ABB
Annual Report 2021

Plain-text annual report

— Annual report — Highlights 2021 Operational performance Portfolio management Strongly increased demand for ABB’s offering from the low level in the previous year period when the adverse business impact of the COVID-19 pandemic was significant. Orders +20% (+17% comparable(1)) and revenues +11% (+8% compa- rable) increased in all Business Ar- eas and regions. Adverse impact from imbalances in the supply chain to some ex- tent hampered the ability to con- vert orders into actual deliveries, resulting in an order backlog of $16.6 billion, +16% (+21% compa- rable), year-on-year. Strong improvement in Opera- tional EBITA margin(1) to 14.2%, +310 basis points, higher in all Business Areas. Lifted long-term targets as ABB expects to drive through-the-cycle revenue growth to 4-7% (3-5% or- ganic and 1-2% acquired), in con- stant currency, and sharpened Op- erational EBITA margin target to be at least 15% as from 2023, in any given year. Mechanical Power Transmission (Dodge) divestment completed for $2.9 bn in cash. Good progress in Turbocharg- ing and E-mobility processes, ex- pected to be completed during first half of 2022. Acquisition of ASTI to expand in Autonomous Mobile Robots. Improved portfolio management process to build up acquisition pipelines in the divisions. Capital allocation Very strong uplift in cash genera- tion with cash flow from operat- ing activities in continuing opera- tions of $3.3 billion improving by $1.5 billion year-over-year. Net cash positive at the end of 2021. Accelerated R&D investments in focus areas. Board of Directors proposing a CHF 0.82 dividend per share at the 2022 Annual General Meeting. Returned $2.7 billion of Power Grids proceeds during 2021. (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. — ABB at a glance ABB (ABBN: SIX Swiss Ex) is a leading global technology company that energizes the transformation of society and industry to achieve a more productive, sustainable future. By connecting software to its electrification, robotics, automation and motion portfolio, ABB pushes the boundaries of technology to drive performance to new lev- els. With a history of excellence stretching back more than 130 years, ABB’s success is driven by about 105,000 talented employees in over 100 countries. % of FY 2021 third party revenues excl. Corporate and Other % of FY 2021 Operational EBITA excl. Corporate and Other % of FY 2021 third party revenues % of FY 2021 third party revenues (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. (2) Management estimates. Operational EBITA(1)RevenuesEnd-markets(2)44% Electrification23% Motion21% Process Automation11% Robotics & Discrete Automation48% Electrification27% Motion18% Process Automation8% Robotics & Discrete Automation3% Renewables6% Conv. Generation6% Distribution10% O&G, Chemicals9% Mining, Metals5% Automotive5% F&B20% Other Industry19% Buildings17% Other T&IGeographies36% Europe22% USA8% Rest of Americas17% China17% Rest of AMEA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 ($) Dividend per share Cash flow from operating activities(3) Cash flow from operating activities in continuing operations Net (cash) debt (end December)(1) CO2e own operations emissions, kt scope 1 and 2 Lost Time Injury Frequency Rate (LTIFR), frequency / 200,000 working hours Share of females in senior management positions, % FY 2021 31,868 16,607 28,945 5,718 4,122 14.2% 4,730 4,546 2.27 0.82 3,330 3,338 (98) FY2021 405 kt 0.142 16.3% FY 2020 US$ Comparable(4) +17% +21% +8% +37%(5) 26,512 14,303 26,134 1,593 2,899 11.1% 345 5,146 2.44 0.80 1,693 1,875 112 +20% +16% +11% +259% +42% +3.1 pts n.a. -12% -7%(2) +97% +78% FY2020 Change 561 kt 0.162 -28% -12% 13.5% +2.8 pts Scope 1&2 CO2 CO2 scope 1 & 2 Ktons of CO2 equivalent emissions Lost Time Injury Frequency Rate Lost Time Injury Frequency Rate LTIFR, frequency/200,000 working hours Year 2019 2020 2021 Year 2019 2020 2021 0 150 300 450 600 750 Ktons 0 0,1 0,2 0,3 LTIFR (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. (2) EPS growth rates are computed using unrounded amounts. (3) Amount represents total for both continuing and discontinued operations. (4) Growth rates for orders, order backlog and revenues are on a comparable basis, see the “Supplemental information” section of this annual report. (5) Constant currency (not adjusted for portfolio changes). — Table of contents — Table of contents — 01 Introduction 8 – 51 — 02 Corporate governance report 52– 73 — 03 Compensation report 74 – 111 — 04 Financial review of ABB Group 112 – 243 — 05 ABB Ltd statutory financial statements 244 – 261 — 06 Supplemental information 262 – 266 01 Introduction 10 Chairman and CEO letter 14 Targets and targets fulfilment 16 Sustainability: Creating long-term value across the value chain 22 Executive Committee 24 Diversity and inclusion: Our people 28 Electrification 34 Motion 38 Process Automation 42 Robotics & Discrete Automation 46 Share developments 48 Cash generation and capital allocation 50 Key investor questions 2021 10 A B B A N N U A L R E P O R T 2 0 2 1 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 2021 was also characterized by uncer- tainty related to the continuing impacts of the COVID-19 pandemic, especially in the second half. Although demand increased significantly, as can be seen in ABB’s order performance, broad disrup- tions in the global supply chain – including com- ponent shortages, challenging logistics and tight labor markets – hampered our ability to convert strong order intake into actual customer deliveries. We expect supply-chain problems to ease during the course of this year, and while rising inflation is a concern, it seems likely that the era of ultra-loose monetary policy is coming to an end, which is good news for the economy. When it comes to longer-term trends, ABB is well- positioned in very attractive markets. Despite the absence of a global agreement on actions to achieve the Paris climate goal, the COP26 climate conference showed that reducing emissions and making more efficient use of resources are now a must for governments and businesses. For ABB, as a provider of electrification, automation and digital technologies, this represents a huge opportunity. Demand for electricity is growing twice as fast as for any other form of energy and software-driven automation is the most effective way to improve energy and resource efficiency. Positioned for stronger growth In 2021, ABB started to reap the benefits of its on- going transformation. Improved efficiency com- bined with higher demand resulted in a significant increase in orders as well as a marked improve- ment in profitability. In our Business Areas, we ad- vanced on several fronts, with the launch of im- portant innovations for the transport sector and the mining industry, a value-adding acquisition in robotics, and the divestment of our Dodge busi- ness (Mechanical Power Transmission Division) for $2.9 billion in cash. We made good progress in building a high-perfor- mance culture by empowering our Divisions, and we initiated several important actions to reduce our own CO2 emissions and make ABB a more at- tractive employer. These achievements, which are covered in more detail below and in the follow- ing pages, provide a solid foundation for future profitability and growth. They will also help to strengthen ABB’s position in key market segments as well as contribute to sustainable development. In short, our company is now moving forward strongly and with a clear purpose and direction. Tragically, over the course of the year, we lost sev- eral colleagues due to continued outbreaks of COVID-19. However, our high level of prepared- ness helped us protect our people and keep our operations running. Thanks to our strong focus on safety, we saw a further reduction in workplace in- juries and recorded no fatalities for the first time since 2011. Financial performance Our strong financial performance in 2021 showed that our “ABB Way” operating model, introduced in 2020, is the right one for our company. All of our four Business Areas contributed to strong order growth as well as increased profitability. We also improved cash flow and strengthened our balance sheet. For the full-year 2021, Group orders were up 20 percent, revenues rose by 11 percent, and we in- creased our operational EBITA margin by 3.1 per- cent to 14.2 percent. Our order backlog increased, driven in part by strong demand and but also due to supply-chain challenges hampering customer deliveries. We were able to mitigate some of them thanks to our global footprint and multiple sourcing strategy, but a worldwide shortage of semi-conductors, im- pacted logistics and a tight labor market in the United States meant that deliveries to customers were delayed starting in the third quarter. We ex- pect the situation to ease over the course of this year. In light of our improved financial results, and in line with our policy of paying a sustainable dividend over time, we will be proposing a dividend of CHF 0.82 per share to our shareholders to be voted on at the annual general meeting on March 24, 2022. At the AGM, we will also ask our shareholders to approve the cancellation of shares purchased through a second buyback program that was launched on April 9, 2021. The buybacks are to re- turn $7.8 billion of cash proceeds from the Power Grids divestment to shareholders. We will also seek shareholder approval for the cancellation of shares purchased under the initial buyback pro- gram that were not proposed for cancellation at ABB’s 2021 AGM. Cultural change A key objective of our transformation is to build a high-performance culture by empowering our A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 11 20 Divisions with full ownership and accountabil- ity for their respective strategies, performance and resources. Under our decentralized ABB Way op- erating model, performance is measured through a scorecard system, which provides full transpar- ency on key measures. To be able to deliver on our commitments to our stakeholders, our Divisions are required to be sta- ble and profitable before focusing on growth. At the end of 2021, around 60 percent of our Divisions were in growth mode, which means that they focus both on organic growth as well as M&A opportuni- ties to consolidate their market position. Our long-term objective is to shift to more attrac- tive markets, with better quality of revenues, which means better gross margins, less risk and lower earnings volatility. Among the high-growth seg- ments we are targeting are: water and wastewater, food and beverage, sustainable transport and data centers. We aim to be number 1 or 2 in all of our customer segments. Strengthening our portfolio To further strengthen our position in electrification and automation, we pursue a strategy of active portfolio management with the aim of making at least five small- to mid-sized acquisitions per year. In 2021, we acquired leading autonomous mobile robot manufacturer ASTI Mobile Robotics Group, which will help us to capture growing potential in areas such as logistics and warehouse automation. With ASTI, we now have the most comprehensive portfolio of industrial robots on the market. In January 2022, we strengthened our E-mobility business by taking a controlling stake in United States electric vehicle (EV) infrastructure company, In-Charge Energy, as well as increasing our majority stake in Chinese EV charging provider, Chargedot 12 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N Shanghai New Energy Technology Co., Ltd. to 80 percent. To drive the further growth and expansion of our E-mobility business, we are moving ahead with ef- forts to separately list that business and we aim to complete this during the second quarter of 2022. As the world leader in electric vehicle charging in- frastructure, we are well-positioned in an extremely Another important offering, from our Process Au- tomation Business Area, was a portfolio of tech- nologies under the name “ABB Ability™ eMine” to electrify and automate mines, including a remote monitoring capability to optimize energy usage. From 2022, the solution will also include high- power electric chargers for mining trucks as well as an automated trolley system that can reduce diesel consumption by up to 90 percent. TO BE ABLE TO DELIVER ON OuR COMMITMENTS, OuR DIVISIONS ARE REQuIRED TO BE STABLE AND PROFITABLE BEFORE FOCuSING ON GROWTH. AT THE END OF 2021, AROuND 60 PERCENT OF OuR DIVISIONS WERE IN GROWTH MODE. attractive growth market – by 2035, EVs are ex- pected to be outselling combustion cars. Progress on sustainability We also made good progress with our planned di- vestments. We successfully closed the divestment of the Mechanical Power Transmission Division (Dodge) on November 1. This marks the completion of the announced first step to focus our business portfolio on our leading position in electrification and automation. As part of these actions, we have appointed a new head of the Turbocharging Divi- sion ahead of a likely spin off. Groundbreaking innovations In 2021, ABB again demonstrated its capacity for groundbreaking innovation with the launch of sev- eral new solutions that will further drive the shift to electrification and automation and contribute to a low-carbon society. One notable example from our E-mobility Division was the Terra 360, the world’s fastest electric-ve- hicle charger, capable of providing enough charge for 100 km of driving in less than three minutes, or of fully charging an EV in less than 15 minutes. Designed for commercial fleets and heavy-duty vehicles as well as electric cars, the Terra 360 has the capacity to charge up to four vehicles simulta- neously and can be installed in almost any setting from the curbside to gas stations and motorway stops. In 2021, we began implementing our 2030 sustain- ability strategy, with the focus on reducing CO2 emissions across our value chain. In the past two years, we have reduced emissions from our own operations by 39 percent, in part by using our own technologies. To achieve our goal of carbon neu- trality by 2030, we committed to electrifying our vehicle fleet, sourcing 100 percent of our energy from renewables and installing energy manage- ment systems at our sites around the world. Our carbon-neutrality commitment was verified by the Science-Based Targets initiative as being in line with the 1.5°C scenario of the Paris Agreement. To help our customers reduce their CO2 emissions – another key target of our 2030 sustainability strat- egy – we have identified products and solutions from our portfolio that deliver the most significant reductions in CO2 emissions. At the core of our offering are our energy-efficient electric motors and drives produced by our Motion Business Area. Drives can reduce the power consumption of mo- tors by up to 25 percent and the Motion Business Area’s flagship synchronous reluctance (SynRM) motor and drive package has set a new standard for energy efficiency. Thanks to its innovative mag- net-free design, the SynRM motor also requires no rare-earth materials in its manufacture, further re- ducing resource consumption. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 13 Alongside reducing CO2 emissions, we also have the goal of preserving resources for future gener- ations. In December 2021, we unveiled a new com- pany-wide approach to drive circularity in our own and our customers’ operations. By 2030, at least 80 percent of ABB’s products and solutions will be evaluated against a clear set of key performance indicators (KPIs), corresponding to each stage of the product lifecycle. We will also send no waste to landfill, wherever this is compatible with local con- ditions. Today, close to 40 percent of our 440 sites around the world are already sending no waste to landfill. To support a culture of diversity and inclusion, in line with our 2030 sustainability goal of promot- ing social progress, we launched a gender-neu- tral parental leave program for all ABB employees around the world. We also increased the proportion of women in senior management to 16.3 percent, from 13.5 percent in 2020. By 2030, our goal is that 25 percent of senior management roles are filled by women. Accordingly, we have lifted our revenue growth tar- get to 4–7 percent through the economic cycle, in constant currency. Of that, we expect 3–5 per- cent to come from organic growth and 1–2 percent from acquired growth. We have also sharpened our operational EBITA margin target to be at least 15 percent as of 2023. Previously, we had targeted 3–5 percent for revenue growth through the cycle and an operational EBITA margin in the upper half of a 13–16 percent range as of 2023. With our leading technologies and talented people, we are confident that ABB will continue to go from strength to strength while living up to the expec- tations of its stakeholders and making a valuable contribution to a more sustainable society. On behalf of the Board of Directors and the Ex- ecutive Committee, we would like to thank our customers and shareholders for their continued trust in ABB and to thank our employees for their tremendous commitment, engagement and hard work. We are proud to lead them. Best regards, P E T E R VO S E R B J Ö R N R O S E N G R E N Chairman of the Board Chief Executive Officer of Directors To ensure that sustainability is taken as seri- ously as our other performance targets, we are integrating sustainability KPIs into our perfor- mance management planning and our businesses are reporting them at the same time as financial KPIs. Sustainability KPIs are now also part of se- nior management incentives and a selection is in- cluded in our quarterly financial reports. Finally, to encourage our people to get personally involved in driving ABB’s sustainability journey, we launched the “Sustainability Changemaker Award”, inviting ideas that support the achievement of our 2030 sustainability goals. The winning individual or team will get the chance to turn their idea into reality. Strong future prospects Having decentralized our organization and success- fully rolled out our ABB Way operating model, we are in a strong position to capture future growth opportunities. The three key growth drivers for our businesses are: resource efficiency through electri- fication and automation, where we are global lead- ers, occupying number 1 or 2 positions in the mar- ket; new ways of working, in which our Divisions are accountable for growth and decision-making has been moved closer to the market; and the ac- celeration of environmental, social and governance (ESG) drivers for energy efficiency and automation. 14 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Targets fulfilment ABB’s financial framework mirrors the company’s ambition for improved performance and reflects increased accountability, transparency and speed in decision making. With our 2030 sus- tainability strategy, we are enabling a low-carbon society, pre- serving resources, promoting social progress and driving in- tegrity and transparency across the value chain. Financial target framework and 2021 performance R E V E N U E G R O W T H O P E R AT I O N A L E B I TA M A R G I N (2) Target: 2021 performance: Group target: 2021 performance: 4–7% annual average through economic cycle(1) 8% ≥15% as from 2023 14.2% R O C E (2) Target: 2021 performance: Target: 2021 performance: FC F CO N V E R S I O N T O N E T I N CO M E (2) 15–20% 14.9% ~100% 108% B A S I C E P S G R O W T H Target: 2021 performance: EPS growth > revenue growth -7% Basic EPS growth(3) (1) Calculated to exclude FX impacts and transformational acquisitions and divestments, includes bolt-on acquisitions and divestments within divisions. (2) For non-GAAP measures, see the “Supplemental information” section of this annual report. (3) Includes impact from Power Grids related book gain in 2020 and Mechanical Power Transmission related book gain in 2021. Selected sustainability targets and 2021 progress W E E N A B L E A L O W - C A R B O N S O C I E T Y Target: Achieve carbon neutrality in ABB’s own operations by 2030 W E P R E S E R V E R E S O U R C E S Target: Zero waste from ABB’s own operations to be disposed of in landfills by 2030, wherever this is compatible with local conditions and regulations Progress: 39% Reduction compared with 2019 baseline Progress: 28% Reduction compared with 2019 baseline W E P R O M O T E S O C I A L P R O G R E S S Target: Progress: Double number of women in senior management roles to 25% by 2030 16.3% From 13.5% in 2020 16 A B B A N N U A L R E P O R T 2 0 2 1 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 Creating long-term value across the value chain ABB has always taken a sustainable approach to business. Our predecessor companies were founded in the late 19th century to take advantage of electricity and since then ABB has been helping its customers electrify their operations as well as improve energy efficiency and productivity. Today, sustainability is at the center of our com- pany Purpose and the value that we create for stakeholders. Last year, we began implementing our 2030 sustainability strategy, having reduced our greenhouse gas emissions by more than half in our previous strategy period to 2020. Focus areas of our 2030 sustainability strategy To determine the focus areas of our 2030 sustain- ability strategy, we conducted some 400 hours of interviews with 300 stakeholders of ABB’s four Business Areas, including customers, suppliers, in- vestors, public representatives and NGOs in 2019. We also analyzed some 40,000 comments from ABB’s annual employee engagement survey. respectively. Each target is supported by opera- tional targets and actions. From strategy to implementation Last year, we began implementing our 2030 sus- tainability strategy with the focus on enabling a low-carbon society. To support our custom- ers in reducing their CO2 emissions, we identified a basket of the products and solutions from our portfolio that deliver the most significant reduc- tions in CO2 emissions for our customers. The calculations have been validated by a third party and the first measurements will be reported in our 2021 sustainability report. To achieve carbon neutrality across our own oper- ations, we are committed to reducing our scope 1 and 2 emissions by at least 80 percent. To achieve these targets, we will electrify our vehicle fleet, use renewable energy to power our sites and improve energy efficiency across our operations. TO ACHIEVE CARBON NEuTRALITY, WE WILL ELECTRIFY OuR VEHICLE FLEET, uSE RENEWABLE ENERGY TO POWER OuR SITES AND IMPROVE ENERGY EFFICIENCY ACROSS OuR OPERATIONS. Drawing on the expectations and requirements of those stakeholders, we defined areas where we can make the biggest impact: enabling a low-car- bon future, preserving resources, promoting so- cial progress, as well as strengthening our com- mitment to responsible business practices, and driving integrity and transparency across the value chain. Sustainability focus areas and targets For each of our sustainability focus areas, we de- fined at least three main targets that apply to ABB, to our customers, and to our supply chain When it comes to our supply chain, we have mapped our emissions and started engaging with our suppliers through our supplier sustain- ability frame work. We are currently defining more specific actions on the most impactful upstream emissions. To perserve resources, we are introducing circu- larity into our business models, aimed at reducing waste at every stage of the value chain. To achieve this goal, we will continuously improve the recy- cling and reusability of our products and make them more durable, as well as design and reduce the use of virgin and hazardous materials. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 17 — Sustainability strategy 2030 How did we get there* 400 Hours of interviews to determine the focus areas of our 2030 sustainability strategy 300 Stakeholders of ABB’s four Business Areas, including customers, suppliers, investors, public representatives and NGOs interviewed 40,000 Employee comments analyzed from our engagement survey — Material topics • Products, solutions and services • Human rights & labor • Stakeholder engagement • Operations – environment • Carbon reduction • Circular economy • Health & safety • Socio-economic impact • Ethics • Business resilience • Employee wellbeing • Data privacy • Responsible sourcing • Diversity & inclusion * Figures from 2019 internal and external stakeholder engagement process used for sustainability materiality matrix. 18 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Our 2030 commitment Enabling a low-carbon society Preserving resources Support our customers in reducing their annual CO2 emissions by at least 100 megatons. Cover at least 80 percent of ABB products and solutions with our circularity approach. Achieve carbon neutrality across our own operations. Reduce CO2 emissions in our supply chain through a systematic approach with impactful suppliers. Reduce waste sent to landfills to zero. Implement supplier sustainability framework including environment for at least 80% of supply spend in focus countries. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 19 Promoting social progress Integrity and transparency Aim for zero harm to employees and contractors. Double the number of women in senior management roles to 25%; target top-tier employee engagement score in our industry. Extend ABB new Code of Conduct-based approach to projects and counterparties. Include compliance with Supplier Code of Conduct in procurement terms and conditions. Provide impactful support for community-building initiatives. Include sustainability targets in senior management incentives. Implement supplier sustainability framework, including human rights, for at least 80% of supply spend in focus countries. 20 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N To promote social progress, we are creating safe, fair, equitable and inclusive working environments in which our people can succeed and develop. We also work with suppliers to proactively identify, as- sess and address human rights issues, and to drive broader environmental, social and governance performance. Each of our sustainability targets has one or more key performance indicators (KPIs) to measure progress. These are being progressively integrated into our performance management planning and are reported by the business at the same time as financial KPIs. Sustainability KPIs are now also part of senior management incentives. — Actions to enable a low- carbon society to 40 percent are already sending no waste to landfills. We are also working with customers to reuse and recycle our products. We aim to help them reduce their resource consumption through more efficient processes and by replacing or upgrading old and outdated equipment. Our objective is to go beyond compliance to be- come a leader in circularity. That means setting specific, transparent key performance indicators for all aspects of the product lifecycle to enable continuous improvement across our portfolio. When it comes to our suppliers, our target is that 80 percent of our supply spend in focus countries is covered by Sustainable Supply Base Manage- ment (SSBM), which covers all aspects of environ- mental, social and governance (ESG) performance, including preserving resources. ABB joined three initiatives led by the interna- tional non-profit Climate Group to reduce its own emissions: — Case studies • EV 100: ABB commits to electrifying its fleet of more than 10,000 vehicles by 2030. • RE 100: ABB commits to sourcing 100 percent renewable electricity by 2030. • EP 100: ABB commits to establishing energy efficiency targets and continuing to deploy energy management systems at its sites. ABB’s carbon reduction targets received approval by the Science Based Targets initiative (SBTi) con- firming that they are in line with the 1.5°C scenario of the Paris Agreement. ABB also joined the Busi- ness Ambition for 1.5°C Campaign, a global coali- tion of UN agencies, business and industry leaders, led by the UN Global Compact (UNGC). — How we are preserving resources We aim to preserve resources at all levels of the value chain by eliminating waste in our own oper- ations and making our products last longer. To- day, among our 440 sites across the world, close Reducing our carbon footprint with recycled plastic In the Netherlands, ABB introduced a range of sur- face-mounted junction boxes made entirely from recycled plastic waste. Hundreds of millions of these boxes are installed across Europe every year and using recycled rather than new plastic can re- duce carbon emissions by up to 70 percent. In the Netherlands, we estimate that this new range of junction boxes and achieve an annual CO₂ footprint reduction of up to 300,000 kilograms – the equi - valent of 500 flights from London to New York. ABB factory in Italy achieves zero waste to landfill target In 2021, ABB Smart Power’s manufacturing unit in Frosinone, Italy, stopped sending waste to landfills, in line with ABB’s target to eliminate waste to land- fill by 2030. The factory, which produces more than 3 million circuit breakers per year, achieved the tar- get within two years through rigorous waste sort- ing and identification. Today, it separates produc- tion waste into around 150 categories of material and every workstation has separate waste contain- ers for cardboard/paper and plastic. Among our 440 sites across the world, 40% are no longer sending waste to landfills. Waste to landfill has gone down from 17.6 kt in 2019 to 12.6 kt in 2021, corresponding to a reduction of 28%. 22 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Executive Committee As of December 31, 2021 P E T E R T E R W I E S C H President Process Automation S A M I AT I YA President Robotics & Discrete Automation B J Ö R N R O S E N G R E N Chief Executive Officer T H E O D O R S W E D J E M A R K Chief Communications and Sustainability Officer M A R I A VA R S E L L O N A General Counsel & Company Secretary A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 23 C A R O L I N A G R A N AT Chief Human Resources Officer T I M O I H A M U O T I L A Chief Financial Officer TA R A K M E H TA President Electrification M O R T E N W I E R O D President Motion 24 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — D I V E R S I T Y A N D I N C LU S I O N Our people Inclusion means everyone At ABB, we are creating an inclusive culture that represents our communities in all of their diver- sity. Our goal is that every one of our 105,000 colleagues around the world feels that they are working in a safe, fair, equitable and inclusive envi- ronment, where they can succeed and develop. With our 2030 diversity and inclusion (D&I) strat- egy, we seek to increase diversity across all dimen- sions, including gender, LGBTQ+, abilities, ethnic- ity and generations. Our commitment is reflected in the fact that each dimension is sponsored by a member of our Group Executive Committee, with our CEO Björn Rosengren being the sponsor for gender diversity. ABB is already a diverse company, with 140 na- tionalities and five generations represented in the workforce. Here, we tell the stories of nine col- leagues who have chosen to pursue their careers at ABB. The number of nationalities of people working at ABB. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 25 B R I A W I L L I A M S HR business partner, Electrification (uS) A self-described people advocate and change agent, Bria joined ABB to bring people together, help them grow and learn, and bring their authen- tic selves to work. I G A K A C Z M A R E K- W R O N A DevOps engineer and product owner – ABB Ability, Process Automation (Poland) But to achieve her goals, Bria had to overcome one big challenge – her fear of speaking in public. Bria’s supportive manager made sure that she felt com- fortable talking with colleagues and pitching ideas. This meant Bria had to step out of her comfort zone – an experience that changed her life and her career prospects. Today, after successfully obtain- ing her HR certification through the company’s de- velopment opportunities, Bria helps colleagues re- alize their career plans and potential at ABB. As a science student, Iga wanted to work in a role that would allow her to combine her twin interests in arts and physics. After her degree and an internship at ABB, Iga joined the ABB Ability team in Poland where she found an ideal environment to develop and learn as one of the growing number of women in STEM (science, technology, engineering and mathemat- ics) fields. Her current programming role also plays to her love of solving logic puzzles. Through ABB, she was able to meet the famous astronomer and Nobel Prize winner, Didier Queloz, providing fur- ther energy and motivation to keep taking on chal- lenges and continuing her learning journey. P E DY Z H U Z H U R&D program manager, Robotics and Discrete Automation (China) Growing up in China, Pedy was interested in engi- neering, a traditionally male dominated field. Af- ter completing her master’s degree, she joined the ABB Robotics Research & Development center. At ABB, Pedy’s manager trusted her with respon- sibility, allowing her to learn from her mentor and other experienced colleagues. She felt empowered to own her projects and benefited from a support- ive learning environment. The support system con- tinued throughout her maternity leave, and she felt welcomed by her manager and team on her return. In the decade that she has been at ABB, she has the opportunity to develop cobots that help customers increase efficiency, productivity and sustainability. She personally identifies with the IRB 1300 robot, agile and quick, just like her. 26 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N J O R G E P E R E Z B U I T R A G O Planning & fulfilment specialist, Electrification (uS) S U B B A R A M A I A H G A N E S H Leading account payables for AMEA, Global Business Services (India) Jorge’s journey with ABB began at a university job fair in Puerto Rico. Jorge wanted to learn more about the role of a mechanical engineer, and ABB offered him a summer internship. After finishing his degree, Jorge was selected into the ABB R&D team in Milwaukee, WI. Now in Philadelphia, he is exploring the role of a Solutions Product Manager in the Electrification business. Jorge is motivated by the opportunities to con- tinue learning, but the motivation goes beyond that. At ABB, he can be himself at work. As a mem- ber of the LGBTQ+ community, and the spokesper- son of the internal employee group, Encompass Pride, Jorge has felt welcomed by everyone at ABB and wants others to feel as comfortable as he does at work. Subbaramaiah left a permanent job to join ABB on a short-term contract. Two decades later, he is still with ABB. Subbaramaiah has faced many challenges in life. He was diagnosed with polio as a child. Later he suffered an accident that left him partially immo- bile for a few months. Apart from his family, his ABB colleagues provided a strong support system at that tough time. His manager gave him time to recover fully before resuming work, and the man- aging director of ABB India visited him at home to check on his health. “ABB has stood by me, valued me, and given me ex- cellent opportunities,” he said. “Most importantly, the warmth, the feeling of a community here, is unmatched.” Z A H E R R A J A B Automation engineer, Electrification (Netherlands) Zaher arrived in the Netherlands as a Syrian refu- gee in 2015. Faced with learning a new language and culture, different from his Arabic heritage, Za- her embraced the challenge. After his first job in automation, Zaher joined ABB to have more flexibility in his job as a software spe- cialist and to work with a diverse team of talented engineers. By automating processes, such as the packaging of switches, Zaher was able to increase production efficiency. Zaher believes in continuous learning, and that there are no limits to developing new ideas and automating processes. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 27 FA R A H WA H I D A H M A Z L A N Service sales engineer, Electrification (Malaysia) A L I PA R V I Z I Traction sales manager, Motion (Australia) C R I S T I N A D ’ÁV I L A Senior electrification engineer, Process Automation (Brazil) Farah has always loved challenges. Getting into the field of electrical engineering was one of them. After completing her degree program, Farah joined ABB to continue her development as an engineer, and to have a positive impact on her local commu- nity and the environment. In 2020, she achieved a major win at ABB: securing a multi-year service contract with one of Malay- sia’s leading utilities. The secret was her ability to listen and understand what the customer needed. Farah credits her supportive colleagues and a great working environment for keeping her motivated to keep learning and developing as a service engi- neer at ABB. When Ali moved to Australia from his home country of Iran, the future appeared risky, and very differ- ent from the languages and culture he had grown up with. That changed when ABB gave him an op- portunity to join the traction business as a sales manager. Ali’s manager gave him the freedom to take initiatives to develop the traction business in Australia and New Zealand. Ali loves the opportunity of working on innova- tive solutions with talented colleagues and win- ning over influential customers. As a person who is driven to learn new things, Ali has found both en- couragement and reward at ABB, and views this as an immense value-add of working in a truly global company. Cristina studied electrical engineering and took her first career steps in Rio de Janeiro. But she felt her career stalling, and one of the reasons was there were very few women in the field. Cristina did not give up, and went to São Paulo, where she was hired by ABB to work on a project for Usimi- nas, one of the biggest steel producers in Brazil. Since that day 25 years ago, Cristina has been with ABB and is still excited about her work. In her cur- rent role in the field of electrical engineering she is responsible for developing electrical and instal- lation projects for the energy industry division in Brazil. She has proudly witnessed how women are playing a bigger role in engineering. Cristina’s ad- vice to a younger generation of women joining the engineering workforce is to “follow your goals, overcome obstacles regardless of gender, and never stop asking questions.” 28 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Electrification WRITING THE FuTuRE OF SAFE, SMART AND SuSTAINABLE ELECTRIFICATION. ABB’s Electrification business offers a wide-ranging portfolio of products, digital solutions and services, from substation to socket, enabling safe, smart and sustainable electrification. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 29 $13.2 bn Revenues 16.1% Operational EBITA margin Market growth is driven by electricity demand that grows two times faster than other energy sources as a result of urbanization and population growth. Additionally, digitalization is accelerating demand for intelligent solutions. The Business Area consists of the following six Divisions: • Distribution Solutions, GLOBAL NO. 1 IN MEDIUM-VOLTAGE. Medium-voltage electrical components and digital devices, medium- and low-voltage switchgear, energy systems, digital systems and service • Smart Power, GLOBAL NO. 3, NO. 2 IN LOW VOLTAGE. Low-voltage breakers & switches, enclosures, motor starter application and power protection Key figures Electrification • Smart Buildings, GLOBAL NO. 3, NO. 1–2 IN DISTRIBUTION ENCLOSURES AND DIN-RAIL PRODUCTS. Miniature breakers, distribution enclosures, wiring accessories and building automation • Installation Products, GLOBAL NO. 1, NO. 1 IN NORTH AMERICA. Wire & cable management, termination, fittings and other accessories • Power Conversion, NO. 4 IN DC POWER SOLUTIONS. Power conversion products including embedded power products, DC power solutions and services (To be exited) • E-mobility, GLOBAL NO. 1 IN EV CHARGING SOLUTIONS. AC & DC charging hardware, B2C & B2B digital services, advanced energy & fleet management $ in millions, unless otherwise indicated FY 2021 FY 2020 US$ Comparable(2) Orders Order backlog (end December) Revenues Income from operations Operational EBITA(1) as % of operational revenues No. of employees (FTE equiv.) 14,381 5,458 13,187 1,841 2,121 16.1% 50,800 11,884 4,358 11,924 1,335 1,681 14.1% 50,500 +21% +25% +11% +38% +26% +2.0 pts +1% +18% +29% +9% +21%(3) % of FY 2021 third party revenues % of FY 2021 third party revenues End-markets(4) 4% Renewables 16% Distribution, Conv. Generation 5% O&G, Chemicals 4% F&B 15% Other Industry 36% Buildings 7% Data Centers 13% Other T&I 35% Europe 25% USA 9% Rest of Americas 16% China 15% Rest of AMEA Geographies (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. (2) Growth rates for orders, order backlog and revenues are on a comparable basis (local currency adjusted for acquisitions and divestitures). (3) Constant currency (not adjusted for portfolio changes). (4) Management estimates. 30 A B B A N N U A L R E P O R T 2 0 2 1 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 Powering a sustainable future ABB’s Electrification Business Area is meeting growing demand for safe, smart and sustainable electrification by tackling some of society’s great- est challenges. In the face of rising emissions and pollution, population growth and aging infrastruc- ture, cities are having to transform themselves. By far the most significant positive impact we can have is through innovative technologies that re- duce energy consumption and emissions, which improves quality of life for citizens around the world. ABB technologies are found nearly everywhere there is electricity. Operating in more than 100 countries, ABB Electrification employed 51,000 people and generated $13.2 billion in reve- nue in 2021 through its six market-leading Divi- sions – Smart Power, Smart Buildings, Installation Products, Distribution Solutions, E-mobility and Power Conversion. Another innovation that dramatically reduces greenhouse gas (GHG) emissions is ABB’s AirPlus™, a groundbreaking eco-efficient gas mixture that replaces SF6 in gas-insulated switchgear (GIS) ap- plications. The importance of replacing SF6 cannot be underestimated. It is one of the world’s most powerful GHGs, 23,500 times more potent than CO2, with a lifespan of 3,200 years. Since 2002, the concentration of SF6 in the atmosphere has more than doubled. In 2021, ABB Electrification continued to introduce new technologies to the market. In September, we launched the world’s fastest EV charger, the Terra 360, which can deliver 100km of range in less than three minutes or fully charge an electric car in 15 minutes. This milestone for EV charging will sup- port the rapidly growing global demand for emis- sions-free vehicles and net-zero goals. AS A LEADING PROVIDER OF ELECTRIFICATION SOLuTIONS FOR INDuSTRY, INFRASTRuCTuRE AND TRANSPORT – SECTORS THAT ACCOuNT FOR THREE- QuARTERS OF GLOBAL ENERGY CONSuMPTION – ABB ELECTRIFICATION IS A KEY ENABLER OF A LOW- CARBON SOCIETY. Global electricity demand is expected to more than double by 2050. Unless drastic action is taken now to reduce emissions from power generation and consumption, temperatures will continue to rise at unsustainable levels. As a leading provider of elec- trification solutions for industry, infrastructure and transport – sectors that account for three-quarters of global energy consumption – ABB Elec trification is a key enabler of a low-carbon society. Digitalization continues to be an important driver of the energy transition. ABB Electrification is in- creasingly incorporating software and digital ser- vices into its offering. The ABB Ability Market- place™ portal provides customers with access to over 100 cloud-connected digital applications. And the ABB Electrification Startup Challenge invites companies from around the globe to compete for a $30,000 investment to work with our R&D teams. One such technology is the ABB Ability™ Energy and Asset Manager, which combines sensors and analytics software to provide insights on energy consumption and the performance of multiple sys- tems in a factory or plant. By adopting this solu- tion, a site that consumes 2 GWh of power per year, can reduce annual CO2 emissions by 40 tons. By 2030, we expect that our market-leading innova- tions and the promising technologies in our pipe- line will enable customers to reduce annual CO2 emissions by at least 100 megatons, equivalent to the annual emissions of 30 million combustion cars. As part of our “Mission to Zero” initiative, ABB Electrification is using our innovative technologies to make our own sites carbon neutral, while reduc- ing emissions across our supply chain. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 31 Public transport operator, Hamburger Hochbahn AG, is implementing a wide-reaching fleet electrifi- cation program that includes Germany’s first fully electrified bus terminal. ABB’s turnkey solution included the installation of transformer, switchgear, and heavy vehicle charging stations in the central bus depot. These can simultaneously recharge 44 buses, each with a range of up to 150 km. Additionally, ABB provided the planning and implementation of the electric in- frastructure and the connection of the bus depot to the grid. — Case studies Cutting energy costs at Vietnam telecommunications HQ by 20 percent ABB’s smart technology has been key to realizing telecom giant Viettel’s ambitions to save energy and reduce its carbon footprint while maintaining operational efficiency at its Vietnam headquarters. The ABB i-bus® KNX solution in the Hanoi facility controls all of the building’s functions, from light- ing and shutter control to heating, ventilation, se- curity, and energy management. The solution is installed via a single bus interface alongside the standard power lines. Thanks to this ABB technology, energy costs have been reduced by up to 20 percent, and the 1,000 people working in the building have a much more comfortable and secure work environment. This project sets a benchmark for how intelligent tech- nology can reduce a building’s environmental impact. Enabling Germany’s first fully electrified bus terminal As part of Germany’s wider environmental agenda, Hamburg is one of the first cities to commit to the full electrification of its bus fleet. ABB Electrifica- tion equipment is helping the city meet its goal of cutting CO₂ emissions in half by 2030 compared with 1990 levels. 32 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N includes everything from authorization and analyt- ics to remote monitoring and control. The new Terra 360 charger is not only the most high-power charging solution in the world, but also one of the most versatile. Designed for commercial fleets, heavy-duty vehicles as well as electric cars, it is capable of charging up to four vehicles at a time. ABB charging solutions have also played a key role in enabling the rapid transition to e-mobility of countries like Norway, which has installed more than 1,000 ABB fast chargers. Other countries, in- cluding the USA, Finland, and Qatar, are also turn- ing to ABB to support their ambitious emissions reduction commitments. The Gulf state of Qatar in- tends to fully electrify its public transport network and has partnered with ABB to create one of the largest e-bus networks in the world. A heavy vehi- cle charging network with capacity for 1,000 elec- tric buses to transport 50,000 passengers a day is currently under construction, with four bus depots, eight bus stations and 12 metro stations. — E-mobility – the future of road transport Of 46 energy technologies and sectors identified by the International Energy Agency (IEA) as being “critical” to achieve net-zero emissions by 2050, only two are on track, according to the IEA: lighting and e-mobility(1). Electric-vehicle (EV) registrations increased by 41 percent globally in 2020, while sales of combustion-engine cars dropped 16 per- cent. In the first quarter of 2021, global EV sales rose again by around 140 percent, compared to the same period in 2020. Rapid expansion of the world’s EV charging infra- structure is necessary to support the burgeoning adoption of electric vehicles. By 2040, an estima- ted 290 million additional charging points will be required, amounting to circa $500 billion in global investment. ABB invested early in its EV charging busi- ness. Today, through hardware innovation, com- bined with the expansion of our software and digital offering, we are the market leader in EV charging infrastructure, having sold more than 525,000 chargers across 85 markets, including over 25,000 DC fast chargers and 500,000 AC chargers as of December 31, 2021. In addition, dedicated R&D centers such as our new E-mobility Innovation Lab in Delft in the Netherlands ensure the Divi- sion provides charging infrastructure that not only meets today’s needs but anticipates future e-mo- bility requirements. To advance EV charging technology, we are also collaborating with leading software companies. In 2021, ABB’s digital e-mobility venture, PANION, and Amazon Web Services (AWS) began testing a newly developed, cloud-based solution, “PAN- ION EV Charge Planning”. This solution is de- signed for the real-time management of EV fleets and charging infrastructure and will be launched in 2022. ABB’s fast DC chargers run with a Connected Ser- vices Platform, which employs Microsoft’s Azure cloud services to enhance uptime, scalability, and operational efficiencies and to provide real-time remote support services. ABB’s superior offering (1) https://www.iea.org/topics/tracking-clean-energy-progress A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 33 The number of chargers sold across 85 markets, including over 25,000 DC fast chargers and 500,000 AC chargers as of December 31, 2021. 34 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Motion WRITING THE FuTuRE OF MOTION. ABB’s Motion business is the largest supplier of drives and motors, globally. We provide customers with the complete range of electrical motors, generators, drives, services and integrated digital powertrain solutions. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 35 $6.9 bn Revenues 17.1% Operational EBITA margin • IEC LV Motors, GLOBAL NO. 2. Comprehensive portfolio of low voltage motors for any industry and application, compliant with all major markets globally • Large Motors and Generators, GLOBAL NO. 2. Comprehensive product portfolio of large AC motors and generators • NEMA Motors, GLOBAL NO. 1. Comprehensive product portfolio of low voltage electric motors Market growth is driven by megatrends such as growing population, electrification, urbanization, decarbonization and digitalization. This requires further automation of industrial processes, energy efficiency and electric mobility. The Business Area consists of the following seven Divisions: • Drive Products, GLOBAL NO. 1. Comprehensive product portfolio of low-voltage AC drives • System Drives, GLOBAL NO. 1. Low- and medium- voltage AC drives and modules, wind converters • Service, GLOBAL NO. 1. Base services and spare parts, upgrades & replacements, smart solutions • Traction, GLOBAL NO. 2. Traction systems incl. converters and motors, battery energy storage systems, auxiliary converters Key figures Motion $ in millions, unless otherwise indicated FY 2021 FY 2020 US$ Comparable(2) Orders Order backlog (end December) Revenues Income from operations Operational EBITA(1) as % of operational revenues No. of employees (FTE equiv.) 7,616 3,749 6,925 3,276 1,183 17.1% 20,100 6,574 3,320 6,409 989 1,075 16.8% 20,900 +16% +13% +8% +231% +10% +0.3 pts -4% +14% +20% +7% +6%(3) % of FY 2021 third party revenues % of FY 2021 third party revenues End-markets(4) 7% Conv. Generation, Renewables 11% O&G, Chemicals 16% Mining, Metals 8% Water & Wastewater 11% F&B 21% Other Industry 13% Buildings 8% Rail 5% Other T&I 31% Europe 30% USA 6% Rest of Americas 18% China 15% Rest of AMEA Geographies (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. (2) Growth rates for orders, order backlog and revenues are on a comparable basis (local currency adjusted for acquisitions and divestitures). (3) Constant currency (not adjusted for portfolio changes). (4) Management estimates. 36 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — M OT I O N Helping customers become energy efficient In 2021, ABB Motion launched the Energy Effi- ciency Movement, a multi-stakeholder initiative both to raise awareness of the advanced technol- ogies that can mitigate climate change, and drive collective action to reduce energy consumption worldwide. At this critical moment for the climate, roughly 45 percent of the world’s electricity is used to power electric motors in industry and buildings, and much of the installed base is out of date and inefficient. ABB Motion enables major improvements in energy efficiency for industry, cities and transport with its leading portfolio of variable-speed drives, motors, generators, traction systems and digital services. Investing in more efficient technology is one of the simplest and most cost-effective ways to lower en- ergy consumption and associated greenhouse gas emissions. As businesses and transport networks seek to bridge the gap that divides us from a fos- sil-free future, we offer our customers practical and proven technologies that help. Our deep domain expertise, comprehensive offer- ing and unmatched global presence make ABB Mo- tion the partner of choice for customers seeking the best solutions and support. In 2021, Motion employed 20,000 people and generated $6.9 bil- lion in revenue. With the largest research and de- velopment budget in the industry, we are consis- tently pushing the boundaries of motor and drive technology for the benefit of our customers and society. Packaging a modern motor with an ABB drive op- timizes its operation leading to even greater ef- ficiency. Drives control the speed and torque of a motor to match the load requirements, typi- cally reducing energy consumption by 25 percent or more in industrial applications. ABB’s advanced drive offerings include our line of ultra-low-har- monic drives, which minimize electromagnetic dis- turbances in power networks, resulting in more re- liable operations, reduced maintenance needs and higher efficiency. Serving a wide range of applications with efficient solutions Transport represents another field of opportu- nity for the latest electric motion technologies: It accounts for about 25 percent of the world’s en- ergy use, and more than 99 percent of that cur- rently depends on the combustion of fossil fu- els. ABB Motion provides a variety of solutions for modern electric mobility, including systems used in electric trains, buses, ships and other heavy vehicles that are increasingly being pow- ered by electricity. Our state-of-the-art traction, energy storage and e-drivetrain technologies en- able energy-efficient and emission-free mobility in numerous transit systems, rail networks and vehicle fleets. Alongside our technologies, we deliver a compre- hensive range of services and digital solutions to maximize uptime, extend product lifecycles and INVESTING IN MORE EFFICIENT TECHNOLOGY IS ONE OF THE SIMPLEST AND MOST COST-EFFECTIVE WAYS TO LOWER ENERGY CONSuMPTION AND ASSOCIATED GREENHOuSE GAS EMISSIONS. ABB’s portfolio includes the most energy-efficient motors and drives on the market. Among these is a synchronous reluctance (SynRM) motor and drive package that has set a new standard for efficiency. The SynRM motor meets the IE5 ultra-premium ef- ficiency rating, providing the performance advan- tages of permanent magnet technology without using rare earth materials. enhance the performance and efficiency of motors and drives. By tailoring our service offering and solutions to our customers’ needs, we help them run their operations more profitably, safely and re- liably, allowing them to better take advantage of new business opportunities. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 37 ABB motors and drives reduce power consumption at leading fertilizer company To improve energy efficiency at its largest produc- tion site, Norwegian mineral fertilizer producer, Yara, is upgrading its electric motors with high efficiency ABB drives and motors. As part of a global frame agreement, Yara has al- ready upgraded around 1,000 motors to an IE3 ef- ficiency rating, mostly with drives. In the next step, some 2,500 motors will be replaced with IE5 SynRM motor and drive technology. Nearly 70 percent of these applications are for pumps and fans, which offer significant room for energy savings. The an- nual power savings at the Yara Porsgrunn site in Norway are expected to be in the region of 32– 40 GWh, leading to CO2 emissions reductions of 12–19 kilotons. In addition, Yara expects to save some €300,000 per year in maintenance costs due to lower wear and tear. The Yara Porsgrunn site is also part of a project with ABB and Stena Recycling to recycle copper, aluminum and iron from old motors, helping to support the circular economy. — Case studies Synchronous condensers for greener energy ABB is working closely with Statkraft, Europe’s largest generator of renewable energy, to design, manufacture and install two high-inertia syn- chronous condenser systems for the Lister Drive Greener Grid project in Liverpool, England. The in- novative project will play a key role in stabilizing the local electricity network to handle an increas- ing amount of wind and solar power. This will help National Grid meet its target of operating a ze- ro-carbon electrical system in the UK by 2025. Statkraft has signed a 10-year service contract with ABB in which we will deploy digital condition moni toring solutions that optimize performance and predict maintenance needs. By assessing real- time data with cloud-based analytics, our service team will be able to plan corrective actions before issues occur, ensuring the system is highly reliable. ABB traction technology to increase efficiency of Germany’s high-speed trains ABB traction converters were selected in 2021 to upgrade 76 high-speed locomotives on Germany’s Deutsche Bahn network. As part of a refurbishment program, our highly energy-efficient traction con- verters are replacing power electronics from the 1990s. Upgrading the existing fleet will help extend its operating life and improve energy efficiency, re- liability and ease of maintenance. 38 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Process Automation WRITING THE FuTuRE OF SAFE, SMART AND SuSTAINABLE OPERATIONS. ABB’s Process Automation business offers a broad range of solutions for process and hybrid industries, including integrated automation, electrification and digital solutions, control technologies, software and lifecycle services, as well as measurement and analytics, marine and turbocharging offerings. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 39 $6.3 bn Revenues 12.8% Operational EBITA margin Market growth is driven by need for productivity, reliability and improved resource efficiency as well as increasing demand for decarbonized operations and safer workplaces. • Marine & Ports, GLOBAL NO. 1. Azipod® propulsion, ship and port electrification & automation, digital • Measurement & Analytics, NO. 1 IN The Business Area consists of the following five Divisions: ANALYTICS, FORCE MEASUREMENT, NO. 2–5 IN INSTRUMENTATION. Gas and liquid analyzers, field instrumentation, force measurement, digital, service • Energy Industries, NO. 1–2 IN DISTRIBUTED • Turbocharging, NO. 1 IN LOW AND MEDIUM SPEED. Low, medium and high speed turbochargers, service, digital solutions (To be exited) CONTROL SYSTEMS, NO. 1 IN POWER GENERATION, NO. 3–5 IN OIL, GAS, CHEMICALS. Integrated automation & electrical systems, safety, service and digital solutions • Process Industries, NO. 1 IN DISTRIBUTED CONTROL SYSTEMS, NO. 1–2 MINING, PULP & PAPER. Automation, electrical & motion systems; quality control, mine hoists, gearless mill drives, high power rectifiers, electromagnetic stirrers Key figures Process Automation $ in millions, unless otherwise indicated FY 2021 FY 2020 US$ Comparable(2) Orders Order backlog (end December) Revenues Income from operations Operational EBITA(1) as % of operational revenues No. of employees (FTE equiv.) 6,779 6,079 6,259 713 801 12.8% 22,000 6,144 5,805 5,792 344 451 7.8% 22,200 +10% +5% +8% +107% +78% +5.0 pts -1% +7% +10% +5% +70%(3) % of FY 2021 third party revenues % of FY 2021 third party revenues End-markets(4) 15% Conv. Generation, Renewables 14% O&G 11% Chemicals & refinery 22% Mining, Metals, Pulp & Paper 13% Other Industry 22% Marine & Ports 3% Other 39% Europe 13% USA 10% Rest of Americas 12% China 26% Rest of AMEA Geographies (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. (2) Growth rates for orders, order backlog and revenues are on a comparable basis (local currency adjusted for acquisitions and divestitures). (3) Constant currency (not adjusted for portfolio changes). (4) Management estimates. 40 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — P R O C E S S AU TO M AT I O N Supporting a prosperous, low-carbon society Demand for energy and material is expanding in step with the world’s population growth and the pursuit of higher living standards. At the same time, there is a need to reduce harmful emissions from human activity. ABB’s Process Automation Business Area supports industries that address a wide range of essential needs – from supplying energy and water to manu- facturing goods and transporting them to market. Through our automation, electrification and digital technologies, we help our customers in industry, transport and infrastructure sectors improve the safety, efficiency and sustainability of their opera- tions. With our R&D and innovation pipeline, we are continuing to push the boundaries of how to ad- dress the world’s energy challenges and contribute to a circular economy, together with our partners and customers. With 22,000 employees and $6.3 billion in revenue in 2021, Process Automation enables efficient oper- ations that are safer, smarter and more sustainable over the lifecycle of its customers’ investments – some of the largest and most complex industrial infrastructures on the planet. Key to this is the ex- tensive portfolio of solutions combined with the deep domain expertise of our five Divisions – Energy Industries, Process Industries, Marine & Ports, Measurement & Analytics, and Turbocharg- ing. Our solutions include industry-specific prod- ucts such as mine hoists, gearless mill drives, ma- expand our solutions and portfolio with Industry 4.0 advances. Our Business Area is a trusted part- ner for customers at every stage of their digitaliza- tion journey, enabling them to maximize their ex- isting investments and installed infrastructure as well as integrate new digital solutions, to take “bil- lions of better operational decisions”. In 2021, in response to the challenges of the COVID-19 pandemic, the use of digital technologies for remote monitoring and control of operations became the “new normal”. Today, ABB’s remote technologies serve a growing number of custom- ers with asset health monitoring, predictive ana- lytics, enterprise-wide emissions tracking, and con- tinuous access to service expertise, while enabling consistent cost reductions and improvements in productivity and safety. Our ABB Ability™ Collab- orative Operations network provides 24/7 re- mote support to more than 1,500 ships, 80 mines, 300 power generation sites and over 1,200 other industrial facilities. Also in 2021, this remote sup- port was critical to keeping critical infrastructure and production running, and people connected during expansive lockdown periods. Pushing the boundaries of process technologies In 2021, we released new applications as part of the ABB Ability™ Genix Industrial Analytics and AI Suite. ABB Ability™ Genix Datalyzer enables com- prehensive analysis, consolidation, and utilization WE ENABLE INDuSTRY TO OPERATE SAFELY, EFFICIENTLY AND SuSTAINABLY – MAKING A WORLD OF DIFFERENCE TOGETHER. rine propulsion systems, high power rectifiers, or paper quality control systems, but also an indus- try-agnostic automation platform in Distributed Control Systems (DCS), where ABB has been the market leader for the past 22 years. All our solu- tions are supported by a wide range of advanced systems, remote and digital services. Leveraging digitalization of emissions data from industrial plants, helping customers manage their emissions and improve environmental compliance while keeping costs un- der control. ABB Ability™ Genix Asset Performance Management (APM) consolidates ABB’s asset man- agement portfolio into a single powerful system, providing actionable insights that help improve equipment utilization. Connectivity has been at the heart of our solutions for decades. Over the years, we have accelerated the use of digital technologies to continuously In another major advance, Process Automation launched ABB Ability eMine™, a portfolio of solu- tions that makes the all-electric mine a reality. It deploys a range of fully integrated electrification, A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 41 automation and digital systems from mine to port. The benefits of all-electric mining are signif- icant. Electrifying a single mining truck eliminates an amount of CO₂ emissions per year that would take 46,000 trees to absorb. The launch of the world’s fastest, most sensitive drone-based gas leak detection and emissions measure ment system, HoverGuard™, was yet an- other important milestone of 2021. HoverGuard™ is capable of reliably detecting, quantifying and mapping leaks of greenhouse gases from nat- ural gas pipelines and other potential sources from distances of up to 100 meters. In doing so, it can play a critical role in helping industry, cities and communities to reduce emissions and curb climate change. — Case studies A partnership to make green hydrogen more affordable Cost is currently a major barrier to the widespread adoption of green hydrogen, which is about three to six times more expensive than hydrogen pro- duced using fossil fuels. In June 2021, ABB joined forces with Switzerland’s largest producer of re- newable energy, Axpo, to develop modular hydro- gen production plants in Italy, with the goal of pro- ducing affordable green hydrogen. ABB is building on its capabilities in automation, electrification and industrial operations, and combining them with Axpo’s experience as an energy provider. The work will include feasibility studies and exploring strategies for the standardization, modularization, and efficient production of hydrogen solely from renewable resources. Equipping an all-electric ferry service in Lisbon In the Portuguese capital, Lisbon, ABB is partner- ing with shipbuilder Astilleros Gondán GRP Division to replace 10 diesel-powered vessels of the public ferry operator Transtejo, S.A. with an all-electric fleet. The new vessels, operating across the Tagus River, will begin to enter service in 2022. ABB will deliver a comprehensive electric power solution, in- cluding energy storage, and an integrated marine and propulsion automation system. Increased elec- trification of transport, including river vessels, will play a key role in helping Portugal meet its goal of achieving carbon neutrality by 2050. ABB estimates that the new electric ferries will cut CO2 emissions by about 6,500 tons every year. Using paper mill technology to enable a more efficient way to recycle textiles ABB was chosen to deliver an integrated automa- tion, electrification, motion and quality control sys- tem for Renewcell’s new industrial textile recycling production facility in Sweden. Renewcell, a special- ist in textile-to-textile recycling, is using the ABB solution to transform a former paper mill into the world’s first commercial-scale recycling plant for cellulosic textiles, which are manufactured by dis- solving natural fibers. The process for recycling these materials is similar to pulp drying, as the cel- lulose in cotton and viscose textiles is broken down for reuse in new materials. The recycled textiles would otherwise have been disposed of in landfills or incinerated. 