring in August 2022, A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 205 • up to 13.2 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 13.0 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 12.7 million shares relating to the options granted under the 2019 launch of the MIP, with a strike price of 19.00 Swiss francs, vesting in August 2022 and expiring in August 2025, • up to 2.3 million shares relating to the ESAP, vesting and expiring in October 2020, • up to 4.7 million shares to Eligible Participants under the 2019, 2018 and 2017 launches of the LTIP, vesting and expiring in May 2022, April 2021 and June 2020, respectively, and • approximately 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 and 2017, the Company delivered 2.4 million and 6.3 million shares, respectively, out of treasury stock, for options exercised in relation to the MIP, while in 2019 the amount was not significant. In addition, in 2019 and 2017 the Company delivered 0.5 million and 2.8 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, 2019, the total unconsolidated stockholders’ equity of ABB Ltd was 8,420 million Swiss francs ($8,696 million), including 260 million Swiss francs ($269 million) representing share capital, 8,920 million Swiss francs ($9,212 million) representing reserves and 760 million Swiss francs ($785 million) representing a reduction of equity for own shares (treasury stock). Of the reserves, 760 million Swiss francs ($785 million) relating to own shares and 52 million Swiss francs ($54 million) representing 20 percent of share capital, are restricted and not available for distribution. In February 2020, the Company announced that a proposal will be put to the 2020 AGM for approval by the shareholders to distribute 0.80 Swiss francs per share to shareholders. 206 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — Note 20 Earnings per share Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise outstanding written call options and outstanding options and shares granted subject to certain conditions under the Company’s share-based payment arrangements. In 2019, 2018 and 2017, outstanding securities representing a maximum of 81 million, 88 million and 31 million shares, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would have been antidilutive. Basic earnings per share: ($ in millions, except per share data in $) Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 2019 2018 2017 1,043 396 1,439 1,514 659 2,173 1,441 772 2,213 Weighted-average number of shares outstanding (in millions) 2,133 2,132 2,138 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income Diluted earnings per share: ($ in millions, except per share data in $) Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 0.49 0.19 0.67 0.71 0.31 1.02 0.67 0.36 1.04 2019 2018 2017 1,043 396 1,439 1,514 659 2,173 1,441 772 2,213 Weighted-average number of shares outstanding (in millions) 2,133 2,132 2,138 Effect of dilutive securities: Call options and shares 2 7 10 Adjusted weighted-average number of shares outstanding (in millions) 2,135 2,139 2,148 Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income from discontinued operations, net of tax Net income 0.49 0.19 0.67 0.71 0.31 1.02 0.67 0.36 1.03 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 207 — Note 21 Other Comprehensive Income The following table includes amounts recorded within “Total other comprehensive income (loss)” including the related income tax effects: ($ in millions) Foreign currency translation adjustments: 2019 2018 2017 Before tax Tax effect Net of tax Before tax Tax effect Net of tax Before tax Tax effect Net of tax Foreign currency translation adjustments (130) — (130) (641) Gain on liquidation of foreign subsidiary Changes attributable to divestments(1) — (2) — — — (2) (31) 12 Net change during the year (132) — (132) (660) 14 — — 14 1 — 1 (627) 911 (31) 12 — 12 (646) 923 (4) 1 (3) 1 — 1 1 — — 1 — — — 912 — 12 924 1 — 1 16 1 17 (2) (1) (3) 14 — 14 (5) 1 (4) 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: Net gains (losses) arising during the year Reclassification adjustments for net (gains) losses included in net income Changes attributable to divestments(1) Net change during the year 3 3 6 (11) 4 (7) (20) 4 (16) (293) 73 (220) (411) 59 (352) (184) 45 (139) (25) (3) (28) (19) (5) (24) 6 — 91 (22) 90 (27) 69 19 — 13 8 (4) (2) 16 (295) (87) 6 63 9 6 (71) 99 (31) 38 — (178) 20 (9) — 11 (6) — 36 — — — — 68 32 — 23 — (142) (327) 20 (51) (9) — 11 20 — (31) (4) — 32 2 1 — 3 (49) 45 (7) 38 21 — (28) (26) (4) 15 4 1 (2) 15 (22) (3) 13 867 Total other comprehensive income (loss) (282) 33 (249) (1,022) 50 (972) 852 (1) Changes attributable to divestments are included in the computation of the net gain or loss on sale of businesses (see Note 4). 208 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P The following table shows changes in “Accumulated other comprehensive loss” (OCI) attributable to ABB, by component, net of tax: ($ in millions) Foreign currency translation adjustments Unrealized gains (losses) on available- for-sale securities Pension and other post- retirement plan adjustments Unrealized gains (losses) of cash flow hedge derivatives Accumulated other compre- hensive loss Balance at January 1, 2017 (3,592) 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 Adoption of an accounting standard update(2) 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, 2019 912 — 12 924 25 (2,693) — (627) (31) 12 (646) (15) (3,324) — (130) — (2) (132) (6) (3,450) 7 1 — — 1 — 8 (9) (4) 1 — (3) — (4) — 14 — — 14 — 10 (1,601) (1) (5,187) (155) 78 6 (71) — (1,672) — (359) 64 — (295) — (1,967) (36) (214) 72 — (142) — (2,145) 38 (22) (3) 13 — 12 — (49) 21 — (28) — (16) — 20 (9) — 11 — (5) 796 56 15 867 25 (4,345) (9) (1,039) 55 12 (972) (15) (5,311) (36) (310) 63 (2) (249) (6) (5,590) (1) Amounts relate to the adoption of two accounting standard updates in 2018 regarding the Recognition and measurement of financial assets and financial liabilities and Revenue from contracts with customers. (2) Amounts relate to the adoption of an accounting standard update in 2019 regarding the Tax Cuts and Jobs Act of 2017. See “Applicable for current periods” 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 2019 2018 2017 Foreign currency translation adjustments: Gain on liquidation of foreign subsidiary Other income (expense), net — (31) 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 (25) 99 38 112 (40) 72 (19) 91 23 95 (31) 64 — 6 90 13 109 (31) 78 (1) Amounts include a total of $6 million, $12 million and $9 million in 2019, 2018 and 2017, respectively, reclassified from OCI to Income from discontinued operations. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 209 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 2019, 2018 and 2017. — Note 22 Restructuring and related expenses OS program In December 2018, the Company announced a two-year restructuring program with the objective of simplifying 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 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, core technologies and the ABB Ability™ platform. The program is expected to be performed over two years and incur restructuring expenses of $350 million, primarily relating to employee severance costs. The following table outlines the costs incurred in 2019 and 2018, the cumulative costs incurred to date and the total amount of costs expected to be incurred under the program per operating segment: ($ in millions) Electrification Industrial Automation Motion Robotics & Discrete Automation Corporate and Other Total Costs incurred in(1) 2019 18 3 6 8 54 89 2018 32 21 1 — 11 65 Cumulative costs incurred up to December 31, 2019(1) Total expected costs(1) 50 24 7 8 65 154 80 40 50 20 160 350 (1) Amounts in the table above have been recast to reflect the reorganization of the Company’s operating segments in 2019 as outlined in Note 23. The Company recorded the following expenses, net of change 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 Costs incurred in 2019 2018 Cumulative costs incurred up to December 31, 2019 81 1 7 89 65 — — 65 146 1 7 154 Restructuring expenses recorded for this program 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 2019 2018 8 46 1 34 89 35 23 3 4 65 210 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P Liabilities associated with the OS program are primarily included in “Other provisions”. The following table shows the activity from the beginning of the program to December 31, 2019: ($ in millions) Liability at January 1, 2018 Expenses Liability at December 31, 2018 Expenses Cash payments Change in estimates Exchange rate differences Liability at December 31, 2019 Employee severance costs Contract settlement, loss order and other costs — 65 65 111 (44) (30) (3) 99 — — — 1 (1) — — — Total — 65 65 112 (45) (30) (3) 99 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. 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 $86 million is due to significantly higher than expected rates of attrition and internal redeployment and a lower than expected severance cost per employee for the employee groups affected by the first phase of restructuring initiated in 2015. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 211 The following table outlines the net costs incurred in 2017 and the cumulative net costs incurred up to December 31, 2017: ($ in millions) Electrification Industrial Automation Motion Robotics & Discrete Automation Corporate and Other Total Net costs incurred in 2017(1) Cumulative costs incurred up to December 31, 2017(1) (17) (23) (10) (4) (32) (86) 72 106 42 14 91 325 (1) Amounts in the table above have been recast to reflect the reorganization of the Company’s operating segments in 2019 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 Cumulative costs incurred up to December 31, 2017 307 8 10 325 2017 (90) 3 1 (86) 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 Other restructuring-related activities In 2019, 2018 and 2017, the Company executed various other restructuring-related activities and incurred charges of $114 million, $116 million and $181 million, respectively. ($ in millions) Employee severance costs Estimated contract settlement, loss order and other costs Inventory and long-lived asset impairments Total 2019 2018 55 37 22 114 74 29 13 116 2017 (47) (35) (5) 1 (86) 2017 130 32 19 181 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 2019 2018 46 4 — 64 114 24 52 2 38 116 2017 119 10 — 52 181 At December 31, 2019 and 2018, $189 million and $245 million, respectively, was recorded for other restructuring-related liabilities and is primarily included in “Other provisions”. 212 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P — 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 these operating segments consist of Electrification, Industrial Automation, Motion, and Robotics & Discrete Automation. The remaining operations of the Company are included in Corporate and Other. Effective April 1, 2019, the Company announced a reorganization of its operating segments into four customer-focused, entrepreneurial businesses. The Electrification Products segment was renamed the Electrification segment. The Industrial Automation segment remains unchanged except that it now excludes the Machine and Factory Automation business line, which has been transferred, along with the Robotics business line from the former Robotics and Motion segment, to the new Robotics & Discrete Automation segment. The new Motion segment contains the remaining business lines of the former Robotics and Motion segment. The segment information for 2018 and 2017, and at December 31, 2018 and 2017, has been recast to reflect these changes. In addition, the segment level information for restructuring and related expenses included in Note 22 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: 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 large turbochargers. In addition, the Business offers a comprehensive range of services ranging from repair to advanced services such as remote monitoring, preventive maintenance and cybersecurity services. • Motion: manufactures and sells motors, generators, drives, wind converters, mechanical power transmissions, complete electrical powertrain systems and related services and digital solutions for a wide range of applications in industry, transportation, infrastructure, and utilities. • Robotics & Discrete Automation: develops and sells robotics and machinery automation solutions, including robots, controllers, software, function packages, cells, programmable logic controllers (PLC), industrial PCs (IPC), servo motion, engineered manufacturing solutions, turn-key solutions and collaborative robot solutions for a wide range of applications. In addition, the Business offers a comprehensive range of digital solutions as well as field and after sales service. • Corporate and Other: includes headquarters, central research and development, the Company’s real estate activities, Corporate Treasury Operations, historical operating activities of certain divested businesses and other non-core operating activities. 