42 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Robotics & Discrete Automation WRITING THE FuTuRE OF FLEXIBLE AuTOMATION AND SMART MACHINES. ABB’s Robotics & Discrete Automation business provides products, software and solutions in robotics, machine, and factory automation. Our unparalleled expertise and the seamless integration of our products enable customers from all industries to unlock flexible automation. With our global presence in sales, engineering, and service, we support our customers at every step of their growth journey. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 43 $3.3 bn Revenues 10.8% Operational EBITA margin Market growth driven by megatrends of individual- ized consumers, labor shortage, digitalization and uncertainty. Resulting in need for automation solu- tions for increased productivity, highest flexibility, improved quality and maximum simplicity. • Machine Automation, GLOBAL NO. 5, NO. 2 IN HIGH-END SEGMENT. Solutions based on Programmable Logic Controllers (PLCs), Industrial PCs (IPCs), servo motion, industrial transport systems and vision, software The Business Area consists of the following two Divisions: • Robotics, GLOBAL NO. 2. Robots, robotics application cells and smart systems, field services, spare parts, digital services and software Key figures Robotics & Discrete Automation $ in millions, unless otherwise indicated FY 2021 FY 2020 US$ Comparable(2) Orders Order backlog (end December) Revenues Income from operations Operational EBITA(1) as % of operational revenues No. of employees (FTE equiv.) 3,844 1,919 3,297 269 355 10.8% 10,600 2,868 1,403 2,907 -163 237 8.2% 10,300 +34% +37% +13% n.a. +50% +2.6 pts +3% +29% +43% +9% +43%(3) % of FY 2021 third party revenues % of FY 2021 third party revenues 33% Automotive 7% Electronics 23% General Industry 10% CSSR(5) 28% Machine Automation Geographies 48% Europe 9% USA 4% Rest of Americas 29% China 10% Rest of AMEA End-markets(4) (1) For non-GAAP measures, see the “Supplemental information” section of this annual report. (2) Growth rates for orders, order backlog and revenues are on a comparable basis (local currency adjusted for acquisitions and divestitures). (3) Constant currency (not adjusted for portfolio changes). (4) Management estimates. (5) Consumer Segments and Service Robotics. 44 A B B A N N U A L R E P O R T 2 0 2 1 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 Opening a new world of possibilities with flexible automation With 11,000 employees and $3.3 billion in reve- nue in 2021, ABB Robotics & Discrete Automation is a pioneer in robotics, machine automation and digital services, providing innovative solutions for a diverse range of industries. The Business Area supports automotive OEMs, automotive tier 1 sup- pliers, electronics manufacturers, general industry and the consumer and service robotics segments and provides machine automation solutions for machine builders. Against the backdrop of the Covid-19 pandemic and resulting acceleration in global mega trends – from labor shortages, to consumer demand for personalized products and growing pressure to op- automotive market, our new fast and precise Ul- trasonic Spot Weld quality inspection offers a 20x increase in productivity, using cutting edge AI and ultrasound technology. Our Machine Automation division launched an in- novative magnetic levitation shuttle system, ACO- POS 6D, offering up to four times the shuttle den- sity of other systems on the market. In addition, we have continued to develop solutions targeting new, high-growth customer segments including e-commerce, laboratories and logis- tics. These segments offer double-digit, profit- able growth by increasing automation levels with AT ABB ROBOTICS & DISCRETE AuTOMATION, WE ARE LEADING THE TRANSFORMATION TO AuTOMATION AND HELPING OuR CuSTOMERS REALIZE NEW POSSIBILITIES AND OPPORTuNITIES. erate sustainably – businesses across the board are seeking to adapt their processes. In a survey of 1,650 large and small businesses in the United States, Europe and China, 84 percent(1) said that they will introduce or increase the use of robotics and machine automation in the next decade, with flexibility becoming a strategic need. Our intelligent robotics solutions support busi- nesses well beyond traditional manufacturing, in- creasing productivity and flexibility in high-growth segments including healthcare, logistics, food and beverage, construction and retail, including ecommerce. Strategic expansion in 2021 Throughout 2021, we successfully expanded both our market and our offer. We launched more than 20 major new products, covering a broad range of applications across mul- tiple industries. Our new OmniCore™ robot con- trollers offer faster, scalable, more energy effi- cient manufacturing, while the speed of our new IRB 920T SCARA robot helps customers in elec- tronics launch new products faster. In our core our value-adding, flexible automation solutions. We have made strong progress in our efforts to support long-term profitability by reducing expo- sure to the automotive systems business. This current and future market expansion is under- pinned by significant steps to broaden our technol- ogy and application leadership. In February, we announced a new generation of stronger, faster collaborative robots that can work side-by-side with people on a broad range of tasks, dramatically expanding the reach of robotics au- tomation and unlocking potential for sectors and businesses that have not previously had the oppor- tunity to automate. We further expanded our portfolio of flexible au- tomation solutions in August by completing the acquisition of ASTI Mobile Robotics Group, which has the lar gest installed fleet of autonomous mo- bile robots (AMRs) in Europe, and a broad cus- tomer base in 20 coun tries. The market for AMRs has sig nificant growth potential, with global sales expected to reach $14 billion by 2025, a CAGR of approximately 20 percent. (1) The survey, commissioned by ABB, was conducted by 3Gem Global Market Research & Insights between December 26, 2020, and January 19, 2021. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 45 This acquisition means we are now the only com- pany with a comprehensive and integrated portfo- lio covering robots, AMRs and machine automation solutions, designed and orchestrated by our val- ue-creating software. In November, we took another step to enhance our AMR offering, announcing a strategic partnership and investment with Swiss-based start-up, Seven- sense Robotics. Their AI and 3D vision mapping software will enable our mobile robots to navigate autonomously in complex, dynamic environments, helping to drive the next generation of flexible au- tomation for our customers. We continue to expand our software portfolio, for example enhancing our RobotStudio® simulation and programming software with a new Augmented Reality capability, advancing our integration of dig- ital and physical worlds, and creating an intuitive, easy to use interface for new customers. 2021 saw double digit growth for RobotStudio®, doubling the number of active users. Contributing to a brighter future At Robotics & Discrete Automation, we provide solutions that free people from dull, dirty, danger- ous and repetitive tasks, enabling them to develop their skills and pursue more fulfilling occupations. At the same time, we help our customers save en- ergy, reduce waste and extend the lifetime of their equipment with solutions that increase product quality and durability. workplaces safer and healthier, and contribute to a more sustainable future. — Case studies A ground-breaking factory transport system In 2021, our Machine Automation division launched ACOPOS 6D, a rail-free product transport system, with intelligent shuttles that move independently between stations. Unlike conventional systems, the solution is not limited to rigid, sequential pro- cesses. The solution integrates magnetic levitation techno logy from Planar Motors Inc. (PMI) and helps customers transition to producing smaller batch sizes and shorter product lifecycles. The healthcare and pharmaceutical sectors, in particular, stand to benefit from this highly flexible manufacturing solution. A vision for sustainable packaging ABB Robotics & Discrete Automation is helping to address the problem of plastic waste by collabo- rating with Zume, a provider of innovative sus- tainable packaging solutions, to create fully com- postable packaging from plant-based agricultural waste. Over the next five years, ABB robots will be installed in more than 1,000 Zume packaging man- ufacturing cells worldwide, with the potential to turn thousands of tons of plant material into mil- lions of pieces of sustainable packaging every year. Our vision is of a world where robots are as famil- iar in the workplace as laptops or smartphones, and where, by collaborating with humans, robots help make work more rewarding and productive, With Zume’s solutions, enabled by ABB robots, we can potentially replace single-use plastics, reducing emissions, preserving scarce resources, and cut- ting plastic waste. 46 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Share developments ABB Ltd share price trend during 2021 Dividends and total shareholder return During 2021, the price of ABB Ltd shares listed on the SIX Swiss Exchange increased 41 percent, while the Swiss Market Index increased 20 percent. The price of ABB Ltd shares on NASDAQ OMX Stock- holm increased 51 percent, compared to the OMX 30 Index, which increased 29 percent. The price of ABB Ltd American Depositary Shares traded on the New York Stock Exchange increased 37 percent, compared to the S&P 500 Index, which increased 27 percent. During 2021, ABB distributed a dividend of 0.80 Swiss francs per share to shareholders. To- tal shareholder return of ABB Ltd shares listed on the SIX Swiss Exchange was 45 percent during the year. With respect to the year ended December 31, 2021, ABB Ltd’s Board of Directors has proposed to distribute a dividend to shareholders in the amount of 0.82 Swiss francs per share. This is sub- ject to approval by shareholders at ABB Ltd’s 2022 Annual General Meeting. The proposal is in line with the Company’s dividend policy to pay a rising, sustainable dividend per share over time. Key data Dividend per share (CHF) Votes per share Basic earnings per share (USD)(2) Total ABB stockholders’ equity per share (USD)(3) Dividend payout ratio (%)(4) Weighted-average number of shares outstanding (in millions) 2021 0.82(1) 1 2.27 7.96 40% 2,001 2020 0.80 1 2.44 7.72 37% 2,111 2019 0.80 1 0.67 6.34 123% 2,133 (1) Proposed by the Board of Directors and subject to approval by shareholders at the Annual General Meeting on March 24, 2022. (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. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 47 Share developments — Source: FactSet Zurich Average daily traded number of shares: 4,75 millions Stockholm Average daily traded number of shares: 1,04 millions Year end: 345.4 High: 348.5 CHF 38 36 34 32 30 28 26 24 22 Low: 24.71 Year end: 34.90 High: 35.18 SEK 380 360 340 320 300 280 260 240 220 Low: 229.0 1 2 0 2 n a J 1 2 0 2 b e F 1 2 0 2 r a M 1 2 0 2 r p A 1 2 0 2 y a M 1 2 0 2 n u J 1 2 0 2 l u J 1 2 0 2 g u A 1 2 0 2 p e S 1 2 0 2 t c O 1 2 0 2 v o N 1 2 0 2 c e D 1 2 0 2 n a J 1 2 0 2 b e F 1 2 0 2 r a M 1 2 0 2 r p A 1 2 0 2 y a M 1 2 0 2 n u J 1 2 0 2 l u J 1 2 0 2 g u A 1 2 0 2 p e S 1 2 0 2 t c O 1 2 0 2 v o N 1 2 0 2 c e D ABB Swiss Market Index Rebased ABB OMX Stockholm 30 Index Rebased New York Average daily traded number of shares: 1,45 millions Year end: 38.17 High: 38.65 USD 42 40 38 36 34 32 30 28 26 Low: 27.96 1 2 0 2 n a J 1 2 0 2 b e F 1 2 0 2 r a M 1 2 0 2 r p A 1 2 0 2 y a M 1 2 0 2 n u J 1 2 0 2 l u J 1 2 0 2 g u A 1 2 0 2 p e S 1 2 0 2 t c O 1 2 0 2 v o N 1 2 0 2 c e D ABB S&P 500 Index Rebased 48 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Cash generation and capital allocation During 2021, ABB delivered a very strong cash flow for the full year. Cash flow from operating activities in continuing operations was $3,338 million, 78 per- cent higher year-on-year. The increase was driven by improved profitability from all Business Areas, a strong focus on net working capital management as well as fewer items impacting comparability, in- cluding transformational impacts such as restruc- turing or separation costs and cash outflow in the prior year due to the Kusile settlement and pension plan transfers. Cash flow volatility between quar- ters declined during 2021 – a result of a high focus on net working capital management. Free cash flow (FCF)(1)(2) was $2,603 million, 159 percent higher on a year-on-year basis, and FCF conversion to net income(2) 108 percent despite 11 percent revenue growth. The Group’s benchmark for the measurement of re- turns is Return on Capital Employed (ROCE)(2). The Group’s ROCE significantly increased to 14.9 per- cent, from 10.3 percent in 2020, just shy of ABB’s 15 – 20% target range. The improvement was driven by a higher Operational EBITA(2) and a lower ad- justed group effective tax rate compared to 2020. The Group’s ROCE was negatively impacted by Free cash flow and conversion rate USD bn 4 3 2 1 0 approximately 120 basis points due to the 19.9% ownership interest in Hitachi Energy. Return on Capital Employed % 18 16 14 12 10 8 2017 2018 2019 2020 2021 ROCE(2)(3) Impact of PG JV ownership interest Target range 15–20% % 250 200 150 100 50 2017 2018 2019 2020 2021 Free cash flow(1) % of net income(1) (1) Amount represents total for both continuing and discontinued operations. (2) For non-GAAP measures, see the “Supplemental information” section of this annual report. (3) 2021, 2020 and 2019 are not comparable to 2018 and 2017 due to the adoption of the new lease accounting stan- dard in 2019. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 49 with a broad portfolio across all major applications enabled by the company’s software suite. In April 2021, ABB launched a follow-up share buy- back program of up to $4.3 billion to return to shareholders cash proceeds following the comple- tion of the sale of 80.1 percent of the Power Grids business to Hitachi. Through this follow-up buy- back program, the Company purchased shares in 2021 for approximately $2.0 billion. Together with the initial share buyback program, which ran from July 2020 to March 2021, ABB spent approximately a combined $2.7 billion during the year 2021. ABB plans to continue its share buybacks for the full year of 2022, also in excess of the Power Grids capi- tal return program. ABB’s capital allocation priorities are: • Fund organic growth, research and development (R&D), capex at attractive returns • Rising, sustainable dividend per share over time • Value-creating acquisitions • Returning additional cash to shareholders ABB invested $820 million in capital expenditure. Non-order related R&D investment was $1,219 mil- lion in 2021 or 4.2 percent of revenues for the year. ABB paid $1,726 million in dividends during 2021. The Board of Directors is proposing a 0.82 Swiss francs dividend per share at the 2022 Annual Gen- eral Meeting. The proposal is in line with ABB’s divi- dend policy of paying a rising, sustainable dividend per share over time. In April 2021, the E-mobility Division acquired a majority stake in Enervalis, a smart energy control platform company. In August 2021, the Robotics Di- vision acquired ASTI Mobile Robotics Group, a lead- ing global autonomous mobile robot manufacturer Allocation of Capital Dividends 2017–2021 USD bn 10 8 6 4 2 0 CHF 0.84 0.82 0.80 0.78 0.76 0.74 Organic investment(1) (capital expenditure, R&D) Dividends Non-organic investment Share buybacks 2017 2018 2019 2020 2021(2) Dividend per share (1) Continuing operations only. (2) Proposed. 50 A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N — Key investor questions 2021 Q You have moved to a decentralized operating model during 2020 and 2021 – The ABB Way – is this now fully implemented? A We have come a long way and have reached important milestones. Under the ABB Way, the Divisions represent the highest level of op- erating decisions ensuring speed and customer focused decisions as they are closest to the mar- kets. A lean corporate only focuses on necessary strategic, financial and governance activities. The Divisions are fully accountable for their perfor- mance and the divisional targets are aligned with their strategic mandate of stability, profitabil- ity before growth. To complement the decentral- ized operating model, we apply an improved per- formance management system. This facilitates transparency on divisional and Business Area performance, based on a standardized set of Key Performance Indicators. To fully complete the de- centralized way of working at ABB, our focus area in 2022 will be to make sure that we also have ac- countability, transparency and speed within all of the Divisions. In many cases, it makes sense to drive global accountability even one level lower for product groups within Divisions and here we still have potential to improve. cent Operational EBITA margin in 2023? Q What are the levers to reach at least 15 per - A We have made strong progress towards our profitability target during 2021, improv- ing the Operational EBITA margin from 11.1% in 2020 to 14.2% in 2021. This was driven by bet- ter results in all Business Areas, supported by in- creased efficiency, good volumes and part of the cost base still running at lower “pandemic levels”, as well as clearly lower corporate costs and lower specific items which impact comparability. We see further potential in all of our Business Areas. Six out of 18 Divisions (excluding Divisions that we plan to exit) have a strategic mandate to sta- bilize their business or improve profitability. The remaining 12 Divisions are incentivized to drive profitable growth and therefore improve the mix of the Group. All Divisions have an annual pro- ductivity target of 3 percent per annum and will focus on pushing through strategic pricing ac- tions and further improve operational efficien- cies including footprint optimizations. Addition- ally, the exit of our non-core business will also be an important driver. A B B A N N U A L R E P O R T 2 0 2 1 0 1 I N T R O D u C T I O N 51 Q You are now targeting 3 to 5 percent comparable growth through the cycle, clearly above what you have achieved over the last five years. What has changed? A In recent years, we have taken significant organic and inorganic actions to align our business portfolio to more attractive growth markets, increasing our focus on discrete indus- tries as well as transport and infrastructure that offer better growth opportunities. This ongoing shift towards better quality of revenues is part of ABB’s DNA which centers around resource- efficiency in electrification and automation. Ad- ditionally, the responsibility for growth has now been fully transferred into the businesses, close to customers. Divisions have the best insights into current and future customer needs and are accountable to build their respective business accordingly. With more Divisions transitioning from stability and profitability to growth over time, we expect to see a continuous shift in the growth profile of ABB. Finally, the underlying de- mand for our products, systems and services is supported by the escalating drivers from sus- tainability megatrends with more favorable regu- lations, improved technology and changing con- sumer patters. Q What is the timeline for the remaining port- folio actions after the divestment of the Mechanical Power Transmission Division? A Active portfolio management is part of our performance culture. On the back of sys- tematic portfolio reviews we ascertain whether ultimately ABB is the best owner of the differ- ent businesses. As a result, we successfully di- vested the Mechanical Power Transmission Divi- sion during 2021. We continue to make progress on the exit of the Turbocharging Division, where we are currently running a dual track process for a spin-off or divestment with a spin-off currently looking more likely and a preliminary timeline for summer 2022. We plan to exit the Power Conver- sion Division during H2 2022 upon improving per- formance. In addition, we target to complete the legal separation of the E-mobility Division during Q1 2022 and work towards an IPO in Q2 2022 to create a platform for accelerated growth and value creation. We plan to remain a clear majority owner of the new company. At the same time, our active portfolio management process is driving decisions within the Divisions to improve or exit areas of underperformance, supporting improved performance ambitions. Further, the Group in- tends to pursue strategic partnerships as well as bolt-on acquisitions driven by the Divisions. Over time it is our ambition to complete approximately five bolt-on acquisitions each year. Q You ended the year 2021 with a net cash position and have significantly improved your cash generation. What are your capital allocation priorities? A We reiterate our capital allocation principles, which are 1) funding organic growth, 2) pay- ing a rising, sustainable dividend per share over time, 3) investing in value creating acquisitions and 4) returning additional cash to shareholders, which we have mainly done through buybacks in the past. We expect that our improved cash gen- eration on the back of the ABB Way operating model will enhance our flexibility to invest in both organic growth and bolt-on acquisitions, while providing attractive returns to shareholders. We aim to increase the pace of acquisitions going for- ward, adding technology, digital know-how and further improve geographical footprint. Addition- ally, we plan to continue our share buybacks for full year of 2022, also in excess of the PG capital return program. Q How are you managing the various supply chain imbalances that you are currently facing? A Under the ABB Way, the Divisions are in the lead to manage the supply chain imbalances. Mitigating measures include Divisions cooperat- ing where it is an advantage to pool supply vol- umes and put the combined ABB weight behind supply chain negotiations, including C-suite dis- cussions where needed. Disruptions towards the end of the year were tangible, predominantly in semiconductor shortages but also in logistics. 2022? Q What are your expectations for ABB in A In full year 2022, we expect a steady mar- gin improvement towards the 2023 target of at least 15%, supported by increased efficiency as we fully incorporate the decentralized operat- ing model and performance culture in all our di- visions. Furthermore, we expect support from an anticipated positive market momentum and our strong order backlog. 02 Corporate governance report 54 Chairman’s letter 56 Summary of corporate governance approach 56 Board of Directors 62 Executive Committee 64 Shares 66 Shareholders 69 Independent external auditors 70 Other governance information 54 A B B A N N U A L R E P O R T 2 0 2 1 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, 2021 was another turbulent year, due to continued outbreaks of COVID-19. However, our high level of preparedness helped us protect our people and keep our operations running. Strong demand boosted our order and revenue growth, but supply-chain disruptions caused delays in deliver- ies to customers in the second half of the year. Overall, we are pleased with ABB’s financial performance, which has improved significantly compared with pre-pandemic times. Against that backdrop, we continued to transform ABB by moving accountability to our Divisions, increasing efficiency, making our operations safer and more sustainable, and redesigning our leader- ship development and succession planning. We also plan to spin off our Turbocharging Division and separately list our E-mobility business. With these steps, we are living up to our Purpose of creating superior, sustainable value, and strength- ening our focus on electrification and automation, both of which are key technologies to reduce emissions and enable a more sustainable future. Sustainability strategy 2030 In 2021, we began implementing our 2030 sustain- ability strategy, with the focus on reducing CO2-equivalent emissions across our value chain. In the past two years, we have reduced emissions from our own operations by 39 percent, putting us well on track to achieve our goal of carbon neutrality by 2030. In the years ahead, we can make an even bigger contribution in our custom- ers’ operations through many of our technologies like ABB’s energy-efficient electric motors and drives and electric-vehicle charging solutions. By 2030, we aim to help our customers reduce their annual CO2-equivalent emissions by 100 mega- tons, equivalent to the annual emissions of 30 million combustion cars. We also clarified roles and responsibilities related to sustainability within the Board: The Gover- nance and Nomination Committee is responsible for overseeing corporate social responsibility (including health, safety and environment as well as sustainability), while ultimate responsibility for ABB’s sustainability strategy, its sustainability targets and its annual sustainability report lies with the entire Board of Directors. At next year’s AGM, we intend to seek shareholder support for our environmental, social and gover- nance (ESG) goals. These include emissions reductions across our value chain, increasing circularity in our own and our customers’ opera- tions, and promoting social progress, including human rights and good governance, in our supply chain and the communities in which we operate. Stock-exchange listings In December, we appointed a new head of our Turbocharging Division ahead of a likely spin-off, in the event of which we would invite shareholders to an extraordinary general meeting to seek their approval. We are also moving ahead with efforts to separately list our E-mobility business and we aim to complete this during the second quarter. ABB would retain a majority shareholding in the future listed entity. As a world leader in electric- vehicle (EV) charging infrastructure, we are well-positioned in an extremely attractive growth market – by 2035, EVs are expected to be outsell- ing combustion cars. Board assessment and diversity In 2021, an external assessment concluded that the Board’s effectiveness was in the top quartile of comparable companies. The assessment put forward a small number of recommendations concerning the Board’s role in ESG, risk and reputation management, and future requirements in the skills matrix of new Board members, all of which were comprehensively addressed by the Board during the course of last year. As part of this assessment, we also conducted a peer review within the Board in which every Board member assessed the individual performance of all other members. The Board will continue to conduct internal self-assessments every year, comple- mented periodically with external reviews. Last year, we also highlighted the need to improve gender diversity on the Board of Directors. In 2021, we sought and identified candidates that would further strengthen the Board’s diversity, expertise and experience. To accommodate candidates’ personal career planning and allow for board adjustments as necessary (overboard- ing), we will be proposing one or more new A B B A N N U A L R E P O R T 2 0 2 1 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 members for election at the AGM in 2023. This year, all existing Board members will stand for re-election, and no new members will be proposed. Leadership development and succession planning Finally, as part of the implementation of the ABB Way operating model, our leadership develop- ment and succession planning was redesigned and has been reviewed by the Executive Commit- tee and the Board of Directors, including the Governance and Nomination Committee. Instead of position-based succession planning, we have introduced an open job market, where all posi- tions up to Executive Committee (EC) level are posted on our internal jobs platform. As part of the new approach, EC- and Business Area-level leadership teams review the strengths and devel- opment needs of all team members and support their development so that they are ready to pursue new opportunities when they arise. In this way, we enable our leaders to realize their ambi- tions through a fair and transparent process that promotes the best people for the job. On behalf on the Board of Directors, I would like to thank you for your continued trust and support. Peter Voser Chairman of the Board of Directors Zurich, February 24, 2022 56 A B B A N N U A L R E P O R T 2 0 2 1 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 reinforced in its structure, processes and rules as outlined in this section of the Annual Report. In line with this, ABB complies with the general principles as set forth in the Swiss Code of Best Practice for Corporate Governance, as well as those of the capital markets where its shares are listed and traded. In addition to the provisions of the Swiss Code of Obligations, ABB’s key princi- ples and rules on corporate governance are laid down in ABB’s Articles of Incorporation, the ABB Ltd Board Governance Rules (which includes the governance rules of ABB’s Board committees and the ABB Ltd Related Party Transaction Policy, which was prepared based on the Swiss Code of Best Practice for Corporate Governance and the independence criteria set forth in the corporate governance rules of the New York Stock Ex- change), and the ABB 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 recent developments and practices, as well as to ensure compliance with applicable laws and regulations. Shareholders and other interested parties may communicate with the Chairman of the Board or the independent directors by writing to ABB Ltd (Attn: Chairman of the Board/indepen- dent directors), at Affolternstrasse 44, CH-8050 Zurich, Switzerland. Compensation governance and Board and EC compensation Information about ABB’s compensation gover- nance as well as Board and Executive Committee (EC) compensation and shareholdings is provided in the Compensation Report that can be found on pages 74 to 110 of this Annual Report. — Board of Directors Board and Board committees (2021–2022 board term) Board of Directors Chairman: Peter R. Voser Gunnar Brock Vice-Chairman: Jacob Wallenberg 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 Peter R. Voser (chairman) Frederico Fleury Curado (chairman) Lars Förberg Jennifer Xin-Zhe Li Jacob Wallenberg David Constable Jennifer Xin-Zhe Li A B B A N N U A L R E P O R T 2 0 2 1 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 57 Board governance Chairman of the Board 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 organizational structure and the definition of the areas of responsibility of the Board, as well as the information and control instruments vis-à-vis the Executive Committee are set forth in the ABB Ltd Board Governance Rules (available at https://new. abb.com/about/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 assist the Board in its tasks and report regularly to the Board. 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 Obligations, to perform their duties with all due care, to safeguard the interests of the corporation in good faith and to extend equal treatment to shareholders in like circumstances. Prior to pro- posing new candidates for election to the Board, checks are performed to ensure that they are independent and that there are no conflicts of interest. The Swiss Code of Obligations does not specify what standard of due care is required of the directors of a corporate board. However, it is generally held by Swiss legal scholars and juris- prudence that the directors must have the requisite capability and skill to fulfill their func- tion, and must devote the necessary time to the discharge of their duties. Moreover, the directors must exercise all due care that a prudent and diligent director would have taken in like circum- stances. 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 Governance Rules (available at https://new.abb.com/about/ corporate-governance) state that board members shall avoid entering into any situation in which their personal or financial interests may conflict with the interests of ABB. 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 internally and in the public sphere. Vice-Chairman of the Board The Vice-Chairman is elected by the Board and handles the responsibilities of the Chairman to the extent the Chairman is unable to do so or would have a conflict of interest in doing so. He also acts as counselor/advisor to the Chairman on any matters that are Company or Board relevant and as appropriate or as the Chairman may re- quire and with a particular focus on strategic aspects related to the Company and its business in general. In addition, the Vice-Chairman takes such other actions as may be decided by the Board or requested by the Chairman. Finance, Audit and Compliance Committee The FACC is responsible for overseeing (1) the integrity of ABB’s financial statements, (2) ABB’s compliance with legal, tax and regulatory require- ments, (3) the external auditors’ qualifications and independence, (4) the performance and role of ABB’s internal audit function and the perfor- mance of the external auditors, (5) ABB’s capital structure, funding requirements and financial and risk policies, and (6) ABB’s implementation and maintenance of an integrity program and internal controls designed to mitigate integrity risk. The FACC must comprise three or more indepen- dent directors who have a thorough under- standing of finance and accounting. The Chair- man of the Board and, upon invitation by the committee’s chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained. In addition, the chief integrity officer, the head of internal audit and the external auditors participate in the meet- ings as appropriate. The Board has determined that each member of the FACC is an audit commit- tee financial expert as such term is defined in Form 20-F. 58 A B B A N N U A L R E P O R T 2 0 2 1 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 Governance and Nomination Committee Board membership The GNC is responsible for (1) overseeing corpo- rate governance practices within ABB, (2) over- seeing 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 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. Upon invitation by the committee’s chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained. Compensation Committee The CC is responsible for compensation matters relating to the Board and the Executive Committee. The CC must comprise three or more directors who are elected by the shareholders. The Chair- man of the Board and, upon invitation by the committee’s chairman, the CEO or other 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 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 aspects including gender, nationalities, geo- graphic/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 the 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 expired shall be immediately eligible for re-elec- tion. ABB’s Articles of Incorporation (available at https://new.abb.com/about/ corporate-governance) do not provide for the retirement of directors based on their age. How- ever, an age limit for members of the Board is set forth in the ABB Ltd Board Governance Rules (available at https://new.abb.com/about/ corporate-governance), although waivers are possible and subject to Board discretion. If the office of the Chairman of the Board of Directors or any position on the Compensation Committee becomes vacant during a Board term, the Board Members of the Board (2021–2022 board term) Board Experience Corporate Officer Experience Other Business 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 7 23 4 7 6 5 4 4 6 6 Board Member Peter R. Voser Jacob Wallenberg Gunnar Brock David Constable Frederico Fleury Curado Lars Förberg Jennifer Xin-Zhe Li Geraldine Matchett David Meline Satish Pai 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 O E C O F C / 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 SE CA, US BR, PT SE, CH CN, CA CH, UK, FR US, CH IN e v i t u c e x E - n o N Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes t n e d n e p e d n I Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes r e d n e G M M M M M M F F M M A B B A N N U A L R E P O R T 2 0 2 1 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 59 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. also serves as a member of the board of directors. 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 and U.S. citizen. Members of the Board (2021–2022 board term) Peter R. Voser has been a member and Chairman of ABB’s Board of Directors since April 2015. He was also ABB’s Chief Executive Officer from April 2019 to February 2020. 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 member of ABB’s Board of Directors since June 1999 and Vice-Chairman since April 2015. He is the chairman of the board of Investor AB (Sweden). He is vice-chairman of the boards of Telefonaktiebolaget LM Ericsson, FAM AB and Patricia Industries (all Sweden). He is also a member of the boards of directors of Nasdaq, Inc. (U.S.) and the Knut and Alice Wallen- berg 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. Gunnar Brock has been a member of ABB’s Board of Directors since March 2018. He is chairman of the boards of Neptunia 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 Industries (both Sweden). He was formerly president 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 member of ABB’s Board of Directors since April 2015. He is the chief executive officer of Fluor Corporation (U.S.), for which he Frederico Fleury Curado has been a member of ABB’s Board of Directors since April 2016. He is a member of the boards of directors of Ultrapar S.A. (Brazil) and Transocean Ltd. (Switzerland). He was for- merly the chief executive officer of Ultrapar S.A. and Embraer S.A. (both Brazil). Mr. Curado was born in 1961 and is a Brazilian and Portuguese 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 was born in 1965 and is a Swedish and Swiss citizen. Jennifer Xin-Zhe Li has been a member of ABB’s Board of Directors since March 2018. She is a member of the boards of directors of Flex Ltd (Singa- pore/U.S.), Kone Oy (Finland) and Full Truck Alliance Co. Ltd. (Cayman Islands/P.R.C.). Through May 2021, she was a member of the boards of directors of Philip Morris International Inc. (U.S.) and The Hongkong and Shanghai Banking Corpo- ration Limited (Hong Kong). Ms. Li is a founder and general partner of Changcheng Investment Partners (P.R.C.), a private investment fund. From 2008 to 2018, she served as chief financial officer of Baidu Inc. (P.R.C.) and chief executive officer of Baidu Capital (P.R.C.). Prior to that, Ms. Li spent 14 years with General Motors, holding various senior finance positions, including chief financial officer of GM China and corporate controller for GMAC North American Operations. Ms. Li was born in 1967 and is a Canadian citizen. Geraldine Matchett has been a member of ABB’s Board of Directors since March 2018. She is the co-chief executive officer, the chief financial officer and a member of the managing board of Royal DSM N.V. (The Netherlands). She was previously the chief financial officer of SGS Ltd (Switzerland). Prior to joining SGS she worked as an auditor at Deloitte Ltd (Switzerland) and KPMG LLP (U.K.). Ms. Match- ett was born in 1972 and is a Swiss, British and French citizen. 60 A B B A N N U A L R E P O R T 2 0 2 1 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 in order to allow each member time to study the covered matters prior to the meetings. Each board meeting has a private session without management or others being present. Decisions made at the Board meetings are recorded in written minutes of the meetings. Some decisions are also taken by circular resolution. 2021 was an intensive year for the Board and its committees. The table below shows the number of meetings held during 2021 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 mandates, such as those in our subsidiaries, those in the same group of companies and those in non-profit and charitable institutions, are not subject to those limits. Additional details can be found in Article 38 of ABB’s Articles of Incorpora- tion (available at https://new.abb.com/about/ corporate-governance). David Meline has been a member of ABB’s Board of Directors since April 2016. He is the chief financial officer of Moderna Inc. (U.S.). From 2014 through 2019, Mr. Meline was the chief financial officer of Amgen Inc. (U.S.). He 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 U.S. and Swiss 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 directors 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, 2021, none of the Board members held any official functions or political posts. Further information on ABB’s Board mem- bers can be found by clicking on the ABB Board of Directors link (available at https://new.abb.com/ about/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 2021 Board and Board Committee Meetings Pre annual general meeting 2021 Post annual general meeting 2021 Board Meetings and attendance Average duration (hours) Mtg. 7.5 Conf. Call 1.5 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 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 GNC 1.25 2 2 2 2 CC 1.75 2 2 2 2 FACC 3 2 2 2 2 2 Board Mtg. Conf. Call FACC 9 4 3 4 4 4 4 4 4 3 4 4 1 2 2 2 2 2 2 2 2 2 2 2 3 4 4 4 4 4 GNC 1.4 5 5 4 5 5 CC 1.6 5 5 5 5 A B B A N N U A L R E P O R T 2 0 2 1 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 61 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. Fluor Corporation (Fluor) is an important cus- tomer of ABB. ABB sells primarily electrical switchgears, control systems and electrical solutions through its Electrification and Process Automation businesses to Fluor. David Constable is the CEO and a director of Fluor. After reviewing the level of business with Fluor, the Board has determined that ABB’s business relationship with Fluor is not unusual in its nature or conditions and does not constitute a material business relationship. As a result, the Board concluded that all members of the Board are independent. These determinations were made in accordance with ABB Ltd’s Related Party Transaction Policy which was prepared based on the Swiss Code of Best Practice for Corporate Governance and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange. This policy is contained in the ABB Ltd Board Governance Rules (available at https://new.abb. com/about/corporate-governance). Information and control systems of the Board vis-à-vis the Executive Committee Information from the Executive Committee In accordance with the ABB Board Governance Rules (available at https://new.abb.com/about/ 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); and • 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 resources, finance, legal and the business. Internal Audit ABB has an Internal Audit team that provides independent objective assurance and other services to help ensure that ABB operates in accordance with applicable laws as well as inter- nal 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 Integrity Investigations and Monitoring department, which is part of ABB’s integrity function. Internal Audit reports on a regular basis its main observations and recom- mendations to the relevant 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 objectives of the business. The ERM process is typically cyclical in nature, conveying the idea of continuous 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 operational risks, both current and long term. Key risks identified and managed in 2021 were those related to the continuation of the COVID-19 pandemic, to constraints in global supply chains, as well as to the preparation for the separation of ABB’s turbocharging business and the planned initial public offering in Switzerland of ABB’s electric-vehicle charging business. ERM results are reported to the FACC and the entire Board. This information becomes part of the overall strategic and risk discussions by the Board to help create value for stakeholders. 62 A B B A N N U A L R E P O R T 2 0 2 1 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 (at December 31, 2021) Björn Rosengren 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 A R E A P R E S I D E N T S Timo Ihamuotila Chief Financial Officer Carolina Granat Chief Human Resources Officer Maria Varsellona General Counsel Tarak Mehta Electrification Peter Terwiesch Process Automation Morten Wierod Motion Theodor Swedjemark Chief Communications and Sustainability Officer Sami Atiya Robotics & Discrete Automation Executive Committee responsibilities and organization The Board has delegated the executive manage- ment of ABB to the CEO. The CEO and, under his direction, the other members of the Executive Committee are responsible for ABB’s overall business and affairs and day-to-day management. The CEO reports to the Board regularly, and whenever extraordinary circumstances so require, on the course of ABB’s business and financial performance and on all organizational and per- sonnel matters, transactions and other issues material to the Group. Each member of the Execu- tive Committee is appointed and discharged by the Board. Members of the Executive Committee (at December 31, 2021) Björn Rosengren was appointed Chief Executive Officer and member of the Executive Commit- tee effective March 2020. He is a member of the board of directors of the World Childhood Foundation (Sweden). Before joining ABB, he was the president and chief executive officer of Sandvik AB (Sweden) since 2015. Prior to that, Mr. Rosengren was the chief executive officer of Wärtsilä Corporation (Fin- land) from 2011 to 2015. He held a variety of management roles at Atlas Copco AB (Sweden) from 1998 to 2011. Mr. Rosengren was born in 1959 and is a Swedish citizen. Timo Ihamuotila was appointed Chief Financial Officer and member of the Executive Committee effec- tive April 2017. He is a member of the board of directors of SoftwareONE Holding AG and Hitachi Energy Ltd (both Switzerland). From 2009 to 2016, Mr. Ihamu- otila was chief financial officer and an executive vice president of the Nokia Corporation (Finland). From 1999 to 2009, he held various senior roles with Nokia. Mr. Ihamuotila was born in 1966 and is a Finnish citizen. Carolina Granat was appointed Chief Human Resources Officer and member of the Executive Commit- tee effective January 2021. She joined ABB in 2020 as Head of People Development. Prior to that, she was glob- ally responsible for human resources at the Machining Solutions business area of Sandvik AB (Sweden). Ms. Granat was born in 1972 and is a Swedish citizen. Maria Varsellona was appointed General Counsel and member of the Executive Committee effective November 2019. From 2014 to 2019 she was the Chief Legal Officer of Nokia Corporation (Finland) and from 2018 to 2019 she was also the president of Nokia Technol- ogies. From 2013 to 2014 she was the General Counsel of Nokia Siemens Networks. 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 Group General Counsel of Sidel, both part of the Tetra Laval Group (Sweden). From 2001 to 2009 she held various senior legal roles mainly with GE Oil & Gas. A B B A N N U A L R E P O R T 2 0 2 1 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 63 Ms. Varsellona was born in 1970 and is an Italian citizen. Theodor Swedjemark was ap- pointed Chief Communications Officer and member of the Execu- tive Committee effective August 2020. As per March 2021 his title was amended to Chief Communications and Sustainability Officer and member of the Execu- tive Committee. He is a member of the board of directors of the Swedish Swiss Chamber of Com- merce and is the chairman of the ABB Jürgen Dormann Foundation. Mr. Swedjemark acted as interim Head of Corporate Communications & Public Affairs from March 2020 through August 2020. Prior to that, he assumed the role of Chief of Staff in 2017, later adding group responsibility for government relations and public affairs. During 2016, Mr. Swedjemark managed the Strate- gic Portfolio Review of the Power Grids project. From 2006 to 2015, he held various management positions at ABB in different functions and busi- nesses. Mr. Swedjemark was born in 1980 and is a Swedish citizen. Tarak Mehta was appointed Presi- dent of the Electrification Business effective April 2019 and has been a member of the Executive Committee since October 2010. He is a member of the board of directors of Prysmian S.p.A. (Italy). He had previously been President of the Electrification Products 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 business. Between 1998 and 2006, he held several management positions with ABB. Mr. Mehta was born in 1966 and is a U.S. and Swiss citizen. Peter Terwiesch was appointed President of the Process Automa- tion Business (known as Industrial Automation from 2017–2020) and member of the Executive Commit- tee effective January 2015. He is a member of the board of directors of Metall Zug AG (Switzerland). 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 German and Swiss citizen. Morten Wierod was appointed President of the Motion Business and member of the Executive Committee 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 Automation Business effective April 2019 and has been a member of the Executive Committee since June 2016. He is a member of the board of direc- tors of SGS SA (Switzerland). He had previously been President of the Robotics and Motion divi- sion 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 as chief executive officer of the mobility and logistics division in the infrastruc- ture and cities sector from 2011. Mr. Atiya was born in 1964 and is a German citizen. 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/corporate-governance). Mandates of EC members outside the ABB Group No member of the EC may hold more than five additional mandates, of which no more than one may be in a listed company. Certain types of mandates, such as those in our subsidiaries, those in the same group of companies and those in non-profit and charitable institutions, are not subject to those limits. Additional details can be found in Article 38 of ABB’s Articles of Incorpora- tion (available at https://new.abb.com/about/ corporate-governance). Business relationships between ABB and its EC members This section describes important business relation- ships between ABB and its EC members, or companies and organizations represented by them. ABB has a minority stake in Hitachi Energy Ltd (Hitachi Energy), the holding company of ABB’s former power grids business. Hitachi Energy is both an important supplier to and customer of ABB. Timo Ihamuotila is a director of Hitachi Energy. 64 A B B A N N U A L R E P O R T 2 0 2 1 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 After reviewing the level of business with Hitachi Energy, the Board has determined that ABB’s business relationship with Hitachi Energy is not unusual in its nature or conditions. These determinations were made in accordance with ABB Ltd’s Related Party Transaction Policy which was prepared based on the Swiss Code of Best Practice for Corporate Governance and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange. This policy is contained in the ABB Ltd Board Governance Rules (available at https://new.abb. com/about/corporate-governance). — Shares Share capital of ABB At December 31, 2021, ABB’s ordinary share capi- tal (including treasury shares) as registered with the Commercial Register amounted to CHF 246,377,791.68, divided into 2,053,148,264 fully paid registered shares with a par value of CHF 0.12 per share. ABB Ltd’s shares are listed on the SIX Swiss Exchange, 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, 2021, ABB Ltd had a market capitalization based on outstanding shares (total number of outstanding shares: 1,958,344,400) of approximately CHF 68 billion ($75 billion, SEK 676 billion). The only consolidated subsidiary in the ABB Group with listed shares is ABB India Limited, Bangalore, India, which is listed on the BSE Ltd. (Bombay Stock Exchange) and the National Stock Exchange of India. At December 31, 2021, ABB Ltd, Switzer- land, directly or indirectly owned 75 percent of ABB India Limited, Bangalore, India, which at that time had a market capitalization of approximately INR 474 billion. Stock exchange listings (at December 31, 2021) Stock exchange SIX Swiss Exchange SIX Swiss Exchange Security Ticker symbol ISIN code ABB Ltd, Zurich, share ABBN CH0012221716 ABB Ltd, Zurich, share buyback (second trading line) ABBNE CH0357679619 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. Share repurchases and cancellation Under the share buyback program that ran from July 2020 to March 2021, ABB repurchased a total of 128,620,589 shares. At ABB’s Annual General Meeting 2021, the shareholders approved the proposal to cancel 115,000,000 repurchased shares. These shares were cancelled in June 2021, resulting in a reduced total number of issued ABB Ltd shares of 2,053,148,264. ABB intends to pro- pose to the Annual General Meeting 2022 to cancel the remaining 13,620,589 repurchased shares. In April 2021, ABB launched a follow-up share buyback program of up to $4.3 billion to complete ABB’s plan to return $7.8 billion of cash proceeds from the Power Grids divestment to shareholders. Under that share buyback program, ABB repur- chased a total of 58,627,600 shares as per December 31, 2021, and a total of 74,782,600 shares as per February 15, 2022. ABB intends to propose to the Annual General Meeting 2022 to cancel these shares. In addition, ABB repurchased a total of 32,668,987 shares as per December 31, 2021, primarily for use in connection with employee share programs. Further information can be found at https://www. abb.com/investorrelations. A B B A N N U A L R E P O R T 2 0 2 1 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 65 Changes to the ordinary share capital Except for the share cancellation described above, there were no other changes to ABB’s ordinary share capital during 2021, 2020 and 2019. Convertible bonds and options ABB does not have any bonds outstanding that are convertible into ABB shares. For information about options on shares issued by ABB, please refer to “Note 19 – Stockholders’ equity” to ABB’s Consolidated Financial Statements. Contingent share capital At December 31, 2021, ABB’s share capital may be increased by an amount not to exceed CHF 24,000,000 through the issuance of up to 200,000,000 fully paid registered shares with a par value of CHF 0.12 per share through the exercise of conversion rights and/or warrants granted in connection with the issuance on national or inter- national 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 approximately 9.7 percent. The contingent share capital has not changed during the last three years. At December 31, 2021, 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 approximately 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 convertible or warrant-bearing bonds or other financial market instruments or the grant of warrant rights. The then current owners of con- version rights and/or warrants will be entitled to subscribe for new shares. The conditions of the conversion rights and/or warrants will be deter- mined 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 the Shareholders section below) (available at https://new.abb.com/about/ 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 share- holders if such bonds or other financial market instruments are for the purpose of financing or refinancing the acquisition of an enterprise, parts of an enterprise, participations or new investments or an issuance on national or international capital markets. If the Board denies advance subscription rights, the convertible or warrant-bearing bonds or other financial market instruments will be issued at the relevant market conditions and the new shares will be issued pursuant to the relevant market conditions taking into account the share price and/or other compa- rable instruments having a market price. Conversion rights may be exercised during a maximum ten-year period, and warrants may be exercised during a maximum seven-year period, in each case from the date of the respective issuance. The advance subscription rights of the shareholders may be granted indirectly. At December 31, 2021, 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 increase the existing share capital by approxi- mately 4.6 percent. This contingent share capital has not changed during the last three years. 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 performance, functions, level of responsibility and profitability criteria. ABB may issue shares or subscription rights to employees at a price lower than that quoted on a stock exchange. The 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 the Shareholders section below). Authorized share capital At December 31, 2021, 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 66 A B B A N N U A L R E P O R T 2 0 2 1 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 through March 25, 2023. If the authorized share capital were fully issued, this would increase the existing share capital by approximately 9.7 per- cent. Aside from renewal at the 2021 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 underwriting through a banking institu- tion, a syndicate or another third party with a subsequent offer of these shares to the shareholders. The Board may permit pre-emptive rights that have not been exercised by sharehold- ers to expire or it may place these rights and/or shares as to which pre-emptive rights have been granted but not exercised at market conditions or use them for other purposes in the interest of the Company. Furthermore, the Board is authorized to restrict or deny the pre-emptive rights of share- holders and allocate such rights to third parties if the shares are used (1) for the acquisition of an enterprise, parts of an enterprise, or participa- tions, or for new investments, or in case of a share placement, for the financing or refinancing of such transactions; or (2) for the purpose of broad- ening the shareholder constituency in connection with a listing of shares on domestic or foreign stock exchanges. The subscription and the acqui- sition of the new shares, as well as each subsequent transfer of the shares, will be subject to the restrictions of ABB’s Articles of Incorpora- tion (available at https://new.abb.com/about/ corporate-governance). — Shareholders Shareholder structure As of December 31, 2021, the total number of shareholders directly registered with ABB Ltd was approximately 96,000 and another 513,000 shareholders held shares indirectly through nominees. In total as of that date, ABB had ap- proximately 609,000 shareholders. Significant shareholders Under the Swiss Financial Market Infrastructure Act, shareholders and groups of shareholders acting in concert who directly or indirectly acquire or sell shares of a listed Swiss corporation or rights based thereon and thereby reach, exceed or fall below the thresholds of 3 percent, 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 33¹/₃ percent, 50 percent or 66²/₃ percent of the voting rights of the corporation must notify the corporation and the SIX Swiss Exchange of such holdings. Consequently, significant shareholdings may have varied within the relevant threshold levels since they were reported. Investor AB, Sweden, held 265,385,142 ABB shares as of December 31, 2021 (refer to Investor’s year-end 2021 report available at https://www. investorab.com/investors-media/ reports-presentations). This holding represented 12.9 percent of ABB’s total share capital and voting rights as registered in the Commercial Register on December 31, 2021. 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. The Capital Group Companies Inc., USA, disclosed that as of July 1, 2021, it, together with its direct and indirect affiliates, held 115,841,336 ABB shares (refer to https://www.ser-ag.com/en/ resources/notifications-market-participants/ significant-shareholders.html#/ shareholder-details/TAL7600020). This holding represented 5.64 percent of ABB’s total share capital and voting rights as registered in the Commercial Register at that time. Cevian Capital II GP Limited, Jersey, disclosed that as of August 3, 2020, it held 105,988,662 ABB shares (refer to https://www.sec.gov/Archives/ edgar/data/1091587/000090266420002862/ p20-1467sc13da.htm). This holding represented 4.89 percent of ABB’s total share capital and voting rights as registered in the Commercial Register at that time. 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 https://www.ser-ag.com/en/resources/ notifications-market-participants/ significant-shareholders.html#/ shareholder-details/TAH91000F4). This holding represented 3.36 percent of ABB’s total share capital and voting rights as registered in the Commercial Register at that time. A B B A N N U A L R E P O R T 2 0 2 1 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 67 At December 31, 2021, 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 notifications made by shareholders during 2021 can be found via the search facility on the platform of the Disclo- sure Office of the SIX Swiss Exchange: https:// www.ser-ag.com/en/resources/notifications-market- participants/significant-shareholders.html#/. Under ABB’s Articles of Incorporation (available at https://new.abb.com/about/corporate- governance), each registered share represents one vote. Significant shareholders do not have differ- ent voting rights. To our knowledge, we are not directly or indirectly owned or controlled by any government or by any other corporation or person. Shareholders’ 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 Incorporation (available at https://new.abb.com/ about/corporate-governance). Right to vote ABB has one class of shares and each registered share carries one vote at the general meeting. Voting rights may be exercised only after a share- holder has been registered in the share register of ABB as a shareholder with the right to vote, or with Euroclear Sweden AB (Euroclear), which 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 another shareholder with the right to vote or by the independent proxy elected by the sharehold- ers (unabhängiger Stimmrechtsvertreter). If the Company does not have an independent proxy, the Board of Directors shall appoint the indepen- dent proxy for the next General Meeting of Shareholders. All shares held by one shareholder may be represented by one representative only. For practical reasons shareholders must be registered in the share register no later than 6 business days before the general meeting in order to be entitled to vote. Except for the cases de- scribed under “Limitations on transferability of shares and nominee registration” below, there are no voting rights restrictions limiting ABB’s share- holders’ rights. Annual General Meeting/COVID-19 ABB’s top priority is protecting the health of its shareholders and employees. Therefore, due to the extraordinary circumstances and in accor- dance with applicable Swiss COVID-19 legislation, shareholders were not able to attend ABB’s Annual General Meeting 2021 in person, but could exercise their shareholder rights via the indepen- dent proxy only. The Board of Directors has resolved that for ABB’s Annual General Meeting 2022, in accordance with applicable Swiss COVID-19 legislation, the same procedures shall apply. In addition, ABB will offer shareholders the opportunity to address questions on agenda items to the Board of Directors in writing ahead of the meeting. 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 Auditors’ 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. 68 A B B A N N U A L R E P O R T 2 0 2 1 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 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 matters described in Article 704 of the Swiss Code of Obligations and for resolutions with respect to restrictions on the exercise of the right to vote and the removal of such restrictions, which all require the approval of two-thirds of the votes represented at the meeting. At December 31, 2021, 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 applicable legal provisions. Shareholders’ dividend rights The unconsolidated statutory financial state- ments of ABB Ltd are prepared in accordance with Swiss law. Based on these financial statements, dividends may be paid only if ABB Ltd has suffi- cient distributable profits from previous years or sufficient free reserves to allow the distribution of a dividend. Swiss law requires that ABB Ltd retain at least 5 percent of its annual net profits as legal reserves until these reserves amount to at least 20 percent of ABB Ltd’s share capital. Any net profits remaining in excess of those reserves are at the disposal of the shareholders’ meeting. Under Swiss law, ABB Ltd may only pay out a dividend if it has been proposed by a shareholder or the Board of Directors and approved at a general meeting of shareholders, and the auditors confirm that the dividend conforms to statutory law and ABB’s Articles of Incorporation. In prac- tice, the shareholders’ meeting usually approves dividends 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 received by holders of ADSs upon conver- sion of those cash dividends by Citibank, N.A., the depositary, in accordance with the Amended and Restated Deposit Agreement dated May 7, 2001. For shareholders who are residents of Sweden, ABB has established a dividend access facility (for up to 600,004,716 shares). With respect to any annual dividend payment for which this facility is made available, shareholders who register with Euroclear may elect to receive the dividend from ABB Norden Holding AB in Swedish krona (in an amount equivalent to the dividend paid in Swiss francs) without deduction of Swiss withholding tax. For further information on the dividend access 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 acquired the shares in its own name and for its own account. If the shareholder refuses to make such declaration, it will be registered as a share- holder without voting rights. A person failing to expressly declare in its registration/application that it holds the shares for its own account (a 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 nominee is subject to recognized bank or financial market supervision. In special cases the Board may grant exemptions. There were no exemptions granted in 2021. The limitation on the transfer- ability of shares may be removed by an amendment 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 register kept by Citibank does not affect transfer- ability of ABB shares or ADSs. Registered ABB shareholders or ADR holders may therefore pur- chase or sell their ABB shares or ADRs at any time, including before a General Meeting regardless of the record date. The record date serves only to determine 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 Market Conduct in Securities and Derivatives Trading. A B B A N N U A L R E P O R T 2 0 2 1 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 69 — Independent external auditors Duration of the mandate and term of office of the auditors On March 25, 2021, shareholders at the Annual General Meeting of ABB Ltd approved the ap- pointment of KPMG AG (KPMG) to be the auditors of the Company for the 2021 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 responsible for the mandate, Hans-Dieter Krauss, began serving in this capacity in respect of the financial year ended December 31, 2018. Pursuant to ABB’s Articles of Incorporation (available at https://new.abb.com/about/ 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 2021, the FACC had 6 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 Company that could impair their independence. The FACC reviews the auditor engagement letter and the audit plan including discussion of scope, staffing, locations and general audit approach. The FACC also reviews and evaluates the auditors’ judgment 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 re- views a report 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; and • 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 proposed for election at the shareholders meeting. Audit and additional fees paid to the auditors The audit fees charged by KPMG for the legally prescribed audit amounted to $34.5 million in 2021. Audit services are defined as the standard audit work performed each fiscal year necessary to allow the auditors to issue an opinion on the consolidated financial statements of ABB and to issue an opinion on the local statutory financial statements. This classification may also include services that can be provided only by the auditors, such as pre-issuance reviews of quarterly financial results and comfort letters delivered to underwriters in connection with debt and equity offerings. Included in the 2021 audit fees were approxi- mately $4.7 million related to audits from 2020 and earlier, which were not agreed until after the Company had filed its annual report on Form 20-F with the SEC on February 26, 2021. In addition, KPMG charged $13.6 million for non-audit services during 2021. Non-audit services include primarily carve-out financial statement audits in relation to transactional activities, service organization attestation 70 A B B A N N U A L R E P O R T 2 0 2 1 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 procedures, agreed-upon procedure reports, accounting consultations, audits of pension and benefit plans, accounting advisory services and other attest services related to financial reporting that are not required by statute or regulation, income tax and indirect tax compliance services as well as tax advisory services. In accordance with the requirements of the U.S. Sarbanes Oxley Act of 2002 and rules issued by the SEC, we utilize a procedure for the review and pre approval of any services performed by KPMG. — Other governance information ABB Group organizational structure Employee participation programs ABB Ltd, Switzerland, is the ultimate parent company of the ABB Group. It is the sole share- holder of ABB Asea Brown Boveri Ltd which directly or indirectly owns the other companies in the ABB Group. The table in the appendix to this Corporate Governance Report sets forth, as of December 31, 2021, the name, place of incorpora- tion, ownership interest and share capital of the significant direct and indirect subsidiaries of ABB Ltd. In addition, ABB Ltd also owns 19.9 percent of Hitachi Energy Ltd. ABB’s operational group structure is described in the “Financial review of ABB Group” section of this Annual Report under “Operating and financial review and prospects – Organizational structure”. Management contracts There are no management contracts between ABB and companies or natural persons not belonging to the ABB Group. Change of control clauses Board members, Executive Committee 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 (LTIP) and the Management Incentive Plan (MIP) may be subject to accelerated vesting in the event of a change of control. From 2021, the rules for the LTIP have been amended to no longer provide for accelerated vesting upon a change in control. No further grants are made under the MIP. In order to align its employees’ interests with the business goals and financial results of the Com- pany, ABB operates a number of incentive plans, linked to ABB’s shares, such as the Employee Share Acquisition Plan, the Management Incentive Plan and the Long Term Incentive Plan. For a more detailed description of these incentive plans, please refer to “Note 18 – Share-based payment arrangements” to ABB’s Consolidated Financial Statements. General blackout periods for trading ABB securities During the 30 days prior to the day of publication of the ABB Group’s quarterly financial results, as well as on such day, the members of the Board of Directors and the Executive Committee as well as certain employees of ABB, as specified in ABB’s internal policies, are prohibited from trading in ABB Ltd securities and any related financial instruments. Governance differences from NYSE Standards According to the New York Stock Exchange’s corporate governance standards (the Standards), ABB is required to disclose significant ways in which its corporate governance practices differ from the Standards. ABB has reviewed the Stan- dards 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 A B B A N N U A L R E P O R T 2 0 2 1 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 71 General Meeting rather than by the audit committee or the board of directors. • The Standards require that all equity compensation plans and material revisions thereto be approved by the shareholders. Consistent with Swiss law such matters are decided by our Board. However, the shareholders decide about the creation of new share capital that can be used in connection with equity compensation plans. • Swiss law requires that the members of the compensation committee are elected by the shareholders rather than appointed by our Board. • Swiss law requires shareholders to approve the maximum aggregate Board compensation and the maximum aggregate Executive Committee compensation. — Information policy ABB, as a publicly traded company, is committed to communicating in a timely and consistent way to shareholders, potential investors, financial analysts, customers, suppliers, the media and other interested parties. ABB is required to dis- seminate material information pertaining to its businesses in a manner that complies with its obligations under the rules of the stock ex- changes where its shares are listed and traded. ABB publishes an annual report that provides audited financial statements and information about ABB including our business results, strat- egy, products and services, corporate governance and executive compensation. ABB also submits an annual report on Form 20-F to the Securities and Exchange Commission (SEC). In addition, ABB publishes its results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the stock exchanges on which its shares are listed and traded. Press releases relating to financial results and material events are also filed with the SEC on Form 6-K. An archive containing Annual Reports, Form 20-F reports, quarterly results releases and related presenta- tions can be found in the “Financial results and presentations” section at www.abb.com/inves- torrelations. The quarterly results press releases contain unaudited financial information prepared in accordance with or reconciled to U.S. GAAP. To subscribe to important press releases, please click on the “Contacts and Services” and choose “Subscribe to updates” at https://www.abb.com/ investorrelations. Ad-hoc notices can also be found in the press releases section at https:// www.abb.com/news. ABB’s official means of communication is the Swiss Official Gazette of Commerce (https:// www.shab.ch). The invitation to the Company’s Annual General Meeting is sent to registered shareholders by mail. Inquiries may also be made to ABB Investor Relations: Affolternstrasse 44 CH-8050 Zurich, Switzerland Telephone: +41 43 317 7111 E-Mail: investor.relations@ch.abb.com ABB’s website is: www.abb.com Further information on corporate governance The list below contains references to additional information concerning the corporate governance of ABB (available at https://new.abb.com/about/ corporate-governance). • Articles of Incorporation • ABB Ltd Board Governance Rules, which includes: – Governance Rules of the Finance, Audit and Compliance Committee – Governance Rules of the Governance and Nomination Committee – Governance Rules of the Compensation Committee – Related Party Transaction Policy • ABB Code of Conduct • 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. 72 A B B A N N U A L R E P O R T 2 0 2 1 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 Appendix – ABB Ltd’s significant subsidiaries Company name/location ABB S.A., Buenos Aires ABB Australia Pty Limited, Moorebank ABB Group Holdings Pty. Ltd., Moorebank ABB Group Investment Management Pty. Ltd., Moorebank ABB AG, Wiener Neudorf B&R Holding GmbH, Eggelsberg B&R Industrial Automation GmbH, Eggelsberg ABB N.V., Zaventem ABB Automacao LTDA, Soracaba ABB Eletrificacao LTDA, Soracaba ABB Bulgaria EOOD, Sofia ABB Electrification Canada ULC, Edmonton ABB Inc., Saint-Laurent ABB S.A., Santiago ABB (China) Investment Limited, Beijing ABB (China) Ltd., Beijing ABB Beijing Drive Systems Co. Ltd., Beijing ABB Beijing Switchgear Limited, Beijing ABB Electrical Machines Ltd., Shanghai ABB Engineering (Shanghai) Ltd., Shanghai ABB LV Installation Materials Co. Ltd. Beijing, Beijing ABB Shanghai Free Trade Zone Industrial Co., Ltd., Shanghai ABB Shanghai Motors 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 Beteiligungs- und Verwaltungsges. mbH, Mannheim ABB Stotz-Kontakt GmbH, Heidelberg B + R Industrie-Elektronik GmbH, Bad Homburg Busch-Jaeger Elektro GmbH, Lüdenscheid ABB Engineering Trading and Service Ltd., Budapest Industrial C&S Hungary Kft., Budapest ABB Global Business Services and Contracting India Private Limited, Bangalore ABB Global Industries and Services Private Limited, Bangalore ABB India Limited, Bangalore ABB S.p.A., Milan ABB K.K., Tokyo ABB Ltd., Seoul ABB Electrical Control Systems S. de R.L. de C.V., Monterrey ABB Mexico S.A. de C.V., San Luis Potosi Asea Brown Boveri S.A. de C.V., San Luis Potosi ABB B.V., Rotterdam ABB Finance B.V., Rotterdam ABB Holdings B.V., Rotterdam ABB AS, Fornebu ABB Electrification Norway AS, Skien ABB interest % Share capital in thousands Currency Country Argentina Australia Australia Australia Austria Austria Austria Belgium Brazil Brazil Bulgaria Canada Canada Chile China China China China China China China China China China China China Czech Republic Denmark Egypt Egypt Estonia Finland France France Germany Germany Germany Germany Germany Hungary Hungary 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 278,860 131,218 552,982 505,312 15,000 35 1,240 34,308 196,554 268,759 65,110 —(2) —(2) 100.00 5,484,348 100.00 100.00 90.00 60.00 100.00 100.00 85.70 100.00 75.00 100.00 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 95,000 140,000 5,000 16,500 14,400 40,000 17,100 6,500 11,217 15,800 29,500 6,200 400,000 100,000 353,479 166,000 1,663 10,003 25,778 45,921 167,500 61,355 7,500 358 1,535 436,281 3,000 India India India Italy 100.00 5,200,100 100.00 366,923 75.00 423,817 100.00 110,000 Japan 100.00 1,000,000 Korea, Republic of 100.00 23,670,000 Mexico Mexico Mexico Netherlands Netherlands Netherlands Norway Norway 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 315,134 683,418 667,686 9,200 20 363 134,550 60,450 ARS AUD AUD AUD EUR EUR EUR EUR BRL BRL BGN CAD CAD CLP USD USD USD USD USD USD USD CNY USD USD USD USD CZK DKK EGP USD EUR EUR EUR EUR EUR EUR EUR EUR EUR HUF HUF INR INR INR EUR JPY KRW MXN MXN MXN EUR EUR EUR NOK NOK A B B A N N U A L R E P O R T 2 0 2 1 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 73 PLN PLN PLN PLN USD RUB SAR SGD ZAR ZAR ZAR EUR SEK SEK SEK CHF CHF CHF CHF CHF CHF CHF Company name/location ABB Holding AS, Fornebu ABB Business Services Sp. z o.o., Warsaw ABB Industrial Solutions (Bielsko-Biala) Sp. z o.o., Bielsko-Biala ABB Industrial Solutions (Klodzko) Sp.z o.o., Klodzko ABB Sp. z o.o., Warsaw Industrial C&S of P.R. LLC, San Juan ABB Ltd., Moscow Country ABB interest % Share capital in thousands Currency Norway 100.00 240,000 NOK Poland Poland Poland Poland Puerto Rico Russian Federation 99.94 99.94 99.94 99.94 100.00 100.00 24 328,125 50 245,461 —(2) 23,000 ABB Electrical Industries Co. Ltd., Riyadh Saudi Arabia 65.00 181,000 ABB Pte. Ltd., Singapore ABB Holdings (Pty) Ltd., Modderfontein ABB Investments (Pty) Ltd, Modderfontein ABB South Africa (Pty) Ltd., Modderfontein Asea Brown Boveri S.A., Madrid ABB AB, Västerås ABB Electrification Sweden AB, Västerås ABB Norden Holding AB, Västerås ABB Asea Brown Boveri Ltd, Zurich ABB Canada EL Holding GmbH, Zurich ABB Capital AG, Zurich ABB Information Systems Ltd., Zurich ABB Investment Holding 2 GmbH, Zurich ABB Management Services Ltd., Zurich ABB Schweiz AG, Baden ABB Ltd., Taipei ABB Elektrik Sanayi A.S., Istanbul ABB Industries (L.L.C.), Dubai ABB Holdings Limited, Warrington ABB Limited, Warrington ABB Finance (USA) Inc., Wilmington, DE ABB Holdings Inc., Cary, NC ABB Inc., Cary, NC ABB Installation Products Inc, Memphis, TN ABB Motors and Mechanical Inc, Fort Smith, AR ABB Treasury Center (USA), Inc., Wilmington, DE Edison Holding Corporation, Wilmington, DE Industrial Connections & Solutions LLC, Cary, NC (1) Company consolidated as ABB exercises full management control. (2) Shares without par value. Singapore South Africa South Africa South Africa Spain Sweden Sweden Sweden 100.00 100.00 51.00 74.91 100.00 100.00 100.00 32,797 217,758 56,000 200,001 33,318 200,000 10,000 100.00 2,344,783 Switzerland 100.00 2,767,880 Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland 100.00 100.00 100.00 100.00 100.00 100.00 1,000 100 500 20 571 55,000 Taiwan (Chinese Taipei) 100.00 195,000 TWD Turkey 99.99 United Arab Emirates 49.00(1) United Kingdom United Kingdom United States United States United States United States United States United States United States United States 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 13,410 5,000 226,014 120,000 1 2 1 1 —(2) 1 —(2) —(2) TRY AED GBP GBP USD USD USD USD USD USD USD USD 03 Compensation report 76 Letter from the Chairman of the Compensation Committee 78 Compensation at a Glance 81 Compensation governance 83 Board compensation policy 84 Implementation of Board compensation policy 84 Shareholding of Board members 85 Executive Committee compensation policy 91 Implementation of EC compensation policy 99 Shareholding of EC members 99 Changes applicable to EC members 100 Votes on compensation at the 2022 AGM 102 Compensation tables and share ownership tables 111 Report of the statutory auditor 76 A B B A N N U A L R E P O R T 2 0 2 1 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 Compensation Committee, I am pleased to pres- ent the ABB Compensation Report for 2021. Our focus remains to ensure that the compensa- tion structure at ABB drives value creation for our shareholders, represents a motivating package for our executives, meets best-practice corporate governance standards and aligns with ABB’s sustainability strategy. Summary of changes for 2022 One of the main subjects of our analysis this year was how to best link our sustainability strategy - and its associated ambitious targets for 2030 - to the short- and long-term incentive plans of our Executive Committee (EC) members. This and other discussions resulted in a suite of changes which we believe will place ABB in line with leading market practices for executive compensation and reinforce our commitment towards sustainability and long-term value creation. In brief: Annual Incentive Plan (AIP) All EC members will have two or more KPIs relat- ing to environmental, social and corporate governance (ESG) matters in the personal compo- nent of their short-term incentive plan, and the existing mechanism of subjectively adjusting its outcome against an ESG “boundary condition” will be discontinued. Long-Term Incentive Plan (LTIP) • A Corporate ESG measure will be added to the LTIP of all EC members, with a material weighting of 20 percent, and the Company will set and prospectively disclose appropriate ESG target(s) on an annual basis. The target for the 2022 LTIP is set out in this Compensation Report; • There will be no vesting of the Total Shareholder Return (TSR) portion of our LTIP award below the median (50th percentile) of the peer group; • A dividend equivalent (to the dividends paid during the vesting period) payment will be introduced on the final number of awarded shares at the time of vesting. This will be largely offset by the reduction of other benefit-related costs; • The existing discretion to increase or decrease the target pool size applicable to EC members will be discontinued, as well as the discretion to increase or decrease individual target grants (except to give no grant in certain circumstances) and • The clawback and leaver provisions will be updated to provide greater clarity of the use of discretion of the Compensation Committee to adjust the formulaic outcomes of the achievement level against defined performance measures and targets. Policy and general terms and conditions New joiners to the EC will have an increased variable, performance oriented portion of com- pensation mix and, in turn, a reduced fixed portion, when compared to current EC members. The compensation structure for the EC, its pur- pose and links to our Company strategy, and associated performance measures, valid as of 2022, are set out in Exhibit 3 below. Compensation policy outcomes Board of Directors: the approved maximum aggregate compensation for the 2021-2022 term is lower than for the previous term, as a result of a reduction in the number of members of the Board (from eleven to ten). The aggregate Board compensation for the 2021-2022 term is in line with the amount approved at the 2021 Annual General Meeting (AGM). There has been no change to the individual Board fees since 2015 . Executive Committee: the aggregate EC total compensation was CHF 39.2 million in 2021, compared to CHF 35.4 million in 2020, as summa- rized in Exhibit 21 below and presented in detail in Exhibits 38 and 39. This difference in total com- pensation was driven by the increase in performance related variable pay elements. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 77 Three of the nine EC members in place in March 2021 received a salary adjustment, which ranged from 2.1 to 6.7 percent, for exceptional perfor- mance and/or market adjustment. This corresponded to an average 1.3 percent increase on annual aggregate base salaries for the EC members in post in March 2021, which was broadly consistent with the salary review budget for the wider Swiss employee population. The average award for the current EC members under the AIP for 2021 was 143.4 percent (out of a maximum 150 percent), compared to 72.4 percent in 2020. This significant outcome was driven by a strong performance from all businesses, leading to an overachievement re- lated to the majority of the 2021 AIP financial targets. In comparison, the 2020 performance levels were heavily influenced by the impact on the business from the COVID-19 pandemic, and no changes in targets were made. The average weighted achievement level of the 2018 LTIP, which vested in 2021, was 57.4 percent (out of a maximum 200 percent). There was no vesting under the EPS component, which was impacted by the COVID-19 pandemic that took place during the performance period, and for which no adjustments to targets were applied. Disclosure During the reporting year, the Compensation Committee listened carefully to inputs and sug- gestions to increase the clarity of disclosures in our Compensation Reports. As such, we intro- duced a new section “Compensation at a glance” at the beginning of the Compensation Report, where we provide a tabular overview of the EC compensation structure. We continue to structure the Compensation Report to clearly differentiate between our compensation policies and their implementation. It is also intended to progres- sively move from narrative and complex tables towards more simplified charts with enhanced disclosures. Governance During 2021, the CC also reviewed the Company’s gender pay policy and disclosure requirements and fully performed its regular activities, which include formulating the Compensation Report, preparing the “say-on-pay” vote for the AGM, reviewing the terms of departure for members of the EC, and recommending to the Board the performance measures and targets for the EC as well as the compensation of the Board, the CEO and the EC members. You will find further infor- mation on our activities and on ABB’s compensation system and governance in the following pages. At the AGM on March 24, 2022, you will be asked to vote on the maximum aggregate compensation for the Board for its 2022–2023 term and on the maximum aggregate compensation for the EC in 2023. It is important to note that the increase in maximum aggregate compensation for 2023, rather than any structural increase to EC compen- sation, is the result of the associated cost related to the 2020 LTIP vesting in 2023, influenced by the increased number of shares subject to vesting compared to prior years; the current, solid perfor- mance of the Company against its earnings per share targets and total shareholder return peer group; and the strong share price development since the time of grant, with a reference price of CHF 19.36. 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 our compensation system. On behalf of the Compensation Commit- tee, I thank you for your continued trust in ABB and for your consistently supportive feedback. Frederico Fleury Curado Chairman of the Compensation Committee Zurich, February 24, 2022 78 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T — Compensation report Compensation at a glance Board compensation Compensation for the 2021-2022 term of office The effective Board compensation for the 2021-2022 term of office (CHF 4,380,000) was within the maximum amount approved at the 2021 AGM (CHF 4,400,000). Exhibit 1: Board compensation (in CHF) for the 2021-2022 term of office Effective compensation Approved compensation amount 4,380,000 4,400,000 Shareholding of Board members All Board members held ABB shares at Decem- ber 31, 2021, worth at least 200 percent of their 2021 Board compensation. Exhibit 2: Board members shareholding (at December 31, 2021) in % of 2021 total compensation* Peter Voser Jacob Wallenberg Gunnar Brock David Constable Frederico Curado Lars Förberg Jennifer Xin-Zhe Li Geraldine Matchett David Meline Satish Pai at 1417% Board appointment April 2015 June 1999 March 2018 April 2015 April 2016 April 2017 March 2018 March 2018 April 2016 April 2016 0 100% 200% 300% 400% 500% 600% * Based on share price of CHF 26.59, the 2021 LTIP reference price, and shares held at December 31, 2021. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 79 Executive Committee (EC) compensation Compensation structure as from 2022 Exhibit 3: EC compensation structure as from 2022 Fixed compensation - base salary and benefits Variable compensation – short-term incentive (AIP) Variable compensation – long-term incentive (LTIP) Wealth at risk/ Share ownership Purpose and link to strategy Base salary compensates for the role and relevant experience; Benefits protect against risks. Facilitates attraction and retention of talented EC members Rewards annual Company, Business Area, functional and individual performance. Aligned with the Company’s Annual Performance Plan Operation Salary in cash, benefits in kind, and pension contribution Annual awards, payable in cash after a one-year performance period Opportunity level (as % of base salary) Based on scope of responsibilities, personal expe rience and skillset 0% Minimum Target Maximum 100% 150% Rewards the achievement of Company goals over a three-year period. Encourages creation of long-term, sustainable value for shareholders, and delivery of long-term strategic goals. Aligned with the Company’s Long- term Performance Plan Annual grants in shares which may vest after three years, subject to performance conditions CEO Minimum Target Maximum 0% 150% 300% Other current EC Members 0% Minimum Target Maximum 80–100% 160–200% Aligns individual’s personal wealth at risk directly to the ABB share price, and EC members’ interests with those of shareholders in order to maintain focus on ABB’s long-term success Individuals required to hold ABB shares CEO 500% (net of tax) Other EC Members 400% (net of tax) Exhibit 3: Structure of EC compensation as from 2022 Exhibit 3: Structure of EC compensation as from 2022 300% Other new EC Members* Minimum Target Maximum 150% 0% * higher LTIP opportunity to be largely offset by lower fixed cost benefits Performance indicators Changes to base salary take into account individual performance, CEO and future potential and Corporate external benchmarking Officers CEO and Corporate Officers Exposed to ABB share price LTIP measures LTIP measures 80% Group 80% Group financial results financial results 20% Individual results 20% Individual results 50% Average EPS 30% Relative TSR 20% ESG (CO2 emission reduction) 50% Average EPS 30% Relative TSR 20% ESG (CO2 emission reduction) Business Area Presidents Business Area Presidents 20% Group 20% Group financial results financial results 60% Business Area results 60% Business Area results 20% Individual results 20% Individual results Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Total EC compensation for 2021 The effective EC compensation for 2021 (CHF 39,157,046) is within the maximum amount approved at the 2020 AGM (CHF 39,500,000). CEO The larger portion of the CEO’s 2021 total com- pensation was delivered via variable Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level compensation (61 percent represented by short-term incentive and long-term incentive). For the other EC members, on an aggregate level, Other EC members variable compensation represented 54 percent of their 2021 compensation. The following chart shows the composition of the 2021 total compen- Variable Fixed Fixed 8,247,610 compensation compensation sation for the current EC, without consideration compensation 54% 39% 39% of former EC members. Fixed 28,514,999 compensation 46% Variable 8,247,610 compensation 61% Variable compensation 61% Variable 28,514,999 compensation 54% Other EC members 39,500,000 39,157,046 CEO Effective aggregate compensation Approved aggregate compensation Exhibit 4: EC compensation (in CHF) for 2021 Fixed 46% compensation 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incentive 31% Long-term incentive 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incentive 31% Long-term incentive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term incentive 22% Long-term incentive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term incentive 22% Long-term incentive Exhibit 16: Mix of target compensation for current and new EC members Exhibit 16: Mix of target compensation for current and new EC members Current Other EC Members New Other EC Members 25% Current Other EC Members 24% New Other EC Members 15% 25% 10% 15% 25% 10% 25% 25% 25% 9% 7% 24% 24% 9% 7% 36% 24% 36% Base salary Base salary Pension benefits Pension benefits Other benefits Other benefits Short-term incentive Short-term incentive Long-term incentive Long-term incentive Exhibit 22: Compensation mix Exhibit 22: Compensation mix CEO CEO 20% 9% 10% 20% 9% 30% 10% 30% 31% 31% Other 22% Other EC Members EC Members 12% 22% 12% 12% 32% 12% 32% 22% Base salary Base salary Pension benefits Pension benefits Other benefits Other benefits 22% Short-term incentive Short-term incentive Long-term incentive Long-term incentive Exhibit 3: Structure of EC compensation as from 2022 LTIP measures 50% Average EPS 30% Relative TSR 20% ESG (CO2 emission reduction) CEO and Corporate Officers 80% Group financial results 20% Individual results Business Area Presidents 20% Group financial results 60% Business Area results 20% Individual results 80 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level CEO Other EC members Variable compensation 61% 8,247,610 Fixed compensation 39% Variable compensation 54% 28,514,999 Fixed compensation 46% 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incentive 31% Long-term incentive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term incentive 22% Long-term incentive Exhibit 16: Mix of target compensation for current and new EC members Realized variable compensation in 2021 Realized variable compensation considers the AIP award and the LTIP award at the end of their respective performance cycles, reflecting actual AIP payment and LTIP vesting based on achieve- ment of the plan specific performance measures. 25% 10% 15% While the outcome of the 2021 short-term incen- tive was above the target for all current EC members (143.4 percent on average), the long-term incentive that vested in 2021 (2018 LTIP) remained substantially below the target, with a final vesting level of 57.4 percent of target. 25% 25% Exhibit 6: AIP 2021 outcome compared to target 24% 9% 7% 24% 36% Current Other EC Members New Other EC Members O E C 145% CHF 2,465,000 150% C E r e h t O * s r e b m e m Exhibit 22: Compensation mix 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 Target AIP award Realized AIP award Maximum AIP award 10% Target AIP award corresponds to 100% of base salary individual outcome ranges from 140% to 145% * CEO 20% 9% 30% 31% Other EC Members Realized total compensation in 2021 Considering the stated variable components above, the realized total compensation in 2021 22% 12% 12% 32% 22% was above the target total compensation for all current EC members, driven by strong perfor- mance in 2021. Exhibit 7: Long-term incentive: 2018 LTIP outcome compared to target Relative TSR (50% of total) Average EPS (50% of total) 0% LTIP Vesting (total) 100% 114.8% 57.4% 100% 200% 200% 200% 0% 25% 50% 75% 100% 125% 150% 175% 200% Target achievement level Realized achievement level Maximum achievement level Base salary Pension benefits Other benefits Short-term incentive Long-term incentive 143% CHF 9,017,900 150% Base salary Pension benefits Other benefits Short-term incentive Long-term incentive A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 81 Exhibit 8: Realized total compensation compared to target total compensation CHF 4,951,782 115% CHF 5,716,782 O E C C E r e h t O s r e b m e m CHF 22,903,903 108% CHF 24,846,171 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 Target total compensation Realized total compensation Further details related to the realized compensa- tion of each EC member and each compensation component are specified in Exhibit 44. Shareholding of EC members Three out of nine EC members have achieved or exceeded their share ownership requirement, while three members have been newly appointed to the EC in the last two years, and one member is leaving the Company. Note that EC members may not sell their shares (except to meet tax and social security costs) until they achieve the required shareholding level. Exhibit 9: EC shareholding compared to share ownership guideline* Björn Rosengren Timo Ihamuotila Carolina Granat Maria Varsellona Theodor Swedjemark Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod CEO shareholding requirement (500%) Other EC members shareholding requirement (400%) EC appointment March 2020 April 2017 January 2021 November 2019 August 2020 June 2016 October 2010 January 2017 April 2019 0% 100% 200% 300% 400% 500% 600% 700% Held shares Shareholding requirement *Based on share price of CHF 26.59, the 2021 LTIP reference price, and shares held at December 31, 2021. Compensation governance The Compensation Report is prepared in accor- dance with the Ordinance against Excessive Remuneration in Listed Stock Corporations, 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 shares are also listed, and the principles of the Swiss Code of Best Practice for Corporate Governance of economiesuisse. ABB’s Articles of Incorporation 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 of Directors and Executive Committee. They can be found on ABB’s Corporate Governance website new.abb. com/about/corporate-governance and are sum- marized below: • Compensation Committee (Articles 28 to 31): The Compensation Committee (CC) is composed of a minimum of three members of the Board and are elected individually by the shareholders at the Annual General Meeting for a period of one year. It 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 also available on ABB’s Corporate Governance website. 82 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T • 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. • 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 Exhibit 10: Authority levels in compensation matters 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. Authority levels in compensation matters The CC acts in an advisory capacity while the Board retains the decision authority on compen- sation 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 10. Shareholders also have a consultative vote on the prior year’s Com- pensation Report at the AGM and a binding vote on the maximum aggregate amount of compensa- tion of the Board for the following Board term and of the EC for the following financial year. CEO CC Board AGM Compensation policy including incentive plans Maximum aggregate compensation amount for the EC CEO compensation Individual compensation of other EC members Performance target setting and assessment of the CEO Performance target setting and assessment of other EC members Shareholding requirements for CEO and other EC members Maximum aggregate compensation amount for the Board Individual compensation of Board members Compensation Report Proposal Recommendation Approval Activities of the CC in 2021 The CC meets as often as business requires but at least four times a year. In 2021, the CC held seven meetings and performed the activities described in Exhibit 11. The CEO, the Chief Human Resources Officer (CHRO) and the Head of Performance and Reward also attend all or part of the CC meetings in an advisory capacity. The Chairman of the CC may decide to invite other executives upon con- sultation with the CEO, as appropriate. Executives do not attend the meetings or the parts of the meetings in which their own compensation and/ or performance are being discussed. Details on meeting attendance of the individual CC mem- bers (number of meetings held during 2021, their Consultative vote average duration, as well as the attendance of the individual members) are provided in the section titled “Board of Directors – Meetings and atten- dance” 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 advisors for compensation matters. PricewaterhouseCoopers (PwC) was mandated to provide consulting services related to executive compensation matters. Apart from its CC advisory role, PwC also provides human resources, tax and advisory services to ABB. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 83 Exhibit 11: CC activities during 2021 Strategy Review of Long-Term Incentive plan (LTIP) Review of link between Environmental, Social and Corporate Governance (ESG) and compensation EC Compensation Review of recommendations on individual compensation for EC members Review of the share ownership of EC members Review and approval of compensation for departing EC members Performance – relating to past performance cycle Assessment of short-term incentive awards for 2020 Assessment of achievement of performance targets for LTIP awards vesting in 2021 Performance – relating to forthcoming performance cycle Setting of Annual Incentive Plan (AIP) design and targets for 2021 Consideration of forecast AIP outcomes for 2021 Consideration of preliminary AIP targets for 2022 Setting of performance targets for LTIP grants in 2021 Consideration of forecast achievement against performance targets for unvested LTIP grants Compliance Review of CC Terms of Reference and annual plan Review of the gender pay policy and disclosure in Switzerland Review of feedback from Stakeholder Engagement meetings Regulatory and market updates Review of the Compensation Report for publication Preparation of maximum aggregate compensation for the Board to be submitted for AGM vote Preparation of maximum aggregate compensation for the EC to be submitted for AGM vote Pay equity ABB believes that a culture of diversity, inclusion and equal opportunity is critical to our business success and makes us stronger. This mindset is supported by our Diversity & Inclusion Strategy 2030, that clearly defines ABB plans to ensure an inclusive culture and equal treatment of everyone, regardless of gender, age, ethnic origin, sexual orientation, etc. Equal pay is a critical component of this strategy. In Switzerland, under the revised Swiss Federal Act on Gender Equality (GEA) that came into force last year, legal entities with more than 100 em- ployees are required to conduct an equal pay analysis. ABB has completed this analysis for all four required legal entities and the results of this analysis were verified by an external accounting firm, KPMG. As a result, the two in-scope legal entities forming part of ABB Switzerland (ABB Schweiz AG and ABB Power Protection SA, which now is part of ABB Schweiz AG), meet the equal pay requirements and are within the applicable thresholds for salary and overall compensation (salary plus actual bonus). At ABB Headquarters, ABB Asea Brown Boveri Ltd meets the equal pay requirements and is within the applicable thresholds for salary and overall compensation (salary plus actual bonus). The smaller legal entity in scope, ABB Management Services Ltd, meets the equal pay requirements for salary and slightly underachieves the parity level for overall compensation (salary plus actual bonus), as it has employees from different busi- nesses assigned with different bonus plans, leading to varying levels of bonus payments. In accordance with the Swiss law, ABB will continue to monitor these requirements. Board compensation policy The compensation policy for the members of the Board is designed to attract and retain experi- enced people to the Board of Directors. Compensation takes into account the responsibil- ities, time and effort required to fulfill their roles on the Board and its Committees, and is generally positioned at levels similar to other Swiss listed companies of comparable size and complexity. Compensation structure A fixed fee is payable for the Chairman, Vice-Chairman and members of the Board, and additional fees are payable for chairing or mem- bership of a Board Committee, except for the Chairman and Vice-Chairman. Board members are paid for their service over a 12-month period that starts with their election at the AGM. Payment of fees is made in semi-annual installments in arrears. 84 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Each fee is delivered in cash and shares, although Board members may elect to receive all their fees in shares. The number of shares delivered is calculated prior to each semi-annual payment by dividing the monetary amount to which the Board members are entitled by the average closing price of the ABB share over a predefined 30-day period. The shares are subject to a three-year restriction period during which they cannot be sold, trans- ferred or pledged. Any restricted shares are unblocked when the Board member leaves the Board. Implementation of Board compensation policy Board fees by role As mentioned above, the levels and mix of com- pensation of Board members are regularly compared against the compensation of non-executive Board members from a cross- section of publicly traded companies in Switzer- land that are part of the Swiss Market Index (i.e., Adecco, Alcon, Geberit, Givaudan, Holcim, Lonza, Richemont, SGS, Sika, Swisscom, Swiss Life, Zurich Insurance). Such a review was last under- taken in 2020, and there was no adjustment made to Board fees for the term of office from the 2021 AGM to the 2022 AGM, as set out in Exhibit 12 below. Exhibit 12: Current Board 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 additional committee fees for their roles on the GNC. (2) CC: Compensation Committee, FACC: Finance, Audit and Compliance Committee, GNC: Governance and Nomination Committee. Total Board compensation The compensation paid to the Board members for the calendar year 2021 and for the term of office from the 2021 AGM to the 2022 AGM are disclosed in Exhibit 13 below and in Exhibits 35 and 36, respectively, in the section “Compensation tables and share ownership tables”. At the 2021 AGM, the shareholders approved a maximum aggregate compensation amount of CHF 4.40 million for the 2021-2022 Board term. This amount was lower than the approved amount for the previous Board term, reflecting the reduction of the total number of members of the Board from eleven to ten. The Board compensation to be paid is CHF 4.38 mil- lion and is therefore within the amount approved by the shareholders. The Board compensation paid for the previous 2020-2021 term of office was below the amount approved by the share- holders due to the voluntary donation of 10 percent of fees for a six-month period during 2020 to fight the impacts of the COVID-19 pandemic. Exhibit 13: Board compensation (in CHF) Board term Board of Directors 2021–2022 2020–2021 Number of members 10 11 Total compensation 4,380,000 4,436,500 Maximum aggregate compensation amount approved at previous AGM 4,400,000 4,700,000 Compensation of former Board members In 2021, no payment was made to any former Board member. Compensation for services rendered In 2021, ABB did not pay any fees or compensation to the members of the Board for services ren- dered to ABB other than those disclosed in this Compensation Report. Shareholding of Board members The members of the Board collectively owned less than 1 percent of ABB’s total shares outstanding at December 31, 2021. Exhibit 37 in the section “Compensation tables and share ownership tables” shows the number of ABB shares held by each Board member at Decem- ber 31, 2021 and 2020. 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. Shares delivered to Board members as part of their compensation are blocked for a period of three years. Exhibit 14 shows the wealth at risk for each Board member, comparing the value of held shares at December 31, 2021 with the total com- pensation for the 2021-2022 term of office. At December 31, 2021, all Board members held ABB shares worth at least 200 percent of their 2021 total compensation. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 85 Exhibit 14: Board shareholding (at December 31, 2021) in % of 2021 total compensation* Peter Voser Jacob Wallenberg Gunnar Brock David Constable Frederico Curado Lars Förberg Jennifer Xin-Zhe Li Geraldine Matchett David Meline Satish Pai at 1417% 0% 100% 200% 300% 400% 500% 600% * Based on share price of CHF 26.59, the 2021 LTIP reference price, and shares held at December 31, 2021. Executive Committee compensation policy The EC compensation policy reflects ABB’s com- mitment to attract, motivate and retain people with the talent necessary to strengthen its posi- tion as a leading global technology company. Compensation structure The compensation structure is designed to be competitive, based on performance, and to encourage executives to deliver outstanding results and create sustainable shareholder value without taking excessive risks. The EC compensa- tion framework therefore balances fixed and variable compensation. Variable compensation is provided through short-term and long-term incentives based on strategic, financial and ESG objectives, recognizing Group, Business Area and Corporate Function performance as well as indi- vidual performance. This structure is linked to our strategy and is illustrated in Exhibit 15. A significant portion of total compensation depends on variable pay components, which require the achievement of challenging perfor- mance targets, in alignment with ABB Annual and Long-Term Performance Plans. The target AIP award is defined as a percentage of base salary, currently 100 percent for all EC members. There is no award under the AIP if performance is below thresholds on all financial performance measures. When performance exceeds targets, the maximum award is capped at 150 percent of the targeted amount. The target LTIP grant size is defined as a percent- age of base salary, currently 150 percent for the CEO and 80 to 100 percent for all other EC mem- bers. There will be no award under the LTIP if performance is below thresholds for all applicable measures. When performance exceeds targets, the maximum award is capped at 200 percent of the conditional grant. 86 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 15: EC compensation structure as from 2022 Fixed compensation - base salary and benefits Variable compensation – short-term incentive (AIP) Variable compensation – long-term incentive (LTIP) Wealth at risk/ Share ownership Purpose and link to strategy Base salary compensates for the role and relevant experience; Benefits protect against risks. Facilitates attraction and retention of talented EC members Rewards annual Company, Business Area, functional and individual performance. Aligned with the Company’s Annual Performance Plan Operation Salary in cash, benefits in kind, and pension contribution Annual awards, payable in cash after a one-year performance period Opportunity level (as % of base salary) Based on scope of responsibilities, personal expe rience and skillset 0% Minimum Target Maximum 100% 150% Rewards the achievement of Company goals over a three-year period. Encourages creation of long-term, sustainable value for shareholders, and delivery of long-term strategic goals. Aligned with the Company’s Long- term Performance Plan Annual grants in shares which may vest after three years, subject to performance conditions CEO Minimum Target Maximum 0% 150% 300% Other current EC Members 0% Minimum Target Maximum 80–100% 160–200% Aligns individual’s personal wealth at risk directly to the ABB share price, and EC members’ interests with those of shareholders in order to maintain focus on ABB’s long-term success Individuals required to hold ABB shares CEO 500% (net of tax) Other EC Members 400% (net of tax) Exhibit 3: Structure of EC compensation as from 2022 Exhibit 3: Structure of EC compensation as from 2022 300% Other new EC Members* Minimum Target Maximum 150% 0% * higher LTIP opportunity to be largely offset by lower fixed cost benefits Performance indicators Changes to base salary take into account individual performance, CEO and future potential and Corporate external benchmarking Officers CEO and Corporate Officers Exposed to ABB share price LTIP measures LTIP measures 80% Group 80% Group financial results financial results 20% Individual results 20% Individual results 50% Average EPS 30% Relative TSR 20% ESG (CO2 emission reduction) 50% Average EPS 30% Relative TSR 20% ESG (CO2 emission reduction) Business Area Presidents Business Area Presidents 20% Group 20% Group financial results financial results 60% Business Area results 60% Business Area results 20% Individual results 20% Individual results Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level From 2022, the mix of fixed and variable target compensation elements for new EC members will be adjusted to provide a greater emphasis on variable pay. This will be achieved by increasing the LTIP grant size from 100 percent to 150 per- CEO cent of base salary, while reducing the level of pension contributions and other benefits. The reduction of pension contributions and other Variable 8,247,610 compensation 61% Variable compensation 61% CEO benefits substantially offsets the increase of the LTIP component, and represents a shift from guaranteed pay elements to pay at risk. Fixed compensation for new EC members will represent 40 percent of their target total compensation, in Other EC members comparison to 50 percent for current EC mem- bers. Exhibit 16 below illustrates the changes for new EC members in more detail. Fixed 8,247,610 compensation 39% Variable Fixed compensation compensation 54% 39% Variable 28,514,999 compensation 54% Other EC members Fixed 28,514,999 compensation 46% Fixed compensation 46% 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incentive 31% Long-term incentive 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incentive 31% Long-term incentive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term incentive 22% Long-term incentive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term incentive 22% Long-term incentive Exhibit 16: Mix of target compensation for current and new EC members Exhibit 16: Mix of target compensation for current and new EC members Current Other EC Members New Other EC Members 25% Current Other EC Members 24% New Other EC Members 15% 25% 10% 15% 25% 10% 25% 25% 25% 9% 7% 24% 24% 9% 7% 36% 24% 36% Base salary Base salary Pension benefits Pension benefits Other benefits Other benefits Short-term incentive Short-term incentive Long-term incentive Long-term incentive Exhibit 22: Compensation mix Exhibit 22: Compensation mix CEO CEO 20% 9% 10% 20% 9% 30% 10% 30% 31% 31% Other 22% Other EC Members EC Members 12% 22% 12% 12% 32% 12% 32% 22% Base salary Base salary Pension benefits Pension benefits Other benefits Other benefits 22% Short-term incentive Short-term incentive Long-term incentive Long-term incentive Exhibit 3: Structure of EC compensation as from 2022 LTIP measures 50% Average EPS 30% Relative TSR 20% ESG (CO2 emission reduction) CEO and Corporate Officers 80% Group financial results 20% Individual results Business Area Presidents 20% Group financial results 60% Business Area results 20% Individual results Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level CEO Other EC members Variable compensation 61% 8,247,610 compensation 28,514,999 compensation Fixed 39% Variable compensation 54% Fixed 46% 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incentive 31% Long-term incentive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term incentive 22% Long-term incentive A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 87 Exhibit 16: Mix of target compensation for current and new EC members Exhibit 16: Mix of target compensation for current and new EC members Current Other EC Members New Other EC Members 25% 15% 10% 25% 25% 24% 9% 7% 24% 36% Base salary Pension benefits Other benefits Short-term incentive Long-term incentive Competitive positioning of compensation Exhibit 22: Compensation mix The Board considers competitive market data when setting the compensation policy for the EC. It is also one of several factors in positioning the target compensation for individual EC members which include: The CC conducted a comprehensive review of its approach to competitive benchmarking in 2020, which led to the creation of three benchmarking peer groups, designed to match the size, scope and complexity of ABB, and exclude companies from the financial services sector. CEO • market value of the role 20% 9% 10% 30% (compensation benchmarking); 12% 22% 12% • individual profile of the EC member in terms of Other EC Members experience and skills; • personal performance and potential. 32% 31% 22% The use of these peer groups depends on the Base salary Pension benefits nature of the role and the source of relevance. For Other benefits example, a stronger emphasis is placed on the Short-term incentive Global Industry peer group for operational roles Long-term incentive and in compensation design, and on the Pan-European Market peer group for functional roles. In all cases, the other two peer groups are used to stress test the findings of the primary peer group (see the summary in Exhibit 17 below). Exhibit 17: Compensation benchmarking peer groups Peer Group Composition Rationale Global Industry A tailored group of 16 global industry peer compa- nies(1), matching the scale and complexity of ABB Focus for Business Area roles and benchmark- ing compensation design Pan-European Market A panel of 50 cross-industry European companies(2), Swiss Market matching the scale and complexity of ABB A panel of 16 SMI and SMIM companies(3), matching the scale and complexity of ABB Focus for Corporate roles; continuity and stability of data points Swiss listing and location of headquarters (1) AB SKF, Alstom, Airbus, Atlas Copco, Denso, Eaton, Emerson Electric, Honeywell, Mitsubishi Electric, Mitsubishi Heavy Industries, Schneider Electric, Schindler, Siemens, Thermo Fisher Scientific, Toshiba and Traton. (2) AB InBev, Adidas, Air Liquide, Associated British Foods, AstraZeneca, BAE Systems, Bayer, Bouygues, British American Tobacco, Compass Group, Continental, CRH, Danone, Endesa, EssilorLuxottica, Fresenius, Fresenius Medical Care, GlaxoSmithKline, HeidelbergCement, Heineken, Henkel, Hennes & Mauritz, Iberdrola, Imperial Brands, Industria de Diseno Textil, Jeronimo Martins SGPS, Kuehne & Nagel, Holcim, Linde, L’Oreal, Michelin, National Grid, Naturgy Energy Group, Nokia, Novartis, Novo Nordisk, OMV, Philips, Rio Tinto, Safran, Saint Gobain, Sanofi, SAP, Schneider Electric, Telefonaktiebolaget LM Ericsson, Thales, Umicore, Veolia Environment, Vinci and Vodafone. (3) SMI: Swiss Market Index; SMIM: Swiss Market Index MID; Companies include: Adecco, Geberit, Givaudan, Glencore, Kuehne & Nagel, Holcim, Nestle, Novartis, Richemont, Roche, Schindler, SGS, Sika, STMicroelectronics, Swatch and Swisscom. Since benchmark reviews are performed every other year, the comparison of ABB to its compen- sation benchmarking peer groups, shown in Exhibit 18 below is based on the last review in 2020. This data shows that ABB is typically posi- tioned at the median of key comparator indicators (market capitalization, revenues, number of employees) against the Global Industry and Pan-European Market peer groups, and at the upper quartile of the Swiss Market peer group. It is the intention to position target compensa- tion for individual EC members between median and upper quartile of the relevant peer group(s) considering the other factors referenced above (e.g., the EC member’s skills, experience, perfor- mance, potential). 88 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 18: Comparison of ABB to compensation benchmarking peer groups(1) Market capitali- zation(2)(3)(4) Revenues(2)(4)(5) Number of employees(5)(6) ABB 45.6 27.0 110,000 Global Industry Upper Quartile Median Lower Quartile Pan-European Market Upper Quartile Median Lower Quartile Swiss Market Upper Quartile Median Lower Quartile 54.6 31.1 12.4 68.9 37.4 18.2 31.6 25.9 18.0 37.8 29.2 16.5 38.4 26.9 22.2 31.7 13.4 8.2 137,828 94,500 72,827 126,994 95,331 61,450 93,930 55,930 31,785 (1) Data sources for market capitalization, revenues and number of employees are Thomson Reuters or Annual Reports. (2) Market capitalization and revenues are in CHF millions. (3) Market capitalization is averaged over a period of three months (May 3, 2020 until August 3, 2020). (4) Amounts have been translated to CHF using the one-year average rate from July 1, 2019 until June 30, 2020. (5) Revenues and number of employees as per last financial year prior to October 2020. (6) Number of employees in full-time equivalent (FTE) unless FTE information was not available, then in total number of employees. Compensation elements Exhibit 15 above sets out the purpose and link to strategy, the operation, the opportunity level and the performance measures. In addition, this section provides further details for each compen- sation element. Fixed compensation - base salary and benefits Purpose and link to strategy Base salary compensates for the role and relevant experience; Benefits protect against risks, and facilitate the attraction and retention of talented EC members. Base salary is paid in cash. Benefits consist primarily of retirement, insurance and healthcare plans that are designed to provide a reasonable level of support for the employees and their dependants in case of retirement, disability or death. Opportunity levels Base salary is set with reference to the scope of responsibilities, personal experience and skills and competitive market data. Benefit plans are set in line with the local com- petitive and legal environment and are, at a minimum, in accordance with the legal require- ments of the respective country. The monetary value of base salary and benefits are disclosed in Exhibit 38 “EC compensation in 2021”. Performance measures and weighting Base salary is adjusted considering the factors set out under opportunity levels above, the execu- tive’s performance as well as their future potential. Variable compensation - Annual Incentive Plan (AIP) Purpose and link to strategy The AIP is designed to reward EC members for the Group’s results, the results of their Business Area or Corporate Function and their individual perfor- mance over a time horizon of one year , and is aligned with the Annual Performance Plan ap- proved by the Board. Opportunity levels The AIP opportunity levels for the EC are 100 per- cent of base salary at target with a maximum opportunity of 150 percent. Performance measures and weighting The AIP structure is designed to incentivize operational delivery and underpin our perfor- mance culture. As such, it is focused on key priorities, with a maximum of five measures. • A common Group measure with a 20 to 25 percent weighting. • Up to three Corporate or Business Area measures, with a 55 to 60 percent weighting. • An individual measure with a 20 percent weighting. This personal component is informed by up to three key performance indicators (KPIs) which may include a combination of quantitative and qualitative goals. – From 2022, at least two of these KPIs will relate to ESG, e.g., CO2 emissions, safety or female leader targets. – Business Area Presidents will continue have a safety KPI, and an environment KPI (CO2 emis- sions) will be introduced. – Corporate Officers will have a social KPI (gender representation on management level) or a governance KPI (internal controls), and an environment KPI (CO2 emissions). – The final outcome against this individual mea- sure will be a discretionary judgment based on the combined performance against all per- sonal KPIs. • The CC/Board has a discretionary authority to adjust the results and/or the award. This specifically includes a downwards adjustment based on safety performance, including fatalities. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 89 A summary of the composition and total weight- ing of the measures for all EC members is set out in Exhibit 19. Variable compensation - Long-Term Incentive Plan (LTIP) Exhibit 19: Composition and weighting of short- term incentive measures for EC members CEO and Corporate Officers(¹) Business Area Presidents Common Group measure Other Group measures 25% Up to three measures 55% Business Area measures n.a. 20% n.a. Up to three measures 60% Individual measure Function-specific 20% Business-specific 20% Total 100% 100% (1) Corporate Officers include: Chief Financial Officer, Chief Human Resources Officer, General Counsel and Chief Communications and Sustainability Officer. Other design features For each performance measure, a target will be set corresponding to the expected level of perfor- mance that will generate a target (100 percent) award. For all except the individual mea- sure, a minimum level of performance, below which there is no award (threshold) and a maxi- mum level of performance, above which the award is capped at 150 percent of the target (cap), will also be defined. For quantitative Group, Business Area and Functional measures, the award percentage-achievements between threshold and target, as well as between target and cap are determined by linear interpolations between these points. The outcomes of financial AIP measures are subject to appropriate discretionary upward or downward adjustments for non-operational items and other adjustment principles agreed with the Board. In 2021, progress against defined ESG target(s) was a “boundary condition” for making AIP awards. Under this approach, the Board agreed to review whether the Company had made sufficient progress at the end of the year to justify making the indicated AIP award. If, in the opinion of the Board, insufficient progress had been made, the AIP award might have been reduced on a discre- tionary basis. Following feedback from stakeholders, this practice will be discontinued in 2022 and replaced with the approach to ESG in the AIP individual measure described above, and in the LTIP described below. Purpose and link to strategy Rewards the achievement of predefined perfor- mance goals over a three year period. Encourages the creation of long-term, sustainable share- holder value creation and is aligned with the Company’s Long-Term Performance Plan ap- proved by the Board. Opportunity levels The LTIP opportunity levels for the EC are 80 to 100 percent of base salary at target, with a maxi- mum opportunity of 160 to 200 percent. For new EC members from 2022, the opportunity levels will be 150 percent and 300 percent, respectively. This change, to be mostly offset by a reduction in pension and other benefits costs, is taking into account historical LTIP vesting levels and the risks associated in moving from fixed to variable pay. For the CEO the opportunity levels are 150 per- cent of base salary at target, with a maximum opportunity of 300 percent. Performance measures and weighting The LTIP will have, from 2022, three performance measures: Total Shareholder Return (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 of the shares and ending three years later. The evaluation is performed by an independent third party. • For grants from 2022, the award curve for the TSR measure will be adjusted to become more challenging. The threshold point for awards, for which vesting starts, will move from the 25th percentile to the 50th percentile (P50) of the TSR peer group, i.e., there will be no award for performance below P50. • Vesting for P50 achievement remains at 100 percent of target, and vesting for a 75th percentile (P75) achievement level remains at 200 percent of target (capped). There will be a linear vesting for an achievement between P50 and P75 (100 to 200 percent of target) 90 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Earnings Per Share (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 sum of 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 tax, 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 the long-term strategic plan, calibrated against 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 on book value) and translates such expected returns over a three-year period into EPS targets. • Adjustments to the outcome of the EPS may be considered for items which are not part or the result of the normal course of business operation and/or which were not considered, either by way of inclusion or exclusion, for the target-setting of a specific LTIP launch. Only the net impact of such adjustments over the vesting period of the respective LTIP grant will be considered. ESG • The Board will determine on an annual basis LTIP specific ESG measure(s) and related targets. • For 2022, the ESG measure will be the Company’s scope 1&2 CO2 emission reduction at the end of the three-year performance period (2022-2024), compared to the 2019 baseline. • Appropriate threshold (zero), target (100 percent) and maximum (200 percent) award points are reviewed and approved by the CC on an annual basis. Exhibit 20: ESG target points for the 2022 LTIP Measure Weigh- ting Thresh- old Target Maximum ABB scope 1&2 CO2 emission reduction compared to 2019 baseline 20% 60% 70% 80% At or below threshold point: no award; At target point: 100 percent award; At or above maximum point: capped at 200 percent award; Linear award interpolations between points. The relative weighting of measures for the LTIP is as follows: • EPS measure: 50 percent • TSR measure: 30 percent • ESG measure: 20 percent Other design features The number of shares to be granted is determined by dividing the grant 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 achieve- ment of performance conditions, defined prior to grant. The actual settlement of shares awarded will vary between zero and 200 percent of the shares granted, according to achievement against the performance measures stated above. Default settlement of the final LTIP award is 100 percent in shares, and an automatic sell-to-cover is in place for employees who are subject to withholding taxes. LTIP shares are subject to malus and clawback rules, which include illegal activities and any financial misstatement that have a material impact on any Group company. This means that the Board may decide not to award any unsettled or unvested incentive compensation (malus), or may seek to recover long-term incentive compen- sation that has been settled in the past (clawback). The CC also has the ability to suspend the pay- ment 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). The approved ESG target points for the 2022 LTIP, which are designed to incentivize material prog- ress towards our 2030 sustainability strategy commitments, are illustrated in Exhibit 20 below. For grants from 2021, there is no automatic accelerated vesting of awards in the event of a change of control. For LTIP grants as of 2022 participants will also be entitled to receive a cash amount on each vested award share that is equal to the total dividends A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 91 per share paid by ABB on the ABB Ltd share be- tween the grant date and the delivery date of the vested award (a “dividend equivalent payment”). This will be offset by reducing other benefit-related costs by a similar level over the life of the share grant. CC discretion will be extended to allow for discre- tionary adjustments to the formulaic LTIP vesting outcome. Clawback will be extended to include material reputational damage and will apply for a period of up to five years following the originally scheduled plan specific vesting date. Total wealth at risk / Share ownership Purpose and link to strategy To align EC members’ personal wealth directly with the interests of shareholders in order to maintain focus on the long-term success of the Company. Share ownership program EC members are required to retain all shares vested from the Company’s LTIP and any other share-based compensation until their share ownership requirement is met. In circumstances where there is a withholding tax obligation, the number of shares received will be considered to be the number of shares vested minus the shares sold under the default sell-to-cover facility. The share ownership requirement is equivalent to a multiple of the EC member’s annual base salary, net of tax (see Exhibit 15). These shareholding requirements are aligned with market practice and result in a wealth at risk for each EC member which is aligned with share- holder interests. Only vested shares owned by an EC member and their spouse count for the comparison of the actual share ownership against the share owner- ship requirement. Vested but unexercised and unvested stock options under the Management Incentive Plan (MIP) 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. Notice period, severance provisions and non- competition clauses Employment contracts for EC members in- clude a notice period of 12 months, during which they are entitled to their annual base salary, benefits and short-term incentive. 