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 acquisitions (acquisition-related amortization), • restructuring, related and implementation costs, • 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 (including fair value adjustment on assets and liabilities held for sale), A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 213 • 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 disaggregated segment revenues from contracts with customers for 2019, 2018 and 2017. ($ in millions) Electrification 2019 Industrial Automation Motion Robotics & Discrete Automation Corporate and Other 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 4,039 4,568 3,665 12,272 2,355 4,798 5,119 12,272 10,315 958 999 12,272 12,272 456 12,728 2,416 1,582 2,153 6,151 1,057 3,606 1,488 6,151 1,439 1,648 3,064 6,151 6,151 122 6,273 1,879 2,315 1,827 6,021 696 3,890 1,435 6,021 5,152 — 869 6,021 6,021 512 6,533 1,634 453 1,157 3,244 — 3,165 79 3,244 1,785 968 491 3,244 3,244 70 3,314 36 1 40 77 18 35 24 77 65 12 — 77 77 (947) (870) Total 10,004 8,919 8,842 27,765 4,126 15,494 8,145 27,765 18,756 3,586 5,423 27,765 27,765 213 27,978 214 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P ($ in millions) Electrification 2018 Industrial Automation Motion Robotics & Discrete Automation Corporate and Other 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 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 2,475 1,467 2,449 6,391 1,174 3,573 1,644 6,391 1,528 1,853 3,010 6,391 6,391 109 6,500 1,862 2,389 1,699 5,950 746 3,877 1,327 5,950 5,111 — 839 5,950 5,950 513 6,463 1,737 476 1,339 3,552 — 3,510 42 3,552 2,019 1,001 532 3,552 3,552 59 3,611 58 21 236 315 176 98 41 315 118 197 — 315 315 (913) (598) ($ in millions) Electrification 2017 Industrial Automation Motion Robotics & Discrete Automation Corporate and Other 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 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 2,470 1,349 2,515 6,334 1,273 3,398 1,663 6,334 1,406 2,089 2,839 6,334 6,334 138 6,472 1,657 2,219 1,473 5,349 628 3,488 1,233 5,349 4,595 — 754 5,349 5,349 528 5,877 1,259 534 1,125 2,918 — 2,891 27 2,918 1,489 926 503 2,918 2,918 39 2,957 132 116 493 741 575 155 11 741 169 565 7 741 741 (945) (204) Total 10,013 8,003 9,403 27,419 4,548 15,453 7,418 27,419 18,455 3,668 5,296 27,419 27,419 243 27,662 Total 9,032 6,831 9,070 24,933 5,073 13,954 5,906 24,933 15,981 4,194 4,758 24,933 24,933 263 25,196 (1) Intersegment revenues include sales to the Power Grids business which is presented as discontinued operations and are not eliminated from Total revenues (see Note 3). Revenues by geography reflect the location of the customer. Approximately 24 percent, 22 percent and 20 percent of the Company’s total revenues in 2019, 2018 and 2017, respectively, came from customers in the United States. In each of 2019, 2018 and 2017 approximately 15 percent of the Company’s total revenues were generated from customers in China. In each of 2019, 2018 and 2017 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 2019, 2018 and 2017, as well as Total assets at December 31, 2019, 2018 and 2017. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 215 2019 2018 2017 ($ in millions) Operational EBITA: Electrification Industrial Automation Motion Robotics & Discrete Automation Corporate and Other: – Non-core and divested businesses – Stranded corporate costs – Corporate costs and Other intersegment elimination Total Acquisition-related amortization Restructuring, related and implementation costs(1) Changes in obligations related to divested businesses Changes in pre-acquisition estimates Gains and losses from sale of businesses Fair value adjustment on assets and liabilities held for sale Acquisition- and divestment-related expenses and integration costs Foreign exchange/commodity timing differences in income from operations: Unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives) Realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized Unrealized foreign exchange movements on receivables/payables (and related assets/liabilities) Certain other non-operational items: Costs for planned divestment of Power Grids Regulatory, compliance and legal costs Business transformation costs Executive Committee transition costs Favorable resolution of an uncertain purchase price adjustment Gain on sale of investments Gain on liquidation of a foreign subsidiary Asset write downs/impairments Other non-operational items Income from operations Interest and dividend income Interest and other finance expense Non-operational pension (cost) credit Income from continuing operations before taxes (1) Amounts in 2019 include $97 million of implementation costs in relation to the OS Program. 1,688 732 1,082 393 (145) (225) (418) 3,107 (265) (300) (36) (22) 55 (421) (121) 20 8 (7) (141) (7) (19) (14) 92 15 — (4) (2) 1,938 67 (215) 72 1,862 1,626 914 1,023 528 (291) (297) (498) 3,005 (273) (172) (106) (8) 57 — (204) (1) (23) (9) — (34) (17) — — — 31 (25) 5 2,226 72 (262) 83 2,119 ($ in millions) Electrification Industrial Automation Motion Robotics & Discrete Automation Corporate and Other Consolidated Depreciation and amortization Capital expenditure(1) Total assets(1)(2) at December 31, 2019 2018 2017 2019 2018 2017 2019 2018 414 55 169 124 199 961 355 57 184 127 193 916 315 61 193 73 194 836 279 64 110 59 250 762 244 218 11,671 12,052 58 93 74 303 772 54 89 44 347 752 4,559 6,149 4,661 4,287 6,016 4,760 19,068 17,326 19,200 46,108 44,441 43,458 (1) Capital expenditures and Total assets are after intersegment eliminations and therefore reflect third-party activities only. (2) At December 31, 2019, 2018 and 2017, Corporate and Other includes $9,840 million, $8,591 million and $8,603 million, respectively, of assets in the Power Grids business which is reported as discontinued operations (see Note 3). 1,510 902 838 473 (163) (286) (457) 2,817 (229) (300) (94) (8) 252 — (81) 56 8 (30) — (102) — — — — — (40) (19) 2,230 73 (234) 33 2,102 2017 8,881 4,478 6,051 4,848 216 A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P Other geographic information Geographic information for long-lived assets was as follows: ($ in millions) Europe The Americas Asia, Middle East and Africa Total Long-lived assets at December 31, 2019 2,565 1,469 932 4,966 2018 2,110 1,168 855 4,133 Long-lived assets represent “Property, plant and equipment, net” and, with effect from 2019 as a result of adopting the new leasing standard (see Note 2), “Operating lease right-of-use assets” and are shown by location of the assets. At December 31, 2019, approximately 23 percent, 10 percent and 10 percent of the Company’s long-lived assets were located in the U.S., China, and Switzerland, respectively. 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., China and Switzerland, respectively. A B B A N N U A L R E P O R T 2 0 1 9 0 4 F I N A N C I A L R E v I E W O F A B B G R O U P 217 — E M P T Y PAG E A D D E D I N T E N T I O N A L LY 05 ABB Ltd Statutory Financial Statements — 218 – 235 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 219 — 220 — 221 — 223 — 233 — 234 ABB Ltd Management Report 2019 Financial Statements 2019 Notes to Financial Statements Proposed appropriation of available earnings Report of the Statutory Auditor on the Financial Statements 220 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S — ABB Ltd Management Report 2019 ABB Ltd is the holding company of the ABB Group, owning directly or indirectly all subsidiaries globally. The major business activities during 2019 can be summarized as follows: Management services The Company provided management services to a Group company of CHF 28 million. Share transactions • share deliveries for employee share programs of CHF 34 million. Bonds and loans In 2019, the Company issued bonds in the amount of CHF 280 respectively CHF 170 million and repaid loan in the amount of USD 325 million. Dividend payment to external shareholders • from retained earnings of CHF 1,324 million. Other information In 2019, the Company employed on average 23 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 2020, the Company will continue to operate as the holding company of the ABB Group. No change of business is expected. February 25, 2020 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 221 — Financial Statements 2019 Income Statement Year ended December 31 (CHF in thousands) Note 2019 2018 Dividend income Finance income Other operating income Finance expense Personnel expenses Other operating expenses Net income before taxes Income taxes Net income Balance Sheet December 31 (CHF in thousands) Cash 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 Total current assets Long-term loans – Group Participation Other long-term assets Total non-current assets Total assets 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 Long-term provision Total non-current liabilities Total liabilities Share capital Legal reserves Legal reserves from capital contribution Legal reserves from retained earnings Free reserves Other reserves Retained earnings Net income Own shares Total stockholders' equity Total liabilities and stockholders’ equity 7 8 1,200,000 1,300,000 27,660 98,274 (31,788) (51,857) (40,076) 37,921 83,902 (52,755) (39,826) (31,542) 1,202,213 1,297,700 (3,842) (116) 1,198,371 1,297,584 Note 2019 243 2018 318 345,299 11,522 76 24,190 24,205 582 4,092 46 12,143 344,703 737 3,927 398,687 373,396 387,280 417,665 2 8,973,229 8,973,229 2,530 1,552 9,363,039 9,392,446 9,761,726 9,765,842 4 24,205 344,703 9,416 3,204 10,699 3,018 115,134 126,577 756 152,715 800,292 387,280 1,989 486,986 350,000 417,665 1,850 — 1,189,422 767,665 1,342,137 1,254,651 260,178 260,178 30,430 30,430 1,000,000 1,000,000 — — 6,690,847 6,716,999 1,198,371 1,297,584 (760,237) (794,000) 8,419,589 8,511,191 9,761,726 9,765,842 4 4 6 6 6 6 6 6 222 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S Cash Flow Statement Year ended December 31 (CHF in thousands) Note 2019 2018 Operating activities: Net income 1,198,371 1,297,584 Adjustments to reconcile net income to net cash provided by operating activities: Other non-cash-effective items (1,881) (11,611) 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: Repayments of loan granted to group companies Cash deposit with ABB Group Treasury Operations Net cash provided by investing activities Financing activities: Repayment of Bond 2012–2018 New Bond 280MCHF 2019–2024 New Bond 170MCHF 2019–2029 Repayments of loan granted by group companies Purchase of own shares Delivery of own shares Dividends paid thereof from retained earnings thereof from nominal value reduction Net cash used in financing activities Net change in cash and equivalents Cash and equivalents, opening balance Cash and equivalents, closing balance (12,087) (13,773) (4,759) 3,629 1,170,630 1,284,843 344,064 (333,777) 10,287 49,774 492,346 542,120 4 4 4 4 6 6 6 280,115 170,214 (344,064) — 36,479 (1,323,736) (1,323,736) — (350,000) — — (49,774) (232,300) 86,290 (1,281,550) (1,281,550) — (1,180,993) (1,827,334) (75) 318 243 (371) 689 318 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 223 — Notes to Financial Statements — Note 1 General ABB Ltd, Zurich, Switzerland (the Company) is the parent company of the ABB Group. Its stand-alone financial statements are prepared in accordance with Swiss law. The financial statements have been prepared in accordance with Article 957 et seqq. of Title 32 of the Swiss Code of Obligations. In December 2018, ABB Group announced an agreement to divest 80.1 percent of its Power Grids business to Hitachi Ltd. (Hitachi) valuing the business at $11 billion. The divestment is expected to be completed at the end of the second quarter of 2020, following the receipt of customary regulatory approvals as well as the completion of certain legal entity reorganizations. Group companies are all companies which are directly or indirectly controlled by the Company and variable interest entities if it is determined that the Company is the primary beneficiary. Certain prior-year amounts have been reclassified to conform to the current year’s presentation. — Note 2 Participation December 31, 2019 and 2018 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. 224 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S — Note 3 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, 2019 and 2018. Company name/location Country ABB ownership and voting rights % 2019 Share capital in thousands 2019 ABB ownership and voting rights % 2018 Share capital in thousands 2018 Currency ABB Australia Pty Limited, Moorebank, NSW Australia 100.00 131,218 100.00 131,218 AUD 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 AUTOMACAO LTDA, SOROCABA ABB Ltda., São Paulo ABB Bulgaria EOOD, Sofia ABB Canada Holding Limited Partnership, Saint-Laurent, Quebec ABB Electrification Canada ULC, Edmonton, Alberta(6) ABB Inc., Saint-Laurent, 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 B + R Industrie-Elektronik GmbH, Bad Homburg 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 Australia Austria Austria Belgium Belgium Brazil Brazil Bulgaria 100.00 100.00 100.00 —(3) —(3) 505,312 35 1,240 —(3) —(3) 100.00(5) 37,780(5) 100.00 100.00 854,784 65,110 100.00 100.00 100.00 100.00 100.00 — 100.00 100.00 505,312 35 1,240 24 13,290 — 689,793 65,110 AUD EUR EUR EUR EUR BRL BRL BGN Canada —(4) —(4) 100.00 — CAD Canada Canada China China China China 100.00 100.00 90.00 100.00 100.00 100.00 —(1) —(1) 5,000 235,000 14,400 40,000 100.00 100.00 90.00 100.00 100.00 100.00 —(1) —(1) 5,000 310,000 14,400 40,000 CAD CAD USD USD USD USD China —(3) —(3) 60.00 11,400 USD China 100.00 6,500 100.00 6,500 CNY