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 other 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 cash remuneration (comprising of base salary, short-term incentive and benefits). Implementation of EC compensation policy Overview EC members received total compensation of CHF 39.2 million in 2021 compared with CHF 35.4 million in 2020, as summarized in Ex- hibit 21 below and presented in detail in Exhibits 38 and 39. Exhibit 21: Total compensation of EC members (monetary values in CHF)(1) Number of active EC members Base salaries Pension benefits Other benefits Calendar year 2021 9 2020 9 8,713,406 8,413,363 4,795,259 4,450,785 4,819,803 6,001,823 Total fixed compensation 18,328,468 18,865,971 Short-term incentives 12,144,280 6,782,229 Long-term incentives (fair value at grant) 8,684,298 6,491,137 Replacement share grants n.a. 3,308,781 Total variable compensation 20,828,578 16,582,147 Total compensation 39,157,046 35,448,118 Maximum aggregate compensation approved at AGM 39,500,000 55,500,000 (1) For an overview of compensation by individual and component, please refer to Exhibits 38 and 39 in section “Compensation tables and share ownership tables” below. An overview of 2021 realized compensation by individual is provided in Exhibit 44 in the same section. The total compensation for the EC in 2021 increased by 10.5 percent compared to 2020. Context of the change in costs, in addition to the over-achievement against the challenging short-term incentive targets, includes: • The COVID-19 pandemic, which negatively impacted achievement under the 2020 short-term incentive - when targets were not adjusted - compared to the outperformance against targets in 2021. • In addition, the target short-term incentive was decreased in 2020 to reflect the voluntary 10 percent donation of the EC members’ salary to fight the impact of the COVID-19 pandemic Exhibit 3: Structure of EC compensation as from 2022 LTIP measures 50% Average EPS 30% Relative TSR 20% ESG (CO2 emission reduction) CEO and Corporate Officers 80% Group financial results 20% Individual results Business Area Presidents 20% Group financial results 60% Business Area results 20% Individual results 92 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level CEO 8,247,610 Fixed compensation 39% Variable compensation 61% and a pro-rata outcome was applied for those EC members who joined the EC during the year. • An increase in base salary resulting from a) the omission of the voluntary 10 percent donation of the EC members’ salary to fight the impact of the COVID-19 pandemic for a six-month period during 2020, b) that all EC members provided services for the full year during 2021 and c) the increases in salary for three EC members. 20% Base salary 9% Pension benefits • An increase in pension contributions is solely 10% Other benefits 30% Short-term incentive 31% Long-term incentive due to changes in the constitution of the Executive Committee. The contribution rates in the pension plan have not changed for several years, and only age driven adjustments were applied. • A reduction in other benefits costs given that 2020 included costs related to four former EC members, including the interim CEO, while in 2021 the costs related to only one former EC member. • The increase of the grant fair value for the Current Other EC Members 2021 LTIP grant compared to the 2020 LTIP 24% grant, is mainly driven by the price of the ABB share at the day of grant. New Other EC Members 9% 7% 24% At the 2020 AGM, the shareholders ap- proved a maximum aggregate compensation amount of CHF 39.5 million for the EC for the year 2021. The EC total compensation for 2021 amounted to CHF 39.2 million and is therefore Exhibit 22: Compensation mix Exhibit 22: Compensation mix Other EC members within the approved amount. See Exhibit 21 above. Compensation mix Variable compensation 54% 28,514,999 Fixed compensation 46% The ratio of fixed to variable components in any given year depends on the performance of the Company and individual EC members against predefined performance objectives. 22% Base salary 12% Pension benefits 12% Other benefits In 2021, the variable compensation of the CEO 32% Short-term incentive 22% Long-term incentive was 61 percent of his total annual compensation (previous year: 51 percent). For the other EC members, the variable compensation was 54 per- cent on average (previous year: 41 percent). To allow an appropriate year-on-year comparison, the calculation of the total annual compensation excludes the value of any one-time replacement grant to compensate for foregone compensation with the previous employer. 36% Exhibit 22 below shows the composition of the total annual compensation in 2021 for the CEO and for other current EC members on an aggre- gate level, specifying the split of its five compensation components. Base salary Pension benefits Other benefits Short-term incentive Long-term incentive Note that compensation paid in 2021 for former EC members is not included in Exhibit 22. This can be found in Exhibit 38. Exhibit 16: Mix of target compensation for current and new EC members 25% 15% 10% 25% 25% CEO Other EC Members 20% 9% 10% 30% 31% 22% 12% 12% 32% 22% Base salary Pension benefits Other benefits Short-term incentive Long-term incentive Compensation elements – 2021 highlights Base salary Three of the nine EC members in place in March 2021 received a salary adjustment, which ranged from 2.1 to 6.7 percent, reflecting exceptional performance and closer market alignment. The base salary of Timo Ihamuotila was increased by 2.1 percent to CHF 970,000, Tarak Mehta by 3.3 percent to CHF 930,000, and Morten Wierod by 6.7 percent to CHF 800,000. Considering that the other six current EC mem- bers had no salary adjustments, this corresponded to a 1.3 percent increase on annual base salaries for the EC members post March 2021, which was broadly consistent with the salary review budget for the wider Swiss em- ployee population. Annual Incentive Plan (AIP) - design Exhibit 23 below shows the composition and weighting of the measures applied in 2021 for all EC members under their AIP, specified by their roles. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 93 Exhibit 23: Composition and weighting of 2021 short-term incentive measures for EC members Focus of measure Common Group measure Bottom line earnings Other Group measures Profitability and capital efficiency Cash generation Bottom line output Business Area measures Bottom line earnings CEO and Corporate Officers(1) Op EBITA margin 25% ROCE margin 25% Free Cash Flow 20% Productivity growth 10% Cash generation Bottom line profit Top line input Bottom line output Safety, Cost discipline, Strategy implementation Safety, Acquisi- tions, Digitalization Function- specific 20% Individual measure Total 100% : s d r a w a e v i t n e c n i m r e t - t r o h s r o f n o i t i d n o c y r a d n u o b G S E n o i s s i m e 2 & 1 e p o c s t n e l a v i u q e ₂ O C f o n o i t c u d e R President Electrification President Motion Op EBITA margin 20% Op EBITA margin 20% President Process Automation Op EBITA margin 20% President Robotics & Discrete Automation Op EBITA margin 20% Op EBITA margin 30% Op EBITA margin 30% Op EBITA margin 30% Op Free Cash Flow 20% Op EBITA margin 30% Op Free Cash Flow 20% Gross Profit on Orders 20% Orders received 20% Productivity growth 10% Productivity growth 10% Productivity growth 10% Productivity growth 10% Business- specific 20% 100% Business- specific 20% 100% Business- specific 20% 100% Business- specific 20% 100% (1) Corporate Officers include: Chief Financial Officer, Chief Human Resources Officer, General Counsel and Chief Communications and Sustainability Officer. Under the AIP, all members of the EC have a common Group measure, with a 20 to 25 percent weighting. In 2021, this was Group Operational EBITA margin, applied to create a greater focus on profitability. In addition to the common Group measure, the CEO and the Corporate Officers shared the same Group measures, including ROCE margin, Free Cash Flow and Productivity growth, with a total weighting of 55 percent. For Business Area Presidents, up to three mea- sures were tailored to business imperatives, with a total weighting of 60 percent. While all Business Area Presidents shared two measures, (Operational EBITA margin and Productivity growth with 30 percent and 10 percent weighting, respectively), the third measure varied, including Operational Free Cash Flow, Gross Profit on Orders and Orders received, for the remaining 20 percent. Definitions of the quantitative measures for EC members are set out in Exhibit 24, below. All EC members also had an individual measure with a 20 percent weighting. This personal com- ponent was informed by up to three KPIs, which included a combination of quantitative and qualitative objectives. The final outcome against the individual measure was based on a discretion- ary judgment of the combined performance against all three KPIs. • In 2021, all the EC had a common safety KPI – namely the percentage improvement in the Lost Time Incident Frequency Rate (LTIFR), underpinned by sustainability observation tours. For the CEO and the Corporate Officers, this related to Group level and for Business Areas Presidents to their respective Business Areas. • For the CEO and Corporate Officers, the other KPIs were linked to the Group or Function costs, to the strategy implementation on Group or Function level, or to internal controls. • For the Business Area Presidents, the other KPIs were business growth, digitalization or market positioning targets. 94 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 24: Definition of quantitative objectives, applied in 2021 Objective Description Operational EBITA margin (%) Operational EBITA, which is Operational earnings before interest, tax and amortization, as a percentage of Operational revenues, which is total revenues adjusted for foreign exchange/ commodity timing differences in total revenues Return on Capital Employed (ROCE) margin (%) Free Cash Flow (FCF) Productivity growth Calculated as Operational EBITA after tax divided by the average of the period’s opening and closing Capital employed, adjusted to reflect impacts from significant acquisitions/ divestments occurring during the same period. Capital employed is calculated as the sum of Adjusted total fixed assets and Net Working Capital Free Cash Flow is calculated as net cash provided by operating activities adjusted for: (i) purchases of property, plant and equipment and intangible assets, and (ii) proceeds from sales of property, plant and equipment Productivity is calculated as 12-month rolling revenues over the average number of total workforce in the last three months. Productivity growth is the change of productivity over the same period a year earlier, represented as a percentage change Operational Free Cash Flow (OFCF)(¹) Cash generated by business operations after paying capital expenditures but before paying interests and taxes (OCF(2) minus capital expenditures) Gross Profit on Orders (absolute)(3) Gross Profit on Orders is calculated by deducting the total costs to complete the order from the total revenue value of the order Orders received(4) Represents the values of goods and services contracted and ordered by customers within a given accounting period net of cancellations (1) Applied to Robotics & Discrete Automation and Electrification only. (2) Cash flow from operating activities excluding payments for interest and income taxes. (3) Applied to Process Automation only. (4) Applied to Motion only. Outcomes were subject to appropriate adjust- ments for some non-operational items and other adjustment principles agreed with the Board. with the Board. These led to minor increases in awards for two EC members. For 2021, the “boundary condition” was the setting of plans in each ABB Division to mitigate for ABB scope 1 and 2 CO2 emissions, aligned with ABB’s sustainability strategy and associated targets. 2021 Annual Incentive Plan – achievements In summary, the average award for the current EC members under the AIP for 2021 was 143.4 per- cent (out of a maximum 150 percent), compared to 72.4 percent in 2020. In addition to achieving the challenging performance targets in 2021, this improvement in outcomes from the prior year was influenced by the following factors: • In 2021, all nine EC members served on a full-year basis, compared to only seven members working on a full-year basis in 2020. AIP opportunities and final awards for 2020 were prorated for those EC members who joined the EC during the year. • EC members voluntarily donated 10 percent of their salary to fight the impacts of the COVID-19 pandemic for a six-month period during 2020. Consequently AIP opportunities and final awards for 2020 were based on the reduced salaries. • In 2020, the negative impact of the COVID-19 pandemic on the business performance - when targets were not adjusted - was bigger than in 2021. The 2021 AIP outcomes were net of the applica- tion of adjustments for some non-operational items, aligned with adjustment principles agreed Common Group measure Achievement against the 2021 Group Operational EBITA margin measure, which applied to all EC members, with a weighting of 20 or 25 percent, was 150 percent (2020: 53 percent). The 2021 Group Operational EBITA margin was 14.2 percent compared to 11.1 percent in 2020, primarily re- flecting the increased business activity. The weighted achievement related to the common Group measure was 37.5 percent for the CEO and the Corporate Officers, and 30 percent for the Business Area Presidents. Other Group measures The outcome related to all other Group measures, applied to the CEO and Corporate Officers, with weightings of 10 to 25 percent, was at maximum. Achievement against the Group ROCE target was 150 percent (2020: zero percent), achievement against the Free Cash Flow target was 150 per- cent (2020: 109 percent) and achievement against the Productivity growth target was also 150 percent (2020: n.a.). The weighted achieve- ment related to these Group measures was 82.5 percent. Business Area measures Up to three quantitative business measures were applied to Business Area Presidents, with weight- ings from 10 to 30 percent, and the outcomes ranged from 119 to 150 percent of target. Achievement against the Operational EBITA margin measure ranged from 119 to 150 percent (2020: zero to 95 percent), Operational Free Cash Flow 150 percent for the two Business Areas A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 95 applicable (2020: 106 to 150 percent), Gross Profit on Orders 150 percent (2020: zero percent), Orders received 150 percent (2020: zero to 83 percent) and Productivity growth 150 percent for the four Business Areas (2020: n.a.). The weighted achievement related to these Business Area measures ranged from 80.8 to 90 percent (2020: 21 to 66 percent). Individual measure Thanks to the Company’s strong focus on safety, in 2021 the target set for the Lost Time Incident Frequency Rate (LTIFR) was overachieved at Group level, as a result of all Business Areas overachieving their targets. There were no work-related fatalities in 2021, for the first time since 2011. The assessed achievement of the KPIs informing the outcome of the personal compo- nent for EC members, with a weighting of 20 percent, inclusive of the safety outcomes de- scribed, ranged from 100 to 150 percent (2020: 100 to 150 percent). These outcomes are summarized in Exhibit 25 below. Exhibit 25: AIP 2021 outcomes for the CEO and the Corporate Officers (rounded) Category Measure (and weighting) Target points and achievement Threshold (0%) Target (100%) Maximum (150%) Common Group measure 25% Other Group measures 55% Group Op EBITA margin 25% ROCE 25% Free Cash Flow 20% Productivity growth 10% Individual measure 20% Safety, Cost discipline, Strategy implementation 20% 150% 150% 150% 150% 100–125% AIP 2021 outcomes for the Business Presidents (rounded) Category Measure (and weighting) Target points and achievement Threshold (0%) Target (100%) Maximum (150%) Common Group measure 20% Group Op EBITA margin 20% Business measures 80% Op EBITA margin 30% Op Free Cash Flow 0–20% Gross Profit on Orders 0–20% Orders received 0–20% Productivity growth 10% Individual measure 20% Safety, Acquisitions, Digitalization 20% 150% 119–150% 150% 150% 150% 150% 125–150% 96 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 26 below provides information related to the overall actual 2021 AIP outcomes, in comparison to the target 2021 AIP for all current EC members. Exhibit 26: Overview of targeted and realized AIP 2021 values Common Group Other Group Business Area measure measures measures Individual measure t n e m e v e i h c A g n i t h g i e W e m o c t u O t n e m e v e i h c A g n i t h g i e W e m o c t u O Björn Rosengren Timo Ihamuotila Carolina Granat Maria Varsellona 150.0% 25.0% 37.5% 150.0% 55.0% 82.5% 150.0% 25.0% 37.5% 150.0% 55.0% 82.5% 150.0% 25.0% 37.5% 150.0% 55.0% 82.5% 150.0% 25.0% 37.5% 150.0% 55.0% 82.5% Theodor Swedjemark 150.0% 25.0% 37.5% 150.0% 55.0% 82.5% t n e m e v e i h c A n.a. n.a. n.a. n.a. n.a. g n i t h g i e W n.a. n.a. n.a. n.a. n.a. t n e m e v e i h c A e m o c t u O g n i t h g i e W e m o c t u O e m o c t u o P I A l a t o T ) t e g r a t f o % n i ( e g a t n e c r e p d r a w a P I A t e g r a T ) F H C n i ( d r a w a P I A l a u t c A ) 1 ( ) F H C n i ( n.a. 125.0% 20.0% 25.0% 145.0% 1,700,000 2,465,000 n.a. 100.0% 20.0% 20.0% 140.0% 970,000 1,358,000 n.a. 100.0% 20.0% 20.0% 140.0% 700,000 980,000 n.a. 125.0% 20.0% 25.0% 145.0% 800,000 1,160,000 n.a. 125.0% 20.0% 25.0% 145.0% 500,000 725,000 Sami Atiya Tarak Mehta 150.0% 20.0% 30.0% 150.0% 20.0% 30.0% Peter Terwiesch 150.0% 20.0% 30.0% Morten Wierod 150.0% 20.0% 30.0% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 150.0% 60.0% 90.0% 125.0% 20.0% 25.0% 145.0% 800,000 1,160,000 n.a. 150.0% 60.0% 90.0% 125.0% 20.0% 25.0% 145.0% 930,000 1,348,500 n.a. 150.0% 60.0% 90.0% 125.0% 20.0% 25.0% 145.0% 800,000 1,160,000 n.a. 134.7% 60.0% 80.8% 150.0% 20.0% 30.0% 140.8% 800,000 1,126,400 Total 8,000,000 11,482,900 (1) Represents accrued AIP award for the year 2021, which will be paid in 2022, after the publication of ABB’s financial results. ESG boundary condition The Board also considered that the terms for the 2021 ESG “boundary condition” were fully met. accordingly. The 2021 LTIP target points are illustrated in Exhibit 27 below. Overall outcomes The overall average award under the AIP for the entire current EC was 143.4 percent of target (2020: 72.4 percent) with a range from 140.8 percent (lowest achievement) to 145.0 percent of target (highest achievement). This compared to a range of 51.0 to 95.6 percent in 2020. Long-Term Incentive Plan (LTIP) 2021 LTIP grants The estimated value at grant of the share-based grants to EC members under the 2021 LTIP was CHF 8.7 million, compared with CHF 6.5 million in 2020. This increase in grant fair value for the 2021 LTIP grant compared to 2020 was mainly driven by the price of the ABB share on the day of grant. In 2020 the price of the ABB share at the day of grant, was influenced by significant market volatility at the start of the COVID-19 pandemic which impacted the 2020 LTIP grant fair value substantially at that time. The 2021 LTIP is based on two equally weighted performance measures, one tied to ABB’s TSR and the other to ABB’s EPS. The companies approved by the Board to deter- mine ABB’s relative TSR performance for the 2021 LTIP were: 3M, Danaher, Eaton, Emerson Electric, General Electric, Honeywell Intl., Holcim, Legrand, Mitsubishi Electric, Raytheon Technolo- gies, Rockwell, Rolls Royce, Schneider Electric, Siemens and Yokogawa. These were selected to provide an appropriate and very challenging set of peers, and influenced the vesting point setting Exhibit 27: 2021 LTIP target points Weigh- ting 50% 50% Measure Relative TSR Average EPS Threshold Target 25th percentile 50th percentile Maximum 75th percentile Target point -14% Disclosed after per- formance period Target point +14% At or below threshold point: no award; At target point: 100 percent award; At or above maximum point: capped at 200 percent award; Linear award interpolations between points; The actual EPS target is not prospectively disclosed for reasons of commercial sensitivity. The latest change in the EPS target points (range reduced from plus/minus 17 percent of target for 2020 LTIP to plus/minus 14 percent of target for the 2021 LTIP) is a reflection of the perceived EPS volatility during the performance period, and also serves to make the achievement of a threshold award under the plan more demanding. The reference price for the 2021 LTIP grant which is used to determine the number of shares granted to participants was CHF 26.59. 2018 LTIP achievements The final number of shares vesting under the 2018 LTIP grant in 2021 was determined based on the achievement level against the defined TSR and EPS targets. The relative TSR measure was achieved at 114.8 percent (previous year: not applicable) out of a potential of 200 percent. The average EPS measure vested at zero percent (previous year: 41 percent) out of a potential 200 percent, net of adjustments for items A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 97 considered outside the normal course of business operation and/or which were not considered in the target setting of the 2018 LTIP. On this occa- sion, adjustments were made for the impact of divestments, integration costs and restructuring costs. The EPS for 2020 applicable to the 2018 LTIP grant after the application of the approved adjustments, amounted to USD 1.06, leading to plan relevant average EPS of USD 0.98, being below the threshold target point. The average weighted achievement level of the two performance measures under the 2018 LTIP was 57.4 percent (out of a maximum 200 percent), as specified in Exhibit 28. There was no award under the EPS measure, since the performance period for determining the value of the award was from 2018 to 2021 and in conse- quence, the EPS outcome was impacted by the COVID-19 pandemic, for which no adjustment was applied. As announced in our 2019 Compensation Report, the EPS performance targets for vested LTIP awards will be retrospectively disclosed in our Compensation Reports. The three target points (threshold, target and maximum) and the actual achievement for the adjusted 2018 EPS perfor- mance measure are shown in Exhibit 28 below. Since the Average EPS amounted to USD 0.98, no vesting occured as the threshold target was not met. The relative ranking of ABB’s TSR against the predefined peer group of companies for the 2018 LTIP set on the 54th percentile, which leads to a vesting level of 114.8 percent under this measure. The weighted combined vesting level corresponds to 57.4 percent of the target. Exhibit 28: Target points and achievements of 2018 LTIP performance measures Measure Weighting Threshold Target Maximum Actual Relative TSR 50% 25th percentile 50th percentile 75th percentile 54th percentile Achievement level Average EPS (USD) 50% Achievement level 0% 1.15 0% Award as percentage of target (capped at 200%) 100% 1.36 100% 200% 1.57 200% 114.8% 0.98 0% 57.4% Overview of disclosed and realized 2018 LTIP value In the 2020 Compensation Report ABB intro- duced a new table, requested by stakeholders, to provide information related to the past LTIP, that vested in the reporting year. This table compares the previously disclosed “fair value” of the grant to each EC member and the actual value of the grant at the time of vesting. The following Exhibit 29 shows such comparison for the 2018 LTIP, that vested in 2021. The values presented are gross and before payment of any applicable taxes owing by the recipient. This indicates the average gross realized LTIP value was 76.2 percent of the dis- closed grant fair value. Exhibit 29: Realized value of 2018 LTIP grant for current EC members Number of shares granted related to the TSR measure(1) Shares granted related to the EPS measure(2) Total number of shares granted Disclosed grant fair value (CHF)(3)(4) Vesting date Vesting percent- age Number of vested shares Realized value (CHF)(5) Björn Rosengren Grant date n.a. Timo Ihamuotila April 6, 2018 18,609 18,608 37,217 819,965 April 6, 2021 57.4% 21,364 624,897 Carolina Granat Maria Varsellona Theodor Swedjemark Sami Atiya Tarak Mehta n.a. n.a. n.a. April 6, 2018 11,651 11,650 23,301 513,368 April 6, 2021 57.4% 13,376 391,248 April 6, 2018 17,395 17,395 34,790 766,494 April 6, 2021 57.4% 19,970 584,123 Peter Terwiesch April 6, 2018 18,690 18,689 37,379 823,534 April 6, 2021 57.4% 21,457 627,617 Morten Wierod April 6, 2018 7,646 7,646 15,292 336,913 April 6, 2021 57.4% 8,778 256,757 Total 3,260,274 2,484,642 (1) Actual achievement level of the TSR measure was 114.8 percent. (2) Actual achievement level of the EPS measure was zero percent. (3) Valued at CHF 22.03, the grant fair value of the ABB share on the day of grant. (4) At the time of disclosure Morten Wierod was not member of the EC. (5) Valued at CHF 29.25, the closing price of the ABB share on the day of vesting. 98 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T LTIP vesting outcomes in the last five years The historical vesting percentages for the prior five years are shown in Exhibit 30 below. Over the last five years vesting has averaged at 75.6 per- cent of target and 47.8 percent of the maximum award. Exhibit 30: LTIP historical actual vesting percentages(1) 200% 160% 120% 80% 40% 0% 74.80% 53.40% 80.50% 53.70% 92.50% 61.70% 73.00% 41.70% 57.40% 28.70% 2014 LTIP 2014 LTIP 2015 LTIP 2016 LTIP 2017 LTIP 2018 LTIP Vesting in % of target award Vesting in % of maximum potential award (1) Average of relevant performance measures. Realized total compensation - 2021 In the 2020 Compensation Report, ABB started to disclose the realized total compensation for each EC member. Realized compensation means that the AIP award and the LTIP award are disclosed at the end of their respective performance cycles, reflecting actual payment and settlement, based on achievements of the plan specific performance measures. Such transparency on realized compen- sation is designed to aid stakeholder’s understanding of ABB’s link between pay and performance. The following Exhibit 31 sets out a high-level comparison of realized and target total compen- sation for each EC member. Note that the higher percentages relating to the CEO and Corporate Officers (except for the CFO) are driven by the fact that they were not an EC member in 2018, and therefore did not receive an LTIP grant in 2018, vesting in 2021. A detailed summary table is specified in Exhibit 44 in the section “Compensa- tion tables and share ownership tables”. Exhibit 31: Realized total compensation compared to target total compensation Björn Rosengren Timo Ihamuotila Carolina Granat Maria Varsellona Theodor Swedjemark 115% Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod 115% 105% 113% 114% 108% 107% 105% 109% 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 Target total compensation Realized total compensation Other compensation - 2021 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. Five members of the EC participated in the 18th annual launch of the plan in 2021. EC members who participated will, upon vesting, each be entitled to acquire up to 330 ABB shares at CHF 30.32 per share, the market share price at the start of the 2021 launch. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 99 For a more detailed description of the ESAP, please refer to “Note 18 – Share-based payment arrangements” in our Consolidated Financial Statements. In 2021, ABB did not pay any fees or compensation to the members of the EC for services rendered to ABB other than those disclosed in this Compensa- tion Report. Except as disclosed in the section titled “Executive Committee – Business relation- ships between ABB and its EC members” in the Corporate Governance Report, ABB did not pay any additional fees or compensation in 2021 to persons closely linked to a member of the EC for services rendered to ABB. Shareholding of EC members Three out of nine EC members have achieved or exceeded their share ownership requirement. Two members are close to achieving their require- ment, and a further three members have been newly appointed to the EC in the last two years. When considering the number of granted, but unvested shares of current EC members as per December 31, 2021, it is expected that the major- ity of these members will meet or exceed their share ownership requirement. Exhibit 32: EC shareholding compared to share ownership guideline* Björn Rosengren Timo Ihamuotila Carolina Granat Maria Varsellona Theodor Swedjemark Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod CEO shareholding requirement (500%) Other EC members shareholding requirement (400%) EC appointment March 2020 April 2017 January 2021 November 2019 August 2020 June 2016 October 2010 January 2017 April 2019 0% 200% 400% 600% 800% 1000% 1200% 1400% Held shares Granted, but unvested shares Shareholding requirement * Based on share price of CHF 26.59, the 2021 LTIP reference price, and shares held at December 31, 2021. Future allocation of granted, but unvested shares is based on target achievement level and relevant plan specific settlement: default settlement of the final 2019 LTIP award is 65 percent in shares (recipients may elect to receive 100 percent of the vested LTIP award in shares), default settlement of the final 2020 LTIP and 2021 LTIP awards is 100 percent in shares. Default settlement of replacement shares is 65 percent in shares (recipients may elect to receive 100 percent of the vested award in shares). The EC members collectively owned less than 1 percent of ABB’s total shares outstanding at December 31, 2021. to a member of the EC held any shares of ABB or options on ABB shares at December 31, 2021 and 2020. At December 31, 2021, EC members held ABB shares and conditional rights to receive shares, as shown in Exhibit 42 in the section “Compensation tables and share ownership tables” below. Their holdings at December 31, 2020, are shown in Exhibit 43 in the same section. Changes applicable to EC members Terms of appointment for new EC members As previously communicated, as from 2020, grants under the Management Incentive Plan (MIP), a stock option plan without performance conditions, have been discontinued, and no further grants were made. Any MIP instruments held by EC members were awarded prior to their appointment as EC members. For a more detailed description of MIP, please refer to “Note 18 – Share-based payment arrangements” in our Consolidated Financial Statements. The new Chief Human Resources Officer (CHRO), Carolina Granat, was appointed to the EC effec- tive from January 1, 2021 with an annual base salary of CHF 700,000, a target short-term and long-term incentive of 100 percent of annual base salary. This represents a reduction in total target direct compensation (TTDC) compared to the prior CHRO incumbent. Carolina Granat is eligible for standard EC benefits and, where appropriate legacy relocation benefits. Except as described in Exhibits 42 and 43, no member of the EC and no person closely linked 100 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Terms of departure for EC members leaving the EC, as shown in Exhibit 38, footnotes (5) and (6). The General Counsel & Company Secretary, Maria Varsellona, has resigned from ABB and will depart on March 31, 2022. She will be entitled to receive compensation and benefits up to the point of her departure. This includes a contractually agreed pro-rata short-term incentive payment of CHF 181,985 for the period January 1 to March 31, 2022. All her unvested LTIP share grants and the unvested second tranche of her replace- ment share grant were forfeited. Compensation of former EC members In 2021, certain former EC members received contractual compensation for the period after Votes on compensation at the 2022 AGM As illustrated in Exhibit 33, the Board’s proposals to shareholders at the 2022 AGM will relate to Board compensation for the 2022–2023 term of office and EC compensation for the calendar year 2023. There will also be a non-binding vote on the 2021 Compensation Report. Exhibit 33: Shareholders will have three separate votes on compensation at the 2022 AGM 2021 2022 2023 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 maxi- mum aggregate Board compensation for 2022– 2023 term of office Binding vote on maximum aggregate EC compensation for 2023 Non-binding vote on 2021 compensation report March AGM March AGM March AGM Compensation period Date of vote A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 101 In determining the proposed maximum aggregate EC compensation, the Board takes into consider- ation the criteria illustrated in Exhibit 34. Given the variable nature of a major portion of the compensation components, the proposed maxi- mum aggregate EC compensation will almost normally be higher than the actual compensation paid or awarded, as it must cover the potential maximum value of each component of compensation. It is important to note that the increase in maxi- mum aggregate compensation for 2023 is mainly the result of the associated cost related to the 2020 LTIP vesting in 2023, influenced by: a) the increased number of shares subject to vesting compared to prior years (see Ex- hibit 34), b) the current, solid performance of the Company against its earnings per share targets and total shareholder return peer group and c) the strong share price development since the time of grant with a reference price of CHF 19.36, rather than any structural increase to EC compensation. Exhibit 34: Overview of key factors affecting the determination of maximum aggregate EC compensation 2019 52.0 2020 55.5 Aggregate EC compensation in CHF (millions) 2021 39.2 35.8 2022 2023(1) 39.5 40.0 xx.x Maximum (approved at 2018 AGM) Maximum (approved at 2019 AGM) Actual Target Maximum (approved at 2020 AGM) Maximum (approved at 2021 AGM) Maximum (to be requested at 2022 AGM) Assumptions AIP award percentage 150% Adjustment of LTIP grant size 12.5% 150% 12.5% Number of LTIP shares vested or potentially vesting in year(3) 532,674 266,104 n.a. 139%(2) 100% 0% 0% n.a. 150% 12.5% 150% 12.5% 150% n.a. 147,979 220,561 354,869 Number of EC members 11 12 10 10 9 9 9 (1) Number will be provided in the AGM invitation. (2) Outcome without the allocation of former EC members, but including previous CHRO. For full description, see previous section “Compensa- tion elements – 2021 Highlights”. (3) For example, 354,869 LTIP shares were granted in 2020 that potentially vest in 2023, subject to performance conditions. 102 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Compensation tables and share ownership tables Exhibit 35: Board compensation in 2021 and 2020 (audited) Paid in 2021 Paid in 2020 November Board term 2021–2022 May Board term 2020–2021 November Board term 2020-2021 May Board term 2019-2020 – 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 ( 1 2 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 ( 0 2 0 2 n i d i a p CHF Name Peter Voser, Chairman(4) — 17,209 — 20,089 1,200,000 — 21,831 — 32,642 1,140,000 Jacob Wallenberg(5) 112,500 2,599 112,500 3,033 450,000 101,250 3,297 112,500 Matti Alahuhta(6) — — Gunnar Brock(7) 82,500 1,906 — — 3,615 160,000 4,542 330,000 — 4,787 — 4,937 — — David Constable(8) 80,000 1,848 87,500 2,359 335,000 78,750 2,564 87,500 Frederico Curado(9) Lars Förberg(10) — 3,829 — 4,577 — — 4,090 335,000 5,347 320,000 — 4,438 — 5,805 — — Jennifer Xin-Zhe Li(11) 87,500 1,866 80,000 1,993 335,000 72,000 2,163 80,000 Geraldine Matchett(12) 82,500 2,490 82,500 2,906 330,000 74,250 3,159 82,500 David Meline(13) 100,000 2,310 100,000 2,696 400,000 90,000 2,931 100,000 Satish Pai(14) 82,500 1,759 82,500 2,055 330,000 74,520 2,231 82,500 4,928 7,155 7,379 3,833 6,646 8,688 3,239 4,722 4,380 3,340 427,500 304,000 313,500 332,500 304,000 304,000 304,000 313,500 380,000 313,500 Total 627,500 40,393 545,000 52,725 4,525,000 490,770 58,143 545,000 86,952 4,436,500 (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 2021 and 2020 the Company paid CHF 231,287 and CHF 272,312, respectively, in related mandatory social security payments. (4) Chairman of the ABB Ltd Board for the 2019-2020, 2020-2021 and 2021-2022 board terms and Chairman of the Governance and Nomination Committee for the 2021-2022 board term; is receiving 100 percent of his compensation in the form of ABB shares. (5) Vice-Chairman of the ABB Ltd Board for the 2019-2020, 2020-2021 and 2021-2022 board terms; Chairman of the Governance and Nomination Committee for the 2019-2020 and 2020-2021 board terms and member of that committee for the 2021-2022 board term; is receiving 50 percent of his compensation in the form of ABB shares. (6) Member of the Governance and Nomination Committee for the 2019-2020 and 2020-2021 board terms; received 100 percent of his compensation in the form of ABB shares for the 2019-2020 and 2020-2021 board terms. Did not stand for election in 2021. (7) Member of the Finance, Audit and Compliance Committee for the 2019-2020, 2020-2021 board terms; received 100 percent of his compensation in the form of ABB shares for the 2019-2020 and 2020-2021 board term and is receiving 50 percent of his compensation in the form of ABB shares for the 2021-2022 board term. (8) Chairman of the Compensation Committee for the 2019-2020, 2020-2021 board terms and member of that committee for the 2021-2022 board term; is receiving 50 percent of his compensation in the form of ABB shares. (9) Member of the Compensation Committee for the 2019-2020, 2020-2021 and Chairman of the Compensation Committee for the 2021-2022 board term; is receiving 100 percent of his compensation in the form of ABB shares. (10) Member of the Governance and Nomination Committee for the 2019-2020, 2020-2021 and 2021-2022 board terms; is receiving 100 percent of his compensation in the form of ABB shares. (11) Member of the Compensation Committee for the 2019-2020, 2020-2021 and 2021-2022 board terms and member of Governance and Nomination Committee for 2021-2022 board term; is receiving 50 percent of her compensation in the form of ABB shares. (12) Member of the Finance, Audit and Compliance Committee for the 2019-2020, 2020-2021 and 2021-2022 board terms; is receiving 50 percent of her compensation in the form of ABB shares. (13) Chairman of the Finance, Audit and Compliance Committee for 2019-2020, 2020-2021 and 2021-2022 board terms; is receiving 50 percent of his compensation in the form of ABB shares. (14) Member of the Finance, Audit and Compliance Committee for the 2019-2020, 2020-2021 and 2021-2022 board terms; is receiving 50 percent of his compensation in the form of ABB shares. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 103 Exhibit 36: Board compensation for the Board terms 2021-2022 and 2020-2021 (audited) Name Specific Board Roles Peter Voser Jacob Wallenberg Chairman of the Board for 2020-2021 term, Chairman of the Board and Chairman GNC for 2021-2022 term Vice-Chairman of the Board and Chairman GNC for 2020-2021 term, Vice Chairman of the Board and Member GNC for 2021-2022 term Matti Alahuhta Member GNC for 2020-2021 term Board term 2021-2022 Board term 2020-2021(1) CHF CHF 1,200,000 1,140,000 450,000 427,500 n.a. 304,000 Gunnar Brock Member FACC for both the 2020-2021 and 2021-2022 terms 330,000 313,500 David Constable Chairman CC for 2020-2021 term, Member CC for the 2021-2022 term 320,000 332,500 Frederico Curado Member CC for 2020-2021 term, Chairman CC for the 2021-2022 term 350,000 304,000 Lars Förberg Member GNC for both the 2020-2021 and 2021-2022 terms 320,000 304,000 Jennifer Xin-Zhe Li Member CC for the 2020-2021 term Member CC and Member GNC for the 2021-2022 term Geraldine Matchett Member FACC for both the 2020-2021 and 2021-2022 terms 350,000 304,000 330,000 313,500 David Meline Chairman of FACC for both the 2020-2021 and 2021-2022 terms 400,000 380,000 Satish Pai Total Member FACC for both the 2020-2021 and 2021-2022 terms 330,000 313,500 4,380,000 4,436,500 (1) This reflects a 10 percent COVID-19 related voluntary donation in Board fees for the first half of the 2020-2021 Board term. Key: CC: Compensation Committee FACC: Finance, Audit and Compliance Committee GNC: Governance and Nomination Committee Exhibit 37: Board ownership of ABB shares (audited as part of the financial statement stand-alone audit) Name Peter Voser(1) Jacob Wallenberg Matti Alahuhta(2) Gunnar Brock David Constable Frederico Curado Lars Förberg Jennifer Xin-Zhe Li Geraldine Matchett David Meline(3) Satish Pai Total Total number of shares held December 31, 2021 December 31, 2020 191,946 239,878 n.a. 33,399 38,185 40,301 59,916 37,580 25,196 37,780 28,432 732,613 314,648 234,246 93,408 26,951 33,978 32,382 49,992 33,721 19,800 33,774 24,618 897,518 (1) Includes 2,000 shares held by spouse. (2) Matti Alahuhta did not stand for re-election at ABB’s Annual General Meeting in March 2021. (3) Includes 3,150 shares held by spouse. 104 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 38: EC compensation in 2021 (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 1 2 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 ( 1 2 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 1 2 0 2 n i t n a r g d e s a b - e r a h s ) 6 ( ) 5 ( ) s 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 ( n o i t a s n e p m o c l a t o T 1 2 0 2 CHF CHF CHF CHF CHF CHF CHF CHF Name Björn Rosengren Timo Ihamuotila Carolina Granat (EC member as of January 1, 2021) Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod Total Executive Committee members at December 31, 2021 Sylvia Hill (EC member until December 31, 2020) Total departing Executive Committee members 1,700,012 2,465,000 744,770 807,000 5,716,782 2,530,828 966,675 1,358,000 518,063 570,546 3,413,284 962,708 700,000 980,000 417,382 399,334 2,496,716 694,744 Maria Varsellona 800,009 1,160,000 455,000 511,824 2,926,833 793,997 Theodor Swedjemark 500,004 725,000 274,535 263,567 1,763,106 397,012 800,009 1,160,000 482,662 481,598 2,924,269 793,997 925,008 1,348,500 507,646 476,481 3,257,635 923,018 800,009 1,160,000 473,441 422,542 2,855,992 793,997 791,676 1,126,400 443,506 362,112 2,723,694 793,997 7,983,402 11,482,900 4,317,005 4,295,004 28,078,311 8,684,298 — 36,762,609 730,004 661,380 478,254 524,799 2,394,437 730,004 661,380 478,254 524,799 2,394,437 — — Total 8,713,406 12,144,280 4,795,259 4,819,803 30,472,748 8,684,298 (1) Represents accrued short-term variable compensation for the year 2021, which will be paid in 2022, after the publication of ABB’s financial results. Short-term variable compensation is linked to the objectives defined in each EC member’s Annual Incentive Plan. Upon full achievement of these objectives, the short-term variable compensation of the EC members represents 100 percent of their respective base salary. Sylvia Hill received a short-term variable compensation payment in December 2021 related to her termination period, in accordance with the contractual obligations of ABB. (2) Other benefits mainly comprise payments related to social security, health insurance, children’s education, transportation, tax advice and compensation for foregone dividends on replacement share grants and certain other items. (3) Prepared on an accrual basis. (4) The estimated value of the share-based LTIP grants are based on the price of ABB shares on the grant date, adjusted for expected foregone dividends during the vesting period. On the day of vesting (April 26, 2024), 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. (5) Payments totaling CHF 296,004 were made in 2021 on behalf of certain other former EC members, representing social security premium payments due on the LTIP 2018 vesting and tax advisory services for the period when they have been active EC members. (6) Ulrich Spiesshofer received non-compete payments for the period January 1, 2021 to April 30, 2021 and a vesting of the 2018 LTIP, with related social security payments, totaling to CHF 1,726,896. — 8,247,610 — 4,375,992 — 3,191,460 — 3,720,830 — 2,160,118 — 3,718,266 — 4,180,653 — 3,649,989 — 3,517,691 — 2,394,437 — 2,394,437 — 39,157,046 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 105 Exhibit 39: EC compensation in 2020 (audited) Cash Compensation ) 2 ( ) 1 ( e v i t n e c n i m r e t - t r o h S ) 1 ( 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 ) 3 ( 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 0 2 0 2 ) 4 ( 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 ) 5 ( 0 2 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 0 2 0 2 n i t n a r g d e s a b - e r a h s ) 6 ( ) s 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 ( n o i t a s n e p m o c l a t o T 0 2 0 2 CHF CHF CHF CHF CHF CHF CHF CHF 1,504,141 977,685 666,175 688,685 3,836,686 1,970,457 3,308,781 9,115,924 Name Björn Rosengren (EC member as of January 27, 2020, CEO as of March 1, 2020) Timo Ihamuotila 902,508 698,535 494,360 646,278 2,741,681 734,103 Sylvia Hill 725,004 547,500 471,925 290,108 2,034,537 564,097 Maria Varsellona 760,008 655,880 471,538 818,288 2,705,714 618,193 Theodor Swedjemark (EC member as of August 1, 2020) Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod Total Executive Committee members at December 31, 2020 Peter Voser (EC member until February 29, 2020) Ulrich Spiesshofer (EC member until April 16, 2019)(7) Jean-Christophe Deslarzes (EC member until May 31, 2019) Diane de Saint Victor (EC member until October 31, 2019) Total departing Executive Committee members 200,002 130,000 118,951 75,259 524,212 92,887 760,008 418,000 465,509 423,787 2,067,304 618,193 848,339 695,115 479,932 390,681 2,414,067 695,462 760,008 387,600 456,374 334,575 1,938,557 618,193 704,171 681,150 413,120 346,080 2,144,521 579,552 7,164,189 5,191,465 4,037,884 4,013,741 20,407,279 6,491,137 3,308,781 30,207,197 280,835 421,250 37,443 48,160 787,688 561,670 749,825 214,588 820,421 2,346,504 156,668 158,939 86,309 169,099 571,015 250,001 260,750 74,561 950,402 1,535,714 1,249,174 1,590,764 412,901 1,988,082 5,240,921 — — — — — — 787,688 — 2,346,504 — 571,015 — 1,535,714 — 5,240,921 Total 8,413,363 6,782,229 4,450,785 6,001,823 25,648,200 6,491,137 3,308,781 35,448,118 (1) Base salary as well as the target short-term incentive were adjusted where appropriate for EC members who voluntarily donated 10 percent of their salary to fight the impacts of the COVID-19 crisis for a six-month period during 2020. (2) Represents accrued short-term variable compensation for the year 2020, which was paid in 2021, after the publication of ABB’s 2020 financial results. Short-term variable compensation is linked to the objectives defined in each EC member’s Annual Incentive Plan. Upon full achievement of these objectives, the short-term variable compensation of the EC members represents 100 percent of their respective base salary. The short-term variable compensation of the former CEO, Ulrich Spiesshofer, corresponded to the contractually agreed average of the year 2017 and 2018 short-term variable compensation award. Peter Voser received his short-term variable compensation payment monthly at target achievement level. Diane de Saint Victor and Jean-Christophe Deslarzes received a pro-rata short-term variable compensation payment for their period of service as an EC member, in accordance with the contractual obligations of ABB. (3) Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items like compensation for unused vacation balances at the time of departure from ABB. (4) Prepared on an accrual basis. (5) The estimated value of the share-based LTIP grants are based on the price of ABB shares on the grant date, adjusted for expected foregone dividends during the vesting period. On the day of vesting (April 27, 2023), 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. (6) Payments totaling CHF 161,274 were made in 2020 on behalf of certain other former EC members, representing social security premium payments. (7) ABB paid Ulrich Spiesshofer in addition to the compensation related to the termination period, non-compete payments for the period May 1, 2020, to December 31, 2020, and related social security payments totaling CHF 2,806,111. — 3,475,784 — 2,598,634 — 3,323,907 — 617,099 — 2,685,497 — 3,109,529 — 2,556,750 — 2,724,073 106 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 40: LTIP grants in 2021 (audited) ) 3 ( ) 2 ( P I T L e h t f o h c n u a l 1 2 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 1,265,401 481,354 347,372 396,985 198,506 396,985 461,509 396,985 396,985 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 1 2 0 2 e h t f o r o t c a f ) 1 ( P I T L e h t f o 47,951 18,240 13,163 15,044 7,522 15,044 17,488 15,044 15,044 ) 3 ( ) 2 ( P I T L e h t f o h c n u a l 1 2 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 1,265,427 481,354 347,372 397,012 198,506 397,012 461,509 397,012 397,012 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 1 2 0 2 e h t f o r o t c a f ) 1 ( P I T L e h t f o 47,950 18,240 13,163 15,043 7,522 15,043 17,488 15,043 15,043 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 ( 1 2 0 2 n i P I T L e h t r e d n u s t n a r g CHF 2,530,828 962,708 694,744 793,997 397,012 793,997 923,018 793,997 793,997 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 1 2 0 2 e h t r e d n u ) 2 ( ) 1 ( P I T L e h t f o 95,901 36,480 26,326 30,087 15,044 30,087 34,976 30,087 30,087 164,535 4,342,082 164,540 4,342,216 329,075 8,684,298 Name Björn Rosengren Timo Ihamuotila(4) Carolina Granat (EC member as of January 1, 2021) Maria Varsellona Theodor Swedjemark(4) Sami Atiya Tarak Mehta(4) Peter Terwiesch4) Morten Wierod(4) Total Executive Committee members at December 31, 2021 (1) Vesting date April 26, 2024. (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 adjusted for expected foregone dividends during the vesting period. (3) Default settlement of the final LTIP award is 100 percent in shares, with an automatic sell-to-cover in place for employees who are subject to withholding taxes. 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, five members of the EC participated in the 18th launch of the ESAP in 2021, which will allow them to save over a 12-month period and, in November 2022, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP will be entitled to acquire up to 330 ABB shares at an exercise price of CHF 30.32 per share. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 107 Exhibit 41: LTIP grants in 2020 (audited) ) 3 ( ) 2 ( P I T L e h t f o h c n u a l 0 2 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 985,221 367,044 282,041 309,089 46,436 309,089 347,731 309,089 289,776 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 0 2 0 2 e h t 65,857 24,535 18,853 20,661 3,104 20,661 23,244 20,661 19,370 ) 3 ( ) 2 ( P I T L e h t f o h c n u a l 0 2 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 985,236 367,059 282,056 309,104 46,451 309,104 347,731 309,104 289,776 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 0 2 0 2 e h t 65,858 24,536 18,854 20,662 3,105 20,662 23,244 20,662 19,370 r e d n u d e t n a r g s e r a h s f o r e b m u n l a t o T ) 2 ( ) 1 ( P I T L e h t f o h c n u a l 0 2 0 2 e h 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 ( 0 2 0 2 n i P I T L e h t r e d n u s t n a r g CHF 131,715 1,970,457 49,071 37,707 41,323 6,209 41,323 46,488 41,323 38,740 734,103 564,097 618,193 92,887 618,193 695,462 618,193 579,552 216,946 3,245,516 216,953 3,245,621 433,899 6,491,137 Name Björn Rosengren (EC member as of January 27, 2020, CEO as of March 1, 2020) Timo Ihamuotila(4) Sylvia Hill Maria Varsellona Theodor Swedjemark (EC member as of August 1, 2020)(4) Sami Atiya Tarak Mehta(4) Peter Terwiesch(4) Morten Wierod(4) Total Executive Committee members at December 31, 2020 (1) Vesting date April 27, 2023. (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 adjusted for expected foregone dividends during the vesting period. (3) Default settlement of the final LTIP award is 100 percent in shares, with an automatic sell-to-cover in place for employees who are subject to withholding taxes. 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, five members of the EC participated in the 17th launch of the ESAP in 2020, which allowed them to save over a 12-month period and, in November 2021, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP was be entitled to acquire up to 440 ABB shares at an exercise price of CHF 22.87 per share. 108 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 42: EC shareholding overview at December 31, 2021 (audited as part of the financial statement stand-alone audit) Total number of shares held at Decem- ber 31, 2021 Vested at December 31, 2021 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 — — — — — — — — — 10,000 150,440 1,200 26,006 1,360 51,472 118,056 100,440 51,912 Unvested at December 31, 2021 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 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 ) 1 ( 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 0 2 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 ) 1 ( 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 1 2 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 ) 1 ( 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 ) 2 ( r e y o p m e r e m r o f m o r f s t i f e n e b e n o g e r o f r o f t n a r g e r a h s t n e m e c a p e R l l ) 2 ( r e y o p m e r e m r o f m o r f s t i f e n e b e n o g e r o f r o f (vesting 2022) (vesting 2022) (vesting 2023) (vesting 2024) (vesting 2022) (vesting 2023) — — — — 148,750 — — — — — 131,715 95,901 130,150 18,904 49,071 49,071 36,480 — — — 49,587 44,422 41,323 36,158 — — 26,326 — 6,209 15,044 41,323 46,488 41,323 38,740 30,087 34,976 30,087 30,087 — — — — — — — — — — — — — — — — 510,886 — 148,750 220,561 354,869 298,988 130,150 18,904 Name Björn Rosengren Timo Ihamuotila Carolina Granat (EC member as of January 1, 2021)(3) Maria Varsellona(4) Theodor Swedjemark(3)(5) Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod Total Executive Committee members at December 31, 2021 (1) The final LTIP 2019 award will be settled 65 percent in shares and 35 percent in cash. This applies to both performance factors (EPS and TSR). However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. The final LTIP 2020 and LTIP 2021 award will be settled 100 percent in shares, with an automatic sell-to-cover in place for employees who are subject to withholding taxes. (2) 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. (3) This includes shares held by the spouse. (4) Unvested share grants were forfeited as a result of the resignation provided and removed from the shareholding overview. (5) In addition, his spouse holds unvested shares and options granted in connection with her role in the company. A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T 109 Exhibit 43: EC shareholding overview at December 31, 2020 (audited as part of the financial statement stand-alone audit) Total number of shares held at Decem- ber 31, 2020 Vested at Decem- ber 31, 2020 Unvested at December 31, 2020 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 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 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 ) 1 ( 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 ) 1 ( 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 0 2 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 ) 1 ( 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 ) 2 ( r e y o p m e r e m r o f m o r f s t i f e n e b e n o g e r o f r o f t n a r g e r a h s t n e m e c a p e R l l ) 2 ( r e y o p m e r e m r o f m o r f s t i f e n e b e n o g e r o f r o f t n a r g e r a h s t n e m e c a p e R l l ) 2 ( r e y o p m e r e m r o f m o r f s t i f e n e b e n o g e r o f r o f (vesting 2021/ 2022) (vesting 2021) (vesting 2022) (vesting 2023) (vesting 2021) (vesting 2022) (vesting 2023) Name Björn Rosengren (EC member as of January 27, 2020, CEO as of March 1, 2020) Timo Ihamuotila Theodor Swedjemark (EC member as of August 1, 2020)(3) Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod Total Executive Committee members at December 31, 2020 5,000 171,610 — — — — — 37,217 Sylvia Hill 2,265 796,875 318,750 Maria Varsellona — — — — — — — 131,715 — 130,150 18,904 49,071 36,158 41,323 49,071 37,707 — — — — 41,323 40,010 40,009 — 6,209 49,587 41,323 44,422 46,488 41,323 36,158 41,323 38,740 — — — — — — — — — — — — — — — — — — 480 102,000 250,750 42,778 179,636 142,338 1,544 — — — — — — — — 23,301 34,790 37,379 15,292 545,651 898,875 569,500 147,979 298,042 433,899 40,010 170,159 18,904 (1) The final LTIP 2018 award and LTIP 2019 award will be settled 65 percent in shares and 35 percent in cash. This applies to both performance factors (EPS and TSR). However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. The final LTIP 2020 award will be settled 100 percent in shares, with an automatic sell-to-cover in place for employees who are subject to withholding taxes. (2) 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. (3) In addition, his spouse holds unvested shares and options granted in connection with her role in the company. 110 A B B A N N U A L R E P O R T 2 0 2 1 0 3 C O M P E N S AT I O N R E P O R T Exhibit 44: Targeted and realized EC total compensation in 2021 Base salary Pension benefits Other benefits(1) Target short-term incentive(2) Grant fair value of 2018 LTIP(3) Target total variable compensation Target total compensation 1,700,012 744,770 807,000 1,700,000 n.a. 1,700,000 4,951,782 966,675 518,063 570,546 970,000 819,965 1,789,965 3,845,249 Target compensation (in CHF) Björn Rosengren Timo Ihamuotila Carolina Granat (EC member as of January 1, 2021) Maria Varsellona 800,009 455,000 511,824 800,000 Theodor Swedjemark 500,004 274,535 263,567 500,000 700,000 417,382 399,334 700,000 n.a. n.a. n.a. 700,000 2,216,716 800,000 2,566,833 500,000 1,538,106 Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod Total 800,009 482,662 481,598 800,000 513,368 1,313,368 3,077,637 925,008 507,646 476,481 930,000 766,494 1,696,494 3,605,629 800,009 473,441 422,542 800,000 823,534 1,623,534 3,319,526 791,676 443,506 362,112 800,000 336,913 1,136,913 2,734,207 7,983,402 4,317,005 4,295,004 8,000,000 3,260,274 11,260,274 27,855,685 Realized compensation (in CHF) Björn Rosengren Timo Ihamuotila Carolina Granat (EC member as of January 1, 2021) Base salary Pension benefits Other benefits(1) Short-term incentive 2021(4) Grant fair value of 2018 LTIP(5) Total variable compensation Total compensation 1,700,012 744,770 807,000 2,465,000 n.a. 2,465,000 5,716,782 966,675 518,063 570,546 1,358,000 624,897 1,982,897 4,038,181 Maria Varsellona 800,009 455,000 511,824 1,160,000 Theodor Swedjemark 500,004 274,535 263,567 725,000 700,000 417,382 399,334 980,000 n.a. n.a. n.a. 980,000 2,496,716 1,160,000 2,926,833 725,000 1,763,106 Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod Total 800,009 482,662 481,598 1,160,000 391,248 1,551,248 3,315,517 925,008 507,646 476,481 1,348,500 584,123 1,932,623 3,841,758 800,009 473,441 422,542 1,160,000 627,617 1,787,617 3,483,609 791,676 443,506 362,112 1,126,400 256,757 1,383,157 2,980,451 7,983,402 4,317,005 4,295,004 11,482,900 2,484,642 13,967,542 30,562,953 Realized achievement level Björn Rosengren Timo Ihamuotila Carolina Granat (EC member as of January 1, 2021) Base salary Pension benefits Other benefits(1) Short-term incentive(4) Grant fair value of 2018 LTIP(5) 100.0% 100.0% 100.0% 145.0% n.a. 100.0% 100.0% 100.0% 140.0% 76.2% 100.0% 100.0% 100.0% 140.0% Maria Varsellona 100.0% 100.0% 100.0% Theodor Swedjemark 100.0% 100.0% 100.0% 145.0% 145.0% 145.0% 145.0% 145.0% n.a. n.a. n.a. 76.2% 76.2% 76.2% 76.2% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 140.8% 100.0% 100.0% 100.0% 143.4% 76.2% Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod Average Total variable compensation Total compensation 145.0% 110.8% 140.0% 145.0% 145.0% 118.1% 113.9% 110.1% 121.7% 127.7% 115.4% 105.0% 112.6% 114.0% 114.6% 107.7% 106.5% 104.9% 109.0% 110.0% (1) Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items. (2) Target short-term incentive corresponds to 100 percent of the latest applicable annual base salary. (3) Represents the LTIP 2018 grant date fair value as per April 6, 2018, as disclosed in our annual report 2018. (4) Represents accrued STI for the year 2021, which will be paid in 2022, after the publication of ABB’s financial results. STI is linked to the objectives defined in each EC member’s Annual Incentive Plan. (5) Valued at CHF 29.25, the closing price of the ABB share on the day of vesting. 111 1 Report of the Statutory Auditor To the General Meeting of ABB Ltd, Zurich We have audited the accompanying compensation report of ABB Ltd for the year ended December 31, 2021. 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 102 to 109 of the compensation report. Responsibility of the Board of Directors The Board of Directors is responsible for the preparation and overall fair presentation of the compensation report in accordance with Swiss law and the Ordinance against Excessive compensation in Stock Exchange Listed Compa-nies (Ordinance). The Board of Directors is also responsible for designing the compensation system and defining individual compensation packages. Auditor's Responsibility Our responsibility is to express an opinion on the accompanying compensation report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the compensation report complies with Swiss law and articles 14 – 16 of the Ordinance. An audit involves performing procedures to obtain audit evidence on the disclosures made in the compensation report with regard to compensation, loans and credits in accordance with articles 14 – 16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstate-ments in the compensation report, whether due to fraud or error. This audit also includes evaluating the reasonable-ness of the methods applied to value components of compensation, as well as assessing the overall presentation of the compensation report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the compensation report for the year ended December 31, 2021 of ABB Ltd complies with Swiss law and articles 14 – 16 of the Ordinance. KPMG AG Hans-Dieter Krauss Mohammad Nafeie Licensed Audit Expert Auditor in Charge Zurich, Switzerland February 24, 2022 KPMG AG, Badenerstrasse 172, CH-8036 Zurich © 2022 KPMG AG, a Swiss corporation, is a subsidiary of KPMG Holding AG, which is a member of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 04 2021 Financial review of ABB Group 114 2021 Operating and financial review and prospects 162 Consolidated Financial Statements of ABB Group 114 A B B A N N U A L R E P O R T 2 0 2 1 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 leading global technology company that energizes the transformation of society and industry to achieve a more productive, sustain- able future. By connecting software to its electrification, robotics, automation and motion portfolio, ABB pushes the boundaries of technol- ogy to drive performance to new levels. With a history of excellence stretching back more than 130 years, ABB’s success is driven by about 105,000 talented employees. — Organizational structure Our business is international in scope and we generate revenues in numerous currencies. We operate in over 100 countries across three regions: Europe, the Americas, and Asia, Middle East and Africa. We are headquartered in Zurich, Switzerland. We manage our company through our four Busi- ness Areas: Electrification, Motion, Process Automation, and Robotics & Discrete Automation. For a breakdown of our consolidated revenues (i) by Business Area, (ii) by geographic region, and (iii) by product type, see “Analysis of results of operations—Revenues” and “Note 23 - Operating segment and geographic data” to our Consoli- dated Financial Statements. Until June 30, 2020, we also operated the Power Grids business, which is reported as discontinued operations in the Consolidated Financial Statements (see “Discon- tinued operations” section below). On July 1, 2020, we completed the divestment of 80.1 per- cent of the Power Grids business to Hitachi Ltd (Hitachi). We retain a 19.9 percent ownership interest through our investment in Hitachi Energy Ltd, formerly Hitachi ABB Power Grids Ltd (Hitachi Energy) which beneficially owns or controls all the subsidiaries of the Power Grids business. Our principal corporate offices are located at Affolternstrasse 44, CH 8050 Zurich, Switzerland, telephone number +41 43 317 7111. 