China China China Czech Republic Denmark Egypt Egypt Estonia Finland France France Germany Germany Germany Germany Germany Germany Germany Hungary 100.00 66.52 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 29,500 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 7,500 358 1,535 3,000 100.00 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 —(3) 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 —(3) 1,535 3,000 India India Italy Italy 100.00 190,000 100.00 190,000 75.00 423,817 100.00 100.00 110,000 22,000 75.00 100.00 100.00 423,817 110,000 22,000 Japan 100.00 1,000,000 100.00 1,000,000 USD USD USD CZK DKK EGP USD EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR HUF INR INR EUR EUR JPY Korea, Republic of 100.00 23,670,000 100.00 23,670,000 KRW A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 225 ABB ownership and voting rights % 2019 Share capital in thousands 2019 ABB ownership and voting rights % 2018 Share capital in thousands 2018 Currency Company name/location 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 Country Mexico 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 —(4) 315,134 633,368 667,686 9,200 1,000 20 119 —(4) 100.00 134,550 100.00 240,000 99.93 24 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.93 315,134 633,368 667,686 9,200 1,000 20 119 100 250,000 240,000 50 99.93 99.93 328,125 245,461 99.99 99.93 328,124 350,656 Industrial C&S of P.R. LLC, San Juan Puerto Rico 100.00 — 100.00 — ABB Ltd., Moscow ABB Contracting Company Ltd., Riyadh Russian Federation Saudi Arabia 100.00 —(3) 5,686 —(3) ABB Electrical Industries Co. Ltd., Riyadh Saudi Arabia 65.00 181,000 ABB Holdings Pte. Ltd., Singapore ABB Pte. Ltd., Singapore ABB Holdings (Pty) Ltd., Modderfontain ABB South Africa (Pty) Ltd., Modderfontein Asea Brown Boveri S.A., Madrid ABB AB, Västerås ABB Norden Holding AB, Västerås ABB Power Grids Sweden AB, Västerås(7) ABB Information Systems Ltd., Zurich ABB Investment Holding GmbH, Zurich ABB Investment Holding 2 GmbH, Zurich ABB Management Holding Ltd., Zurich ABB Management Services Ltd., Zurich ABB Schweiz AG, Baden ABB Turbo Systems AG, Baden ABB LIMITED, Bangkok Singapore Singapore South Africa South Africa 100.00 100.00 100.00 74.91 32,797 28,842 4,050 1 Spain 100.00 33,318 Sweden 100.00(5) 200,000(5) Switzerland 100.00 Switzerland —(4) Switzerland 100.00(5) Switzerland Switzerland Switzerland Switzerland 100.00 100.00 100.00 100.00 500 —(4) 20(5) 1,051 571 55,000 10,000 100.00 95.00 65.00 100.00 100.00 100.00 74.91 100.00 — 5,686 40,000 181,000 32,797 28,842 4,050 1 33,318 — — 100.00 100.00 — 100.00 100.00 100.00 100.00 — 500 92,054 — 1,051 571 55,000 10,000 ABB Capital AG, Zurich Switzerland 100.00(5) 100(5) Sweden Sweden 100.00 2,344,783 100.00 2,344,783 100.00 400,000 100.00 400,000 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 Enterprise Software Inc., Atlanta, GA 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 United Arab Emirates United Kingdom United Kingdom United States United States United States United States United States United States United States United States Industrial Connections & Solutions LLC, Cary, NC United States Verdi Holding Corporation, Wilmington, DE United States 49.00(2) 5,000 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 226,014 120,000 1 1 2 1 1 — 1 — — — 49.00(2) 100.00 100.00 —(3) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 5,000 226,014 120,000 —(3) 1 2 1 1 — 1 — — — (1) Shares without par value. (2) Company consolidated as ABB exercises full management control. (3) Based on the internal defined thresholds, these indirect participations are considered not significant, and therefore no details to these participations are disclosed in the respective year. (4) Participation was either sold or liquidated in 2019. (5) Participation newly incorporated in 2019. (6) In 2019, renamed from ABB Installation Products Ltd., Saint-Jean-sur-Richelieu, Quebec. (7) In 2019, renamed from ABB AB, Västerås. MXN MXN MXN EUR USD EUR EUR EUR NOK NOK PLN PLN PLN USD RUB SAR SAR SGD SGD ZAR ZAR EUR SEK SEK SEK CHF CHF CHF CHF CHF CHF CHF CHF THB TRY AED GBP GBP USD USD USD USD USD USD USD USD USD USD 226 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S — Note 4 Interest-bearing liabilities December 31 (CHF in thousands) Bonds 2019–2024 0.3% coupon Bonds 2019–2029 1.0% coupon Bonds 2011–2021 2.25% coupon Loan 2016–2024 $450 million (in 2018 $450 million) Loan 2017–2019 $325 million (in 2018 $325 million) Total 2019 2018 nominal value 280,000 premium on issuance 96 nominal value 170,000 premium on issuance 196 nominal value 350,000 Group Group 411,485 — — — — — 350,000 442,665 319,703 1,211,777 1,112,368 In February 2019, the Company issued the following bonds: (i) CHF 280 million 0.3% bonds due 2024 and (ii) CHF 170 million 1.0% bonds due 2029. Each of the respective bonds pays interest annually in arrears in August and May respectively. The Company has the option, one month before their maturity date in case of the 2024 bonds and three months before their maturity date in the case of the 2029 bonds, to redeem the bonds, in whole but not in part, at par plus accrued interest. The 2.25% bonds, due 2021, also pay interest annually in arrears, at a fixed annual rate of 2.25%. 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 swap is treated as an off-balance sheet item and is therefore not recorded. The Company has the option to redeem all the above bonds prior to maturity, in whole but not in part only, at par plus accrued interest, if 85% of the aggregate principle amount of the relevant bond issue has been redeemed or purchased and cancelled at the time of the option exercise notice. 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. 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 2019 and 2018, the Company repaid USD 25 million in both years. The average interest in 2019 and 2018 was 3.40% and 3.11%, 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. In 2019, the Company repaid the full remaining amount of USD 325 million. The average interest in 2019 and 2018 was 3.61% and 3.08% respectively. — Note 5 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 726,150 thousand as of December 31, 2019 and CHF 737,775 thousand as of December 31, 2018. 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 insufficient unused commitments under its credit facilities with its lenders, the Company will make A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 227 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. 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 7,605,596 thousand as of December 31, 2019 and CHF 7,567,523 thousand as of December 31, 2018. 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 76,966 thousand as per December 31, 2019 and CHF 78,336 thousand as per December 31, 2018. Furthermore, the Company is the guarantor in the Group’s USD 2 billion multicurrency revolving credit facility (“Group Facility”). In December 2019, the Group Facility maturing in 2021 was replaced with a new Group Facility maturing in 2024, with the option in 2020 and 2021 to extend the maturity to 2025 and 2026, respectively. No amounts were outstanding at December 31, 2019 and 2018. 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 provisions as further described in “Note 15 – Commitments and contingencies” to the Consolidated Financial Statements of ABB Ltd. As described in the note, there is a remote risk of material adverse outcomes beyond the provisioned amounts. 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 6 Stockholders’ equity Legal reserves Free reserves from capital contri- bution Share capital from retained earnings Other reserves from retained earnings Net income Own shares Total 260,178 30,430 1,000,000 — 6,716,999 1,297,584 (794,000) 8,511,191 1,297,584 (1,297,584) — (1,323,736) (1,323,736) — 33,763 33,763 1,198,371 1,198,371 260,178 30,430 1,000,000 — 6,690,847 1,198,371 (760,237) 8,419,589 (CHF in thousands) Opening balance as of January 1, 2019 Allocation to retained earnings Dividend payment CHF 0.80 per share Purchases of own shares Delivery of own shares Net income for the year Closing balance as of December 31, 2019 228 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S Share capital as of December 31, 2019 Issued shares Contingent shares Authorized shares Share capital as of December 31, 2018 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) Total (CHF in thousands) 0.12 0.12 0.12 260,178 36,485 24,000 Par value (CHF) Total (CHF in thousands) 0.12 0.12 0.12 260,178 36,485 24,000 The own shares are valued at acquisition cost. During 2019 and 2018, a loss from the delivery of own shares of CHF 2,716 thousand and CHF 12,701 thousand, respectively, was recorded in the income statement under finance expenses. During 2019, no call options related to ABB Group’s management incentive plan (MIP) by a bank, were exercised. 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 in 2012 by the Group company that facilitates the MIP at fair value 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 delivered 1,708,620 shares at CHF 15.75 and 416,373 shares at CHF 17.50, respectively, out of own shares. The ABB Group has an annual employee share acquisition plan (ESAP) which provides share options to employees globally. To enable the Group company that facilitates the ESAP to deliver shares to 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 2019, the Company issued, out of own shares, to the Group company 396,323 shares at CHF 21.92 and 78,591 at USD 22.21. No shares were delivered in 2018, in connection with ESAP. In 2019 and 2018, the Company transferred 1,063,791 and 1,230,924 own shares at an average acquisition price per share of CHF 21.94 and CHF 21.90, respectively, to fulfill its obligations under other share-based arrangements. During 2019 there was no purchase of shares by the Company. In 2018, the Company purchased 10 million shares, for CHF 232.3 million, to support its employee share programs globally. The movement in the number of own shares during the year was as follows: 2019 2018 Average acquisition price Number of shares per share (in CHF) Number of shares Average acquisition price per share (in CHF) Opening balance as of January 1 36,185,858 21.94 Purchases for employee share programs Purchases for cancellation Cancellation Delivery for employee share programs Closing balance as of December 31 Thereof pledged for MIP — — — (1,538,705) 34,647,153 11,881,394 — — 21.94 21.94 29,541,775 10,000,000 — — (3,355,917) 36,185,858 13,336,804 21.50 23.23 — — 21.93 21.94 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 229 — Note 7 Dividend income The Company received in 2019 and 2018, a dividend payment from ABB Asea Brown Boveri Ltd of CHF 1.2 billion and CHF 1.3 billion, respectively. — Note 8 Other operating income Other operating income includes mainly outgoing charges for division management services and guarantee compensation fees to Group companies. — Note 9 Significant shareholders Investor AB, Sweden, held 254,915,142 ABB Ltd shares as of December 31, 2019, and 232,165,142 shares as per December 31, 2018, respectively. This corresponds to 11.76 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register on December 31, 2019 and 10.71 as per December 31, 2018. 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, 2019 and 2018, 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, 2019 and 2018, respectively. Pursuant to its disclosure notice, Artisan Partners Limited Partnership, USA, disclosed that, as per April 10, 2019, it, together with its direct and indirect subsidiaries, held 65,721,454 ABB Ltd shares. This corresponds to 3.03 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register on December 31, 2019. 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, 2019 and 2018, respectively. 230 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S — Note 10 Shareholdings of Board and Executive Committee At December 31, 2019 and 2018, the members of the Board of Directors as of that date, held the following numbers of shares (or ADSs representing such shares): Board ownership of ABB shares (audited) Total number of shares held at December 31 Name Peter Voser(1) Jacob Wallenberg Matti Alahuhta Gunnar Brock David Constable Frederico Curado Lars Förberg Jennifer Xin-Zhe Li Géraldine Matchett David Meline(2) Satish Pai Total (1) Includes 2000 shares held by spouse. (2) Includes 3,150 shares held by spouse. 