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 or global.abb. The information contained on or accessible from our Web site is not incorporated into this annual report, and you should not consider it to be a part of this annual report. The United States Securities and Ex- change 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. — Employees A breakdown of our employees by geographic region is as follows: December 31, Europe The Americas 2021 2020 2019 50,000 49,200 68,400 25,600 27,600 35,200 Asia, Middle East and Africa 28,800 28,800 40,800 Total 104,400 105,600 144,400 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. A B B A N N U A L R E P O R T 2 0 2 1 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 — History of the ABB Group The ABB Group was formed in 1988 through a merger between Asea AB and BBC Brown Boveri AG. Initially founded in 1883, Asea AB was a major participant in the introduction of electricity into Swedish homes and businesses and in the development of Sweden’s railway network. In the 1940s and 1950s, Asea AB ex- panded into the power, mining and steel industries. Brown Boveri and Cie. (later renamed BBC Brown Boveri AG) was formed in Switzerland in 1891 and initially specialized in power genera- tion and turbines. In the early to mid-1900s, it expanded its operations throughout Europe and broadened its business operations to in- clude a wide range of electrical engineering activities. In January 1988, Asea AB and BBC Brown Boveri AG each contributed almost all of their businesses to the newly formed ABB Asea Brown Boveri Ltd, of which they each owned 50 percent. In 1996, Asea AB was renamed ABB AB and BBC Brown Boveri AG was renamed ABB AG. In February 1999, the ABB Group announced a group reconfigura- tion designed to establish a single parent holding company and a single class of shares. ABB Ltd was incorporated on March 5, 1999, under the laws of Switzerland. In June 1999, ABB Ltd became the holding company for the entire ABB Group. This was accomplished by having ABB Ltd issue shares to the shareholders of ABB AG and ABB AB, the two companies that formerly owned the ABB Group. The ABB Ltd shares were exchanged for the shares of those two companies, which, as a result of the share exchange and certain related transactions, became wholly-owned subsidiaries of ABB Ltd. As described above, on July 1, 2020, we divested 80.1 percent of our ownership in the Power Grids business to Hitachi. ABB Ltd shares are currently listed on the SIX Swiss Exchange, the NASDAQ OMX Stockholm Exchange and the New York Stock Exchange (in the form of American Depositary Shares). — ABB Today As a global leader in resource efficiency, excelling in electrification and automation, our offering is relevant for the global energy transition, increased energy efficiency, and the transition to more adaptive manufacturing and automation, putting us right in the center of long-term secu- lar trends. The ABB Purpose The ABB Purpose captures what we do, and the ABB Way describes how we do it. With our Pur- pose at the core, ABB strives to create superior value for customers, employees and shareholders. The ABB Purpose is summarized as: constitutes a barrier to entry: decades-long domain expertise, cutting-edge technology and innovation as well as the ability to scale opera- tions and distribution. • We succeed by creating superior value. • We push the boundaries of technology to drive performance to new levels. • We energize the transformation of society and industry to achieve a more productive, sustainable future. Our core competencies With its long history, ABB not only invented or pioneered many power and automation technolo- gies but has retained technology and market leadership in many of these areas. Being present in various vertical markets for decades with close long-term relationships with customers and channel partners has resulted in our unique deep domain expertise, enabling a thorough under- standing of customers’ needs and operations. Our leadership in resource efficiency is based on our core competencies, each of which We continuously evolve our offering to remain a relevant and trusted partner to our 116 A B B A N N U A L R E P O R T 2 0 2 1 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 customers. Our annual non-order related research and development spending in 2021 amounted to approximately 4.2 percent of revenues. We focus our research and development expenditures on key areas of innovation and have spent approxi- mately $7 billion since the beginning of 2016, focusing on developing best-in-class products and services in the fields of electrification and automation with the goal of helping our custom- ers to increased productivity and lower their ecological footprint. All our four Business Areas are market leaders in their respective areas being in either the number 1 or 2 positions. Our global reach along with our extensive local presence assists us in scaling innovations to achieve stronger returns, which supports higher absolute investments for future growth. Active globally, our revenues are well-balanced across regions with customers served directly and through a strong channel partner network. The ABB Way The ABB Way is the glue that unites our Group and comprises a select number of common processes covering our business model, our people and culture, the ABB brand and our governance frame- work. It facilitates accountability, transparency and speed in ABB. In our operating model, the Divisions represent the highest level of operating decisions. They are closest to their respective markets and customer needs. Each Division progresses through the strategic mandates and priorities of stability and profitability before growth. Meaning, in order to deploy full focus on organic and acquired growth to the extent of consolidating the market, the business’ structure should be robust and profit- ability should be at least in line with industry peers. We have made good progress on the transi- tion through these priorities with two thirds of our Divisions, representing approximately 60 per- cent of Group revenues, now on a growth mandate. Each Division has full accountability for its results and carries the responsibility for business devel- opment, and research and development for leading technology to secure a number 1 or 2 market position. To fully complete the decentral- ized way of working at ABB, our focus area in 2022 will be to make sure that we also have account- ability, transparency and speed within all of the Divisions. Strong performance management is key in a decentralized business model. We apply a monthly scorecard system for the Divi- sions and Business Areas, based on a standardized set of Key Performance Indica- tors, to support full transparency of performance. It is accompanied by a mandatory target to make annual productivity improvements of at least 3 percent each year. The corporate functions focus on necessary strategic, financial and governance activities, with a lean headcount of approximately 800 employees. Enhanced growth profile Over the past several years, we have taken signifi- cant organic and inorganic actions to align our business portfolio to more attractive growth markets, increasing our focus on discrete indus- tries, as well as transport and infrastructure, that offer better growth opportunities. Additionally, we have increased the proportion of sales stem- ming from short-cycle businesses, meaning a reduced proportion from project-related activities, which should reduce the risk and volatility in our earnings. This ongoing shift towards better quality of revenues is part of ABB’s DNA which centers around resource-efficiency in electrification and automation. The responsibility for growth has been fully transferred to the Divisions, as they are closest to customers. This includes both organic and ac- quired growth. The Divisions have the best insights into current and future customer needs and are accountable for building their respective business accordingly. With more Divisions transi- tioning over time from stability and profitability to growth, we expect to see a continuous shift in our growth profile. Finally, the underlying demand for our products, systems and services is supported by strong sustainability megatrends with more favorable regulations, improved technology and changing consumer patterns all being positive drivers. An example of such a megatrend is sustainable transport. We estimate that approximately 10 per- cent of our order intake comes from this area and that we have outgrown the market in recent years. The related segments have different commercial maturity, including more mature technologies which already generate significant orders, includ- ing traction systems in rail or hybrid ships using Azipod® propulsion. Segments that are in com- mercial take-off (i.e. currently see very high growth rates) include electric vehicle charging solutions or robotic solutions for electric vehicle A B B A N N U A L R E P O R T 2 0 2 1 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 manufacturing. There are also very early-stage segments which are still emerging and which might offer a high potential in the future such as fully electric mines (“eMines”) or alternative fuels such as hydrogen. — Our markets ABB is a leading global technology company with a comprehensive and increasingly digitalized offering of electrification, motion and automa- tion solutions. Our exposure to customers is geographically balanced while catering to multi- ple end-markets and segments. We believe that our portfolio is well positioned to benefit from secular growth drivers, including urbanization, labor shortage, shift to electrification, automa- tion and robotization, as well as other data and digitalization trends. We are focused on creating superior customer value through our comprehensive, modular offer- ing, combining traditional products and services with software-enabled products and systems as well as digital services and software that we sell both separately and combined as scalable solu- tions. Superior software is a key differentiation of our digital offering and about 60 percent of our approximately 7,000 employees in research and development are active in software development. The majority of our businesses are market leaders within their respective segments. We believe market leadership is critical, as it provides the opportunity for price leadership, which in turn supports profitability, enabling us to invest in further research and development to sustain our technological leadership. For a discussion of the geographic distribution of our total revenues, see “Analysis of results of operations—Revenues.” Industry market Approximately half of our customers are indus- trial customers. We serve production facilities and factories all around the world, from process industries such as oil and gas, pulp and paper as well as mining, to discrete industries including automotive, food and beverage and consumer electronics. Automation, software and digital services that help customers achieve improved safety, uptime, energy efficiency and productivity are key to the success of our offerings in this market. The ongoing COVID-19 pandemic has served as a prominent reminder for companies of the importance of simplicity and flexibility in automated production and has accelerated customer demand for the digital services and solutions we offer. Industrial end-markets recovered from the initial pandemic-related impacts. In discrete industries, end-markets such as food and beverage, con- sumer electronics, machine builders and general industry grew strongly. Investments in robotics by the automotive industry recovered and we ap- plied a strategic selective order approach aimed at improving long-term profitability in the segment. Later-cycle process industries segments picked up especially during the second half of 2021, benefiting from a rebound in commodity prices and generally easing international travel restric- tions. This was particularly the case for the oil and gas segment, while the recovery in segments such as pulp and paper, mining or water and wastewa- ter had already started earlier. Transport & infrastructure market Approximately one-third of our customers oper- ate in the transport & infrastructure market. Our expertise provides efficient, reliable and sustain- able solutions for these customers, with a focus on energy efficiency and reduced operating costs. Transport & infrastructure markets were strong in 2021. Buildings activity rebounded from the widespread lockdowns of the previous year. Data center markets continued to expand, with ABB successful in offering bundled solutions to hyper- scale and co-location customers in particular. Underlying demand in rail for electrification and traction solutions was also high, while modest growth rates were impacted by the strong order intake in 2020. In the marine sector, we saw continued strong order demand for our market-leading electric propulsion systems. Services in the cruise segment started to pick-up in the second half of 2021 in anticipation of a recovery in cruising activities. EV charging mar- kets also continued to see very strong growth rates. 118 A B B A N N U A L R E P O R T 2 0 2 1 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 Utilities market ABB delivers solutions mainly for distribution utilities and renewables customers, while continu- ing to service conventional power generation customers with our control and automation solutions. Following the divestment of our Power Grids business to Hitachi in July 2020, our expo- sure to the utilities market has decreased significantly. During 2021, the renewables markets saw very strong growth after a challenging, pandemic- impacted 2020. Business levels in the conventional power generation market improved, albeit from a low level. Demand from electrical distribution utilities was strong, with ongoing investments to increase grid reliability and resil- ience with integrating increased renewables. We serve industry, transport & infrastructure and utilities through our operating Divisions which are included in our Business Areas. Developments in these Business Areas are discussed in more detail below. Revenue figures presented in this Businesses section are before intersegment eliminations. — Businesses Electrification Business Area Overview Products and Services The products of the Electrification Business Area portfolio are designed to enable safe, smart, and sustainable electrification, with a full range of low- and medium-voltage products and solutions, along with pre-engineered packaged services and tailored solutions for intelligent protection and connection. The Electrification Business Area delivers prod- ucts through a global network of channel partners and end customers. Most of the Business Area’s revenue is derived from distributors and approxi- mately a quarter is derived from direct sales to end-users. The remaining revenues are generated from original equipment manufacturers (OEMs), engineering, procurement, construction (EPC) contracting companies, system integrators, utilities and panel builders. The proportion of direct compared to channel partner sales varies by segment, product technology and geographic markets. The Electrification Business Area had approxi- mately 50,800 employees on December 31, 2021, and generated $13.2 billion of revenues in 2021. Customers The Electrification Business Area serves a wide range of customer segments, including residen- tial, commercial, and industrial buildings, electric utilities, oil and gas, chemicals, data centers, e-mobility, renewables, food and beverage, and other industries and infrastructure. The Electrification Business Area’s products and services are delivered through six operating Divisions. The Distribution Solutions Division helps utility, industry and transport & infrastructure custom- ers improve power quality and control, reduce outage time and enhance operational reliability and efficiency. The Division offers products, solutions and services that largely serve the power distribution sector, often providing the requisite medium-voltage link between high-voltage transmission systems and low-voltage users. With ABB AbilityTM enabled digital solutions at its core, the offering includes low-voltage switchgear (up to 1 kilovolt) and medium-voltage equipment (1 to 66 kilovolts), indoor and outdoor circuit breakers, reclosers, fuses, contactors, relays, instrument transform- ers, sensors, motor control centers, as well as a wide range of air- and gas-insulated switch- gear. The Division also produces indoor and outdoor modular systems and other segment-specific solutions to facilitate efficient and reliable distribution, protection and control of power, adding value through design, engineer- ing, 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, enriched by advanced digital services for asset management. Throughout the value chain, the Division provides training, technical support and customized contracts. A B B A N N U A L R E P O R T 2 0 2 1 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 The Smart Power Division helps protect, control, and connect people, plants, and systems with a portfolio of low-voltage products and systems. The product offering includes, molded-case and air-circuit breakers, safety products including sensors, switches, contactors, relays, and power protection solutions such as uninterruptible power supply (UPS) solutions, status transfer switches and power distribu- tion units. The Smart Buildings Division helps optimize efficiency, safety, security and comfort in homes and other buildings. The Division offers digitally enabled controls for HVAC, lighting, shutters, and security in addition to low-voltage products including conventional wiring accessories, indus- trial plugs and sockets, emergency lighting, DIN-rail products, and enclosures ideal for single family homes, multiple dwellings, commercial buildings, infrastructure and industrial applica- tions. The Division’s highly innovative solutions serve rising global demand among developers, owners, and investors for smart building technol- ogy, offering significant sustainable and financial benefits, as well as answering social and environ- mental needs, and addressing customers’ carbon reduction strategies. The Installation Products Division helps manage the connection, protection and distribution of electrical power. The Division’s products are engineered to provide ease of installation and perform in demanding and harsh conditions, helping to ensure safety and continuous opera- tion for our customers and people around the world. The commercial essentials product seg- ment includes electrical junction boxes, commercial fittings, strut and cable tray metal framing systems for commercial and residential construction. The premier industrial product segment includes multiple product lines, such as Ty-Rap®, T&B Liquidtight Systems®, PVC coated and nylon conduit systems, power connection and grounding systems, cable protection systems of conduits and fittings for harsh and industrial applications. The Division also manufactures solutions for medium-voltage applications used in utility and industrial applications under its marquee brands including ElastimoldTM reclosers and switchgear, capacitor switches, current limiting fuses, the High Tech ValiantTM full-range current limiting fuse for fire mitigation, faulted current indicators and distribution connectors, cable accessories and apparatus with products for overhead and underground distribution. The Power Conversion Division supplies innova- tive critical power solutions to infrastructure customers and manufacturers of a wide range of equipment. The Division supports its customers in telecom/5G, networking, data centers, and industrial applications (such as oil and gas, utility, power generation, and robotics) in rapidly chang- ing, disruptive environments where information, access and response times are redefining the markets. The Power Conversion Division also provides customers with reliable and efficient power that supports increasing infrastructure requirements, ensuring that data flows 24/7, while optimizing footprint, energy costs and operations. The Division supports customers by providing the latest industry insights and technol- ogy, partnering to co-develop solutions to tackle evolving challenges. The E-mobility Division engineers electrification solutions to enable global, accessible, reliable, smart and emission-free mobility. The Division offers to its customers a total electric vehicle charging solution from compact AC wall boxes and DC fast charging stations to on-demand electric bus charging systems. The Division also provides customers with services such as infra- structure installation and maintenance to meet the requirements of the next generation of smarter mobility. ABB Ability™ connected char- gers enable fast global service and pro-active maintenance. Sales and Marketing The Electrification Business Area’s global markets common sales and marketing organization cre- ates demand across all channels and products, with a range of promotional activities and sup- port services including account, channel, and segment sales management, commercial opera- tions, and digital expertise. Competition The Electrification Business Area’s principal competitors vary by product group and include Chint, Eaton, Hubbell, Legrand, LS Electric, Pana- sonic, Rittal, Schneider Electric and Siemens. Capital Expenditures The Electrification Business Area’s capital expen- ditures for property, plant and equipment totaled $345 million in 2021, compared to $316 million in 2020. Investments in 2021 were higher than in 2020 as some investments were previously de- layed in 2020 due to the COVID-19 pandemic. Investments in 2021 principally related to capacity expansion for e-mobility products, including the construction of a new factory in Italy, and to footprint changes, equipment replacement and upgrades. Geographically, in 2021, Europe repre- sented 54 percent of the capital expenditures, 120 A B B A N N U A L R E P O R T 2 0 2 1 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 followed by the Americas (34 percent) and Asia, Middle East and Africa (12 percent). Motion Business Area Overview The Motion Business Area provides pioneering technology, products, solutions and related services to industrial customers to increase energy efficiency, improve safety and reliability, and maintain precise control over processes. The portfolio includes motors, generators and drives for a wide range of applications in all industrial sectors. The Motion Business Area had approximately 20,000 employees as of December 31, 2021, and generated around $6.9 billion of revenues in 2021. Products and Services The Motion Business Area designs, manufactures and sells drives, motors, generators and traction converters. Building on long-standing experience in electric powertrains, the Business Area com- bines domain expertise and technology to deliver the optimum solution for a wide range of applica- tions for a comprehensive range of industrial segments. In addition, the Business Area, along with its channel partners, has an industry-leading global service presence. At December 31, 2021, the Motion Business Area’s products and services are delivered through seven operating Divisions. The Business Area divested its Mechanical Power Transmission Division on November 1, 2021, which designed, manufactured and sold various mechanical power transmission products sold under the Dodge® brand. The Drive Products Division serves the industries and infrastructure segments with world-class drives and programmable logic controllers (PLC). With its products, global scale and local presence, the Division helps customers to improve energy efficiency, productivity and safety. The System Drives Division supplies high-power, high-performance drives, drive systems and packages for industrial process and large infra- structure applications. The Division offers global support to help customers, partners and equip- ment manufacturers with asset reliability, performance improvement and energy efficiency in mission critical applications. The Service Division serves customers worldwide and aims to help customers by maximizing uptime, extending life cycle and enhancing the performance and energy efficiency of their elec- trical motion solutions. The Division is leading the way in digitalization by securely connecting motors and drives to help customers prevent expensive downtime while also optimizing opera- tions’ profitably, safely and reliably. The Traction Division is a recognized leader in traction technologies that drive innovation in rail, bus and other modes of electric transporta- tion. A comprehensive range of high performance propulsion, auxiliary and energy storage solutions help improve energy efficiency and contributes to making transportation more sustainable. The IEC Low Voltage Motors Division is a global market leader that provides a full range of energy efficient low voltage motors, including ultra-efficient motors such as synchronous reluctance motors (SynRM) to help customers reduce power bills and cut emissions. Through a global footprint, application expertise and with rugged designs, the Division’s products support customers with IEC low-voltage motor solutions that improve reliability and productivity in the most demanding applications. The Large Motors and Generators Division offers a comprehensive product portfolio of large AC motors and generators. The Division’s robust, reliable and highly efficient offerings power critical infrastructure and transportation across all major industries and applications often in remote and demanding locations. The NEMA Motors Division is a marketer, designer and manufacturer that offers Baldor-Reliance® industrial electric motors, primarily in North America. The Division focuses on quality, reliabil- ity and efficiency to provide a comprehensive offering of NEMA motors in the market across most industrial segments and applications. Customers The Motion Business Area serves a wide range of customers in different industrial segments such as pulp and paper, oil and gas, metals and mining, food and beverage, HVAC, water and wastewater, transportation, power generation, marine and offshore. 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, OEMs and system integrators. The proportion of direct sales to end users compared to channel partner A B B A N N U A L R E P O R T 2 0 2 1 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 sales varies among the different industries, products and geographic markets. Customers Competition The principal competitors of the Motion Business Area include Schneider, Siemens, Toshiba, WEG Industries, SEW EURODRIVE and Danfoss. Capital Expenditures Capital expenditures in the Motion Business Area for property, plant and equipment totaled $230 million in 2021, compared to $118 million in 2020. Principal investments in 2021 related to the purchase of a formerly leased property in China as well as equipment replacement, footprint adjust- ments and automation upgrades. Geographically, in 2021, Asia, Middle East and Africa represented 49 percent of the capital expenditures, followed by Europe (34 percent) and the Americas (17 percent). — Process Automation Business Area Overview In 2021, the former Industrial Automation Busi- ness Area was renamed Process Automation and there was no change in the composition of the Divisions. The Process Automation Business Area offers customers in process, hybrid and maritime industries a broad range of integrated automa- tion, electrical, motion and digital systems, solutions and related services that are designed to optimize productivity, energy efficiency, sustainability and safety of industrial processes and operations, based on the Business Area’s deep domain knowledge and expertise of each end market. The Business Area’s offering can be grouped, with about half relating to solutions for new and brownfield projects and half relating to service, mainly for installed own products. In some cases, the Business Area integrates offerings from the Electrification, Motion and Robotics & Discrete Automation Business Areas into its integrated systems. The Business Area’s offerings are sold primarily through its direct sales force with a smaller share through partners and distributors. The Business Area had approximately 22,000 employees as of December 31, 2021, and generated revenues of $6.3 billion in 2021. The Process Automation Business Area’s end customers include companies across process, hybrid and maritime industries. These industries include oil, gas, chemicals and plastics, mining and minerals, metals, pulp and paper, pharmaceu- ticals, food and beverage, power generation, marine and ports. Products and Services The offering of the Process Automation Business Area includes an extensive portfolio of products, solutions, digital applications and services for the control of the simplest to the most complex and critical of processes and infrastructure. These systems can link various process and information flows, allowing customers to manage and control their entire business process based on real-time information. The Business Area’s control platform includes ABB Ability™ Distributed Control System (DCS), System 800xA®, which is also an electrical control system, a safety system and a collaboration enabler with the capacity to improve engineering efficiency, operator perfor- mance and asset utilization. Other control solutions include Symphony® Plus (designed to address the open automation platform needs of the Hydropower and Water industry segments) and our Freelance DCS solution. Components for basic automation solutions, process controllers, I/O modules, panels, and Human Machine Inter- faces (HMI), are available through the Compact Product Suite offering. The product portfolio is complemented by a suite of ABB Ability™ Advanced Digital Services and by ABB Care, a subscription-based lifecycle management program that provides services to maintain and continually advance and enhance ABB’s distrib- uted control systems and optimize customers’ lifecycle costs. The ABB Ability™ Genix Industrial Analytics and Artificial Intelligence Suite unlocks greater value by contextualizing and integrating data from IT, engineering, and operations sys- tems to provide deep, meaningful and actionable insights. The portfolio is complemented by a range of industry-specific products in each Division. The Process Automation Business Area has five operating Divisions. The Energy Industries Division enables safe, smart, and sustainable projects and operations for businesses across the oil and gas, chemicals, life sciences, power generation and water sectors. It is committed to driving more sustainable use of our planet’s resources through innovative solutions that enable energy efficient and low carbon operations across traditional industries 122 A B B A N N U A L R E P O R T 2 0 2 1 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 support the development of new and renew- able energy models. The Division serves the energy market with leading integrated solutions that automate, digitalize and electrify operations across industries. The Division’s goal is to help customers adapt and succeed in the rapidly changing global energy transition. Harnessing data, machine learning and AI, the Division brings over 50 years of domain expertise delivering solutions designed to improve energy, process and production efficiency, as well as reduce risk, operational cost and capital cost, while minimiz- ing waste for all customers, from project start-up and throughout the entire plant lifecycle. The Process Industries Division serves the mining, minerals processing, metals, aluminum, cement, pulp and paper, battery manufacturing, and food and beverage, as well as their associated service industries. The Division brings deep industry domain expertise coupled with the ability to integrate both automation and electrical, increase productivity and reduce overall capital and operating costs for customers. For mining, metals and cement customers, solutions include special- ized products and services, as well as total production systems. The Division designs, plans, engineers, supplies, erects and commissions integrated electrical and motion systems, includ- ing 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. The offering for the pulp and paper industries includes control sys- tems, quality control systems, drive systems, on-line sensors, actuators and field instruments. Digitalization solutions, including collaborative operations and augmented reality, help improve plant and enterprise productivity, and reduce maintenance and energy costs. The Marine & Ports Division serves the shipping industry through its extensive portfolio of inte- grated marine systems and solutions that improve the flexibility, reliability and energy efficiency of vessels. By coupling power, propul- sion, automation, marine software and services that ensure maximum vessel uptime, we are well positioned to help improve the profitability and sustainability of our customers’ business throughout the entire lifecycle of a fleet. With ABB Ability™ Marine software solutions and ABB Ability™ Collaborative Operations Centers around the world, shipowners and operators can run their fleets at lower fuel and maintenance costs, while improving crew, passenger and cargo safety as well as overall productivity of their operations. Further, the Division delivers automation, electrical systems and digital solu- tions for container and bulk cargo handling, from ship to gate. These solutions help terminal opera- tors meet the challenge of larger ships, taller cranes and bigger volumes per call, and make terminal operations safer, greener and more productive. The portfolio of the Measurement & Analytics Division consists of analyzers (measuring compo- sitions of gases and liquids), instrumentation (measuring the typical process variables of tem- perature, pressure, flow, and level) as well as specialized measurements for specific industries. With this offering the Division serves virtually all process, hybrid and marine industries, the largest among them being the oil, gas and chemical value chain, water and power generation industries. The Division also provides advanced digital solutions to help customers improve productivity, safety and environmental sustainability. The Turbocharging Division manufactures and services turbochargers for diesel and gas engines with power levels ranging from 500 kilowatts to over 80 megawatts. Key end sectors are marine- and land-based power generation. The Division provides engine builders and operators advanced solutions and services for efficient and flexible application operations, in compliance with the most stringent environmental requirements. Sales and Marketing The Process Automation Business Area’s sales are primarily made through its direct sales force as well as third-party channel partners, such as distributors, system integrators and OEMs. The majority of revenues are derived through the Business Area’s own direct sales channels. Competition The Process Automation Business Area’s principal competitors vary by industry or product group. Competitors include: Emerson, Honeywell, Schneider Electric, Siemens, Siemens Energy, Yokogawa, Endress + Hauser, Kongsberg, Valmet and Garrett. Capital Expenditures The Process Automation Business Area’s capital expenditures for property, plant and equipment totaled $85 million in 2021, compared to $75 mil- lion in 2020. Principal investments in 2021 were in the Turbocharging and the Measurement & Ana- lytics Divisions. Geographically, in 2021, Europe represented 73 percent of the capital A B B A N N U A L R E P O R T 2 0 2 1 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 expenditures, followed by Asia, Middle East and Africa (18 percent) and the Americas (9 percent). — Robotics & Discrete Automation Business Area Overview The Robotics & Discrete Automation Business Area provides robotics, and machine and factory automation including products, software, solu- tions and 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 Area had approximately 10,600 employees as of December 31, 2021, and generated $3.3 billion of revenues in 2021. Products and Services The Robotics & Discrete Automation Business Area’s products and services are delivered through two operating Divisions. The Robotics Division offers a wide range of products, solutions and services including robots, robotics application cells and smart systems, field services, spare parts, digital services, engi- neering and operations software. This offering provides customers with increased productivity, quality, flexibility and simplicity for operations, e.g. to meet the challenge of making smaller lots of a larger number of specific products in shorter cycles for today’s dynamic global markets and coping with increasing uncertainty. 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 and can help customers address labor shortages. Robotics solutions are used in a wide range of segments from automotive OEMs, automotive suppliers, electronics, general industry, consumer goods, food and beverage, and warehouse/logistics center automation. They are increasingly de- ployed in service applications for health care, restaurants and retail. Typical robotic applica- tions include welding, material handling, machine tending, machining, painting, picking, packing, palletizing and assembly. In 2021, we acquired ASTI Mobile Robotics Group (ASTI) adding a broad portfolio of autonomous mobile robot vehicles and solutions. The Machine Automation Division offers inte- grated automation solutions based on programmable logical controllers, industrial PCs, servo motion, industrial transport systems and machine vision. It also provides software for engineering and optimization. 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 active 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 as well as through third-party channel partners, such as system integrators and machine builders. The proportion of direct sales compared to channel partner sales varies among the different indus- tries, product technologies and geographic markets. Competition Competitors of the Robotics & Discrete Automa- tion Business Area vary by offering and include companies such as Fanuc, Kuka, Yaskawa, Epson, Dürr, Stäubli, Universal Robots, Rockwell Automa- tion, Siemens, Mitsubishi Electric and Beckhoff. Capital Expenditures The Robotics & Discrete Automation Business Area’s capital expenditures for property, plant and equipment totaled $96 million in 2021, compared to $65 million in 2020. Principal invest- ments in 2021 were primarily related to research and development and training facilities, especially the new Machine Automation Division global innovation and training campus in Austria, and upgrades and equipment replacement. In 2021, Europe represented 75 percent of capital expendi- tures, followed by Asia, Middle East and Africa (23 percent) and the Americas (2 percent). — Corporate and Other Corporate and Other includes core headquarter functions, real estate activities, Corporate Trea- sury Operations, Global Business Services (GBS), the investment in Hitachi Energy and other minor business activities. Certain strategic investments managed by ABB Technology Ventures are also 124 A B B A N N U A L R E P O R T 2 0 2 1 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 included in Corporate. The remaining activities of certain EPC projects which we are completing and are in a wind-down phase are reported as non-core businesses within Corporate and Other. In addition, the historical business activities of certain divested businesses are presented in Corporate and Other. These include the high-voltage cables business, steel structures and certain EPC contracts relating to the oil and gas industry. Corporate headquarters and stewardship activi- ties include the operations of our corporate headquarters in Zurich, Switzerland, as well as limited corporate-related activities in some countries. These activities cover staff functions with group-wide responsibilities, such as accounting and financial reporting, corporate finance and corporate treasury, taxes, financial planning and analysis, internal audit, legal and integrity, compliance, risk management and insurance, corporate communications, informa- tion systems and investor relations. GBS operates shared service centers globally through a network of five hubs and consists of both expert and transactional services in the areas of human resources, finance, information services, legal, real estate, customer contact centers, global travel services and other ancillary activities. GBS also staffs and maintains front offices in most countries. The costs in GBS are incurred primarily for the benefit of the Business Areas, who are charged for their use of the services and the related number of employees are allocated to the Business Areas. GBS also provides services to third-parties under transitional service agreements in relation to certain divested businesses, the largest of which is the Power Grids business. A significant portion of the costs for GBS and other shared corporate overhead costs are charged to the operating businesses. Up until the divestment of the Power Grids business on July 1, 2020, overhead and other management costs, including GBS costs, which would have been allocated or charged to our Power Grids business, and which were not directly attributable to this business, have not been allocated to the discon- tinued operation and are included in Corporate and Other as “stranded costs”. Corporate and Other had approximately 1000 employees at December 31, 2021, of which approximately 200 pertain to our non-core businesses. — Discontinued operations In July 2020, we divested 80.1 percent of our Power Grids business to Hitachi Ltd. As a result, the Power Grids business is reported as discon- tinued operations in the Consolidated Financial Statements for all years presented. See “Note 3 - Discontinued operations” to our Consolidated Financial Statements. Power Grids business The former Power Grids business of ABB delivered products, systems, software and service solu- tions across the power value chain for utility, industry and transport & infrastructure customers. The Power Grids business operated worldwide with a globally diversified manufacturing, engi- neering, and research and development footprint. Direct sales accounted for the majority of total revenues generated by the business while exter- nal channel partners such as EPCs, wholesalers, distributors and OEMs accounted for the rest. Products and Services The Grid Automation operation supplied substa- tion automation products, systems and services. It also provided 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 and also offered grid-edge and microgrid solutions. Its enterprise software portfolio provided solutions for manag- ing and optimizing assets, operations, logistics, financials and HR, reducing operating costs and improving productivity for customers. The Grid Integration operation was a leading provider of integration and transmission solu- tions such as High Voltage Direct Current (HVDC). Another key part of the portfolio was the Flexible Alternating Current Transmission Systems (FACTS) business, which comprises Static Var Compensation (SVC) and static compensator (STATCOM) technologies to address stability and A B B A N N U A L R E P O R T 2 0 2 1 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 power quality issues. The Grid Integration opera- tion’s portfolio also included a range of high-power semiconductors, a core technology for power electronics deployed in HVDC, FACTS and rail applications. The Grid Integration opera- tion also provided transmission and distribution substations and associated lifecycle services. These substations are used in utility and non-utility applications including rail, data cen- ters and various industries. Battery energy storage solutions and shore-to-ship power supply were also part of the customer offering. The High Voltage products operation was a provider of high voltage switchgear up to 1200 kV AC and 1100 kV DC with a portfolio spanning air-insulated, gas-insulated and hybrid technolo- gies. It also manufactured generator circuit breakers, a key product for integrating large power plants into the grid. The portfolio also included a broad range of capacitors and filters that facilitate power quality, instrument trans- formers and other substation components. The Transformers operation supplied transform- ers that are an integral component found across the power value chain, enabling the reliable, efficient and safe conversion of voltage levels. The product range included dry- and liquid-distribution transformers, traction trans- formers for rail applications and special application transformers plus related compo- nents, for example, insulation kits, bushings and other transformer accessories. The Power Grids business also had an extensive portfolio of service offerings across the value chain. The portfolio included spare parts, condi- tion monitoring and maintenance services, on- and off-site repairs as well as retrofits and upgrades. Advanced software-based monitoring and advisory services further enhanced the portfolio. — Capital expenditures Total capital expenditures for property, plant and equipment and intangible assets (excluding intangibles acquired through business combina- tions) amounted to $820 million, $694 million and $762 million in 2021, 2020 and 2019, respectively. In 2021 and 2020, capital expenditures were 8 percent and 24 percent lower, respectively, than depreciation and amortization. Excluding acquisition-related amortization, capital expendi- tures were 28 percent higher in 2021 and 6 percent higher in 2020, respectively, than depreciation and amortization. Capital expenditures in 2021 remained primarily focused in mature markets, reflecting the geo- graphic distribution of our existing production facilities. Capital expenditures in Europe and North America in 2021 were driven primarily by upgrades and maintenance of existing production facilities, mainly in the U.S., Austria, Italy, Switzer- land, Finland and Sweden. Capital expenditures in Austria included continued investment in the state-of-the-art innovation and training campus, which is planned to become one of our largest research and development centers for new auto- mation technologies. We also are constructing a new facility in Italy for our E-mobility Division. This investment aims to serve as a global center of excellence and production site for electric vehicle charging infrastructure. Our capital expenditures in emerging markets continued to remain primarily concentrated in China and focus on increasing existing produc- tion capacity. In Asia, we continued our significant investments in China investing in the new auto- mated and flexible robotics factory and also purchasing a significant formerly leased property. The share of emerging markets capital expendi- tures as a percentage of total capital expenditures in 2021 and 2020 was 33 percent and 22 percent, respectively. At December 31, 2021, construction in progress for property, plant and equipment was $522 mil- lion, mainly in the U.S., Switzerland, Germany, Sweden, Italy, China and India while at Decem- ber 31, 2020, construction in progress for property, plant and equipment was $505 million, mainly in the U.S., Switzerland, Austria, Germany and China. Our capital expenditures relate primarily to property, plant and equipment and are funded primarily through cash flows from operating activities. For 2022, we estimate the expenditures for property, plant and equipment will be higher than our annual depreciation and amortization charge, excluding acquisition-related amortization. 126 A B B A N N U A L R E P O R T 2 0 2 1 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 — Supplies and raw materials a stable cost base during order execution. In addition to using derivatives to reduce our expo- sure to fluctuations in raw materials prices, in some cases we can reduce this risk by incorporat- ing changes in raw materials prices into the prices of our end products (through price escala- tion clauses). Overall, during 2021, 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. Responding to the challenges of overall global supply chain constraints, each Business Area quickly implemented a task force to mitigate supply chain shortages. The Business Areas experienced some delays in supplier deliveries and product shortages for various categories such as semiconductors and other raw materials as well as constraints in the transportation of inbound supplies. However, we responded to these challenges and took mitigating actions such as building up buffer stocks, approving new suppliers, changing supplier splits, combined with daily, weekly and monthly task force project follow ups. We have, to a large extent, been able to mitigate most disruptions, maintain a competi- tive service level and support our business growth, while maintaining delivery schedules to our customers. In August 2012, the SEC issued its final rules regarding “Conflict Minerals”, as required by section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. We initi- ated 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 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 “Material Compliance” at global.abb/ group/en/about.supplying. 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 fabricated products, electronic components and systems. We operate a worldwide supply chain management network with employees dedicated to this function in our Business Areas, Divisions and in key countries. Our supply chain operations consists of a number of teams, each focusing on different product categories. These category teams take advantage of opportunities to lever- age the scale of ABB on a global, Business Area and/or Division level, as appropriate, to optimize the efficiency of our supply networks in a sustain- able manner. Our supply chain management organization’s activities 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 deriva- tive contracts. For example, we manage copper, silver and aluminum price risk using principally swap contracts based on prices for these com- modities quoted on leading exchanges. ABB’s hedging policy is designed to safeguard margins by minimizing price volatility and providing A B B A N N U A L R E P O R T 2 0 2 1 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 — Patents and trademarks While we are not materially dependent on any one of our intellectual properties, as a technology-driven company, we believe that intellectual property rights are crucial to protect the assets of our business. Over the past ten years, we have continued to substantially add new applications to our existing first patent filings, and we intend to continue our aggressive approach to seeking patent protection. As of December 31, 2021, we have approximately 25,000 patent applications and registrations, of which approximately 5,500 are pending applica- tions. These patents include more than 3,500 utility model and design applications and registrations, of which approximately 200 are pending applications. In 2021, we filed more than 2,250 patents, utility model and design applica- tions for more than 1,250 inventions. Based on our existing intellectual property strategy, 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 proactively assert our intellectual 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 dependency of the business on any single patent, utility model or design application. — Management overview During 2021, we saw a strong recovery from the pandemic-related disruptions of 2020. It also was the first full fiscal year where we operated under our decentralized operating model, the ABB Way. In 2021, we have seen improved efficiencies from this new way of operating and we expect the increased transparency, accountability and speed to further support future growth and profitability. Additionally, we made progress in reshaping our business portfolio, completing the divestment of the Mechanical Power Transmission business, as we continue to be fully focused on electrification and automation. This transaction completes the first of the three planned Divisional exits previ- ously announced in 2020. Active portfolio management is part of our per- formance culture. On the back of systematic portfolio reviews we ascertain whether ultimately ABB is the best owner of the different businesses. As a result, we have successfully divested the Mechanical Power Transmission Division during 2021. We continue to make progress on the exit of the Turbocharging Division, where we are cur- rently running a dual track process for a spin-off or divestment, and plan to exit the Power Conver- sion Division. At the same time, we are carving-out the E-mobility Division and work towards an initial public offering to create a platform for accelerated growth and value cre- ation. We plan to remain a majority owner of the new company. In addition, our active portfolio management process is driving decisions within the Divisions to improve or exit areas of underperformance, supporting improved performance ambitions. Further, we intend to pursue strategic partner- ships as well as bolt-on acquisitions driven by the Divisions. In 2021, we acquired ASTI Mobile Robot- ics Group, a global leader in the high-growth autonomous mobile robots market with a broad portfolio of vehicles and software. As part of our future strategy we aim to complete five or more bolt-on acquisitions each year. Business progress During 2021, demand for ABB’s offering recovered from the low level in 2020 when the adverse business impact of the pandemic was most significant. Orders and revenues increased in all Business Areas. Demand increased year-on-year in all regions with the Americas seeing the highest growth, while the increase was lower in Asia, Middle East and Africa as China had already started to recover in 2020. While short-cycle product demand recovered relatively quickly from the sharp downturn seen at the onset of the pandemic, project activities, particularly in pro- cess industries, predominantly picked-up during the second half of 2021. The loosening of various pandemic-related travel restrictions allowed for a more significant improvement in service-related activities. 128 A B B A N N U A L R E P O R T 2 0 2 1 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 While our orders increased 20 percent in 2021, revenues only grew by 11 percent. Supply chain constraints, and imbalances in the overall supply chain limited our ability to convert orders into actual deliveries resulting in an increase of our order backlog by 16 percent to $16.6 billion at the end of the year. 0.82 Swiss francs per share. We also plan to continue our announced share buyback to return $7.8 billion of cash proceeds from the Power Grids divestment to shareholders. At December 31, 2021, under the initial and follow-up share buy- back programs, we had cumulatively purchased shares for approximately $5.5 billion. Group profitability showed strong improvement during 2021 with segment profit (Operational EBITA) higher in all Business Areas and continued progress towards a lean corporate function. The result was driven by better volumes, continuous improvements, improved internal efficiency and the absence of certain larger non-core project losses incurred in 2020. Active price management and productivity gains were able to offset in- creasing raw material costs and general cost inflation emphasized by the tight supply situation over the year. While some costs such as discre- tionary travel or certain marketing costs are still expected to rebalance from low pandemic levels, we believe we are on track to achieve our future business targets. The profitability improvement as well as lower cash costs for transformation initiatives have also allowed us to achieve strong cash generation, with cash flows from operating activities in continuing operations improving to $3.3 billion in 2021, an increase of 78 percent compared to 2020. We continued to make organic growth invest- ments in a disciplined manner, prioritizing research and development while reducing admin- istrative costs. Total non-order related research and development was $1.2 billion in 2021, or 4.2 percent of revenues. We also completed key acquisitions and divestments in 2021, strengthen- ing our portfolio. Capital allocation Our capital allocation priorities are unchanged: • funding organic growth, research and development, and capital expenditures at attractive returns, • paying a rising, sustainable dividend per share over time, • investing in value-creating acquisitions, and • returning additional cash to shareholders. We expect that our improved cash generation, on the back of the ABB Way operating model, will enhance our flexibility to invest in both organic growth and bolt-on acquisitions, while providing attractive returns to shareholders. At the 2022 Annual General Meeting (AGM), the Board of Directors is proposing a dividend of Updated financial target framework During 2021, we raised our growth target to 4 to 7 percent (up from 3 to 5 percent) annual average revenue growth, through an economic cycle and in constant currencies. This includes 3 to 5 percent organic growth and 1 to 2 percent from acquired growth. For the Operational EBITA margin, we have re- moved the previous margin ranges and raised our target to at least 15 percent as from 2023 (from upper half of 13 to 16 percent range in 2023). The other targets within our financial framework remain unchanged: • 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. Sustainability strategy 2030 With our 2030 sustainability strategy, we are actively contributing to a more sustainable world, leading by example in our own operations and partnering with customers and suppliers to enable a low-carbon society, preserve resources and promote social progress. Our sustainability focus is part of ABB’s commitment to responsible business practices, which are at the center of our comprehensive governance framework, based on integrity and transparency. Amongst other focus areas in 2021, we unveiled, at the Capital Markets Day 2021, our circularity framework covering every stage of the product lifecycle to preserve resources. It includes four stages: circular design and sourcing, resource efficient operations, optimized use phase and responsible end of life. The goal is to have 80 percent of ABB products, solutions and ser- vices covered by the circularity framework by 2030, with our progress measured against a set of KPIs. For further information on sustainability see the Sustainability section in the Introduction to this Annual Report. A B B A N N U A L R E P O R T 2 0 2 1 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 — Critical accounting policies and estimates 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 requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis (see “Note 2 - Significant accounting policies” to our Consolidated Financial Statements for a listing of our most significant accounting estimates). Where appropriate, we base our estimates on historical experience and on various other as- sumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates and assumptions. We deem an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consoli- dated Financial Statements. We also deem an accounting policy to be critical when the applica- tion of such policy is essential to our ongoing operations. We believe the following critical accounting policies require us to make subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain and material to our Consolidated Finan- cial Statements. These policies should be considered when reading our Consolidated Finan- cial Statements. arrangement with a customer, we determine which revenue recognition method applies. 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. The percentage-of-completion method of ac- counting is generally used when recognizing revenue on an over time basis and involves the use of assumptions and projections, principally relating to future material, labor, subcontractor and project-related overhead costs as well as estimates of the amount of variable consideration to which we expect to be entitled. As a conse- quence, there is a risk that total contract costs or the amount of variable consideration will, respec- tively, either exceed or be lower than those we originally estimated (based on all information reasonably available to us) and the margin will decrease or the contract may become unprofit- able. This risk increases if the duration of a contract increases because there is a higher probability that the circumstances upon which we originally developed our estimates will change, resulting in increased costs that we may not recover. Factors that could cause costs to in- crease 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 Revenue recognition or events. 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 parties, and has been approved. By analyzing the type, terms and conditions of each contract or Changes in our initial assumptions, which we review on a regular basis between balance sheet dates, may result in revisions to estimated costs, current earnings and anticipated earnings. We recognize these changes in the period in which the changes in estimates are determined. By 130 A B B A N N U A L R E P O R T 2 0 2 1 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 recognizing changes in estimates cumulatively, recorded revenue and costs to date reflect the current estimates of the stage of completion of each project. Additionally, losses on such con- tracts are recognized in the period when they are identified and are based upon the anticipated excess of contract costs over the related contract revenues. Pension and other postretirement benefits As more fully described in “Note 17 - Employee benefits” to our Consolidated Financial State- ments, we have a number of defined benefit pension and other postretirement plans and recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in our Consolidated Balance Sheets. We measure such a plan’s assets and obligations that deter- mine its funded status as of the end of the year. Significant differences between assumptions and actual experience, or significant changes in assumptions, may materially affect the pension obligations. The effects of actual results differing from assumptions and the changing of assump- tions are included in net actuarial loss within “Accumulated other comprehensive loss”. We recognize actuarial gains and losses gradually over time. Any cumulative unrecognized actuarial gain or loss that exceeds 10 percent of the greater of the present value of the projected benefit obligation (PBO) and the fair value of plan assets is recognized in earnings over the expected average remaining working lives of the employees participating in the plan, or the expected average remaining lifetime of the inactive plan partici- pants if the plan is comprised of all or almost all inactive participants. Otherwise, the actuarial gain or loss is not recognized in the Consolidated Income Statements. We use actuarial valuations to determine our pension and postretirement benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates, mortality rates and expected return on plan assets. Under U.S. GAAP, we are required to consider current market conditions in making these assumptions. In particular, the discount rates are reviewed annually based on changes in long-term, highly-rated corporate bond yields. Decreases in the discount rates result in an in- crease 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 pen- sion costs. Conversely, an increase in mortality rates results in a decrease in the PBO and in pension costs. Holding all other assumptions constant, a 0.25 percentage-point decrease in the discount rate would have increased the PBO related to our defined benefit pension plans by $262 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 $254 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 2021 by $21 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 represent a mandatory short-term cash obliga- tion. Instead, the funded status of a defined benefit pension plan is the difference between the PBO and the fair value of the plan assets. At December 31, 2021, our defined benefit pension plans were $27 million overfunded compared to an underfunding of $656 million at December 31, 2020. Our other postretirement plans were under- funded by $71 million and $98 million at December 31, 2021 and 2020, respectively. Income taxes In preparing our Consolidated Financial State- ments, we are required to estimate income taxes in each of the jurisdictions in which we operate. Tax expense from continuing operations is recon- ciled from the weighted-average global tax rate (rather than from the Swiss domestic statutory tax rate). As the parent company of the ABB Group, ABB Ltd, is domiciled in Switzerland, income which has been generated in jurisdictions outside of Switzerland (hereafter “foreign juris- dictions”) and has already been subject to corporate income tax in those foreign jurisdic- tions 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 subsidiar- ies. There is no requirement in Switzerland A B B A N N U A L R E P O R T 2 0 2 1 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 for a parent company of a group to file a tax return of the group determining domestic and foreign pre-tax income and as our consolidated income from continuing operations is predomi- nantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely deter- mines our global weighted-average tax rate. We account for deferred taxes by using the asset and liability method. Under this method, we determine deferred tax assets and liabilities based on temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We recog- nize a deferred tax asset when it is more likely than not that the asset will be realized. We regu- larly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. To the extent we increase or decrease this allowance in a period, we recognize the change in the allow- ance within “Income tax expense” in the Consolidated Income Statements unless the change relates to discontinued operations, in which case the change is recorded in “Income from discontinued operations, net of tax”. Unfore- seen changes in tax rates and tax laws, as well as differences in the projected taxable income as compared to the actual taxable income, may affect these estimates. Certain countries levy withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. Switzerland has concluded double taxation treaties with many countries in which we operate. These treaties either eliminate or reduce such withholding taxes on dividend distributions. It is our policy to distribute retained earnings of subsidiaries, insofar as such earnings are not permanently reinvested or no other reasons exist that would prevent the subsidiary from distribut- ing them. No deferred tax liability is set up, if retained earnings are considered as indefinitely reinvested, and used for financing current opera- tions as well as business growth through working capital and capital expenditure in those countries. We operate in numerous tax jurisdictions and, as a result, are regularly subject to audit by tax authorities, including for transfer pricing. We provide for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Contingency provisions are recorded based on the technical merits of our filing position, considering the applicable tax laws and OECD guidelines and are based on our evaluations of the facts and circumstances as of the end of each reporting period. Changes in the facts and cir- cumstances 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 income tax provisions and accruals. An estimated loss from a tax contingency must be accrued as a charge to income if it is more likely than not that a tax asset has been impaired or a tax liability has been incurred and the amount of the loss can be reasonably estimated. We apply a two-step approach to recognize and measure uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation pro- cesses, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. The required amount of provisions for contingencies of any type may change in the future due to new developments. Goodwill and 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 quanti- tative assessment method for each reporting unit. As each of our Divisions have full ownership and accountability for their respective strategies, performance and resources, we have determined our reporting units to be at the Division level, which is one level below our operating segments of Electrification, Motion, Process Automation and Robotics & Discrete Automation. When performing the qualitative assessment, we first determine, for a reporting unit, factors which would affect the fair value of the reporting unit including: (i) macroeconomic conditions related to the business, (ii) industry and market trends, and (iii) the overall future financial performance and future opportunities in the markets in which the business operates. We then consider how 132 A B B A N N U A L R E P O R T 2 0 2 1 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 these factors would impact the most recent quantitative analysis of the reporting unit’s fair value. Key assumptions in determining the fair value of the reporting unit include the projected level of business operations, the reporting unit’s weighted-average cost of capital, the income tax rate and the terminal growth rate. During 2021, we added three new Divisions by splitting two existing ones into multiple stand- alone Divisions and announced (in July 2021) the divestment of the Mechanical Power Transmission Division, resulting in twenty reporting units in total for the Group at October 1, 2021. For each change in reporting unit which arose during 2021, an interim quantitative impairment test was conducted before and after the change. In both the “before” and “after” tests, it was concluded that the fair value of the reporting units exceeded the carrying value by a significant amount. In 2020, prior to the adoption of the new “ABB Way” operating model on July 1, 2020, goodwill was generally assessed at the level of ABB’s operating segments (one level above the Division, with the exception of Process Automation where the reporting units were the same as the Divi- sions) while after the change, goodwill impairment was assessed at the Division level. Although the new operating model resulted only in an allocation of goodwill within the operating segments and did not change the segment level goodwill, an interim quantitative impairment test was conducted before and after the July 1 change. In the “before” test, it was concluded that the fair value of our reporting units exceeded the carrying value under the historical reporting unit structure. For the impairment test performed immediately after the change in reporting units, the fair value of each of the eighteen reporting units was determined using a discounted cash flow fair value estimate based on objective information at the measurement date. The significant assump- tions used to develop the estimates of fair value for each reporting unit included our best esti- mates of the expected future results and discount rates specific to the reporting unit. Determining the projected future cash flows required signifi- cant judgments and estimates involving variables such as future sales volumes, sales prices, pro- duction and other operating costs, capital expenditures, net working capital requirements and other economic factors such as the continued impact of the COVID-19 pandemic. The fair value estimates were based on assumptions that we believed to be reasonable, but which were inher- ently uncertain and thus, actual results may differ from those estimates. Sensitivity analyses were performed around certain of these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values. The 2020 interim quantitative impairment test indicated that, with the exception of the Machine Automation reporting unit within the Robotics & Discrete Automation operating segment, the estimated fair values of our reporting units were substantially in excess of their carrying value. The contraction of the global economy in 2020, partic- ularly in end-customer industries and considerable uncertainty around the continued pace of macroeconomic recovery generally led to a reduction in the fair values of the reporting units, thus also affecting the Machine Automation reporting unit. At the Division level, this reporting unit does not benefit from shared cash flows generated within an entire operating segment. In addition, the book value of the Machine Automa- tion Division includes a significant amount of intangible assets recognized in past acquisitions, resulting in a proportionately higher book value than the other reporting unit within the Robotics & Discrete Automation operating segment. These factors led to the carrying value of the Machine Automation reporting unit exceeding its fair value. During 2020, a goodwill impairment charge of $290 million was recorded to reduce the carry- ing value of this reporting unit to its implied fair value. The remaining goodwill for the Machine Automation reporting unit was $554 million as of December 31, 2020. Since the carrying value of this reporting unit was reduced to its fair value as of July 1, 2020, any material adverse changes such as market deterioration or changes in the com- petitive landscape could result in future impairment charges. At October 1, 2021 and 2020, respectively, we performed qualitative assessments and deter- mined 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 con- cluded that it was not necessary to perform the quantitative impairment test. Intangible assets are reviewed for recoverability upon the occurrence of certain triggering events (such as a decision to divest a business or pro- jected losses of an entity) or whenever events or changes in circumstances indicate that the carry- ing amount may not be recoverable. We record impairment charges other than impairments of goodwill in “Other income (expense), net” in our Consolidated Income Statements, unless they relate to a discontinued operation, in which case the charges are recorded in “Income from discon- tinued operations, net of tax”. A B B A N N U A L R E P O R T 2 0 2 1 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 — New accounting pronouncements For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our Consolidated Financial Statements, see “Note 2 - Significant accounting policies” to our Consolidated Financial Statements. — Research and development Each year, we invest significantly in research and development. Our research and development focuses on developing and commercializing the technologies, products and solutions of our businesses that are of strategic importance to our future growth. In 2021, we invested $1,219 million, or approximately 4.2 percent of our 2021 consoli- dated revenues, on research and development activities in our continuing operations. We also had expenditures of $53 million, or approximately 0.2 percent of our 2021 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 businesses in our research and development laboratories, which operate on a global basis, such as our ABB Ability™ platform. Through active management of our investment in research and development, we seek to maintain a balance between short-term and long-term research and development programs and optimize our return on investment. We protect these results by hold- ing patents, copyrights and other appropriate intellectual property protection. To complement our business-focused product development, our businesses invest together in collaborative research activities covering topics such as artificial intelligence, software, sensors, control and optimization, mechatronics and robotics, power electronics, communication technologies, material and manufacturing, elec- trodynamics and electrical switching technologies. This results in advancing the state-of-the-art technologies used in our prod- ucts and in common technology platforms that can be applied in multiple product lines. Universities are incubators of future technology, and one task of our research and development teams is to transform university research into industry-ready technology platforms. We collabo- rate 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 several continents, including long-term, strategic relationships with a number of leading institu- tions in the U.S., the United Kingdom, Sweden, Germany, Switzerland, Poland, India and China. We are also leveraging our ecosystem to enhance our innovation efforts and gain speed with strate- gic partners with complementary competencies. In addition, we invest and collaborate with start-ups worldwide via our corporate venture arm ABB Technology Ventures and our start-up collaboration arm SynerLeap. The result of our investment in research and development is that ABB is widely recognized for its world-class technology. Technology has been deeply embedded in our DNA since our founding and has carried us through our century-long history. It is one of the main reasons why custom- ers and partners turn to us for help on their biggest challenges. Together with them, we continuously push technology frontiers to make things possible that were not possible before. We are committed to stay ahead to help our custom- ers address the world’s energy challenges, transform industries to reach new levels of per- formance and embed sustainability, all to leave behind a world for future generations that is at least as healthy and prosperous as the one we inherited. 134 A B B A N N U A L R E P O R T 2 0 2 1 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 and divestments Acquisitions During 2021 and 2020, ABB paid $212 million and $79 million to purchase two and three businesses, respectively. The principal acquisition in 2021 was ASTI Mobile Robotics Group SL (ASTI). ASTI, headquartered in Burgos, Spain, is a global autonomous mobile robot (AMR) manufacturer and employs approxi- mately 300 people. See “Note 4 - Acquisitions, divestments and equity-accounted companies” to our Consolidated Financial Statements. There were no significant acquisitions in 2020 or 2019. Divestments Divestment of Mechanical Power Transmission Division In November 2021, we completed the sale of our Mechanical Power Transmission Division (Dodge) to RBC Bearings Inc. for cash proceeds of $2,862 million, net of transactions costs and cash disposed and recognizing a net gain on sale of $2,195 million. Prior to its disposal, the Dodge business was part of our Motion operating segment. See “Note 4 - Acquisitions, divestments and equity-accounted companies” to our Consoli- dated Financial Statements. Divestment of Power Grids On July 1, 2020, ABB completed the divestment of 80.1 percent of its former Power Grids business to — 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. Hitachi. As this divestment represented a strate- gic shift that had a major effect on our operations and financial results, the results of operations for this business are presented as discontinued operations and the assets and liabilities are reflected as held for sale for all periods presented. For more information on the divestment of the Power Grids business see “Note 3 - Discontinued operations” to our Consolidated Financial Statements. Divestment of solar inverters In February 2020, ABB completed the sale of its solar inverters business to FIMER S.p.A. (Italy) for no consideration. Under the agreement, which was reached in July 2019, ABB was obligated to transfer $143 million of cash to the buyer on the closing date. In addition, further payments total- ing EUR 132 million ($145 million at the divestment date) are required to be transferred to the buyer from 2020 through 2025. In connection with this divestment, in 2019, we recorded a loss of $421 million, representing the excess of the carrying value over the estimated fair value of this business. In 2020, a further $33 million was recorded for additional changes in fair value occurring prior to the date of sale. Both amounts, in the respective years are reported in “Other income (expense), net”. See “Note 4 - Acquisitions, divestments and equity-accounted companies” to our Consolidated Financial Statements. Other In 2019, we recorded net gains (including transac- tion costs) of $55 million, primarily due to the divestment of two businesses in China. We translate non-USD denominated results of operations, assets and liabilities to USD in our Consolidated Financial Statements. Balance sheet items are translated to USD using year-end cur- rency exchange rates. Income statement and cash flow items are translated to USD using the rele- vant monthly average currency exchange rate. A B B A N N U A L R E P O R T 2 0 2 1 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 In 2021, approximately 74 percent of our cost of sales and selling, general and administrative expenses were reported in currencies other than the USD. The following percentages of consoli- dated cost of sales and selling, general and administrative expenses were reported in the following currencies: • Euro, approximately 20 percent, and • Chinese renminbi, approximately 14 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 U.S. 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 translated into USD at applicable exchange rates for inclu- sion in our Consolidated Financial Statements. The discussion of our results of operations below provides certain information with respect to orders, revenues, income from operations and other measures as reported in USD (as well as in local currencies). We measure period-to-period variations in local currency results by using a constant foreign exchange rate for all periods under comparison. Differences in our results of operations in local currencies as compared to our results of operations in USD are caused exclu- sively by changes in currency exchange rates. While we consider our results of operations as measured in local currencies to be a significant indicator of business performance, local currency information should not be relied upon to the exclusion of U.S. GAAP financial measures. In- stead, local currencies reflect an additional measure of comparability and provide a means of viewing aspects of our operations that, when viewed together with the U.S. GAAP results, provide a more complete understanding of fac- tors and trends affecting the business. As local currency information is not standardized, it may not be possible to compare our local currency information to other companies’ financial mea- sures that have the same or a similar title. We encourage investors to review our financial state- ments and publicly filed reports in their entirety and not to rely on any single financial measure. Increases and decreases in the value of the USD against other currencies will affect the reported results of operations in our Consolidated Income Statements and the value of certain of our assets and liabilities in our Consolidated Balance Sheets, even if our results of operations or the value of those assets and liabilities have not changed in their original currency. As foreign exchange rates impact our reported results of operations and the reported value of our assets and liabilities, changes in foreign exchange rates could signifi- cantly affect the comparability of our reported results of operations between periods and result in significant changes to the reported value of our assets, liabilities and stockholders’ equity. While we operate globally and report our financial results in USD, exchange rate movements between the USD and the EUR, the CNY and the CHF are of particular importance to us due to (i) the location of our significant operations and (ii) our corporate headquarters being in Switzerland. The exchange rates between the USD and the EUR, the USD and the CHF and the USD and the CNY at December 31, 2021, 2020 and 2019, were as follows: Exchange rates into $ 2021 2020 2019 EUR 1.00 CHF 1.00 CNY 1.00 1.13 1.10 0.16 1.23 1.14 0.15 1.12 1.03 0.14 The average exchange rates between the USD and the EUR, the USD and the CHF and the USD and the CNY for the years ended December 31, 2021, 2020 and 2019, were as follows: Exchange rates into $ 2021 2020 2019 EUR 1.00 CHF 1.00 CNY 1.00 1.18 1.09 0.16 1.14 1.07 0.14 1.12 1.01 0.14 When we incur expenses that are not denomi- nated in the same currency as the related revenues, foreign exchange rate fluctuations could affect our profitability. To mitigate the impact of exchange rate movements on our profitability, it is our policy to enter into forward foreign exchange contracts to manage the foreign exchange transaction risk of our operations. In 2021, approximately 77 percent of our consoli- dated revenues were reported in currencies other than the USD. The following percentages of consolidated revenues were reported in the following currencies: • Euro, approximately 23 percent, and • Chinese renminbi, approximately 17 percent. 136 A B B A N N U A L R E P O R T 2 0 2 1 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 — Orders Our policy is to book and report an order when a binding contractual agreement has been concluded with a customer covering, at a mini- mum, the price and scope of products or services to be supplied, the delivery schedule and the payment terms. The reported value of an order corresponds to the undiscounted value of reve- nues that we expect to recognize following delivery of the goods or services subject to the order, less any trade discounts and excluding any value added or sales tax. The value of orders received during a given period of time represents the sum of the value of all orders received during the period, adjusted to reflect the aggregate value of any changes to the value of orders re- ceived during the period and orders existing at the beginning of the period. These adjustments, which may in the aggregate increase or decrease the orders reported during the period, may include changes in the estimated order price up to the date of contractual performance, changes in the scope of products or services ordered and cancellations of orders. The undiscounted value of 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 revenues in periods after the order is booked. Consequently, the level of orders generally cannot be used to accurately predict future revenues or operating 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. — 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. Our most significant equity method investment is in Hitachi Energy Ltd (see “Note 4 - Acquisitions, divestments and equity-accounted companies” for details). Also, in the normal course of our business, we engage in transactions with busi- nesses that we have divested. We believe that the terms of the transactions we conduct with these companies are negotiated on an arm’s length basis. — Performance measures We evaluate the performance of our operating segments based on orders received, revenues and Operational 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), A B B A N N U A L R E P O R T 2 0 2 1 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 • 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, • other income/expense relating to the Power Grids joint venture, • 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 (including impairment of goodwill) and certain other fair value changes, as well as other items which are determined by management on a case-by-case basis. See “Note 23 - Operating segment and geographic data” to our Consolidated Financial Statements for a reconciliation of the total Operational EBITA to income from continuing operations before taxes. 138 A B B A N N U A L R E P O R T 2 0 2 1 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 The discussion in the following sections below provides a comparative analysis between 2021 and 2020. See the sections under “Operating and financial review and prospects“ in our 2020 Annual Report for a comparative discussion and analysis between 2020 and 2019. 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 Business Areas follows in the sec- tions of “Business analysis” below for Electrification, Motion, Process Automation, Robotics & Discrete Automation and Corporate and Other. Orders and revenues of our businesses include intersegment transactions which are eliminated in the “Corporate and Other” line in the tables below. Income statement data: ($ in millions, except per share data in $) 2021 2020 2019 Orders ($ in millions) 2021 2020 2019 2021 2020 Electrification 14,381 11,884 13,050 Motion 7,616 6,574 6,782 21% 16% (9)% (3)% % Change Process Automation Robotics & Discrete Automation Total Business Areas 6,779 6,144 6,432 10% (4)% 3,844 2,868 3,260 34% (12)% 32,620 27,470 29,524 19% (7)% Corporate and Other Non-core and divested businesses Intersegment eliminations and other (10) (31) (91) n.a. n.a. (742) (927) (845) n.a. n.a. Total 31,868 26,512 28,588 20% (7)% In 2021, total orders increased 20 percent com- pared to 2020 (17 percent in local currencies). Total orders reflect the growth across all Business Areas as the pandemic-related slowdown affected most of our businesses across all regions in the previous year. The growth rate was highest in the Robotics & Discrete Automation Business Area, while the amount of orders increased the most in Electrification, our largest Business Area. Order growth rates were also strong in the Motion and Process Automation Business Areas. The increase in orders was most significant in the second quarter of the year with growth rates declining over the remainder of the year. The significant growth was visible across all regions. For addi- tional information about individual Business Area order performance, refer to the relevant sections of “Business analysis” below. Revenues Cost of sales Gross profit 28,945 26,134 27,978 (19,478) (18,256) (19,072) 9,467 7,878 8,906 Selling, general and administrative expenses Non-order related research and development expenses (5,162) (4,895) (5,447) (1,219) (1,127) (1,198) Impairment of goodwill — (311) — Other income (expense), net 2,632 48 (323) Income from operations 5,718 1,593 1,938 Interest and dividend income 51 51 67 Interest and other finance expense Losses from extinguishment of debt Non-operational pension (cost) credit (148) (240) (215) — (162) 166 (401) — 72 Income tax expense (1,057) (496) (772) Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Net income attributable to noncontrolling interests 4,730 345 1,090 (80) 4,860 438 4,650 5,205 1,528 (104) (59) (89) Net income attributable to ABB 4,546 5,146 1,439 Amounts attributable to ABB shareholders: Income from continuing operations, net of tax 4,625 294 1,043 Income (loss) from discontinued operations, net of tax Net income (79) 4,852 396 4,546 5,146 1,439 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 2.31 0.14 0.49 (0.04) 2.27 2.30 2.44 0.19 0.67 Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 2.29 0.14 0.49 (0.04) 2.25 2.29 2.43 0.19 0.67 A B B A N N U A L R E P O R T 2 0 2 1 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 Areas with a moderate growth in the Process Automation Business Area. The order backlog in the Motion Business Area was driven by both short and long-cycle business order growth in most Divisions. Order backlog increased across all Divisions in the Electrification Business Area with a very strong order intake, but also reflecting execution challenges. Growth was strong in the E-mobility and Power Conversion Divisions but grew only moderately in the Distribution Solu- tions Division. The growth in the Process Automation Business Area was driven by a strong order increase in most Divisions except the Marine & Ports Division, which decreased, mainly on the execution of large orders received in 2020. The increase in the order backlog in the Robotics & Discrete Automation Business Area was driven by strong growth in the Machine Automation Division, while the Robotics Division decreased slightly due to lower demand from the automotive systems end market. Revenues ($ in millions) 2021 2020 2019 2021 2020 Electrification 13,187 11,924 12,728 Motion 6,925 6,409 6,533 11% 8% (6)% (2)% % Change Process Automation Robotics & Discrete Automation Total Business Areas 6,259 5,792 6,273 8% (8)% 3,297 2,907 3,314 13% (12)% 29,668 27,032 28,848 10% (6)% Corporate and Other 11 (6) 37 n.a. n.a. Non-core and divested businesses Intersegment eliminations and other (734) (892) (907) Total 28,945 26,134 27,978 n.a. 11% n.a. (7)% In 2021, revenues increased 11 percent (8 percent in local currencies). Revenues increased across all Business Areas, recovering from the pandemic-related impacts of the previous year. The Electrification and Robotics & Discrete Auto- mation Business Areas reported strong growth, largely driven by the short-cycle businesses. For additional analysis of revenues for each of the Business Areas, refer to the relevant sections of "Business analysis" below. We determine the geographic distribution of our orders based on the location of the ultimate destination of the products’ end use, if known, or the location of the customer. The geographic distribution of our consolidated orders was as follows: ($ in millions) 2021 2020 2019 2021 Europe 11,857 9,618 10,509 23% 2020 (8)% The Americas 9,940 7,956 9,057 25% (12)% % Change 7,453 5,971 6,804 25% (12)% 10,071 8,938 9,022 13% (1)% of which: United States Asia, Middle East and Africa of which: China 5,036 4,121 4,118 Total 31,868 26,512 28,588 22% 20% 0% (7)% In 2021, total orders increased in all regions as all regions made strong recoveries from the pandemic-related downturn in the previous year. In the Americas, orders increased 25 percent (24 percent in local currencies) and increased across all Business Areas. Orders grew in the U.S., Canada, Brazil and Mexico. In Europe, orders increased 23 percent (19 percent in local curren- cies) with all Business Areas reporting order growth. Orders increased in Germany, France, Switzerland, Italy and Finland while they declined in Poland. In Asia, Middle East and Africa, orders increased 13 percent (8 percent in local curren- cies) and were higher across all Business Areas. Total orders increased in China, India and Austra- lia while they decreased in South Korea, Singapore and Saudi Arabia. Order backlog December 31, % Change ($ in millions) 2021 2020 2019 2021 2020 Electrification 5,458 4,358 4,488 Motion 3,749 3,320 2,967 25% 13% (3)% 12% Process Automation Robotics & Discrete Automation Total Business Areas 6,079 5,805 5,077 5% 14% 1,919 1,403 1,356 37% 17,205 14,886 13,888 16% 3% 7% Corporate and Other Non-core and divested businesses Intersegment eliminations 114 139 192 (18)% (28)% (712) (722) (756) Total 16,607 14,303 13,324 n.a. 16% n.a. 7% At December 31, 2021, consolidated order backlog was 16 percent higher (21 percent in local curren- cies) compared to December 31, 2020. Order backlog increased significantly in most Business 140 A B B A N N U A L R E P O R T 2 0 2 1 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 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 distribution of our consolidated revenues was as follows: ($ in millions) 2021 2020 2019 2021 Europe 10,529 9,764 10,097 8% 2020 (3)% The Americas 8,686 7,949 8,955 9% (11)% % Change 6,397 6,027 6,753 6% (11)% 9,730 8,421 8,926 16% (6)% of which: United States Asia, Middle East and Africa of which: China 4,932 4,098 4,047 Total 28,945 26,134 27,978 20% 11% 1% (7)% In 2021, revenues increased across all regions, reflecting the recovery from the pandemic-related challenges of the previous year. In the Americas revenues increased 9 percent (9 percent in local currencies) and were higher across all Business Areas. Revenues increased in the U.S., Canada, Brazil, Mexico, Argentina and Chile while they decreased slightly in Peru and Panama. In Europe revenues increased 8 percent (5 percent in local currencies) and increased across all Business Areas except the Process Automation Business Area. Sales were lower in Finland and France while revenues grew in Germany, the United Kingdom, Italy, Sweden, Turkey, Austria, Netherlands and Switzerland. In Asia, Middle East and Africa reve- nues increased 16 percent (11 percent in local currencies) and increased across all Business Areas. Revenues increased in China, India, Austra- lia and South Korea while they decreased in Japan. Cost of sales Cost of sales consists primarily of labor, raw materials and component costs but also includes indirect production costs, expenses for warran- ties, contract and project charges, as well as order-related development expenses incurred in connection with projects for which corresponding revenues have been recognized. In 2021, cost of sales increased 7 percent (4 per- cent in local currencies) to $19,478 million. Cost of sales as a percentage of revenues decreased to 67.3 percent from 69.9 percent in 2020, an increase in the gross margin of 2.6 percent, primarily driven by lower losses in non-core businesses, and because 2020 included signifi- cant warranty charges related to a divested business as well as losses on specific projects. The increase in gross margin also reflects higher revenue volumes, a positive portfolio mix as well as price increases and certain cost savings ac- tions taken to mitigate higher commodity prices and freight costs. In 2021, gross margin percent- ages were higher in the Electrification, Robotics & Discrete Automation and Process Automation Business Areas. The gross margin percentage in the Motion Business Area was lower in 2021 compared to 2020 due to the impact of higher commodity prices. For ABB, the gross margin did benefit partially from the results of saving initia- tives in the areas of supply chain and operational excellence. Selling, general and administrative expenses The components of selling, general and adminis- trative expenses were as follows: ($ in millions) Selling expenses General and administrative expenses Total 2021 2020 2019 3,281 3,087 3,383 1,881 1,808 2,064 5,162 4,895 5,447 In 2021, general and administrative expenses increased 4 percent (1 percent in local currencies) compared to 2020. As a percentage of revenues, general and administrative expenses decreased to 6.5 percent from 6.9 percent in 2020. General and administrative expenses in 2021 benefited partially from a $40 million reduction of stranded corporate costs compared to 2020 but continue to include the ongoing costs required to deliver services to Hitachi Energy Ltd under transition service agreements, for which we are compen- sated and recorded $173 million in Other income (expense), net during 2021 compared to $91 mil- lion in the previous year. Stranded costs were overhead and other management costs which could previously be allocated to the Power Grids business. In 2021, selling expenses increased 6 percent (3 percent in local currencies) compared to 2020 across all Business Areas as pandemic-related restrictions were gradually relaxed and we in- creased sales activities to keep pace with the strong recovery in demand. Selling expenses as a percentage of orders received decreased from 11.6 percent in 2020 to 10.3 percent in 2021 mainly due to strong order growth. A B B A N N U A L R E P O R T 2 0 2 1 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 Non-order related research and development expenses In 2021, non-order related research and develop- ment expenses increased 8 percent (4 percent in local currencies) compared to 2020. Non-order related research and development expenses increased mainly due to higher investment activi- ties related to selective growth areas in certain operating Divisions such as Distribution Solu- tions, Robotics, Process Industries, Smart Buildings and E-mobility. In 2021, the higher non-order related research and development expenses were consistent with the higher revenues and as a percentage of revenues these expenditures decreased in 2021 to 4.2 per- cent from 4.3 percent compared to the previous year. In 2021, Other income (expense), net, was an income of $2,632 million compared to $48 million in 2020. In 2021, we recorded gains of $2,193 mil- lion in Other income (expense), net for net gains from sales of businesses. This is primarily due to the divestment of the Dodge business. In 2021, we also recorded a full year of both brand income and income for provision of transition services relat- ing to Hitachi Energy, compared to only six months of income in 2020. In 2021, we recorded higher increases in the fair value of various equity investments in our ABB Technology Ventures portfolio, the most significant of which related to CMR Surgical Ltd. The amount in 2021 also reflects lower restructuring and restructuring-related expenses and lower asset impairments. Partially offsetting this were higher losses from equity-accounted companies mainly reflecting the loss recorded from the Hitachi Energy joint venture. Impairment of goodwill Income from operations In 2020, as a result of the new composition of the reporting units and reallocation of goodwill, we recorded an impairment charge of $311 million, the majority of which related to our Machine Automation Division within the Robotics & Dis- crete Automation Business Area. In 2021, no impairment was recorded as a result of the annual review. See “Note 11 - Goodwill and intangible assets” to our Consolidated Financial Statements. Other income (expense), net ($ in millions) 2021 2020 2019 Net gain (loss) from sale of businesses Income from provision of services under transition services agreements Gain (loss) from change in fair value of investments in equity securities Brand income from Hitachi Energy Net gain from sale of property, plant and equipment Favorable resolution of an uncertain purchase price adjustment Fair value adjustment on assets and liabilities held for sale Asset impairments Restructuring and restructuring- related expenses(1) Income (loss) from equity- accounted companies Other income (expense) Total (1) Excluding asset impairments 2,193 (2) 55 173 91 — 105 89 38 6 — — 71 60 37 (5) — 51 36 92 (33) (35) (421) (56) (48) (87) (69) (100) 176 2,632 (66) (24) 8 22 48 (323) % Change ($ in millions) 2021 2020 2019 2021 2020 Electrification 1,841 1,335 1,049 38% Motion 3,276 989 1,009 231% 27% (2)% Process Automation 713 344 700 107% (51)% Robotics & Discrete Automation Total Business Areas Corporate and Other Intersegment elimination 269 (163) 298 n.a. n.a. 6,099 2,505 3,056 143% (18)% (385) (927) (1,113) n.a. n.a. 4 15 (5) n.a. n.a. Total 5,718 1,593 1,938 259% (18)% In 2021 and 2020, changes in income from opera- tions were a result of the factors discussed above and in “Business analysis” below. Financial income and expenses Financial income and expenses include “Interest and dividend income”, “Interest and other finance expense” and “Losses from extinguishment of debt”. “Interest and other finance expense” includes interest expense on our debt, the amortization of upfront transaction costs associated with long-term debt and committed credit facilities, commitment fees on credit facilities, foreign exchange gains and losses on financial items and gains and losses on marketable securities. In addition, interest accrued relating to uncertain tax positions is included within interest expense. “Interest and other finance expense” excludes 142 A B B A N N U A L R E P O R T 2 0 2 1 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 interest expense which has been allocated to discontinued operations. ($ in millions) 2021 2020 2019 Interest and dividend income 51 51 67 Interest and other finance expense Losses from extinguishment of debt (148) (240) (215) — (162) — In 2020, we redeemed the full amount outstand- ing for two bonds according to the terms of the instruments and executed public tenders for two additional bonds resulting in a partial reduction of the principal outstanding. These transactions resulted in losses on extinguishment of debt in 2020 totaling $162 million (see “Note 12 - Debt” to our Consolidated Financial Statements). The reduction of outstanding debt from these public tenders as well as maturities of bonds in both 2021 and 2020 reduced “Interest and other fi- nance expense” by approximately $70 million compared to 2020. This was partially offset by higher interest expense for income tax related contingencies and the elimination of the alloca- tion of interest expense to discontinued operations subsequent to the divestment of the Power Grids business. Non-operational pension (cost) credit A non-operational pension credit of $166 million was recorded in 2021 compared to a $401 million cost in 2020. Non-operational pension credits primarily result from higher expected returns on plan assets compared to interest costs on benefit obligations. The net cost in 2020 was mainly due to charges of $520 million for settlements of certain international pension plans (see “Note 17 - Employee benefits” to our Consolidated Finan- cial Statements). Income tax expense ($ in millions) 2021 2020 2019 Income from continuing operations before taxes 5,787 841 1,862 Income tax expense (1,057) (496) (772) Effective tax rate for the year 18.3% 59.0% 41.5% In 2021, the effective tax rate decreased from 59.0 percent in 2020 to 18.3 percent primarily due to specific items which increased the effective tax rate in 2020. In 2020, the income tax rate was higher by 9 percent due to the impairment of non-deductible goodwill, 10 percent due to non-deductible charges relating to the settlement of certain defined benefit pension plans and 5 percent due to losses from extinguishment of debt which were incurred in jurisdictions with a full valuation allowance. In 2021, the tax impacts related to the sale of the Dodge business reduced the effective tax rate by approximately 5 percent. We also realized certain benefits from internal reorganizations in anticipation of this divestment which reduced the effective tax rate by a further 4 percent. See “Note 16 - Income taxes” to our Consolidated Financial Statements for additional information. Income from continuing operations, net of tax As a result of the factors discussed above, compared to 2020, Income from continuing operations, net of tax, increased by $4,385 million to $4,730 million in 2021. Income from discontinued operations, net of tax Income (loss) from discontinued operations, net of tax, in 2021, 2020 and 2019 was as follows: ($ millions) Total revenues Total cost of sales Gross profit Expenses Change to net gain recognized on sale of the Power Grids business Income (loss) from operations Net interest income (expense) and other finance expense Non-operational pension (cost) credit Income (loss) from discontinued operations before taxes Income tax 2021 2020 2019 — 4,008 9,037 — (3,058) (6,983) — 950 2,054 (18) (808) (1,394) (65) (83) 5,141 5,282 — 660 2 — (5) (61) (94) 5 (81) 5,182 605 1 (322) (167) Income (loss) from discontinued operations, net of tax (80) 4,860 438 On July 1, 2020, we completed the divestment of 80.1 percent of our former Power Grids business to Hitachi. As a result of the sale, substantially all Power Grids related assets and liabilities have been sold. As this divestment represented a strategic shift that would 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 periods pre- sented. In addition, we also have retained obligations (primarily for environmental and A B B A N N U A L R E P O R T 2 0 2 1 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 taxes) related to other businesses disposed or otherwise exited that qualified as discontinued operations. Changes to these retained obliga- tions are also included in Income (loss) from discontinued operations, net of tax. In 2020, as a result of the sale of the Power Grids business, we recognized a net gain of $5,141 mil- lion, net of transaction costs, for the sale of the entire Power Grids business which is included in Income from discontinued operations, net of tax. Certain amounts included in the net gain are estimated or otherwise subject to change in value and, as a result, we have recorded additional adjustments in 2021, primarily due to the impacts of the final purchase price settlement agreed with Hitachi and net foreign currency losses on certain obligations. We may record additional adjust- ments in future periods to the gain which are not expected to have a material impact on the Consol- idated Financial Statements. The amounts shown in the table above for the full-year 2020 primarily represent the operations of the Power Grids business for six months, compared to a full year of operations for 2019. Income from discontinued operations for 2020 included income from operations, before tax, of $5,182 million. In 2020, we recorded $322 million as income tax expense within discontinued operations, which included $262 million in Income tax within discontinued operations in connection with the reorganization of the legal entity struc- ture of the Power Grids business required to facilitate its sale. For additional information on the divestment and discontinued operations, see “Note 3 - Discontin- ued operations” to our Consolidated Financial Statements. Net income attributable to ABB As a result of the factors discussed above, compared to 2020, Net income attributable to ABB decreased by $600 million to $4,546 million in 2021. Earnings per share attributable to ABB shareholders (in $) 2021 2020 2019 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 2.31 0.14 0.49 (0.04) 2.27 2.30 2.44 0.19 0.67 2.29 0.14 0.49 (0.04) 2.25 2.29 2.43 0.19 0.67 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 exer- cised, if dilutive. Potentially dilutive securities comprise: outstanding written call options and outstanding options and shares granted subject to certain conditions under our share-based payment arrangements. See “Note 20 - Earnings per share” to our Consolidated Financial Statements. 144 A B B A N N U A L R E P O R T 2 0 2 1 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 — Business analysis Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area The financial results of our Electrification Business Area were as follows: Orders and Revenues Orders and Revenues Income from operation & Operational EBITA Income from operation & Operational EBITA Orders and Revenues Income from operation & Operational EBITA $ in millions $ in millions 12M $ in millions 12M $ in millions $ in millions $ in millions 3,600 3,600 15,000 15,000 600 3,200 3,200 2,800 2,800 14,000 14,000 13,000 13,000 12,000 12,000 450 300 150 0 600 450 300 150 0 -150 20% 20% 15% 10% 5% 0% -5% 2,400 2,400 11,000 11,000 -150 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 Orders Revenues 2019 2020 Orders Revenues Orders 12M rolling Orders 12M rolling 2020 2021 2021 2019 2019 2020 2020 2021 2021 Operational EBITA Operational EBITA Income from operations Income from operations Income from operations % Income from operations % ($ in millions) 2021 2020 2019 2021 2020 % Change Motion Business Area Motion Business Area Orders 14,381 11,884 13,050 21% (9)% Order backlog at December 31, Orders and Revenues Orders and Revenues Revenues Income from operations $ in millions Operational EBITA 2,500 Orders 2,000 5,458 4,358 4,488 13,187 11,924 12,728 1,841 1,335 1,049 2,121 12M $ in millions 1,681 1,688 8,000 7,500 25% 11% (3)% (6)% 27% 38% 12M $ in millions 0% 26% 8,000 7,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 500 7,000 6,500 6,500 Approximately two-thirds of the Business Area’s 7,000 1,500 orders are for products with short delivery times; orders are usually recorded and delivered 1,000 within a three-month period and thus are gener- ally considered as short-cycle. The remainder of orders is comprised of smaller projects that Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 require longer lead times, as well as larger solu- tions requiring engineering and installation. Approximately half of the Business Area’s orders are received via third-party distributors; as a consequence, end-customer market data is based partially on management estimates. Orders 12M rolling Revenues 6,000 6,000 Orders 2020 2021 2019 2021 2019 Orders Revenues Orders 12M rolling Process Automation Business Area Process Automation Business Area Orders and Revenues Orders and Revenues In 2021, orders increased 21 percent (18 percent in local currencies) as demand improved across most end-user segments and markets in both short-cycle and long-cycle businesses. Although $ in millions 12M $ in millions global economic output recovered during the year 7,500 2,000 and is now above the pre-pandemic level of 2019, growth was geographically uneven, largely due to 7,000 diverse ongoing pandemic impacts, especially in 1,500 emerging economies. Demand in the buildings 12M $ in millions 7,000 7,500 Motion Business Area Motion Business Area Income from operation & Operational EBITA segment, the Electrification Business Area’s largest end-user segment, was robust with strong growth in the residential market and recovery of the non-residential building sector with increas- ing investments in commercial and healthcare. Income from operation & Operational EBITA Substantial growth continues in the e-mobility segment along with strong growth in food and beverage, utilities, renewables and data centers. $ in millions Additionally, demand in the oil and gas segment 145% 2,500 increased following higher oil prices. 2,400 $ in millions 140% 2,400 2,500 400 The geographic distribution of orders for our 400 Electrification Business Area was as follows: 300 300 20% 15% ($ in millions) 200 Europe 100 The Americas 200 100 2021 2020 2019 10% 5,022 4,149 5,199 4,033 4,281 5% 4,653 0 of which: United States 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 3,891 3,065 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 Asia, Middle East and Africa 2019 2020 4,160 3,702 2021 0% 3,501 2021 4,116 2020 Operational EBITA of which: China Operational EBITA Income from operations 2,141 1,819 1,885 Total Income from operations Income from operations % Income from operations % 14,381 11,884 13,050 Process Automation Business Area Income from operation & Operational EBITA In 2021, orders increased in all regions. Orders in the Americas increased 29 percent (28 percent in Process Automation Business Area local currencies), with strong growth in Mexico, Canada and in the U.S. Orders in Europe increased Income from operation & Operational EBITA 21 percent (18 percent in local currencies) with widespread demand pickup across the region including key markets such as Germany and Italy. Demand in Asia, Middle East and Africa increased $ in millions 12 percent (8 percent in local currencies) with 300 China and India contributing strongly despite continuing pandemic-related challenges. $ in millions 20% 300 15% 200 200 1,000 500 1,000 800 600 400 6,500 6,000 5,500 2021 6,500 6,000 100 5,500 0 4,000 3,500 3,000 2,500 3,500 3,000 2,500 2,000 120 80 40 0 -40 -240 100 0 80 40 0 -40 -240 10% 5% 0 15% 0% -15% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2019 2021 2021 2019 Operational EBITA 2020 2021 2019 Orders Revenues Orders 12M rolling Orders 2020 Revenues Orders 12M rolling Operational EBITA Income from operations Income from operations % Income from operations Income from operations % Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area Orders and Revenues Orders and Revenues Income from operation & Operational EBITA Income from operation & Operational EBITA $ in millions 12M $ in millions $ in millions $ in millions 1,200 12M $ in millions 4,000 $ in millions 120 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2,000 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 -30% 2021 2019 Orders 2020 Revenues Orders 12M rolling 2021 2019 Orders Revenues Orders 12M rolling 2019 Operational EBITA 2020 Income from operations 2021 Operational EBITA Income from operations % Income from operations Income from operations % $ in millions 2,500 2,000 1,500 1,000 500 $ in millions 2,000 1,500 1,000 500 1,200 1,000 800 600 400 15% 10% 5% 0% -5% 145% 140% 20% 15% 10% 5% 0% 20% 15% 10% 5% 0 15% 0% -15% -30% A B B A N N U A L R E P O R T 2 0 2 1 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 Order backlog In 2021, the order backlog increased 25 percent (29 percent in local currencies). The order backlog benefited from the strong order intake, but also reflected execution challenges caused by material shortages, transportation constraints as well as pandemic-related production pressures in some local markets. Revenues In 2021, revenues increased 11 percent (8 percent in local currencies). Revenues increased in all Divisions reflecting widespread market recovery across all regions, however growth was hampered by component shortage and logistic challenges, particularly for the project business. Revenue growth in short-cycle businesses was higher than in long-cycle businesses, reflecting some cus- tomer stockpiling. Pricing actions taken to mitigate increasing material and transportation costs also contributed to the higher revenue level. The revenue growth rate was led by the E-mobility Division mirroring the very high demand in this segment. There was also double-digit revenue growth in the Installation Products Division reflecting demand recovery in the U.S. and Canada, as well as in the Smart Power Division. Revenue growth was solid for the Smart Buildings Division, whereas revenues grew more modestly for the Distribution Solutions and Power Conver- sion Divisions. The geographic distribution of revenues for our Electrification Business Area was as follows: ($ in millions) Europe The Americas 2021 2020 2019 4,628 4,190 4,251 4,503 4,093 4,635 of which: United States 3,322 3,115 3,555 Asia, Middle East and Africa 4,056 3,641 3,842 of which: China Total 2,110 1,858 1,749 13,187 11,924 12,728 In 2021, revenues in the Americas increased 10 percent (9 percent in local currencies) led by a strong recovery in Canada and Mexico, while revenues in the U.S. recorded high single-digit growth. Revenues increased 11 percent (7 percent in local currencies) in Asia, Middle East and Africa, driven by growth in China and India. Revenues in Europe increased 10 percent (8 percent in local currencies) reflecting widespread growth across the region, including key markets such as Ger- many and Italy. Income from operations In 2021, income from operations increased 38 per- cent, supported by higher revenues. Pricing actions across the product businesses and the benefits of savings realized from ongoing restruc- turing and cost savings programs also positively influenced the income from operations. Restruc- turing related expenses and implementation costs in our operating Divisions were lower in 2021 than in 2020, mainly as the integration of GEIS is nearing completion. These positives were partially dampened by higher commodity prices in 2021, as well as increased costs for transporta- tion and logistics. The income from operations was burdened by higher personnel expenses driven by a ramp-up of manufacturing capacity to meet higher demand. There was also negative comparable impact from the discontinuance of various pandemic-related government support programs that were more significant in 2020 compared to 2021. Changes in foreign currencies, including the impacts from FX/commodity timing differences summarized in the table below, posi- tively impacted the income from operations by approximately 1 percentage point. Operational EBITA The reconciliation of Income from operations to Operational EBITA for the Electrification Business Area was as follows: ($ in millions) 2021 2020 2019 Income from operations 1,841 1,335 1,049 Acquisition-related amortization 117 115 115 Restructuring, related and implementation costs 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 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 66 — (6) 13 — 145 112 15 11 — 22 4 (42) 33 421 (5) (36) (92) 70 — 71 119 9 3 25 (21) (19) Operational EBITA 2,121 1,681 1,688 In 2021, Operational EBITA increased 26 percent (20 percent excluding the impact from changes in foreign currency exchange rates) compared to 2020, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Orders and Revenues Orders and Revenues Income from operation & Operational EBITA Income from operation & Operational EBITA 12M $ in millions 12M $ in millions $ in millions $ in millions $ in millions $ in millions 3,600 3,600 3,200 3,200 2,800 2,800 600 450 300 150 0 15,000 15,000 14,000 14,000 13,000 13,000 12,000 12,000 600 450 300 150 0 11,000 11,000 -150 2,400 -150 2,400 20% 15% 10% 5% 0% -5% 20% 15% 10% 5% 0% -5% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 146 Orders Revenues 2019 2020 Orders Revenues Orders 12M rolling Orders 12M rolling 2021 2020 A B B A N N U A L R E P O R T 2 0 2 1 2021 2019 2021 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 2020 2019 2020 2021 Operational EBITA Operational EBITA Income from operations Income from operations Income from operations % Income from operations % Motion Business Area Motion Business Area Motion Business Area Motion Business Area Motion Business Area The financial results of our Motion Business Area were as follows: Orders and Revenues Orders and Revenues Income from operation & Operational EBITA Income from operation & Operational EBITA Orders and Revenues Income from operation & Operational EBITA $ in millions $ in millions 12M $ in millions 12M $ in millions $ in millions $ in millions 2,500 2,500 8,000 8,000 2,500 2,000 2,000 7,500 7,500 1,500 1,500 7,000 7,000 1,000 1,000 6,500 6,500 2,500 2,400 400 300 200 100 0 2,400 400 300 200 100 0 145% 145% 140% 140% 20% 15% 10% 5% 0% 20% 15% 10% 5% 0% 500 500 6,000 6,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 Orders Revenues 2019 2020 Orders Revenues Orders 12M rolling Orders 12M rolling 2020 2021 2021 2019 2019 2020 2020 2021 2021 Operational EBITA Operational EBITA Income from operations Income from operations Income from operations % Income from operations % ($ in millions) 2021 2020 2019 2021 2020 % Change Process Automation Business Area Process Automation Business Area Orders 7,616 6,574 6,782 16% (3)% Orders and Revenues Order backlog at December 31, Orders and Revenues Revenues Income from operations $ in millions Operational EBITA 2,000 $ in millions 2,000 Orders 1,500 3,749 3,320 2,967 13% 6,925 6,409 6,533 8% 12% (2)% 3,276 1,183 989 1,009 231% 12M $ in millions (2)% 12M $ in millions 1,075 1,082 7,500 10% (1)% 7,500 7,000 7,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 500 6,500 6,000 In 2021, orders increased 16 percent (13 percent in 6,500 local currencies) compared to 2020. Order devel- 1,000 opment had a strong performance across most of 6,000 the market segments and Divisions. The Business Area benefited from high demand in food and 5,500 beverage, HVACR (heating, ventilation, air condi- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 tioning and refrigeration), chemicals, metals, pulp and paper, cement, mining, wind and water seg- ments. Oil and gas demand was flat but showed signs of recovery due to higher oil prices and emerging trends. Orders 12M rolling Revenues 5,500 Orders 2020 2019 2021 2021 2019 Orders Revenues Orders 12M rolling Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area The geographic distribution of orders for our Motion Business Area was as follows: Orders and Revenues Orders and Revenues Process Automation Business Area Poland. In Asia, Middle East and Africa, orders increased 12 percent (7 percent in local curren- cies) driven by growth in China and India. In the Process Automation Business Area Americas, orders increased 18 percent (17 percent in local currencies) as a result of recoveries in the U.S., Canada and Mexico. Income from operation & Operational EBITA Income from operation & Operational EBITA $ in millions Order backlog 300 300 $ in millions 20% 20% 200 The order backlog in 2021 increased 13 percent (19 percent in local currencies) compared to 2020. 15% The order backlog increased across most Divi- sions, driven by both short and long-cycle order growth. 100 10% 200 100 Revenues 5% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 0 2019 2019 Operational EBITA Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 In 2021, revenues increased 8 percent (5 percent 2020 in local currencies) compared to 2020 and were higher across all Divisions, recovering from the pandemic-related decline in 2020. Revenues also reflected strong execution from the order backlog as well as resilience in the short-cycle business. Income from operations % Income from operations % Income from operations Income from operations Operational EBITA 2020 2021 2021 Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area The geographic distribution of revenues for our Motion Business Area was as follows: Income from operation & Operational EBITA Income from operation & Operational EBITA ($ in millions) 2021 2020 2019 ($ in millions) $ in millions $ in millions Europe 2,617 12M $ in millions 2,219 12M $ in millions 2,355 Europe $ in millions $ in millions The Americas 1,200 of which: United States Asia, Middle East and Africa 1,000 of which: China Total 800 2,677 2,276 4,000 2,437 4,000 2,200 2,322 1,897 2,048 2,079 3,500 1,990 3,500 1,232 1,077 987 7,616 6,574 3,000 6,782 3,000 The Americas 120 120 of which: United States Asia, Middle East and Africa 80 80 of which: China 40 40 Total 0 0 2021 2020 2019 2,258 2,196 2,162 2,396 2,225 2,378 15% 1,974 1,867 2,009 2,271 1,988 1,993 1,256 1,040 955 0% 6,925 6,409 6,533 600 In 2021, orders increased 18 percent (14 percent in 2,500 local currencies) in Europe as orders increased mainly in Switzerland, Spain, Italy, Austria, Turkey 2,000 400 and France partially offset by a decrease in Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2,000 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 -40 -40 In 2021, revenues in Europe increased 3 percent (flat in local currencies) driven by increases in Turkey, Germany, Poland, Switzerland, Austria and Spain while sales volumes declined in Sweden, -30% -240 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 -15% -240 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 Orders Revenues Orders 12M rolling 2019 2020 Orders Revenues Orders 12M rolling 2020 2021 2021 2019 Operational EBITA 2019 2020 Operational EBITA Income from operations Income from operations % Income from operations Income from operations % 2020 2021 2021 1,500 1,000 500 1,200 1,000 800 600 400 15% 10% 5% 0 15% 0% -15% -30% Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Orders and Revenues Orders and Revenues Income from operation & Operational EBITA Income from operation & Operational EBITA $ in millions 3,600 $ in millions 3,600 A B B A N N U A L R E P O R T 2 0 2 1 12M $ in millions $ in millions 15,000 14,000 12M $ in millions 600 15,000 $ in millions 600 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 450 450 14,000 300 300 20% 147 15% 10% 3,200 2,800 2,400 3,200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 13,000 12,000 12,000 13,000 Estonia, Italy and Finland. In Asia, Middle East and Africa revenues increased 14 percent (9 percent in 2,800 local currencies) compared to 2020 driven by strong revenue growth in China, India and Austra- lia. In the Americas, revenues increased 8 percent 11,000 2,400 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (7 percent in local currencies) on higher revenues 2020 in the U.S., particularly in the book-and-bill busi- ness in the NEMA Motors Division. The Mechanical Power Transmission Division also reported strong order growth prior to its divestment in Novem- ber 2021. Orders 12M rolling Revenues 11,000 Orders 2020 2019 2021 2021 2019 Orders Revenues Orders 12M rolling Motion Business Area Motion Business Area Income from operations Orders and Revenues Orders and Revenues $ in millions 2,500 2,000 1,500 1,000 500 8,000 12M $ in millions 12M $ in millions In 2021, income from operations increased 231 percent compared to 2020 and included the gain of $2,195 million recognized on sale of the $ in millions Mechanical Power Transmission Division. Exclud- 8,000 2,500 ing this gain, income from operations increased 9 percent driven primarily by higher revenues. The 7,500 2,000 higher business volumes reflect the recovery from the pandemic-related slowdown in 2020. Profit- 1,500 ability was also supported by active price management, continued cost discipline, a focus on operational performance and a positive divi- 1,000 sional mix which offset increasing commodities and freight expenses and other cost inflation. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Changes in foreign currencies, including the 2020 impacts from FX/commodity timing differences 6,000 6,500 6,000 6,500 7,000 7,000 7,500 Orders 2020 2019 2021 2021 500 2019 Orders Revenues Revenues Orders 12M rolling Orders 12M rolling Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 summarized in the table below, had no significant 5% 150 impact on the change in income from operations. 150 0 0 Operational EBITA -150 0% -5% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 -150 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 The reconciliation of Income from operations to 2020 Operational EBITA for the Motion Business Area was as follows: Income from operations % Income from operations Income from operations Operational EBITA Operational EBITA 2020 2019 2021 Income from operations % 2021 ($ in millions) 2021 2020 2019 Income from operations 3,276 989 1,009 Acquisition-related amortization Motion Business Area Motion Business Area Restructuring, related and implementation costs 22 Income from operation & Operational EBITA 43 Gains and losses from sale of businesses Income from operation & Operational EBITA (2,196) — 52 44 53 12 — Acquisition- and divestment- related expenses and integration $ in millions $ in millions costs 2,500 2,500 Certain other non-operational items 2,400 FX/commodity timing differences in income from 400 operations 300 Operational EBITA 2,400 400 300 26 1 — — 145% 17 140% 14 11 (27) 1,183 1,075 20% (6) 15% 1,082 10% 0 100 200 200 In 2021, Operational EBITA increased 10 percent 5% 100 (6 percent excluding the impact from changes in foreign currency exchange rates) primarily due to Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 the reasons described under “Income from opera- 2020 2021 tions”, excluding the explanations related to the Operational EBITA reconciling items in the table above. Income from operations Income from operations Operational EBITA Income from operations % 2020 2019 Income from operations % 2019 2021 0% 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 20% 15% 10% 5% 0% -5% 145% 140% 20% 15% 10% 5% 0% Process Automation Business Area Process Automation Business Area Process Automation Business Area Process Automation Business Area Process Automation Business Area The financial results of our Process Automation Business Area were as follows: Orders and Revenues Orders and Revenues Income from operation & Operational EBITA Income from operation & Operational EBITA Orders and Revenues Income from operation & Operational EBITA $ in millions $ in millions 12M $ in millions 12M $ in millions $ in millions $ in millions 2,000 2,000 7,500 7,500 300 300 20% 20% 1,500 1,500 200 200 7,000 7,000 1,000 1,000 6,500 6,500 6,000 6,000 100 100 15% 10% 5% 500 500 5,500 5,500 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 2019 Orders Revenues 2019 2020 Orders Revenues Orders 12M rolling Orders 12M rolling 2020 2021 2021 2019 2019 2020 2020 2021 2021 Operational EBITA Operational EBITA Income from operations Income from operations Income from operations % Income from operations % Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area Orders and Revenues Orders and Revenues Income from operation & Operational EBITA Income from operation & Operational EBITA $ in millions $ in millions 12M $ in millions 12M $ in millions $ in millions $ in millions 1,200 1,000 800 600 400 1,200 1,000 800 600 400 4,000 3,500 3,000 2,500 4,000 120 3,500 3,000 2,500 2,000 80 40 0 -40 -240 120 80 40 0 -40 -240 15% 0% -15% -30% 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 Orders Revenues 2019 2020 Orders Revenues Orders 12M rolling Orders 12M rolling 2020 2021 2021 2019 2019 2020 Operational EBITA 2020 2021 Operational EBITA Income from operations Income from operations % Income from operations Income from operations % 15% 10% 5% 0 15% 0% -15% -30% 148 A B B A N N U A L R E P O R T 2 0 2 1 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) 2021 2020 2019 2021 2020 Orders 6,779 6,144 6,432 10% (4)% % Change in order backlog for all Divisions except the Marine & Ports Division which decreased mainly on lower orders and strong backlog execution. Order backlog at December 31, Revenues Income from operations Operational EBITA Orders 6,079 5,805 5,077 6,259 5,792 6,273 5% 8% 14% (8)% Revenues 713 801 344 451 700 107% (51)% 732 78% (38)% In 2021, orders increased 10 percent (7 percent in local currencies) compared to 2020. Orders grew double digit in almost all Divisions except the Marine & Ports Division where orders declined due to the receipt of a large capital investment order in 2020. Markets recovered to pre-pandemic levels and customers made capital and opera- tional investments across almost all market segments. Demand for products, systems and services improved in the process-related seg- ments like mining, pulp and paper, chemicals, and oil and gas. Demand for products and services recovered in the power generation market and operational investments improved in the marine sector. The geographic distribution of orders for our Process Automation Business Area was as follows: ($ in millions) Europe The Americas 2021 2020 2019 2,614 2,365 2,599 1,645 1,360 1,627 of which: United States 1,047 770 995 Asia, Middle East and Africa 2,520 2,419 2,206 of which: China Total 821 590 631 6,779 6,144 6,432 Orders in Europe increased 11 percent (6 percent in local currencies) driven by strong orders in the process-related businesses and increases in service activity. In local currencies, orders increased in Germany, Norway, France, Russia and the United Kingdom while orders decreased in Sweden and Italy. Orders in Asia, Middle East and Africa increased 4 percent (remained flat in local currencies). Higher orders in China, India and Australia were partly offset primarily by the lower order volumes in South Korea and Singapore due to large orders booked in 2020. In the Americas, orders increased 21 percent (20 percent in local currencies) supported by strong investments in the U.S. across all Divisions. Order backlog In 2021, the order backlog increased 5 percent (10 percent in local currencies) compared to 2020. Strong order growth drove significant increases In 2021, revenues increased 8 percent (5 percent in local currencies) compared to 2020. Revenues increased in all Divisions, reflecting strong execu- tion of the order backlog in the long-cycle businesses, partially offset by challenges from supply chain constraints. The geographic distribution of revenues for our Process Automation Business Area was as follows: ($ in millions) Europe The Americas 2021 2020 2019 2,439 2,395 2,494 1,439 1,329 1,595 of which: United States 836 808 950 Asia, Middle East and Africa 2,381 2,068 2,184 of which: China Total 742 629 612 6,259 5,792 6,273 In 2021, revenues were 15 percent higher (11 per- cent in local currencies) in Asia, Middle East and Africa, 8 percent higher (7 percent in local curren- cies) in the Americas and 2 percent higher (decrease of 2 percent in local currencies) in Europe compared to 2020. In Asia, Middle East and Africa, the Marine & Ports Division registered strong growth in South Korea and China while revenues also increased in the United Arab Emir- ates and South Africa in the Energy Industries Division. In Europe, revenues were higher in Russia and the United Kingdom while lower in France, Finland and Germany. In the Americas, revenues were higher in the U.S., Brazil and Canada while revenues declined in Mexico. Income from operations In 2021, income from operations increased 107 percent compared to 2020 primarily due to the significant charges recorded in 2020 for the Kusile power generation project in South Africa, legacy projects in India and other significant restructur- ings. This was partially offset by higher divestment-related expenses, mainly related to the planned exit of the Turbocharging Division. Excluding these items, income from operations improved significantly driven by volume, strong execution, savings from supply and operation excellence initiatives and continued overhead cost structure improvements. Changes in foreign currencies, including the effect from changes in the FX/commodity timing differences summa- rized in the table below, decreased income from operations by 3 percent compared to 2020. Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Electrification Business Area Orders and Revenues Orders and Revenues Income from operation & Operational EBITA Income from operation & Operational EBITA $ in millions $ in millions 12M $ in millions 12M $ in millions $ in millions $ in millions 3,600 3,600 15,000 15,000 600 3,200 3,200 2,800 2,800 14,000 14,000 13,000 13,000 12,000 12,000 450 300 150 0 2,400 2,400 11,000 11,000 -150 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2021 2021 2019 2019 2020 2020 2021 2021 2019 Orders Revenues 2019 2020 Orders Revenues Orders 12M rolling Orders 12M rolling Operational EBITA Operational EBITA Income from operations Income from operations Income from operations % Income from operations % Motion Business Area Motion Business Area Motion Business Area Motion Business Area Orders and Revenues Orders and Revenues Income from operation & Operational EBITA Income from operation & Operational EBITA $ in millions $ in millions 12M $ in millions 12M $ in millions $ in millions $ in millions 2,500 2,500 8,000 8,000 2,500 2,000 2,000 7,500 7,500 1,500 1,500 7,000 7,000 1,000 1,000 6,500 6,500 600 450 300 150 0 -150 2,500 2,400 400 300 200 100 20% 15% 10% 5% 0% -5% 145% 140% 20% 15% 10% 5% 0% 20% 15% 10% 5% 0% -5% 145% 140% 20% 15% 10% 5% 0% 2,400 400 300 200 100 6,000 0 6,000 500 500 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 A B B A N N U A L R E P O R T 2 0 2 1 2020 2020 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2019 2021 2021 Orders Revenues Orders Revenues Orders 12M rolling Orders 12M rolling Operational EBITA Process Automation Business Area Process Automation Business Area The reconciliation of Income from operations to Operational EBITA for the Process Automation Business Area was as follows: Orders and Revenues Orders and Revenues ($ in millions) 2021 2020 2019 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 2020 2020 2019 2019 2021 149 2021 Operational EBITA Operational EBITA Income from operations Income from operations Income from operations % Income from operations % Process Automation Business Area In 2021, Operational EBITA increased 78 percent (70 percent excluding the impacts from changes in foreign currencies) compared to 2020. The Process Automation Business Area change is due to the reasons described under “Income from operations”, excluding the explana- tions related to the reconciling items in the table above. Income from operation & Operational EBITA Income from operation & Operational EBITA $ in millions Income from operations $ in millions 713 12M $ in millions 700 344 12M $ in millions $ in millions $ in millions 2,000 Acquisition-related amortization 2,000 5 7,500 4 4 7,500 300 300 20% 20% 1,500 1,000 500 800 600 400 15% 15% 10% 10% 5% 0 5% 0 15% 15% 0% 0% -15% -15% -30% -30% Restructuring, related and implementation costs Gains and losses from sale of 1,500 businesses Acquisition- and divestment- related expenses and integration costs 1,000 Certain other non-operational items 48 7,000 125 21 7,000 (13) — — 6,500 35 6,000 1 6,500 — 6,000 2 2 1 200 200 100 100 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 5,500 5,500 0 0 2020 2021 12 2021 (25) 5 2019 2019 2020 2020 2021 2021 801 451 732 Operational EBITA Operational EBITA Income from operations Income from operations Income from operations % Income from operations % 500 FX/commodity timing differences in income from 2019 operations 2020 2019 Orders Operational EBITA Orders Revenues Revenues Orders 12M rolling Orders 12M rolling Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area The financial results of our Robotics & Discrete Automation Business Area were as follows: Orders and Revenues Orders and Revenues Robotics & Discrete Automation Business Area Robotics & Discrete Automation Business Area Income from operation & Operational EBITA Income from operation & Operational EBITA Orders and Revenues Income from operation & Operational EBITA $ in millions $ in millions 12M $ in millions 12M $ in millions $ in millions $ in millions 1,200 1,200 4,000 4,000 120 1,000 1,000 3,500 3,500 800 600 3,000 3,000 2,500 2,500 120 80 40 0 -40 80 40 0 -40 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 400 2,000 2,000 -240 -240 2019 Orders Revenues 2019 2020 Orders Revenues Orders 12M rolling Orders 12M rolling 2020 2021 2021 2019 2019 2020 2020 2021 2021 Operational EBITA Operational EBITA Income from operations Income from operations Income from operations % Income from operations % % Change ($ in millions) 2021 2020 2019 2021 2020 Orders 3,844 2,868 3,260 34% (12)% Order backlog at December 31, 1,919 1,403 1,356 37% 3% Revenues 3,297 2,907 3,314 13% (12)% Income (loss) from operations Operational EBITA 269 355 (163) 237 298 393 n.a. (155)% 50% (40)% Orders In 2021, orders increased 34 percent (29 percent in local currencies). Demand levels in both the Robotics and Machine Automation Divisions recovered in 2021 after 2020 was impacted by the COVID-19 pandemic. Commencing in the second quarter, both Divisions reported significant increases in demand, including from traditional automotive and automotive-related sectors, general industry, machine builders and electron- ics market sectors. Orders continued to grow in the second half of the year benefiting from larger investments by customers in the machine auto- mation sector. 150 A B B A N N U A L R E P O R T 2 0 2 1 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 geographic distribution of orders for our Robotics & Discrete Automation Business Area was as follows: ($ in millions) Europe The Americas of which: United States 2021 2020 2019 1,978 1,424 1,717 530 371 388 277 457 310 Asia, Middle East and Africa 1,336 1,056 1,086 of which: China Total 976 781 729 3,844 2,868 3,260 In 2021, orders increased in all regions. Orders in Europe increased 39 percent (35 percent in local currencies) driven by increases in demand in Germany, Italy, Netherlands and Austria. Orders in the Americas increased 37 percent (35 percent in local currencies) compared to 2020, driven by the strong order intake in the U.S. in both Divisions. Orders in Asia, Middle East and Africa increased 27 percent (20 percent in local currencies) with strong demand in China and India. Order backlog In 2021, the order backlog increased 37 percent (43 percent in local currencies) compared to 2020. The order backlog increased in the Machine Automation Division, but was negatively im- pacted by our selectivity of orders in the automotive segment partially offset by positive momentum in the general industry and consumer segments. Revenues In 2021, revenues increased 13 percent (9 percent in local currencies) compared to 2020. Revenues increased in both Divisions due to higher volumes from book-and-bill business, however growth was hampered by component shortages (primarily related to semiconductors), logistic challenges which triggered longer lead times for some customer deliveries and a tight labor market. Service revenues also increased, driven by strong demand from all industry segments but especially from general industry. The geographic distribution of revenues for our Robotics & Discrete Automation Business Area was as follows: ($ in millions) Europe The Americas of which: United States 2021 2020 2019 1,582 1,481 1,680 441 309 389 273 464 293 Asia, Middle East and Africa 1,274 1,037 1,170 of which: China Total 950 719 829 3,297 2,907 3,314 In 2021, revenues increased in all regions. The revenues from Asia, Middle East and Africa in- creased 23 percent (17 percent in local currencies) compared to 2020 due to higher book-and-bill revenues and a higher level of execution of auto- motive segment orders, particularly in China. Revenues in Europe increased 7 percent (4 percent in local currencies) with Austria and Spain per- forming strongly while revenues declined in the United Kingdom and France. In the Americas, revenues increased 13 percent (12 percent in local currencies) due to strong demand in the U.S. in both Divisions after recovery from the low levels in 2020. Income (loss) from operations In 2021, the Business Area recorded income from operations of $269 million compared to a loss of $163 million in 2020, as the improvement in under- lying operating performance in 2020 was more than offset by the $290 million impairment of goodwill recorded in the Machine Automation Division in 2020. The operational performance in 2021 reflected improved sales volumes, a favor- able change in the revenue mix and the benefit of cost reduction measures taken in 2020. Changes in foreign currencies, including the impacts from FX/commodity timing differences summarized in the table below, positively impacted the income from operations by approximately 6 percent. Operational EBITA The reconciliation of Income (loss) from opera- tions to Operational EBITA for the Robotics & Discrete Automation Business Area was as follows: ($ in millions) Income (loss) from operations Acquisition-related amortization Restructuring, related and implementation costs Acquisition- and divestment- related expenses and integration costs Impairment of goodwill Certain other non-operational items FX/commodity timing differences in income from operations Operational EBITA 2021 269 83 7 1 — — (5) 355 2020 (163) 78 26 — 290 5 1 2019 298 77 12 1 — 4 1 237 393 In 2021, Operational EBITA increased 50 percent (41 percent excluding the impact from changes in foreign currency exchange rates) compared to 2020, primarily due to the reasons described under “Income (loss) from operations”, excluding the explanations related to the reconciling items in the table above. A B B A N N U A L R E P O R T 2 0 2 1 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 Corporate and Other Net loss from operations for Corporate and Other was as follows: ($ in millions) 2021 2020 2019 Corporate headquarters and stewardship Income (loss) from equity- accounted companies Other corporate costs Restructuring Fair value adjustment on equity securities Corporate brand income from Hitachi Energy Corporate real estate Costs for divestment of Power Grids Corporate research and development Digital program costs OS implementation costs Stranded corporate costs (399) (334) (334) (102) (32) (5) 94 89 41 — — — — — (68) (63) (46) 71 60 54 1 56 (60) (5) — 60 (86) (141) (49) (45) (24) (40) (185) (33) (83) (225) Divested businesses and other non-core activities (67) (342) (164) Total Corporate and Other (381) (912) (1,113) In 2021, the net loss from operations within Corporate and Other decreased by $531 million to $381 million compared to 2020. This reflected several items including an elimination of stranded corporate costs and the high costs in 2020 related to the divestment of the Power Grids business. Additionally, corporate costs in 2021 reflect the ending in 2020 of the remaining corporate research and development and digital program costs, which were eliminated as part of the ABB Way program. In 2021, losses in non-core busi- nesses decreased compared to 2020 as projects were completed and certain large losses were not repeated. This was partially offset by a higher loss from equity-accounted companies in 2021 com- pared to 2020 while corporate brand income of $89 million was higher than 2020 for the use of the ABB brand by the Hitachi Energy Ltd. joint venture. Corporate In 2021, corporate headquarters and stewardship costs increased compared to 2020, mainly driven by residual unallocated costs for the Global Business Services operations and continuous implementation of ABB Way. Our investment in the Hitachi Energy Ltd. joint venture is accounted for using the equity method and presented as Income (loss) from equity-accounted companies. The amount in 2021 is for a full year compared to six months in 2020 and primarily represents the amortization of the notional purchase price accounting adjustments (net of tax) which were recorded due to the fair value accounting applied on initial investment in the joint venture (see “Note 4 - Acquisitions, divestments and equity-accounted companies” to our Consolidated Financial Statements for infor- mation on the accounting for the investment in Hitachi Energy Ltd). During 2021, we recorded net revaluation gains totaling $94 million on investments in equity securities in our equity ventures investment portfolio. Corporate brand income results from the granting of the use of the ABB brand to Hitachi Energy Ltd., the fair value of which was initially determined on the date of the divestment. A portion of the proceeds received for the sale of the Power Grids business was allocated to the fair value of the granting of the use of the brand and is being amortized over the expected period of use by Hitachi Energy Ltd. Corporate real estate primarily includes income from property rentals and gains from the sale of real estate properties. In 2021, income from operations in corporate real estate included gains from the sale of real estate properties of $22 mil- lion compared to $27 million in 2020. Other corporate costs consists of operational costs of our Corporate Treasury Operations and other minor items including elimination of changes to eliminated internal profit of Inventory. Other - Divested businesses and other non-core activities The results of operations for certain divested businesses and other non-core activities are presented in Corporate and Other. Divested businesses include the high-voltage cables busi- ness, steel structures business as well as the oil & gas EPC business. Other continuing non-core activities include the execution and wind-down of certain legacy EPC and other contracts. In both 2021 and 2020, the amounts represent charges and losses relating to divested busi- nesses and the winding down of the remaining EPC projects. In 2021, we recorded losses of $67 million which were mostly related to the full train retrofit business but also related to legacy EPC projects and the divested oil & gas EPC business. In 2020, we recorded $143 million for certain retained warranty obligations relating to the steel structures business and also recorded charges for certain retained commitments and guarantees in connection with the oil & gas EPC business. The loss in 2020 also reflects further operational challenges and customer obligations 152 A B B A N N U A L R E P O R T 2 0 2 1 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 relating to several legacy projects including the full train retrofit business, substations and off- shore wind. At December 31, 2021, our remaining non-core activities primarily include the completion of the remaining EPC contracts for substations and oil & gas as well as the completion of the remaining obligations for the full train retrofit business. Restructuring and other cost savings initiatives OS program From December 2018 to December 2020, we executed a two-year restructuring program with the objective of simplifying our business model and structure through the implementation of a new organizational structure driven by our businesses. The program resulted in the elimina- tion of the country and regional structures within the previous matrix organization, including the elimination of the three regional Executive Com- mittee roles. The operating businesses are now responsible for both their customer-facing activi- ties and business support functions, while the remaining Group-level corporate activities pri- marily focus on Group strategy, portfolio and performance management and capital allocation. As of December 31, 2020, we had incurred sub- stantially all restructuring and related expenses related to the OS program. During the course of the program, we imple- mented and executed various restructuring initiatives across all business support functions and all operating segments. The cumulative restructuring and related expenses under this program, originally estimated to be $350 million, were reduced by $41 million to $309 million, mainly due to the reductions in both estimated costs and number of projects planned. The following table outlines the costs incurred in 2020, 2019 and the cumulative costs incurred under the program per operating segment and Corporate and Other as of December 31, 2020: Costs incurred in 2020 2019 Cumulative costs incurred up to December 31, 2020 35 18 37 10 49 149 18 6 3 8 54 89 85 25 61 18 114 303 ($ in millions) Electrification Motion Process Automation(1) Robotics & Discrete Automation Corporate and Other Total (1) Formerly named the Industrial Automation operating segment. The restructuring program resulted in run-rate cost savings of approximately $590 million, impacting all Business Areas and Corporate and Other. These cost savings were realized mainly as reductions in cost of sales, selling, general and administrative expenses, and non-order related research and development expenses. The majority of the remaining cash outlays at December 31, 2020, occurred in 2021 and were primarily for employee severance benefits. — Liquidity and capital resources Principal sources of funding We meet our liquidity needs principally using cash from operations, proceeds from the issuance of debt instruments (bonds and commercial paper), and short-term bank borrowings. In 2021, we also received significant funds from the sale of the Mechanical Power Transmission Division, which was completed on November 1, 2021. Our net debt/cash is shown in the table below: December 31, ($ in millions) 2021 2020 Short-term debt and current maturities of long-term debt Long-term debt Cash and equivalents Restricted cash - current Marketable securities and short-term investments Restricted cash - non-current Net debt (cash) (defined as the sum of the above lines) 1,384 1,293 4,177 4,828 (4,159) (3,278) (30) (323) (1,170) (2,108) (300) (300) (98) 112 A B B A N N U A L R E P O R T 2 0 2 1 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 During 2021, we benefited from a significant increase in cash provided by operating activities compared to 2020 and cash proceeds from sales of businesses. A significant amount of these funds was paid to shareholders during 2021 through both the payment of the annual dividend and the continuation of share buyback activities. During 2021, we changed from a net debt position of $112 million at December 31, 2020, to a net cash position of $98 million at December 31, 2021. Approximately $170 million of this movement is due to movements in foreign exchange rates with several other significant movements mostly offsetting over the year. In 2021, we received net proceeds of $2,862 million for the sale of the Dodge business later in the year. We generated cash flows from operating activities during 2021 of $3,330 million and sold treasury stock in rela- tion to our employee share plans for $826 million. Mostly offsetting these items were amounts for purchases of treasury shares of $3,708 million, including $2,680 million relating to the announced buybacks of our shares, as well as $1,726 million for the payment of the dividend to our sharehold- ers. We made net purchases of property, plant and equipment and intangible assets of $727 million and made payments of dividends to noncon- trolling shareholders totaling $98 million. See “Financial position”, “Investing activities” 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 requirements. At December 31, 2021 and 2020, the proportion of our aggregate “Cash and equiva- lents” (including restricted cash) and “Marketable securities and short-term investments” managed by our Corporate Treasury Operations amounted to approximately 44 percent and 47 percent, respectively. Our investment strategy for cash (in excess of current business requirements) has generally been to invest in short-term time deposits with maturities of less than 3 months, supplemented at times by investments in money market funds, and in some cases, government securities. We actively monitor credit risk in our investment portfolio and derivative portfolio. Credit risk exposures 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 counterparts and closely monitor develop- ments in the credit markets making appropriate changes to our investment policy as deemed necessary. In addition to minimum rating criteria, we have strict investment parameters and specific approved instruments as well as restric- tions 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 40 percent of our cash and cash equivalents held at December 31, 2021, was in U.S. dollars, while the most significant foreign currency cash and cash equivalents were held in Chinese renminbi (17 percent). We believe the ongoing cash flows generated from our business, supplemented, when neces- sary, through access to the capital markets (including short-term commercial paper) and our credit facilities are sufficient to support business operations, capital expenditures, business acqui- sitions, 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 “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. Debt and interest rates Total outstanding debt was as follows: December 31, ($ in millions) 2021 2020 Short-term debt and current maturities of long-term debt 1,384 1,293 Long-term debt: Bonds Other long-term debt Total debt 3,984 4,580 193 248 5,561 6,121 The increase in short-term debt in 2021 was due to the reclassification to short-term of the USD 1,250 million 2.875% Notes mostly offset by the repayment at maturity of both the USD 650 million 4.0% Notes and the CHF 350 mil- lion 2.25% Bonds. At December 31, 2021, Long-term debt decreased $651 million compared to the end of 2020 due to the reclassification to short-term described above offset partly by the issuance in 2021 of EUR 800 million 0% Notes. 154 A B B A N N U A L R E P O R T 2 0 2 1 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 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 exposure. For example, we use interest rate swaps to effectively convert fixed rate debt into floating rate liabilities. After considering the effects of interest rate swaps, at December 31, 2021, the effective average interest rate on our floating rate long-term debt (including current maturities) of $3,598 million and our fixed rate long-term debt (including current maturities) of $1,885 million was 0.3 percent and 3.1 percent, respectively. This compares with an effective rate of 0.2 percent for floating rate long-term debt of $3,330 million and 3.3 percent for fixed rate long-term debt of $2,638 million at December 31, 2020. For a discussion of our use of derivatives to modify the interest characteristics of certain of our individual bond issuances, see “Note 12 - Debt” to our Consolidated Financial Statements. Credit facility In December 2019, we replaced our previous multicurrency revolving credit facility with a new $2 billion multicurrency revolving credit facility, maturing in 2024. In 2021 we exercised our option to further extend the maturity to 2026. No amount was drawn under the facility at December 31, 2021 and 2020. The facility is available for general corporate purposes and contains cross-default clauses whereby an event of default would occur if we were to default on indebted- ness, as defined in the facility, at or above a specified threshold. The credit facility does not contain financial covenants that would restrict our ability to pay dividends or raise additional funds in the capital markets. For further details of the credit facility, see “Note 12 - Debt” to our Consolidated Financial Statements. Commercial paper States, compared to $32 million outstanding at December 31, 2020. At December 31, 2021 and 2020, no amount was outstanding under the $2 billion Euro-commercial paper program. European program for the issuance of debt The European program for the issuance of debt allows the issuance of up to the equivalent of $8 billion in certain debt instruments. The terms of the program do not obligate any third party to extend credit to us and the terms and possibility of issuing any debt under the program are deter- mined with respect to, and as of the date of issuance of, each debt instrument. At December 31, 2021, three bonds (principal amount of EUR 700 million, due in 2023, principal amount of EUR 750 million, due in 2024, and principal amount of EUR 800 million, due in 2030) having a combined carrying amount of $2,522 million were outstand- ing under the program. The carrying amount of the bonds outstanding under the program at December 31, 2020, was $1,821 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 December 31, 2021 and 2020, our long-term debt was rated A3 by Moody’s and currently with a Stable outlook. At December 31, 2021 and 2020, our long-term debt was rated A- by Stan- dard & Poor’s and currently with a Stable outlook. At December 31, 2021, we had two commercial paper programs in place: Limitations on transfers of funds • 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, 2021, no amount was outstand- ing under the $2 billion program in the United Currency and other local regulatory limitations related to the transfer of funds exist in a number of countries where we operate, including: China, Egypt, India, Malaysia, the Philippines, the Russian Federation, South Africa, South Korea, Taiwan (Chinese Taipei), Thailand and Turkey. Funds, other than regular dividends, fees or loan repay- ments, cannot be readily transferred offshore A B B A N N U A L R E P O R T 2 0 2 1 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 from these countries and are therefore deposited and used for working capital needs in those countries. In addition, there are certain countries where, for tax reasons, it is not considered opti- mal 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, 2021 and 2020, the balance of “Cash and equiva- lents” and “Marketable securities and other short-term investments” under such limitations (either regulatory or sub-optimal from a tax perspective) totaled approximately $2,074 million and $1,751 million, respectively. During 2021, we continued to direct our subsidiar- ies in countries with restrictions to place such cash with our core banks or investment grade banks, in order to minimize credit risk on such cash positions. We continue to closely monitor the situation to ensure bank counterparty risks are minimized. — Financial position Balance sheets December 31, ($ in millions) 2021 2020 % Change Current assets Cash and equivalents 4,159 3,278 Restricted cash 30 323 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 1,170 2,108 6,551 6,820 990 985 4,880 4,469 206 573 201 760 136 282 Total current assets 18,695 19,226 27% n.a. (44)% (4)% 1% 9% 2% (25)% (52)% (3)% For a discussion on Cash and equivalents, see sections “Liquidity and Capital Resources—Prin- cipal sources of funding” and “Cash flows” for further details. In 2021, the amount of cash subject to short-term restrictions decreased as restrictions on cash of $290 million were removed upon ABB completing certain obligations in connection with the sale of Power Grids to Hitachi. See “Note 3 - Discontinued operations” to our Consolidated Financial Statements. Marketable securities and short-term investments decreased in 2021. The reduction primarily re- flects lower amounts placed in money market funds classified as equity securities (see “Note 5 - Cash and equivalents, marketable securities and short-term investments” to our Consolidated Financial Statements). Receivables, net, decreased 4 percent primarily due to changes in foreign currencies. In local currency, Receivables, net, remained flat. Contract assets increased 1 percent (5 percent in local currencies). The increase reflects higher levels in the Process Automation and Motion Business Areas. This was partially offset by lower levels in the non-core businesses and in the Robotics & Discrete Automation Business Area. Inventories, net, increased 9 percent (15 percent in local currencies). The increase reflects a signifi- cant build-up of raw materials and some increases in the price of components. Supply chain chal- lenges and shortages in the availability of some items have created the need to stockpile certain key components and also have resulted in some delays in completing and delivering finished goods. Current assets held for sale and in discontinued operations decreased to $136 million from $282 million. These amounts primarily relate to working capital for certain contracts which remain with ABB and are being executed for the direct benefit of the Power Grids business. For the details of the assets of the Power Grids busi- ness see “Note 3 - Discontinued operations” to our Consolidated Financial Statements. 156 A B B A N N U A L R E P O R T 2 0 2 1 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 Restricted cash at December 31, 2021 and 2020, represents certain amounts received on the sale of the Power Grids business which have been placed in escrow, pending resolution of certain of our contractual obligations to Hitachi Ltd. See “Note 3 - Discontinued operations” to our Consoli- dated Financial Statements. In 2021, Property, plant and equipment, net, decreased 3 percent (increased 1 percent in local currencies). The sale of the Mechanical Power Transmission Division decreased Property, plant and equipment, net, by 3 percent. In 2021, Goodwill decreased 3 percent (2 percent in local currencies). The sale of the Mechanical Power Transmission Division reduced Goodwill by 3 percent. Acquisitions of businesses increased Goodwill by 1 percent. Intangible assets, net, decreased 25 percent (22 percent in local currencies). The sale of the Mechanical Power Transmission Division reduced Intangible assets, net, by 10 percent. Acquisitions of businesses increased Intangible assets, net, by 3 percent. For additional information on goodwill and intangible assets see “Note 11 - Goodwill and intangible assets” to our Consolidated Financial Statements. The balance for Investment in equity-accounted companies at December 31, 2021 and 2020, pri- marily represents our remaining 19.9 percent interest in the Hitachi Energy joint venture. For additional information on investments in equity-accounted companies see “Note 4 - Acqui- sitions, divestments and equity-accounted companies” to our Consolidated Financial Statements. Prepaid pension and other employee benefits increased 148 percent (150 percent in local curren- cies). For additional information on Pension and employee benefits see “Note 17 - Employee bene- fits” to our Consolidated Financial Statements. In 2021, Deferred taxes, increased 40 percent (50 percent in local currencies). For details on deferred tax assets see “Note 16 - Income taxes” to our Consolidated Financial Statements. December 31 ($ in millions) 2021 2020 % Change Current liabilities Accounts payable, trade 4,921 4,571 Contract liabilities 1,894 1,903 Short-term debt and current maturities of long-term debt 1,384 1,293 8% 0% 7% Current operating leases 230 270 (15)% Provisions for warranties 1,005 1,035 Other provisions 1,386 1,519 Other current liabilities 4,367 4,181 Current liabilities held for sale and in discontinued operations 381 644 Total current liabilities 15,568 15,416 (3)% (9)% 4% (41)% 1% Accounts payable, trade, increased 8 percent (11 percent in local currencies) due primarily to higher inventory purchases. The increase in short-term debt in 2021 was due to the reclassification to short-term of the USD 1,250 million 2.875% Notes partially offset by the repayment at maturity of both the USD 650 million 4.0% Notes and the CHF 350 million 2.25% Bonds. Current operating leases includes the portion of the operating lease liabilities that are due to be paid in the next 12 months. For a summary of operating lease liabilities, see “Note 14 - Leases” to our Consolidated Financial Statements. Provisions for warranties decreased 3 percent (remained flat in local currencies). For details on the change in the Provisions for warranties, see “Note 15 - Commitments and contingencies” to our Consolidated Financial Statements. Current liabilities held for sale and in discontinued operations decreased to $381 million from $644 million. These amounts primarily relate to certain working capital balances of the Power Grids business as described above as well as amounts recorded for certain guarantees pro- vided for the benefit of Power Grids. December 31, ($ in millions) 2021 2020 % Change Non-current assets Restricted cash, non-current 300 300 0% Property, plant and equipment, net Operating lease right-of-use assets Investments in equity- accounted companies Prepaid pension and other employee benefits 4,045 4,174 (3)% 895 969 (8)% 1,670 1,784 n.a. 892 360 Intangible assets, net 1,561 2,078 Goodwill Deferred taxes Other non-current assets 10,482 10,850 1,177 543 843 504 Total non-current assets 21,565 21,862 148% (25)% (3)% 40% 8% (1)% A B B A N N U A L R E P O R T 2 0 2 1 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 December 31, ($ in millions) 2021 2020 % Change Non-current liabilities Long-term debt 4,177 4,828 (13)% Non-current operating leases Pension and other employee benefits 689 731 (6)% 1,025 1,231 (17)% Deferred taxes 685 661 Other non-current liabilities 2,116 2,025 Non-current liabilities held for sale and in discontinued operations 43 197 Total non-current liabilities 8,735 9,673 4% 4% (78)% (10)% Long-term debt decreased 13 percent. This de- crease reflects the reclassification to short-term described above offset mostly by the issuance in 2021 of EUR 800 million 0% Notes. Long-term debt also decreased 6 percent due to changes in currency exchange rates. For additional informa- tion on Long-term debt, see “Liquidity and Capital Resources—Debt and interest rates” as well as “Note 12 - Debt” to our Consolidated Financial Statements. Non-current operating leases includes the portion of the operating lease liabilities that are due to be paid in more than 12 months. Pension and employee benefits decreased 17 per- cent (12 percent in local currencies). For additional information on Pension and employee benefits see “Note 17 - Employee benefits” to our Consoli- dated Financial Statements. For a breakdown of Other non-current liabilities, see “Note 13 - Other provisions, other current liabilities and other non-current liabilities” to our Consolidated Financial Statements. Non-current liabilities held for sale and in discon- tinued operations relate to the sale in 2020 of the Power Grids business. The balance decreased compared to 2020 due to reclassification to current of certain amounts expected to be paid within the next year. The remaining amount at December 31, 2021, relates to certain amounts which are expected to be payable in more than one year. For the details of the liabilities of the Power Grids business see “Note 3 - Discontinued operations” 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 aggregate for each major cash flow activity and also include the impact from changes in re- stricted cash. The Consolidated Statements of Cash Flows can be summarized as follows: ($ in millions) 2021 2020 2019 Net cash provided by operating activities Net cash provided by (used in) investing activities Net cash used in financing activities Effects of exchange rate changes on cash and equivalents Net change in cash and equivalents and restricted cash 3,330 1,693 2,325 2,307 6,760 (815) (4,968) (8,175) (1,383) (81) 79 (28) 588 357 99 Operating activities ($ in millions) Net income 2021 2020 2019 4,650 5,205 1,528 Loss (income) from discontinued operations, net of tax 80 (4,860) (438) Depreciation and amortization 893 915 961 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 (used in) operating activities — discontinued operations (2,593) 263 220 308 352 (372) 3,338 1,875 1,899 (8) (182) 426 Cash flows from operating activities in continuing operations in 2021 provided net cash of $3,338 million, an increase of 78 percent com- pared to 2020. In 2021, we had significantly higher cash effective net income (i.e. net income from continuing operations adjusted for depreciation, amortization and other non-cash items). The higher cash effective net income is due partly to the negative impacts in 2020 of payments made to settle certain international pension plans. The higher amount in 2021 was also driven by gener- ally higher business volumes and higher profitability. In 2021, changes in operating assets and liabilities positively impacted cash flows primarily due to the timing of payments of higher accrued liabilities, including employee bonuses. Cash paid for income taxes increased to $1,292 million from $905 million, reflecting higher current income taxes, including tax impacts from the sales of businesses. In 2020, net cash pro- vided by operating activities benefited from a reduction of inventory levels (in local currencies) and a more favorable timing of cash flows on long-term projects. 158 A B B A N N U A L R E P O R T 2 0 2 1 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 2021, there were no significant cash flows from operating activities of discontinued operations while in 2020, there were net outflows of $182 mil- lion. The amount in 2020 primarily reflects the cash flows of the Power Grids business in the first half of the year. Investing activities ($ in millions) 2021 2020 2019 Purchases of investments (1,528) (5,933) (748) 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 provided by (used in) investing activities — continuing operations Net cash provided by (used in) investing activities — discontinued operations (820) (694) (762) (241) (121) (22) 2,272 4,341 749 81 93 11 114 80 82 2,958 (136) 69 (121) (23) 138 8 (76) (23) 2,671 (2,272) (651) (364) 9,032 (164) Net cash provided by investing activities for continuing operations in 2021 was $2,671 million compared to $2,272 million used in investing activities during 2020. In 2021, we received pro- ceeds of $2,958 million in connection with sales of businesses, primarily from the sale of the Dodge business. The amount in 2020 reflects the net investment in money market funds of amounts received from the sale of the Power Grids busi- ness as well as cash payments for purchases of property, plant and equipment. In 2021, we also recorded net investing cash outflows of $121 mil- lion for settlements of derivatives compared to net inflows of $138 million in 2020. The following presents purchases of property, plant and equipment and intangible assets by significant asset category: ($ in millions) 2021 2020 2019 Construction in progress 479 493 536 Purchase of machinery and equipment Purchase of land and buildings Purchase of intangible assets Purchases of property, plant and equipment and intangible assets 150 158 33 134 156 17 50 26 44 820 694 762 Cash expenditures for acquisitions of businesses in 2021 primarily reflects the amount paid to acquire ASTI. The divestment of the solar invert- ers business resulted in a net cash outflow of $143 million in 2020. Cash flows from investing activities for discontin- ued operations relates to the Power Grids business. We sold this business in 2020 and generated net cash proceeds of $9,168 million. Certain amounts related to the purchase price were subject to adjustment, including the final settlement for working capital balances. In 2021, certain elements of the purchase price were finalized and we made payments related to the purchase price and certain other obligations totaling $364 million. Financing activities ($ in millions) 2021 2020 2019 Net changes in debt with maturities of 90 days or less Increase in debt Repayment of debt Delivery of shares (83) (587) 164 1,400 343 2,406 (1,538) (3,459) (2,156) 826 412 10 — Purchase of treasury stock (3,708) (3,048) Dividends paid (1,726) (1,736) (1,675) Dividends paid to noncontrolling shareholders Other financing activities Net cash used in financing activities — continuing operations Net cash provided by (used in) financing activities — discontinued operations (98) (41) (82) (49) (90) 13 (4,968) (8,206) (1,328) — 31 (55) 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 distributions to controlling and noncontrolling shareholders. In 2021, the net outflow for debt with maturities of 90 days or less related to net repayments of amounts outstanding under the U.S. commercial paper program and various local country borrowings. In 2021, “Increase in debt” primarily represents the issuance of EUR 800 million 0% Notes due 2030 and borrowings under commercial paper programs for terms longer than 90 days. In 2021, “Repayment of debt” includes the repay- ment at maturity of the USD 650 million 4.0% Notes and the CHF 350 million 2.25% Bonds and repayments under commercial paper programs for terms longer than 90 days. A B B A N N U A L R E P O R T 2 0 2 1 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 “Delivery of shares” in 2021 reflects cash received from the exercise of options in connection with our Management Incentive Plan (resulting in a delivery of 36 million shares) and in connection with our Employee Share Acquisition Plan (result- ing in a delivery of 1.7 million shares). All shares were delivered out of Treasury stock. In 2021, “Purchase of treasury stock” reflects $2,680 million of cash payments to purchase 78 million of our own shares in connection with both of the announced share buyback programs. It also reflects $1,028 million paid to purchase 33 million shares on the open market during 2021. Contractual obligations and commitments The contractual obligations presented in the table below represent our estimates of future pay- ments under fixed contractual obligations and commitments. These amounts may differ from those reported in our Consolidated Balance Sheet at December 31, 2021. Changes in our business needs, cancellation provisions and changes in interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Therefore, our actual payments in future periods may vary from those presented below. The table below summarizes certain of our cash requirements for known contractual obligations and principal and interest payments under our debt instruments and purchase obligations at December 31, 2021 and the timing thereof. For details of future operating and finance lease payments, see “Note 14 - Leases” to our Consoli- dated Financial Statements. December 31, ($ in millions) Current Non- current Total Long-term debt obligations 1,271 4,091 5,362 Interest payments related to long-term debt obligations Purchase obligations Total 73 3,500 638 992 711 4,492 4,844 5,721 10,565 In the table above, the Long-term debt obliga- tions reflect the cash amounts to be repaid upon maturity of those debt obligations. The cash obligations above will differ from Long-term debt due to the impacts of fair value hedge accounting adjustments and premiums or discounts on certain debt. 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 incurred. However, we use interest rate swaps to modify the interest characteristics of certain of our debt obligations. The net effect of these swaps may 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. Purchase obligations are defined as agreements to purchase goods and services that are enforce- able and legally binding, that specify all significant terms, including the quantities to be purchased, price provisions and the approximate timing of the transactions. Purchase obligations includes procurement contracts for raw materials, sub-contracted work, supplies and services. Purchase obligations include amounts recorded as well as amounts that are not recorded in the Consolidated Balance Sheets. Off-balance sheet arrangements Commercial commitments We disclose the maximum potential exposure of certain guarantees, as well as possible recourse provisions that may allow us to recover from third parties amounts paid out under such guarantees. The maximum potential exposure does not allow any discounting of our assessment of actual exposure under the guarantees. The information below reflects our maximum potential exposure under the guarantees, which is higher than our assessment of the expected exposure. Guarantees The following table provides quantitative data regarding our third-party guarantees. The 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(2) Total Maximum potential payments(1) 2021 2020 4,540 6,726 52 136 339 177 4,728 7,242 (1) Maximum potential payments include amounts in both continu- ing and discontinued operations. (2) Certain indemnifications provided to Hitachi in connection with the divestment of Power Grids are without limit. The carrying amount of liabilities recorded in the Consolidated Balance Sheets reflects our best estimate of future payments, which we may incur as part of fulfilling our guarantee obligations. In 160 A B B A N N U A L R E P O R T 2 0 2 1 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 respect of the above guarantees, the carrying amounts of liabilities at December 31, 2021 and 2020, amounted to $156 million and $135 million, respectively, the majority of which is included in discontinued operations. 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 we do not fulfill our contractual obligations. We would then have an obligation to reimburse the financial institution for amounts paid under the performance bonds. At Decem- ber 31, 2021 and 2020, the total outstanding performance bonds aggregated to $3.6 billion and $4.3 billion, respectively, of which $0.1 billion and $0.3 billion, respectively, relate to discontin- ued operations. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2021 and 2020. 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 2 1 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 — E M P T Y PAG E A D D E D I N T E N T I O N A L LY 162 Consolidated Financial Statements of ABB Group A B B A N N U A L R E P O R T 2 0 2 1 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 — Report of management on internal control over financial reporting The Board of Directors and Management of ABB Ltd and its consolidated subsidiaries (“ABB”) are responsible for establishing and maintaining adequate internal control over financial reporting. ABB’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of the published Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with ABB’s policies and procedures may deteriorate. Management conducted an assessment of the effectiveness of internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management has concluded that ABB’s internal control over financial reporting was effective as of December 31, 2021. KPMG AG, the independent registered public accounting firm who audited the Company’s consolidated financial statements, has issued an opinion on the effectiveness of ABB’s internal control over financial reporting as of December 31, 2021, which is included on page 168-169 of this Annual Report. Björn Rosengren Timo Ihamuotila Chief Executive Officer Chief Financial Officer Zurich, February 24, 2022 164 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 its subsidiaries (the Group), which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated income statements, statements of comprehensive income, cash flows and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements on pages (171 to 243). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in accordance with U.S. Generally Accepted Accounting Principles, and comply with Swiss law. Board of Directors’ Responsibility The Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation 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 audits. 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement, whether due to fraud or error. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 165 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. Revenue recognition for long-term fixed price contracts using the percentage-of-completion method Valuation of unrecognized tax benefits related to transfer pricing Revenue recognition for long-term fixed price contracts using the percentage-of-completion method Critical Audit Matter Our response 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. For the year ended December 31, 2021, the Group reported $23,745 million of revenue from sales of products, a portion of which related to long-term fixed price contracts. 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 following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Group’s revenue 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 selection of contracts. We evaluated the estimate of remaining costs to be incurred for a selection 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” 166 Valuation 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. As discussed in Note 16, the Group reported total unrecognized tax benefits of $1,322 million, a portion of which related to unrecognized tax benefits related to transfer pricing. We identified the valuation of unrecognized tax benefits related to transfer pricing as a critical audit matter. A high degree of subjective auditor judgment and specialized skills and knowledge 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 following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Group’s tax 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 tax professionals with specialized skills and knowledge, who assisted in evaluating (1) the Group’s historical ability to accurately estimate the unrecognized tax benefits related to transfer pricing by comparing historical tax positions to subsequent settlements (2) the Group’s transfer pricing documentation and methodology for compliance with applicable laws and regulations by assessing the documentation and relevant agreements, (3) the impact of new information or changes in international tax practice and developments on historical tax positions, and (4) developing an independent expectation of the unrecognized tax benefits estimate relating to current year tax positions in connection with the Group’s intragroup charges and 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” Report on Other Legal and Regulatory Requirements We are a public accounting firm registered with the Swiss Federal Audit Oversight Authority (FAOA) and the PCAOB and we confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA). We are independent of the Group in accordance with Swiss law (article 728 CO and article 11 AOA) and U.S. federal securities laws as well as the applicable rules and regulations of the Swiss audit profession, the U.S. Securities and Exchange Commission and the PCAOB, and we have fulfilled our other ethical responsibilities in accordance with these requirements. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. 167 We have also audited, in accordance with the standards of the PCAOB, the Group’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2022, 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 AG Hans-Dieter Krauss Mohammad Nafeie Licensed Audit Expert Auditor in Charge Zurich, Switzerland February 24, 2022 KPMG AG, Badenerstrasse 172, PO Box, CH-8036 Zurich © 2022 KPMG AG, a Swiss corporation, is a subsidiary of KPMG Holding AG, which is a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 168 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 and its subsidiaries’ (the Group) internal control over financial reporting as of December 31, 2021, 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 Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by 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 of the Group as of December 31, 2021 and 2020, the related consolidated income statements, statements of comprehensive income, cash flows and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 24, 2022, expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Group’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 Report of management on internal control over financial reporting. Our responsibility is to express an opinion on the Group’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 Group 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 audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 169 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. KPMG AG Hans-Dieter Krauss Mohammad Nafeie Licensed Audit Expert Auditor in Charge Zurich, Switzerland February 24, 2022 KPMG AG, Badenerstrasse 172, PO Box, CH-8036 Zurich © 2022 KPMG AG, a Swiss corporation, is a subsidiary of KPMG Holding AG, which is a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 170 — E M P T Y PAG E A D D E D I N T E N T I O N A L LY E M P T Y PAG E A D D E D I N T E N T I O N A L LY — A B B A N N U A L R E P O R T 2 0 2 1 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 — ABB Ltd 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 Impairment of goodwill Other income (expense), net Income from operations Interest and dividend income Interest and other finance expense Losses from extinguishment of debt Non-operational pension (cost) credit Income from continuing operations before taxes Income tax expense Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Net income attributable to noncontrolling interests Net income attributable to ABB Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Weighted-average number of shares outstanding (in millions) used to compute: Basic earnings per share attributable to ABB shareholders Diluted earnings per share attributable to ABB shareholders Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements 2021 23,745 5,200 28,945 (16,364) (3,114) (19,478) 9,467 (5,162) (1,219) — 2,632 5,718 51 (148) — 166 5,787 (1,057) 4,730 (80) 4,650 (104) 4,546 4,625 (79) 4,546 2.31 (0.04) 2.27 2.29 (0.04) 2.25 2,001 2,019 2020 21,214 4,920 26,134 2019 22,554 5,424 27,978 (15,229) (15,811) (3,027) (3,261) (18,256) (19,072) 7,878 (4,895) (1,127) 8,906 (5,447) (1,198) (311) 48 1,593 51 (240) (162) (401) 841 (496) 345 4,860 5,205 (59) 5,146 294 4,852 5,146 0.14 2.30 2.44 0.14 2.29 2.43 2,111 2,119 — (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 2,133 2,135 172 A B B A N N U A L R E P O R T 2 0 2 1 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 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 Changes attributable to divestments Foreign currency translation adjustments Available-for-sale securities: Net unrealized gains (losses) arising during the year Reclassification adjustments for net (gains) losses included in net income Changes attributable to divestments Unrealized gains (losses) on available-for-sale securities Pension and other postretirement plans: Prior service credits arising during the year Net actuarial gains (losses) arising during the year Amortization of prior service credit included in net income Amortization of net actuarial loss included in net income Net losses from settlements and curtailments included in net income Changes attributable to divestments Pension and other postretirement plan adjustments Derivative instruments and hedges: Net unrealized gains arising during the year Reclassification adjustments for net (gains) losses included in net income Changes in derivative instruments and hedges Total other comprehensive income (loss), net of tax Total comprehensive income, net of tax Total comprehensive income attributable to noncontrolling interests, net of tax Total comprehensive income attributable to ABB, net of tax Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements 2021 4,650 2020 5,205 2019 1,528 (521) (9) (530) (10) (5) — (15) — 411 (14) 69 7 (6) 467 8 (13) (5) (83) 4,567 (108) 4,459 498 519 1,017 24 (14) (3) 7 43 (200) (11) 88 518 151 589 2 — 2 1,615 6,820 (86) 6,734 (130) (2) (132) 14 — — 14 6 (220) (28) 68 32 — (142) 20 (9) 11 (249) 1,279 (83) 1,196 A B B A N N U A L R E P O R T 2 0 2 1 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 — ABB Ltd Consolidated Balance Sheets December 31 ($ in millions, except share data) Cash and equivalents Restricted cash 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 Restricted cash, non-current Property, plant and equipment, net Operating lease right-of-use assets Investments in equity-accounted companies Prepaid pension and other employee benefits Intangible assets, net Goodwill Deferred taxes Other non-current assets 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 (2,053 million and 2,168 million shares issued at December 31, 2021 and 2020, respectively) Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost (95 million and 137 million shares at December 31, 2021 and 2020, 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 2021 4,159 30 1,170 6,551 990 4,880 206 573 136 2020 3,278 323 2,108 6,820 985 4,469 201 760 282 18,695 19,226 300 4,045 895 1,670 892 1,561 10,482 1,177 543 300 4,174 969 1,784 360 2,078 10,850 843 504 40,260 41,088 4,921 1,894 1,384 230 1,005 1,386 4,367 381 4,571 1,903 1,293 270 1,035 1,519 4,181 644 15,568 15,416 4,177 689 1,025 685 2,116 43 4,828 731 1,231 661 2,025 197 24,303 25,089 178 22 22,477 (4,088) (3,010) 15,579 378 15,957 40,260 188 83 22,946 (4,002) (3,530) 15,685 314 15,999 41,088 174 A B B A N N U A L R E P O R T 2 0 2 1 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) 2021 2020 2019 Operating activities: Net income Loss (income) from discontinued operations, net of tax Adjustments to reconcile net income to net cash provided by operating activities: 4,650 5,205 80 (4,860) 1,528 (438) Depreciation and amortization Impairment of goodwill Changes in fair values of investments Pension and other employee benefits Deferred taxes Losses from extinguishment of debt Loss (income) from equity-accounted companies Net loss (gain) from derivatives and foreign exchange Net gain from sale of property, plant and equipment Net loss (gain) from sale of businesses Fair value adjustment on assets and liabilities held for sale 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 (used in) 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 provided by (used in) investing activities — continuing operations Net cash provided by (used in) investing activities — discontinued operations Net cash provided by (used in) investing activities 893 — (123) (216) (289) — 100 49 (38) (2,193) — 117 (142) 29 (771) 659 454 (48) 117 10 3,338 (8) 3,330 915 311 (99) 50 (280) 162 66 (2) (37) 2 33 57 (100) 186 196 (13) (92) 243 (76) 8 1,875 (182) 1,693 (1,528) (820) (5,933) (694) (241) 2,272 81 93 2,958 (121) (23) 2,671 (364) 2,307 (121) 4,341 11 114 (136) 138 8 (2,272) 9,032 6,760 961 — (5) (102) (83) — (8) 1 (51) (55) 421 102 (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) A B B A N N U A L R E P O R T 2 0 2 1 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 Year ended December 31 ($ in millions) 2021 2020 2019 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 (83) 1,400 (587) 343 (1,538) (3,459) 826 (3,708) (1,726) (98) (41) 412 (3,048) (1,736) (82) (49) 164 2,406 (2,156) 10 — (1,675) (90) 13 Net cash used in financing activities — continuing operations (4,968) (8,206) (1,328) Net cash provided by (used in) financing activities — discontinued operations — 31 (55) Net cash used in financing activities (4,968) (8,175) (1,383) Effects of exchange rate changes on cash and equivalents and restricted cash Net change in cash and equivalents and restricted cash Cash and equivalents and restricted cash, beginning of period Cash and equivalents and restricted cash, 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 (81) 588 3,901 4,489 132 1,292 79 357 3,544 3,901 189 905 (28) 99 3,445 3,544 284 1,005 176 A B B A N N U A L R E P O R T 2 0 2 1 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, 2021, 2020 and 2019 ($ in millions) Balance at January 1, 2019 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 income (expense) related to pensions and other postretirement plans, net of tax Change in derivative instruments and 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 to shareholders Share-based payment arrangements Delivery of shares Call options Balance at December 31, 2019 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 income (expense) related to pensions and other postretirement plans, net of tax Change in derivative instruments and hedges, net of tax Total comprehensive income Changes in noncontrolling interests Changes in noncontrolling interests in connection with divestments Dividends to noncontrolling shareholders Dividends to shareholders Share-based payment arrangements Purchase of treasury stock Delivery of shares Other Balance at December 31, 2020 Comprehensive income: Net income Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivative instruments and hedges, net of tax Total comprehensive income Changes in noncontrolling interests Dividends to noncontrolling shareholders Dividends to shareholders Cancellation of treasury shares Share-based payment arrangements Purchase of treasury stock Delivery of shares Other Balance at December 31, 2021 Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements Common stock 188 Additional paid-in capital 56 Retained earnings Accumulated other comprehensive loss Treasury stock stockholders’ equity (820) interests 582 Total ABB Noncontrolling Total stockholders’ (17) 55 (24) 4 73 (16) 54 (24) (3) 83 (37) (17) 60 (84) 16 22 188 188 (10) 178 19,839 36 1,439 (1,675) 19,640 (82) 5,146 (1,758) 22,946 4,546 (20) (1,730) (3,130) (136) 22,477 (5,311) (36) (126) (142) 14 11 (5,590) 990 589 7 2 (4,002) (534) (15) 467 (5) (4,088) 34 (785) (3,181) 436 (3,530) 3,157 (3,682) 1,046 (3,010) 13,952 — 1,439 (126) (142) 14 11 1,196 (17) — — — 55 10 4 (1,675) 13,526 (82) 5,146 990 589 7 2 6,734 (16) — — 54 (1,758) (3,181) 412 (3) 15,685 4,546 (534) (15) 467 (5) 4,459 (57) — (1,730) (3,682) — 60 826 16 15,579 equity 14,534 — 1,528 (132) (142) 14 11 1,279 (5) (44) (55) (122) (1,675) 55 10 4 13,980 (91) 5,205 1,017 589 6,820 7 2 3 (138) (98) (1,758) 54 (3,181) 412 (3) 15,999 4,650 (530) (15) 467 (5) 4,567 (2) (98) (1,730) (3,682) — 60 826 16 15,957 89 (6) 83 12 (44) (55) (122) 454 (9) 59 27 86 19 (138) (98) 314 104 4 108 55 (98) 378 — ABB Ltd Consolidated Statements of Changes in Stockholders’ Equity Common stock 188 Additional paid-in capital 56 Years ended December 31, 2021, 2020 and 2019 ($ in millions) Balance at January 1, 2019 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 income (expense) related to pensions and other postretirement plans, net of tax Change in derivative instruments and 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 Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivative instruments and hedges, net of tax Total comprehensive income Changes in noncontrolling interests Changes in noncontrolling interests in connection with divestments Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivative instruments and hedges, net of tax Dividends to noncontrolling shareholders Dividends to shareholders Share-based payment arrangements Delivery of shares Call options Balance at December 31, 2019 Adoption of accounting standard update Comprehensive income: Net income Dividends to noncontrolling shareholders Dividends to shareholders Share-based payment arrangements Purchase of treasury stock Delivery of shares Other Balance at December 31, 2020 Comprehensive income: Net income Total comprehensive income Changes in noncontrolling interests Dividends to noncontrolling shareholders Dividends to shareholders Cancellation of treasury shares Share-based payment arrangements Purchase of treasury stock Delivery of shares Other Balance at December 31, 2021 Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements 188 188 (10) 178 (17) 55 (24) 4 73 (16) 54 (24) (3) 83 (37) (17) 60 (84) 16 22 A B B A N N U A L R E P O R T 2 0 2 1 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 Retained earnings Accumulated other comprehensive loss 19,839 36 1,439 (1,675) 19,640 (82) 5,146 (1,758) 22,946 4,546 (20) (1,730) (3,130) (136) 22,477 (5,311) (36) (126) 14 (142) 11 (5,590) 990 7 589 2 (4,002) (534) (15) 467 (5) (4,088) Treasury stock (820) 34 (785) (3,181) 436 (3,530) 3,157 (3,682) 1,046 (3,010) Total ABB stockholders’ equity Noncontrolling interests Total stockholders’ equity 13,952 — 1,439 (126) 14 (142) 11 1,196 (17) — — — (1,675) 55 10 4 13,526 (82) 5,146 990 7 589 2 6,734 (16) — — (1,758) 54 (3,181) 412 (3) 15,685 4,546 (534) (15) 467 (5) 4,459 (57) — (1,730) — 60 (3,682) 826 16 15,579 582 89 (6) 83 12 (44) (55) (122) 454 (9) 59 27 86 19 (138) (98) 314 104 4 108 55 (98) 378 14,534 — 1,528 (132) 14 (142) 11 1,279 (5) (44) (55) (122) (1,675) 55 10 4 13,980 (91) 5,205 1,017 7 589 2 6,820 3 (138) (98) (1,758) 54 (3,181) 412 (3) 15,999 4,650 (530) (15) 467 (5) 4,567 (2) (98) (1,730) — 60 (3,682) 826 16 15,957 178 A B B A N N U A L R E P O R T 2 0 2 1 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 leading global technology company, connecting software to its electrification, robotics, automation and motion portfolio to drive performance to new levels. — 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. Reclassifications Certain amounts reported for prior years in the Consolidated Financial Statements and the accompanying Notes have been reclassified to conform to the current year’s presentation. These changes primarily relate to the reallocation of certain real estate assets, previously reported within Corporate and Other, into the operating segments which utilize the assets. 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. 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. A B B A N N U A L R E P O R T 2 0 2 1 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 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. 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 and in discontinued operations 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). 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: • growth rates, discount rates and other assumptions used to determine impairment of long-lived assets and in testing goodwill for impairment, • estimates to determine valuation allowances for deferred tax assets and amounts recorded for unrecognized tax benefits, • assumptions used in determining inventory obsolescence and net realizable value, • estimates and assumptions used in determining the initial fair value of retained noncontrolling interest and certain obligations in connection with divestments, • 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, • estimates related to credit losses expected to occur over the remaining life of financial assets such as trade and other receivables, loans and other instruments, • assumptions used in the calculation of pension and postretirement benefits and the fair value of pension plan assets, and 180 A B B A N N U A L R E P O R T 2 0 2 1 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 • assumptions and projections, principally related to future material, labor and project-related overhead costs, used in determining the percentage-of-completion on projects where revenue is recognized over time, 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. Cash and equivalents that are subject to contractual restrictions or other legal obligations and are not readily available are classified as “Restricted cash”. 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. 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 generally reported in “Interest and other finance expense”, however, fair value changes for certain equity securities classified as long-term investments are reported in “Other income (expense), net”. For debt securities classified as available-for-sale where fair value has declined below amortized cost due to credit losses, the Company records an allowance for expected credit losses and adjusts the allowance in subsequent periods in “Interest and other finance expense”. All fair value changes other than those related to credit risk are reported in “Accumulated other comprehensive loss” until the security is sold. In addition, equity securities without readily determinable fair values are remeasured if there is an observable price change in an orderly transaction for the same investment, or if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying amount. Similar to other fair value changes as described above, depending on the nature of the investment, this fair value change is either recorded in “Other income (expense), net” or “Interest and other finance expense”. A B B A N N U A L R E P O R T 2 0 2 1 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 Accounts receivable and allowance for expected credit losses 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 Company recognizes an allowance for credit losses to present the net amount of receivables expected to be collected at the balance sheet date. The allowance is based on the credit losses expected to arise over the asset’s contractual term taking into account historical loss experience, customer-specific data as well as forward looking estimates. The Company’s accounts receivable are first grouped by the individual legal entity which generally has a geographic concentration of receivables, resulting in different risk levels for different entities. Receivables are then further subdivided within the entity into pools based on similar risk characteristics to estimate expected credit losses. Expected credit losses are estimated individually when the related assets do not share similar risk characteristics. Accounts receivable are written off when deemed uncollectible and are recognized as a deduction from the allowance for credit losses. Expected recoveries, which are not to exceed the amount previously written off, are considered in determining the allowance balance at the balance sheet date. 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. 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 an allowance for credit losses as discussed above in “Accounts receivable and allowance for expected credit losses”. 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 182 A B B A N N U A L R E P O R T 2 0 2 1 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 outstanding transactions between two counterparties on the occurrence of one or more pre-defined trigger events. Derivative instruments are presented on a gross basis in the Consolidated Financial Statements. Revenue recognition A customer contract exists if collectability under the contract is considered probable, the contract has commercial substance, contains payment terms, as well as the rights and commitments of both parties, and has been approved. 