2019 260,175 226,021 51,466 14,635 27,581 21,298 35,499 8,319 11,919 25,463 19,047 2018 201,076 217,109 41,872 4,740 20,650 12,391 19,774 2,454 3,380 17,542 12,998 701,423 553,986 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 231 At December 31, 2019, the members of the Executive Committee, as of that date, held the following number of shares (or ADSs representing such shares), the conditional rights to receive ABB shares under the LTIP and options (either vested or unvested as indicated) under the MIP and unvested shares in respect of other compensation arrangements. d l e h s e r a h s f o r e b m u n l a t o T 9 1 0 2 , 1 3 r e b m e c e D t a s n o i t p o d e t s e v f o r e b m u N I P M e h t r e d n u d l e h Unvested at December 31, 2019 s n o i t p o d e t s e v n u f o r e b m u N I P M e h t r e d n u d l e h 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 s e r a h s f o r e b m u n e c n e r e f e R 9 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 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 t n a r g e r a h s t n e m e c a p e R l l ) 4 ( 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 2020/2021) (vesting 2020) (vesting 2021) (vesting 2022) (vesting 2020) (vesting 2020/2021) 64,572 41,000 37,217 49,071 76,628 2,265 743,750 584,375 — 269,846 45,577 24,435 212,869 163,219 122,242 — — 34,984 31,196 34,735 34,494 39,076 37,147 — 36,158 — 31,756 33,981 23,301 34,790 26,214 37,379 41,323 41,323 36,158 49,587 44,422 41,839 41,323 1,064 398,440 — — 15,292 36,158 — — — — — — — — — — — 80,019 — — — — — — — 906,089 1,142,190 584,375 252,632 239,930 417,362 76,628 80,019 Name Timo Ihamuotila Sylvia Hill (EC member as of June 1, 2019) Maria Varsellona (EC member as of November 1, 2019) Frank Duggan Chunyuan Gu Sami Atiya Tarak Mehta Claudio Facchin Peter Terwiesch Morten Wierod (EC member as of April 1, 2019) Total Executive Committee members (1) It is expected that upon vesting, the LTIP 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. (2) It is expected that upon vesting, the LTIP 2018 and 2019 will be settled 65 percent in shares and 35 percent in cash for the performance factors (EPS and TSR). However, participants have the possibility to elect to receive 100 percent of the vested award in shares. (3) 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. (4) It is expected that the replacement share grants will be settled 65 percent in shares and 35 percent in cash. However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. (5) Departing Executive Committee members are not included in this table. 232 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 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 options (either vested or unvested as indicated) under the MIP and unvested shares in respect of other compensation arrangements. Unvested at December 31, 2018 d l 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 509,970 22,000 172,487 569,132 224,941 146,130 28,722 — 183,328 131,987 92,811 r e d n u e b a r e v i l l e d s e r a h s f o r e b m u n e c n e r e f e R e c n a m r o f r e p 6 1 0 2 e h t d n a 1 P ( s t n e n o p m o c ) 1 ( P I T L e h t f o ) 2 P (vesting 2019) 175,881 r e d n u e b a r e v i l l e d s e r a h s f o r e b m u n e c n e r e f e R e c n a m r o f r e p 7 1 0 2 e h t d n a 1 P ( s t n e n o p m o c ) 1 ( P I T L e h t f o ) 2 P (vesting 2020) 150,886 — 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 r e d n u e b a r e v i l l e d s e r a h s f o r e b m u n e c n e r e f e R e c n a m r o f r e p 8 1 0 2 e h t ) R S T d n a S P E ( r o t c a f ) 2 ( P I T L e h t f o 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 2021) (vesting 2019 and 2020) 143,144 37,217 45,632 40,454 31,756 25,390 33,981 23,301 34,790 26,214 37,379 — 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) 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. (2) 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. (3) 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. — Note 11 Full time employees During 2019 and 2018, the Company employed on average 23 and 20 employees, respectively. A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 233 — 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 2019 1,198,371 6,690,847 — 2018 1,297,584 6,716,999 — Retained earnings available to the Annual General Meeting 7,889,218 8,014,583 Gross dividend of CHF 0.80 per share on total number of registered shares(1) Balance to be carried forward (1,734,519) 6,154,699 (1,323,736) 6,690,847 (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 deduc- tion 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 05, 2020, the Company announced that the Board of Directors will recommend for approval at the March 26, 2020, Annual General Meeting that a dividend of CHF 0.80 per share be distributed out of the retained earnings available, to be paid in April 2020. 234 A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 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 232) for the year ended December 31, 2019. 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, 2019 comply with Swiss law and the company’s articles of incorporation. A B B A N N U A L R E P O R T 2 0 1 9 0 5 A B B LT D S TAT U TO R y F I N A N C I A L S TAT E M E N T S 235 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 232) for the year ended December 31, 2019. 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, 2019 comply with Swiss law and the company’s articles of incorporation. Report on Key Audit Matters based on the circular 1/2015 of the Federal Audit Oversight AuthorityKey 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 RequirementsWe confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 COand 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 Boardof 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 AGHans-Dieter KraussDouglasMullinsLicensed Audit ExpertAuditor in ChargeZurich,February 25,2020KPMG AG, Räffelstrasse 28, PO Box, CH-8036 ZurichKPMG 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.06 Supplemental information — 236 – 240 — 238 Supplemental information 238 A B B A N N U A L R E P O R T 2 0 1 9 0 6 S U P P L E M E N TA L I N F O R M AT I O N — 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, refer to Supplemental Reconciliations and Definitions, ABB Q4 2019 Financial Information on new.abb.com/investorrelations/ calendar-events-and-publications/ financial-results-and-presentations/ quarterly-results-and-annual-reports. 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 excluding: • acquisition-related amortization (as defined below), • restructuring, related and implementation costs Comparable growth rates (as defined below), 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 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 (including fair value adjustment on assets and liabilities held for sale), • 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. A B B A N N U A L R E P O R T 2 0 1 9 0 6 S U P P L E M E N TA L I N F O R M AT I O N 239 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. Restructuring, related and implementation costs Restructuring, related and implementation costs consists of restructuring and other related ex- penses, as well as internal and external costs re- lating to the implementation of group-wide re- structuring programs. Operational revenues ABB presents Operational revenues solely for the purpose of allowing the computation of Opera- tional EBITA margin. Operational revenues are to- tal revenues adjusted for foreign exchange/com- modity timing differences in total revenues of: (i) unrealized gains and losses on derivatives, (ii) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (iii) unrealized foreign ex- change movements on receivables (and related assets). Operational revenues are not intended to be an alternative measure to Total revenues, which represent our revenues measured in accor- dance 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, related and implementation costs, (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 (including fair value adjustment on assets and liabilities held for sale), (vii) acquisition- and divestment-related expenses and integration costs, (viii) certain other non-operational items, (ix) foreign exchange/commodity timing differ- ences in income from operations consisting of: (a) unrealized gains and losses on derivatives (for- eign exchange, commodities, embedded deriva- tives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (c) unrealized foreign ex- change movements on receivables/payables (and related assets/liabilities), (x) the amount of income tax on operational adjustments either es- timated using the Adjusted Group effective tax rate or in certain specific cases, computed using the actual income tax effects of the relevant item in (i) to (ix) above, and (xi) Certain other non-operational amounts recorded within Provi- sion for taxes. Adjustment for certain non-operational amounts recorded within Provision for taxes Adjustments are made for certain amounts re- corded within Provision for taxes primarily when the amount recorded has no corresponding un- derlying transaction recorded within income from continuing or discontinued operations before taxes. This would include the amounts recorded in connection with internal reorganizations of the corporate structure of the Company. Acquisition-related amortization Amortization expense on intangibles arising upon acquisitions. Restructuring, related and implementation costs Restructuring, related and implementation costs consists of restructuring and other related ex- penses, as well as internal and external costs relating to the implementation of group-wide re- structuring programs. Adjusted Group effective tax rate The Adjusted Group effective tax rate is com- puted by dividing a combined adjusted provision for taxes (for both continuing and discontinued operations) by a combined adjusted pre-tax in- come (from both continuing and discontinued op- erations). Certain amounts recorded in income before taxes and the related provision for taxes (primarily gains and losses from sale of busi- nesses) are excluded to arrive at the computation. Amounts recorded in Provision for taxes for cer- tain non-operational items are also excluded from the computation of the Adjusted Group effective tax rate. 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. 240 A B B A N N U A L R E P O R T 2 0 1 9 0 6 S U P P L E M E N TA L I N F O R M AT I O N 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). Return on Capital employed (ROCE) Return on Capital employed (ROCE) Return on Capital employed is calculated as Oper- ational EBITA after tax, divided by the average of the period’s opening and closing Capital em- ployed, adjusted (as needed) to reflect impacts from significant acquisitions/divestments occur- ring during the same period. Capital employed Capital employed is calculated as the sum of Ad- justed total fixed assets and Net working capital (as defined below). 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, (iv) investments in equity-accounted companies, and (v) operating lease right-of-use assets, less (vi) deferred tax lia- bilities recognized in certain acquisitions. Net working capital Net working capital is the sum of (i) receivables, net, (ii) contract assets, (iii) inventories, net, and (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, and (c) pension and other employee benefits); and including the amounts related to these accounts which have been presented as either assets or liabilities held for sale but excluding any amounts included in discontinued operations. Notional tax on operational EBITA The Notional tax on operational EBITA is com- puted using an adjusted group effective tax rate applicable to continuing operations. The rate applied is computed as described above in Opera- tional EPS and excludes any impacts from discon- tinued operations. Book-to-bill ratio Book-to-bill ratio is calculated as Orders received divided by Total revenues. A B B A N N U A L R E P O R T 2 0 1 9 0 6 S U P P L E M E N TA L I N F O R M AT I O N 241 Parts of the ABB annual report 2019 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 2019 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 fac- tors 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”, “plans” and similar words and the express or implied discussion of strategy, plans or intentions are intended to identify forward-looking statements. These forward- looking statements are subject to risks, uncertainties and assumptions, including among other things, the following: (i) business risks related to the global volatile economic environment; (ii) costs associated with compliance activities; (iii) difficulties encountered in operating in emerging markets; (iv) risks inherent in large, long term projects served by parts of our business; (v) the timely development of new products, technologies, and services that are useful for our customers; (vi) our ability to anticipate and react to technological change and evolving industry standards in the markets in which we operate; (vii) changes in interest rates and fluctuations in currency exchange rates; (viii) changes in raw materials prices or limitations of supplies of raw materials; (ix) the weakening or unavailability of our intellectual property rights; (x) industry consolidation resulting in more powerful competitors and fewer customers; (xi) effects of competition and changes in economic and market conditions in the product markets and geographic areas in which we operate; (xii) effects of, and changes in, laws, regulations, governmental policies, taxation, or accounting standards and practices and (xiii) other factors described in documents that we may furnish from time to time with the US Securities and Exchange Commission, including our Annual Reports on Form 20-F. Although we believe that the expectations reflected in any such forward-looking statements are based on reasonable assumptions, we can give no assurance that they will be achieved. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements. — ABB Ltd Corporate Communications Affolternstrasse 44 8050 Zurich Switzerland Tel: +41 (0)43 317 71 11 Fax: +41 (0)43 317 79 58 www.abb.com 

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