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 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 goods, 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 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 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 A B B A N N U A L R E P O R T 2 0 2 1 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 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. 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 evaluated for impairment for each of the Company’s asset groups when events or circumstances indicate that the carrying amount of the long-lived asset or asset group may not be recoverable. If the asset group’s net carrying value exceeds the asset group’s net 184 A B B A N N U A L R E P O R T 2 0 2 1 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 undiscounted cash flows expected to be generated over its remaining useful life including net proceeds expected from disposition of the asset group, if any, the carrying amount of the asset group 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 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 reviews performed in 2021 and 2020, respectively, the reporting units were determined to be one level below the operating segments. 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 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. When performing a quantitative impairment test, the Company 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 reporting unit’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 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. 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 A B B A N N U A L R E P O R T 2 0 2 1 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 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). 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 provided by (used in) investing activities”. Leases The Company leases primarily real estate, vehicles and machinery. 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 the use of the identified asset and 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 is 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. 186 A B B A N N U A L R E P O R T 2 0 2 1 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 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. Income taxes The Company uses the asset and liability method to account for deferred taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company records a deferred tax asset when it determines that it is more likely than not that the deduction will be sustained based upon the deduction’s technical merit. Deferred tax assets and liabilities that can be offset against each other are reported on a net basis. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. Deferred taxes are provided on unredeemed retained earnings of the Company’s subsidiaries. However, deferred taxes are not provided on such unredeemed retained earnings to the extent it is expected that the earnings are permanently reinvested. Such earnings may become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. The Company operates in numerous tax jurisdictions and, as a result, is regularly subject to audit by tax authorities. The Company provides for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred. Contingency provisions are recorded based on the technical merits of the Company’s filing position, considering the applicable tax laws and Organisation for Economic Co-operation and Development (OECD) guidelines and are based on its evaluations of the facts and circumstances as of the end of each reporting period. The Company applies a two-step approach to recognize and measure uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. Uncertain tax positions that could be settled against existing loss carryforwards or income tax credits are reported net. Expenses related to tax penalties are classified in the Consolidated Income Statements as “Income tax expense” 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. A B B A N N U A L R E P O R T 2 0 2 1 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 Share-based payment arrangements The Company has various share-based payment arrangements for its employees, which are described more fully in Note 18. Such arrangements are accounted for under the fair value method. For awards that are equity-settled, total compensation is measured at grant date, based on the fair value of the award at that date, and recorded in earnings over the period the employees are required to render service. For awards that are cash-settled, compensation is initially measured at grant date and subsequently remeasured at each reporting period, based on the fair value and vesting percentage of the award at each of those dates, with changes in the liability recorded in earnings. Fair value measures The Company uses fair value measurement principles to record certain financial assets and liabilities on a recurring basis and, when necessary, to record certain non-financial assets at fair value on a non-recurring basis, as well as to determine fair value disclosures for certain financial instruments carried at amortized cost in the financial statements. Financial assets and liabilities recorded at fair value on a recurring basis include foreign currency, commodity and interest rate derivatives, as well as cash-settled call options and available-for-sale securities. Non-financial assets recorded at fair value on a non-recurring basis include long-lived assets that are reduced to their estimated fair value due to impairments. Fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation techniques including the market approach (using observable market data for identical or similar assets and liabilities), the income approach (discounted cash flow models) and the cost approach (using costs a market participant would incur to develop a comparable asset). Inputs used to determine the fair value of assets and liabilities are defined by a three-level hierarchy, depending on the nature of those inputs. The Company has categorized its financial assets and liabilities and non-financial assets measured at fair value within this hierarchy based on whether the inputs to the valuation technique are observable or unobservable. An observable input is based on market data obtained from independent sources, while an unobservable input reflects the Company’s assumptions about market data. The levels of the fair value hierarchy are as follows: Level 1: Valuation inputs consist of quoted prices in an active market for identical assets or liabilities (observable quoted prices). Assets and liabilities valued using Level 1 inputs include exchange-traded equity securities, listed derivatives which are actively traded such as commodity futures, interest rate futures and certain actively traded debt securities. Level 2: Valuation inputs consist of observable inputs (other than Level 1 inputs) such as actively quoted prices for similar assets, quoted prices in inactive markets and inputs other than quoted prices such as interest rate yield curves, credit spreads, or inputs derived from other observable data by interpolation, correlation, regression or other means. The adjustments applied to quoted prices or the inputs used in valuation models may be both observable and unobservable. In these cases, the fair value measurement is classified as Level 2 unless the unobservable portion of the adjustment or the unobservable input to the valuation model is significant, in which case the fair value measurement would be classified as Level 3. Assets and liabilities valued or disclosed using Level 2 inputs include investments in certain funds, certain debt securities that are not actively traded, interest rate swaps, cross-currency 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 188 A B B A N N U A L R E P O R T 2 0 2 1 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 provided certain criteria are met. The NAVs are determined based on the fair values of the underlying investments in the funds. These assets are not classified in the fair value hierarchy but are separately disclosed. Whenever quoted prices involve bid-ask spreads, the Company ordinarily determines fair values based on mid-market quotes. However, for the purpose of determining the fair value of cash-settled call options serving as hedges of the Company’s management incentive plan (MIP), bid prices are used. When determining fair values based on quoted prices in an active market, the Company considers if the level of transaction activity for the financial instrument has significantly decreased, or would not be considered orderly. In such cases, the resulting changes in valuation techniques would be disclosed. If the market is considered disorderly or if quoted prices are not available, the Company is required to use another valuation technique, such as an income approach. Disclosures about the Company’s fair value measurements of assets and liabilities are included in Note 7. Contingencies The Company is subject to proceedings, litigation or threatened litigation and other claims and inquiries, related to environmental, labor, product, regulatory, tax (other than income tax) and other matters, and is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue, often with assistance from both internal and external legal counsel and technical experts. The required amount of a provision for a contingency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution. The Company records a provision for its contingent obligations when it is probable that a loss will be incurred and the amount can be reasonably estimated. Any such provision is generally recognized on an undiscounted basis using the Company’s best estimate of the amount of loss incurred or at the lower end of an estimated range when a single best estimate is not determinable. In some cases, the Company may be able to recover a portion of the costs relating to these obligations from insurers or other third parties; however, the Company records such amounts only when it is probable that they will be collected. The Company generally provides for anticipated costs for warranties when it delivers the related products. 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 plans, defined contribution pension plans and termination indemnity 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”. A B B A N N U A L R E P O R T 2 0 2 1 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 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 intangible assets” above. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred. Upon gaining control of an entity in which an equity method or cost basis investment was held by the Company, the carrying value of that investment is adjusted to fair value with the related gain or loss recorded in income. Deferred tax assets and liabilities based on temporary differences between the financial reporting and the tax base of assets and liabilities as well as uncertain tax positions and valuation allowances on acquired deferred tax assets assumed in connection with a business combination are initially estimated as of the acquisition date based on facts and circumstances that existed at the acquisition date. These estimates are subject to change within the measurement period (a period of up to 12 months after the acquisition date during which the acquirer may adjust the provisional acquisition amounts) with any adjustments to the preliminary estimates being recorded to goodwill. Changes in deferred taxes, uncertain tax positions and valuation allowances on acquired deferred tax assets that occur after the measurement period are recognized in income. New accounting pronouncements Applicable for current period Simplifying the accounting for income taxes In January 2021, the Company adopted a new accounting standard update, which enhances and simplifies various aspects of the income tax accounting guidance related to intraperiod tax allocations, ownership changes in investments and certain aspects of interim period tax accounting. Depending on the amendment, the adoption was applied on either a retrospective, modified retrospective, or prospective basis. This update does not have a significant impact on the Company’s Consolidated Financial Statements. Applicable for future periods Facilitation of the effects of reference rate reform on financial reporting In March 2020, an accounting standard update was issued which provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This update, along with clarifications outlined in a subsequent update issued in January 2021, can be adopted and applied no later than December 31, 2022, with early adoption permitted. The Company does not expect this update to have a significant impact on its Consolidated Financial Statements. 190 A B B A N N U A L R E P O R T 2 0 2 1 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 Business Combinations — Accounting for contract assets and contract liabilities from contracts with customers In October 2021, an accounting standard update was issued which provides guidance on the accounting for revenue contracts acquired in a business combination. The update requires contract assets and liabilities acquired in a business combination to be recognized and measured at the date of acquisition in accordance with the principles for recognizing revenues from contracts with customers. This update is effective prospectively for the Company for annual and interim reporting periods beginning January 1, 2023, with early adoption permitted in any interim period. The Company does not expect this update to have a significant impact on its Consolidated Financial Statements. Disclosures about government assistance In November 2021, an accounting standard update was issued which requires entities to disclose certain types of government assistance. Under the update, the Company is required to annually disclose (i) the type of the assistance received, including any significant terms and conditions, (ii) its related accounting policy, and (iii) the effect such transactions have on its financial statements. The update is effective either prospectively for all in-scope transactions at the date of adoption or retrospectively, for annual periods beginning January 1, 2022, with early adoption permitted. The Company will adopt this update prospectively as of January 1, 2022. The Company does not expect this update to have a significant impact on its Consolidated Financial Statements. — Note 3 Discontinued operations Divestment of the Power Grids business On July 1, 2020, the Company completed the sale of 80.1 percent of its Power Grids business to Hitachi Ltd (Hitachi). The transaction was executed through the sale of 80.1 percent of the shares of Hitachi Energy Ltd, formerly Hitachi ABB Power Grids Ltd (“Hitachi Energy”). Cash consideration received at the closing date was $9,241 million net of cash disposed. Further, for accounting purposes, the 19.9 percent ownership interest retained by the Company was deemed to have been both divested and reacquired at its fair value on July 1, 2020. The Company also obtained a put option, exercisable with three-months’ notice commencing in April 2023 (to be effective from July 2023), allowing the Company to require Hitachi to purchase the remaining interest for fair value, subject to a minimum floor price equivalent to a 10 percent discount compared to the price paid for the initial 80.1 percent. The combined fair value of the retained investment and the related put option, which amounted to $1,779 million, was recorded as an equity-method investment and also accounted for as part of the proceeds for the sale of the entire Power Grids business (see Note 4). In connection with the divestment, the Company recorded liabilities in discontinued operations for estimated future costs and other cash payments of $487 million for various contractual items relating to the sale of the business, including required future cost reimbursements payable to Hitachi Energy, costs to be incurred by the Company for the direct benefit of Hitachi Energy and an amount due to Hitachi Ltd in connection with the expected purchase price finalization of the closing debt and working capital balances. In October 2021, the Company and Hitachi concluded an agreement to settle the various amounts owing by the Company. The net difference between the agreed amounts and the amounts initially estimated by the Company was recorded in 2021 in discontinued operations as an adjustment to “Net gain recognized on sale of the Power Grids business” in the table below. During 2021 and 2020, total cash payments (including the amounts paid under the settlement agreement) of $364 million and $33 million, respectively, were made in connection with these liabilities. At December 31, 2021, the remaining amount recorded was $150 million. A B B A N N U A L R E P O R T 2 0 2 1 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 As a result of the Power Grids sale, the Company recognized an initial net gain of $5,141 million, net of transaction costs, for the sale of the entire Power Grids business in Income from discontinued operations, net of tax, in 2020. Included in the calculation of the net gain was a cumulative translation loss relating to the Power Grids business of $420 million which was reclassified from Accumulated other comprehensive loss (see Note 21). Certain amounts included in the net gain were estimated or otherwise subject to change in value and in 2021 the Company recorded adjustments, including the agreed settlement amount referred to above, reducing the total net gain by $65 million. Certain remaining minor obligations relating to the divestment continue to be subject to uncertainty and will be adjusted in future periods but these adjustments are not expected to have a material impact on the Consolidated Financial Statements. In 2020, the Company recorded $262 million in Income tax expense within discontinued operations in connection with the reorganization of the legal entity structure of the Power Grids business required to facilitate the sale. Certain entities of the Power Grids business for which the legal process or other regulatory delays resulted in the Company not yet having transferred legal titles to Hitachi were accounted for as being sold from the initial divestment date since control of the business as well as all risks and rewards of the business were fully transferred to Hitachi Energy. At December 31, 2021, substantially all of these delayed entities have been legally transferred to Hitachi. The proceeds for these entities were included in the cash proceeds described above and certain funds were placed in escrow pending completion of the transfer process. At December 31, 2021 and 2020, current restricted cash includes $12 million and $302 million, respectively, relating to these proceeds. In connection with the divestment, the Company recognized liabilities in discontinued operations for certain indemnities (see Note 15 for additional information) and also recorded an initial liability of $258 million representing the fair value of the right granted to Hitachi Energy for the use of the ABB brand for up to 8 years. Upon closing of the sale, the Company entered into various transition services agreements (TSAs). Pursuant to these TSAs, the Company and Hitachi Energy provide to each other, on an interim, transitional basis, various services. The services provided by the Company primarily include finance, information technology, human resources and certain other administrative services. Under the current terms, the TSAs will continue for up to 3 years, and can only be extended on an exceptional basis for business-critical services for an additional period which is reasonably necessary to avoid a material adverse impact on the business. In 2021 and 2020, the Company recognized within its continuing operations, general and administrative expenses incurred to perform the TSAs, offset by $173 million and $91 million, respectively, in TSA-related income for such services that is reported in Other income (expense), net. Discontinued operations As a result of the sale of the Power Grids business, substantially all Power Grids-related assets and liabilities have been sold. As this divestment represented a strategic shift that would have a major effect on the Company’s operations and financial results, the results of operations for this business have been presented as discontinued operations and the assets and liabilities are presented as held for sale and in discontinued operations for all periods presented. Certain of the business contracts in the Power Grids business continue to be executed by subsidiaries of the Company for the benefit/risk of Hitachi Energy. Assets and liabilities relating to, as well as the net financial results of, these contracts will continue to be included in discontinued operations until they have been completed or otherwise transferred to Hitachi Energy. Prior to the divestment, interest expense that was not directly attributable to or related to the Company’s continuing business or discontinued business was allocated to discontinued operations based on the ratio of net assets to be sold less debt that was required to be paid as a result of the planned disposal transaction to the sum of total net assets of the Company plus consolidated debt. General corporate overhead was not allocated to discontinued operations. 192 A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P Operating results of the discontinued operations are summarized as follows: ($ in millions) Total revenues Total cost of sales Gross profit Expenses Change to net gain recognized on sale of the Power Grids business Income (loss) from operations Net interest income (expense) and other finance expense Non-operational pension (cost) credit Income (loss) from discontinued operations before taxes Income tax Income (loss) from discontinued operations, net of tax 2021 — — — (18) (65) (83) 2 — (81) 1 (80) 2020 4,008 2019 9,037 (3,058) (6,983) 950 (808) 5,141 5,282 (5) (94) 5,182 (322) 4,860 2,054 (1,394) — 660 (61) 5 605 (167) 438 Of the total income (loss) from discontinued operations before taxes in the table above, $(80) million, $5,170 million and $566 million in 2021, 2020, and 2019, respectively, are attributable to the Company, while the remainder is attributable to noncontrolling interests. Until the date of the divestment, Income income (loss) from discontinued operations before taxes excluded stranded costs which were previously able to be allocated to the Power Grids operating segment. As a result, $40 million and $225 million in 2020 and 2019, 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 income (expense) and other finance expense in 2020 and 2019 includes $20 million and $44 million, respectively, of interest expense which has been recorded on an allocated basis in accordance with the Company’s accounting policy election until the divestment date. Included in the reported Total revenues of the Company for 2020 and 2019 are revenues for sales from the Company’s operating segments to the Power Grids business of $108 million and $213 million, respectively, which represent intercompany transactions that, prior to Power Grids being classified as a discontinued operation, were eliminated in the Company’s Consolidated Financial Statements (see Note 23). Subsequent to the divestment, sales to Hitachi Energy are reported as third-party revenues. In addition, the Company also has retained obligations (primarily for environmental and taxes) related to other businesses disposed or otherwise exited that qualified as discontinued operations. Changes to these retained obligations are also included in Income (loss) from discontinued operations, net of tax, above. The major components of assets and liabilities held for sale and in discontinued operations in the Company’s Consolidated Balance Sheets are summarized as follows: December 31, ($ in millions) Receivables, net Inventories, net Other current assets Current assets held for sale and in discontinued operations Accounts payable, trade Other liabilities Current liabilities held for sale and in discontinued operations Other non-current liabilities Non-current liabilities held for sale and in discontinued operations 2021(1) 2020(1) 131 — 5 136 71 310 381 43 43 280 1 1 282 188 456 644 197 197 (1) At December 31, 2021 and 2020, the balances reported as held for sale and in discontinued operations pertain to Power Grids activities and other obligations which will remain with the Company until such time as the obligation is settled or the activities are fully wound down. A B B A N N U A L R E P O R T 2 0 2 1 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 4 Acquisitions, divestments and equity-accounted companies Acquisition of controlling interests Acquisitions of controlling interests were as follows: ($ in millions, except number of acquired businesses) Purchase price for acquisitions (net of cash acquired) Aggregate excess of purchase price over fair value of net assets acquired(1) Number of acquired businesses 2021 2020 2019 212 161 2 79 92 3 — 92 — (1) 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 2021, relate primarily to the acquisition of ASTI Mobile Robotics Group SL (ASTI). In 2020 and 2019, there were no significant acquisitions. 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 August 2, 2021, the Company acquired the shares of ASTI. ASTI is headquartered in Burgos, Spain, and is a global autonomous mobile robot (AMR) manufacturer. The resulting cash outflows for the Company amounted to $186 million (net of cash acquired). The acquisition expands the Company’s robotics and automation offering in its Robotics & Discrete Automation operating segment. 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 acquisition in 2018 of GEIS (General Electric’s global electrification solutions business) 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”. Acquisition of noncontrolling interests In connection with the divestment of its Power Grids business to Hitachi (see Note 3), the Company retained a 19.9 percent interest in the business. For accounting purposes the 19.9 percent interest is deemed to have been both divested and reacquired, with a fair value at the transaction date of $1,661 million. The fair value was based on a discounted cash flow model considering the expected results of the future business operations of Hitachi Energy and using relevant market inputs including a risk-adjusted weighted-average cost of capital. The Company also obtained a right to require Hitachi to purchase this investment (see Note 3) with a floor price equivalent to a 10 percent discount compared to the price paid by Hitachi for the initial 80.1 percent. This option was valued at $118 million using a standard option pricing model with inputs considering the nature of the investment and the expected period until option exercise. As this option is not separable from the investment the value has been combined with the value of the underlying investment and is accounted for together. Hitachi also holds a call option which would require the Company to sell the remaining 19.9 percent interest in Hitachi Energy at a price consistent with what was paid by Hitachi to acquire the initial 80.1 percent or at fair value, if higher. The option is exercisable with three-months’ notice from April 2023, to be effective from July 2023. 194 A B B A N N U A L R E P O R T 2 0 2 1 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 has concluded that based on its continuing involvement with the Power Grids business, including membership in its governing board of directors, it has significant influence over Hitachi Energy. As a result, the investment (including the value of the option) is accounted for using the equity method. The difference between the initial carrying value of the Company’s investment in Hitachi Energy at fair value and its proportionate share of the underlying net assets created basis differences of $8,570 million ($1,705 million for the Company’s 19.9 percent ownership), which are allocated as follows: ($ in millions) Inventories Order backlog Property, plant and equipment(1) Intangible assets(2) Other contractual rights Other assets Deferred tax liabilities Goodwill Less: Amount attributed to noncontrolling interest Basis difference Allocated amounts Weighted-average useful life 5 months 2 years 9 years 2 years 169 727 1,016 1,731 251 43 (942) 6,026 (451) 8,570 (1) Property, plant and equipment includes assets subject to amortization having an initial fair value difference of $686 million and a weighted-average useful life of 14 years. (2) Intangible assets include brand license agreement, technology and customer relationships. For assets subject to depreciation or amortization, the Company amortizes these basis differences over the estimated remaining useful lives of the assets that gave rise to this difference, recording the amortization, net of related deferred tax benefit, as a reduction of income from equity-accounted companies. Certain other assets are recorded as an expense as the benefits from the assets are realized. At December 31, 2021, the Company determined that no impairment of its equity-accounted investments existed. The carrying value of the Company’s investments in equity-accounted companies and respective percentage of ownership is as follows: ($ in millions, except ownership share in %) Hitachi Energy Ltd Others Total Ownership as of December 31, 2021 19.9% Carrying value at December 31, 2021 1,609 61 1,670 In 2021, 2020 and 2019, the Company recorded its share of the earnings of investees accounted for under the equity method of accounting in Other income (expense), net, as follows: ($ in millions) Income from equity-accounted companies, net of taxes Basis difference amortization (net of deferred income tax benefit) Income (loss) from equity-accounted companies 2021 38 (138) (100) 2020 29 (95) (66) 2020 1,710 74 1,784 2019 8 — 8 A B B A N N U A L R E P O R T 2 0 2 1 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 Business divestments In 2021, the Company received proceeds (net of transactions costs and cash disposed) of $2,958 million, relating to divestments of consolidated businesses and recorded gains of $2,193 million in “Other income (expense), net” on the sales of such businesses. These are primarily due to the divestment of the Company’s Mechanical Power Transmission Division (Dodge) to RBC Bearings Inc. Certain amounts included in the net gain for the sale of the Dodge business are estimated or otherwise subject to change in value and, as a result, the Company may record additional adjustments to the gain in future periods which are not expected to have a material impact on the Consolidated Financial Statements. In 2021, 2020 and 2019 “Income from continuing operations before taxes”, included net income of $115 million, $96 million and $111 million, respectively, from the Dodge business which, prior to its sale was part of the Company’s Motion operating segment. In 2020, the Company completed the sale of its Power Grids business (see Note 3 for details) and its solar inverters business. In 2019, the Company recorded net gains (including transactions costs) of $55 million, primarily due to the divestment of two businesses in China. Divestment of the solar inverters business In February 2020, the Company completed the sale of its solar inverters business for no consideration. Under the agreement, which was reached in July 2019, the Company was required to transfer $143 million of cash to the buyer on the closing date. In addition, payments totaling EUR 132 million ($145 million) are required to be transferred to the buyer from 2020 through 2025. In 2019, the Company recorded a loss of $421 million, in “Other income (expense), net”, representing the excess of the carrying value, which includes a loss of $99 million arising from the cumulative translation adjustment, over the estimated fair value of this business. In 2020, a further loss of $33 million was recorded in “Other income (expense), net” for changes in fair value of this business. The loss in 2020 includes the $99 million reclassification from other comprehensive income of the currency translation adjustment related to the business. The fair value was 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, was part of the Company’s Electrification operating segment. As this divestment does not qualify as a discontinued operation, the results of operations for this business prior to its disposal are included in the Company’s continuing operations for all periods presented. Including the above loss of $33 million and $421 million in 2020 and 2019, respectively, Income from continuing operations before taxes includes net losses of $63 million and $490 million, from the solar inverters business. 196 A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P — Note 5 Cash and equivalents, marketable securities and short-term investments Cash and equivalents and marketable securities and short-term investments consisted of the following: Gross unrealized gains Gross unrealized losses Fair value Cash and equivalents Marketable securities and short-term investments December 31, 2021 ($ in millions) Cost basis Changes in fair value recorded in net income Cash Time deposits Equity securities 2,752 2,037 569 5,358 Changes in fair value recorded in other comprehensive income Debt securities available-for-sale: —U.S. government obligations —Corporate Total Of which: —Restricted cash, current —Restricted cash, non-current 203 74 277 5,635 18 18 7 1 8 26 — (1) (1) (2) (2) 2,752 2,037 587 5,376 209 74 283 2,752 1,737 4,489 — 300 587 887 209 74 283 5,659 4,489 1,170 30 300 Gross unrealized gains Gross unrealized losses Fair value Cash and equivalents Marketable securities and short-term investments December 31, 2020 ($ in millions) Cost basis Changes in fair value recorded in net income Cash Time deposits Equity securities 2,388 1,513 1,704 5,605 Changes in fair value recorded in other comprehensive income Debt securities available-for-sale: —U.S. government obligations —European government obligations —Corporate Total Of which: —Restricted cash, current —Restricted cash, non-current 274 24 69 367 5,972 12 12 19 6 25 37 — — — 2,388 1,513 1,716 5,617 293 24 75 392 2,388 1,513 3,901 — 6,009 3,901 323 300 1,716 1,716 293 24 75 392 2,108 A B B A N N U A L R E P O R T 2 0 2 1 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 Contractual maturities Contractual maturities of debt securities consisted of the following: December 31, 2021 ($ in millions) Less than one year One to five years Six to ten years Due after ten years Total Available-for-sale Cost basis Fair value 1 178 92 6 277 1 181 94 7 283 At December 31, 2021 and 2020, the Company pledged $66 million and $66 million, respectively, of available-for-sale marketable securities as collateral for issued letters of credit and other security arrangements. — Note 6 Derivative financial instruments The Company is exposed to certain currency, commodity, interest rate and equity risks arising from its global operating, financing and investing activities. The Company uses derivative instruments to reduce and manage the economic impact of these exposures. Currency risk Due to the global nature of the Company’s operations, many of its subsidiaries are exposed to currency risk in their operating activities from entering into transactions in currencies other than their functional currency. To manage such currency risks, the Company’s policies require its subsidiaries to hedge their foreign currency exposures from binding sales and purchase contracts denominated in foreign currencies. For forecasted foreign currency denominated sales of standard products and the related foreign currency denominated purchases, the Company’s policy is to hedge up to a maximum of 100 percent of the forecasted foreign currency denominated exposures, depending on the length of the forecasted exposures. Forecasted exposures greater than 12 months are not hedged. Forward foreign exchange contracts are the main instrument used to protect the Company against the volatility of future cash flows (caused by changes in exchange rates) of contracted and forecasted sales and purchases denominated in foreign currencies. In addition, within its treasury operations, the Company primarily uses foreign exchange swaps and forward foreign exchange contracts to manage the currency and timing mismatches arising in its liquidity management activities. Commodity risk Various commodity products are used in the Company’s manufacturing activities. Consequently it is exposed to volatility in future cash flows arising from changes in commodity prices. To manage the price risk of commodities, the Company’s policies require that its subsidiaries hedge the commodity price risk exposures from binding contracts, as well as at least 50 percent (up to a maximum of 100 percent) of the forecasted commodity exposure over the next 12 months or longer (up to a maximum of 18 months). Primarily swap contracts are used to manage the associated price risks of commodities. Interest rate risk The Company has issued bonds at fixed rates. Interest rate swaps and cross-currency interest rate swaps are used to manage the interest rate and foreign currency 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. 198 A B B A N N U A L R E P O R T 2 0 2 1 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 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. 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 Cross-currency interest rate swaps Interest rate contracts Total notional amounts at December 31, 2021 11,276 815 906 2020 12,610 1,134 — 2019 15,015 924 — 3,541 3,227 5,188 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, 2021 36,017 2020 2019 39,390 42,494 2,842,533 1,966,677 2,508,770 7,125 8,112 8,388 Equity derivatives At December 31, 2021, 2020 and 2019, the Company held 9 million, 22 million and 40 million cash-settled call options indexed to ABB Ltd shares (conversion ratio 5:1) with a total fair value of $29 million, $21 million and $26 million, respectively. Cash flow hedges As noted above, the Company mainly uses forward foreign exchange contracts to manage the foreign exchange risk of its operations, commodity swaps to manage its commodity risks and cash-settled call options to hedge its WAR liabilities. The Company applies cash flow hedge accounting in only limited cases. In these cases, the effective portion of the changes in their fair value is recorded in “Accumulated other comprehensive loss” and subsequently reclassified into earnings in the same line item and in the same period as the underlying hedged transaction affects earnings. In 2021, 2020 and 2019, there were no significant amounts recorded for cash flow hedge accounting activities. A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P 199 Fair value hedges To reduce its interest rate exposure arising primarily from its debt issuance activities, the Company uses interest rate swaps and cross-currency interest rate swaps. Where such instruments are designated as fair value hedges, the changes in the fair value of these instruments, as well as the changes in the fair value of the risk component of the underlying debt being hedged, are recorded as offsetting gains and losses in “Interest and other finance expense”. The effect of derivative instruments, designated and qualifying as fair value hedges, on the Consolidated Income Statements was as follows: ($ in millions) 2021 2020 2019 Gains (losses) recognized in Interest and other finance expense: Interest rate contracts Designated as fair value hedges Cross-currency interest rate swaps Designated as fair value hedges Hedged item Hedged item (55) 56 (37) 34 11 (11) — — 38 (38) — — 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 Total cost of sales Interest and other finance expense (1) SG&A expenses represent “Selling, general and administrative expenses”. 2021 3 (53) 11 (2) (173) (7) (2) 78 — (145) 2020 94 — (11) (2) 207 (34) (1) 56 1 310 2019 (7) (64) 2 1 (122) 17 (6) 12 — (167) 200 A B B A N N U A L R E P O R T 2 0 2 1 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 fair values of derivatives included in the Consolidated Balance Sheets were as follows: December 31, 2021 ($ in millions) Derivatives designated as hedging instruments: Foreign exchange contracts Interest rate contracts Cross-currency interest rate swaps Cash-settled call options Total Derivatives not designated as hedging instruments: Foreign exchange contracts Commodity contracts Interest rate contracts Embedded foreign exchange derivatives Total Total fair value December 31, 2020 ($ 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 Interest rate contracts Embedded foreign exchange derivatives Total Total fair value Derivative assets Derivative liabilities Current in “Other current assets” Non-current in “Other non-current assets” Current in “Other current liabilities” Non-current in “Other non-current liabilities” — 9 — 29 38 108 19 1 10 138 176 — 20 — — 20 14 — — 7 21 41 3 — — — 3 107 5 2 16 130 133 5 — 109 — 114 7 — — 10 17 131 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” — 6 10 16 221 59 2 10 292 308 1 78 11 90 22 — — 2 24 114 2 — — 2 106 7 2 28 143 145 4 — — 4 26 — — 16 42 46 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, 2021 and 2020, 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, 2021 and 2020, information related to these offsetting arrangements was as follows: December 31, 2021 ($ 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 200 200 (104) (104) — — — — 96 96 A B B A N N U A L R E P O R T 2 0 2 1 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 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 238 238 (104) (104) — — — — 134 134 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 410 410 (106) (106) — — — — 304 304 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 147 147 (106) (106) — — — — 41 41 December 31, 2021 ($ in millions) Type of agreement or similar arrangement Derivatives Total December 31, 2020 ($ in millions) Type of agreement or similar arrangement Derivatives Total December 31, 2020 ($ in millions) Type of agreement or similar arrangement Derivatives Total — 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, 2021 ($ 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 209 209 — 587 74 176 41 878 133 131 264 Total fair value 587 209 74 176 41 — 1,087 133 131 264 — 202 A B B A N N U A L R E P O R T 2 0 2 1 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, 2020 ($ in millions) Level 1 Level 2 Level 3 Assets Securities in “Marketable securities and short-term investments”: Equity securities Debt securities—U.S. government obligations Debt securities—Other government obligations Debt securities—Corporate Derivative assets—current in “Other current assets” Derivative assets—non-current in “Other non-current assets” Total Liabilities Total fair value 1,716 293 24 75 308 114 293 24 1,716 75 308 114 317 2,213 — 2,530 Derivative liabilities—current in “Other current liabilities” Derivative liabilities—non-current in “Other non-current liabilities” Total 145 46 191 — 145 46 191 — During 2021, 2020 and 2019 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. Non-recurring fair value measures The Company elects to record private equity investments without readily determinable fair values at cost, less impairment, adjusted for observable price changes. The Company reassesses at each reporting period whether these investments continue to qualify for this treatment. In 2021 and 2020, the Company recognized, in “Other income (expense), net”, net fair value gains of $108 million and $73 million, respectively, related to certain of its private equity investments based on observable market price changes for an identical or similar investment of the same issuer. The fair values were determined using Level 2 inputs. The carrying values of these investments at December 31, 2021 and 2020 totaled $169 million and $105 million. Based on valuations at July 1, 2020, the Company recorded goodwill impairment charges of $311 million in the third quarter of 2020. The fair value measurements used in the analyses were calculated using the income approach (discounted cash flow method). The discounted cash flow models were calculated using unobservable inputs, which classified the fair value measurement as Level 3 (see Note 11 for additional information including further detailed information related to these charges and significant unobservable inputs). In June 2019, upon meeting the criteria as held for sale, the Company adjusted the carrying value of the solar inverters business which was sold in February 2020 (See Note 4 for details). Apart from the transactions above, there were no additional significant non-recurring fair value measurements during 2021 and 2020. A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P 203 Disclosure about financial instruments carried on a cost basis The fair values of financial instruments carried on a cost basis were as follows: December 31, 2021 ($ in millions) Assets Cash and equivalents (excluding securities with original maturities up to 3 months): Cash Time deposits Restricted cash Marketable securities and short-term investments (excluding securities): Time deposits Restricted cash, non-current Liabilities Short-term debt and current maturities of long-term debt (excluding finance lease obligations) Long-term debt (excluding finance lease obligations) 1,357 4,043 1,288 4,234 Carrying value Level 1 Level 2 Level 3 Total fair value 2,422 1,737 30 300 300 2,422 30 300 1,737 300 69 58 2,422 1,737 30 300 300 1,357 4,292 Carrying value Level 1 Level 2 Level 3 Total fair value December 31, 2020 ($ in millions) Assets Cash and equivalents (excluding securities with original maturities up to 3 months): Cash Time deposits Restricted cash Restricted cash, non-current Liabilities 1,765 1,513 323 300 1,765 323 300 1,513 Short-term debt and current maturities of long-term debt (excluding finance lease obligations) Long-term debt (excluding finance lease obligations) 1,266 4,668 497 4,909 769 89 1,765 1,513 323 300 1,266 4,998 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), Restricted cash, current and non-current, and Marketable securities and short-term investments (excluding securities): The carrying amounts approximate the fair values as the items are short-term in nature or, for cash held in banks, are equal to the deposit amount. • 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. • 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). 204 A B B A N N U A L R E P O R T 2 0 2 1 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 8 Receivables, net and Contract assets and liabilities “Receivables, net” consisted of the following: December 31, ($ in millions) Trade receivables Other receivables Allowance Total 2021 6,206 684 (339) 6,551 2020 6,417 760 (357) 6,820 “Trade receivables” in the table above includes contractual retention amounts billed to customers of $119 million and $146 million at December 31, 2021 and 2020, respectively. Management expects that the substantial majority of related contracts will be completed and the substantial majority of the billed amounts retained by the customer will be collected. Of the retention amounts outstanding at December 31, 2021, 60 percent and 29 percent are expected to be collected in 2022 and 2023, respectively. “Other receivables” in the table above consists of value added tax, claims, rental deposits and other non-trade receivables. The reconciliation of changes in the allowance for doubtful accounts is as follows: ($ in millions) Balance at January 1, Transition adjustment Current-period provision for expected credit losses Write-offs charged against the allowance Exchange rate differences Balance at December 31, 2021 357 — 33 (37) (14) 339 2020 228 56 115 (42) — 357 2019 219 — 31 (19) (3) 228 The following table provides information about Contract assets and Contract liabilities: ($ in millions) Contract assets Contract liabilities 2021 990 1,894 2020 985 1,903 2019 1,025 1,719 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. 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 January 1, 2021/2020 Additions to Contract liabilities - excluding amounts recognized as revenue during the period Receivables recognized that were included in the Contract assets balance at January 1, 2021/2020 2021 2020 Contract assets Contract liabilities Contract assets Contract liabilities (1,086) 1,136 (1,011) 1,129 (566) (680) A B B A N N U A L R E P O R T 2 0 2 1 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 The Company considers its order backlog to represent its unsatisfied performance obligations. At December 31, 2021, the Company had unsatisfied performance obligations totaling $16,607 million and, of this amount, the Company expects to fulfill approximately 75 percent of the obligations in 2022, approximately 14 percent of the obligations in 2023 and the balance thereafter. — Note 9 Inventories, net “Inventories, net” consisted of the following: December 31, ($ 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 2021 2,136 995 1,594 155 4,880 2020 1,785 1,020 1,499 165 4,469 2021 3,925 5,785 522 10,232 (6,187) 4,045 2020 3,889 6,144 505 10,538 (6,364) 4,174 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 2021 2020 164 92 256 (123) 133 169 79 248 (111) 137 In 2021, 2020 and 2019 depreciation, including depreciation of assets under finance leases, was $575 million, $586 million and $616 million, respectively. In 2021, 2020 and 2019 there were no significant impairments of property, plant or equipment. 206 A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P — Note 11 Goodwill and intangible assets The changes in “Goodwill” were as follows: ($ in millions) Electrification Motion Process Automation Robotics & Discrete Automation Corporate and Other Balance at January 1, 2020 4,372 2,436 1,615 Goodwill acquired during the year Impairment of Goodwill Exchange rate differences and other 71 — 84 — — 20 — — 24 Balance at December 31, 2020(1) 4,527 2,456 1,639 Goodwill acquired during the year Goodwill allocated to disposals Exchange rate differences and other Balance at December 31, 2021(1) 11 — (66) 4,472 — (338) (1) 2,117 — (7) (19) 2,381 21 (290) 116 2,228 150 — (98) 1,613 2,280 Total 10,825 92 (311) 244 10,850 161 (345) (184) 10,482 21 — (21) — — — — — — (1) At December 31, 2021 and 2020, the gross goodwill amounted to $10,760 million and $11,152 million, respectively. The accumulated impair- ment charges amounted to $278 million and $302 million, respectively, and related to the Robotics & Discrete Automation segment. The Company adopted a new operating model on July 1, 2020, which resulted in a change to the identification of the goodwill reporting units. Previously, the reporting units were the same as the operating segments for Electrification, Motion and Robotics & Discrete Automation, while for the Process Automation operating segment the reporting units were determined to be at the Division level, which is one level below the operating segment. The new operating model provides the Divisions with full ownership and accountability for their respective strategies, performance and resources and based on these changes, the Company concluded that the reporting units would change and be the respective Divisions within each operating segment. This change resulted only in an allocation of goodwill within the operating segments and thus there is no change to segment level goodwill in the table above. As a result of the new allocation of goodwill, an interim quantitative impairment test was conducted both before and after the changes which were effective July 1, 2020. In the “before” test, it was concluded that the fair value of the Company’s reporting units exceeded the carrying value under the historical reporting unit structure. The impairment test was performed for the new reporting units and the fair value of each was determined using a discounted cash flow fair value estimate based on objective information available at the measurement date. The significant assumptions used to develop the estimates of fair value for each reporting unit included management’s best estimates of the expected future results and discount rates specific to the reporting unit. The fair value estimates were based on assumptions that the Company believed to be reasonable, but which are inherently uncertain and thus, actual results may differ from those estimates. The fair values for each of the individual reporting units and their associated goodwill were determined using Level 3 measurements. The interim quantitative impairment test indicated that the estimated fair values of the reporting units were substantially in excess of their carrying value for all reporting units except for the Machine Automation reporting unit within the Robotics & Discrete Automation operating segment. The contraction of the global economy in 2020, particularly in end-customer industries related to this reporting unit and considerable uncertainty around the continued pace of macroeconomic recovery generally led to a reduction in the fair values of the reporting units, thus affecting this reporting unit. Also, at the Division level, this reporting unit does not benefit from shared cash flows generated within an entire operating segment. In addition, the book value of the Machine Automation Division includes a significant amount of intangible assets recognized in past acquisitions, resulting in a proportionately higher book value than the other reporting unit within the Robotics & Discrete Automation Business Area. With the fair value of the reporting unit lower due to the economic conditions, the existing book value of the intangible assets combined with the newly allocated reporting unit goodwill led to the carrying value of the Machine Automation reporting unit exceeding its fair value. During 2020, a goodwill impairment charge of $290 million was recorded to reduce the carrying value of this reporting unit to its implied fair value. The remaining goodwill for the Machine Automation reporting unit was $554 million as of December 31, 2020. A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P 207 During 2021, certain reporting units were split into separate reporting units. For each change, an interim quantitative impairment test was conducted before and after the change and in all cases, it was concluded that the fair value of the relevant reporting units exceeded the carrying value by a significant amount. At October 1, 2021 and 2020, respectively, the Company performed qualitative assessments and determined that it was not more likely than not that the fair value for each of these reporting units was below the carrying value. As a result, the Company concluded that it was not necessary to perform the quantitative impairment test. “Intangible assets, net” consisted of the following: December 31, ($ in millions) Capitalized software for internal use Capitalized software for sale Intangibles other than software: Customer-related Technology-related Marketing-related Other Total 2021 2020 Gross carrying amount Accumu- lated amort- ization Net carrying amount Gross carrying amount Accumu- lated amor- tization Net carrying amount 835 31 1,716 1,122 493 56 (732) (29) (707) (868) (327) (29) 103 2 1,009 254 166 27 828 33 2,557 1,170 492 63 (694) (32) 134 1 (1,104) 1,453 (898) (304) (33) 272 188 30 4,253 (2,692) 1,561 5,143 (3,065) 2,078 In 2021 and 2020, additions to intangible assets were $95 million and $78 million, respectively. There were no significant intangible assets acquired in business combinations during 2021 and 2020. Amortization expense of intangible assets consisted of the following: ($ in millions) Capitalized software for internal use Intangibles other than software Total 2021 2020 2019 66 252 318 61 268 329 74 271 345 In 2021, 2020 and 2019, impairment charges on intangible assets were not significant. At December 31, 2021, future amortization expense of intangible assets is estimated to be: ($ in millions) 2022 2023 2024 2025 2026 Thereafter Total 276 249 199 155 142 540 1,561 208 A B B A N N U A L R E P O R T 2 0 2 1 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 12 Debt The Company’s total debt at December 31, 2021 and 2020, amounted to $5,561 million and $6,121 million, respectively. Short-term debt and current maturities of long-term debt “Short-term debt and current maturities of long-term debt” consisted of the following: December 31, ($ in millions) Short-term debt (weighted-average interest rate of 3.2% and 2.8%, respectively) Current maturities of long-term debt (weighted-average nominal interest rate of 2.8% and 3.2%, respectively) Total 2021 2020 78 153 1,306 1,384 1,140 1,293 Short-term debt primarily represents short-term loans from various banks and issued commercial paper. At December 31, 2021, 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, 2021 and 2020, no amount was outstanding under the $2 billion Euro-commercial paper program. At December 31, 2021, no amount was outstanding under the $2 billion program in the United States, while $32 million was outstanding at December 31, 2020. In December 2019, the Company replaced its previous multicurrency revolving credit facility with a new $2 billion multicurrency revolving credit facility maturing in 2024. In 2021, the Company exercised its option to further extend the maturity of this facility to 2026. The facility is for general corporate purposes. Interest costs on drawings under the facility are LIBOR (for drawings in currencies for which LIBOR is still published) and EURIBOR for EURO 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, 2021 and 2020, under this facility. 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. For certain non-U.S. dollar denominated debt, the Company utilizes cross-currency interest rate swaps to effectively convert the debt into a U.S. dollar obligation. 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. A B B A N N U A L R E P O R T 2 0 2 1 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 following table summarizes the Company’s long-term debt considering the effect of interest rate and cross-currency 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 2021 Nominal rate Effective rate 1.2% 3.0% 0.3% 3.1% 2020 Nominal rate Effective rate 1.6% 3.2% 0.2% 3.3% Balance 3,330 2,638 5,968 2.8% 1.0% (1,140) 3.2% 2.6% 4,828 Balance 3,598 1,885 5,483 (1,306) 4,177 At December 31, 2021, the principal amounts of long-term debt repayable (excluding finance lease obligations) at maturity were as follows: ($ in millions) 2022 2023 2024 2025 2026 Thereafter Total 1,271 794 1,156 56 — 2,085 5,362 Details of outstanding bonds were as follows: December 31, (in millions) Bonds: 4.0% USD Notes, due 2021 2.25% CHF Bonds, due 2021 2.875% USD Notes, due 2022 0.625% EUR Instruments, due 2023 0.75% EUR Instruments, due 2024 0.3% CHF Bonds, due 2024 3.8% USD Notes, due 2028(2) 1.0% CHF Bonds, due 2029 0% EUR Notes, due 2030 4.375% USD Notes, due 2042(2) Total 2021 2020 Nominal outstanding Carrying value(1) Nominal outstanding Carrying value(1) USD EUR EUR CHF USD CHF EUR USD 1,250 700 750 280 383 170 800 609 — — 1,258 800 860 306 381 186 862 589 5,242 $ $ $ $ $ $ $ $ $ USD CHF USD EUR EUR CHF USD CHF 650 350 1,250 700 750 280 383 170 USD 609 $ $ $ $ $ $ $ $ $ $ 649 403 1,280 875 946 317 381 192 — 589 5,632 (1) USD carrying values include unamortized debt issuance costs, bond discounts or premiums, as well as adjustments for fair value hedge accounting, where appropriate. (2) Prior to completing a cash tender offer in 2020, the original principal amount outstanding, on each of the 3.8% USD Notes, due 2028, and the 4.375% USD Notes, due 2042, was $750 million. During 2021, the Company repaid at maturity its 4.0% USD Notes and its 2.25% CHF Bonds. The 4.0% USD Notes paid interest semi-annually in arrears, while the 2.25% CHF Bonds paid interest annually in arrears. The Company had entered into interest rate swaps to hedge its interest obligations on the 2.25% CHF 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 at December 31, 2020, in the table of long-term debt above. During 2020, in connection with exercising certain early redemption options on the $250 million 5.625% USD Notes due 2021 and $450 million 3.375% USD Notes due 2023, and the partial redemption through a cash tender offer of the 3.8% USD Notes due 2028 and 4.375% USD Notes due 2042, the Company recognized losses on extinguishment of debt of $162 million, representing the premium associated with the early redemption, as well as the recognition of the relevant remaining unamortized issuance premium or discounts and issuance costs. 210 A B B A N N U A L R E P O R T 2 0 2 1 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 2.875% USD Notes, due 2022, pay interest semi-annually in arrears at a fixed annual rate of 2.875 percent. The 4.375% USD Notes, due 2042, pay interest semi-annually in arrears at a fixed annual rate of 4.375 percent. The Company may redeem both of these notes (which were issued together in May 2012) prior to maturity, in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. These notes, registered with the U.S. Securities and Exchange Commission, were issued by ABB Finance (USA) Inc., a 100 percent owned finance subsidiary, and were fully and unconditionally guaranteed by ABB Ltd. There are no significant restrictions on the ability of the parent company to obtain funds from its subsidiaries by dividend or loan. In reliance on Rule 13-01 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. During 2020, by way of a cash tender offer, the Company redeemed $141 million of the original $750 million 4.375% USD Notes due 2042 issued. The 0.625% EUR Instruments, due 2023 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 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 2020 Notes were repaid at maturity in October 2020 and the 2023 Notes were redeemed in full in December 2020. The Company may redeem the remaining principal outstanding on the 2028 Notes up to three months prior to their maturity 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 Notes terms, plus interest accrued at the redemption date. On or after January 3, 2028 (three months prior to their maturity date), the Company may also redeem the 2028 Notes, 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. During 2020 by way of a cash tender offer, the Company redeemed $367 million of the original $750 million 3.8% USD Notes due 2028 issued. 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 13-01 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 Bonds, due 2024 and (ii) CHF 170 million of 1.0% CHF Bonds, 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). A B B A N N U A L R E P O R T 2 0 2 1 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 In January 2021, the Company issued zero interest Notes having a principal amount of EUR 800 million and due in 2030. The Company recorded net proceeds (after underwriting fees) of EUR 791 million (equivalent to $960 million on the date of issuance). These instruments do not pay interest and have the same early redemption terms as the 0.625% EUR Instruments above. In line with the Company’s policy of reducing its currency and interest rate exposures, cross-currency interest rate swaps have been used to modify the characteristics of these instruments. After considering the impact of these cross-currency interest rate swaps, the Company effectively has a floating rate U.S. dollar obligation. 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, 2021 and 2020, are finance lease obligations, bank borrowings of subsidiaries and other long-term debt, none of which is individually significant. Subsequent events At February 23, 2022, the amount outstanding under the $2 billion Euro-commercial paper program was $475 million. — Note 13 Other provisions, other current liabilities and other non-current liabilities “Other provisions” consisted of the following: December 31, ($ in millions) Contract-related provisions Restructuring and restructuring-related provisions Provision for insurance-related reserves Provisions for contractual penalties and compliance and litigation matters 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) Deferred income Pension and other employee benefits Accrued interest Other Total 2021 2020 762 188 174 63 199 754 292 176 113 184 1,386 1,519 2021 1,547 2020 1,467 768 644 378 322 298 133 95 41 28 113 4,367 650 622 395 317 286 145 130 42 29 98 4,181 212 A B B A N N U A L R E P O R T 2 0 2 1 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 non-current liabilities” consisted of the following: December 31, ($ in millions) Income tax related liabilities Derivative liabilities (see Note 6) Provisions for contractual penalties and compliance and litigation matters Deferred income Employee-related liabilities Environmental provisions Other Total — Note 14 Leases 2021 1,458 130 129 74 59 39 227 2,116 2020 1,423 46 120 138 70 38 190 2,025 The Company’s lease obligations primarily relate to real estate, machinery and equipment. The components of lease expense were as follows: ($ in millions) Operating lease cost Finance lease cost Short-term lease cost Sub-lease income Total lease expense Land and buildings Machinery and equipment Total 2021 2020 2019 2021 2020 2019 2021 2020 2019 240 287 268 101 313 376 369 17 26 (24) 259 13 17 (20) 297 14 19 (2) 73 20 14 (1) 89 16 31 (1) 299 106 135 152 22 29 — 37 40 (25) 365 29 48 (21) 432 36 48 (2) 451 The following table presents supplemental cash flow information related to leases: ($ in millions) Operating leases: Land and buildings Machinery and equipment Total 2021 2020 2019 2021 2020 2019 2021 2020 2019 Cash paid under operating cash flows 223 263 252 Right-of-use assets obtained in exchange for new liabilities: 267 266 153 68 86 83 57 96 52 291 346 348 353 323 205 In 2021, 2020 and 2019 the cash flow amounts under finance leases were not significant. At December 31, 2021, 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) 2022 2023 2024 2025 2026 Thereafter Total 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 197 164 134 109 81 154 839 (59) 780 71 39 21 9 1 1 142 (3) 139 21 21 19 18 16 54 149 (28) 121 15 12 8 5 1 — 41 (1) 40 A B B A N N U A L R E P O R T 2 0 2 1 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 The following table presents certain information related to lease terms and discount rates: Operating Leases: Weighted-average remaining term (months) Weighted-average discount rate 73 2.6% 84 3.0% 78 3.0% 30 1.9% 29 2.0% 29 2.2% Land and buildings Machinery and equipment 2021 2020 2019 2021 2020 2019 Finance Leases: Weighted-average remaining term (months) Weighted-average discount rate 100 7.7% 107 7.7% 110 8.2% 40 1.8% 40 2.3% 33 2.8% 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, 2021, amounts to $27 million and $134 million, respectively, and at December 31, 2020, amounts to $27 million and $160 million, respectively. — Note 15 Commitments and contingencies Contingencies—Regulatory, Compliance and Legal Regulatory 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. In May 2020, the SFO closed its investigation, which it originally announced in February 2017, as the case did not meet the relevant test for prosecution. The Company continues to cooperate with the U.S. authorities as requested. At this time, it is not possible for the Company to make an informed judgment about the outcome of this matter. Based on findings during an internal investigation, the Company self-reported to the SEC and the DoJ, in the United States, to the Special Investigating Unit (SIU) and the National Prosecuting Authority (NPA) in South Africa as well as to various authorities in other countries 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. The Company paid $104 million to Eskom in December 2020 as part of a full and final settlement with Eskom and the Special Investigating Unit relating to improper payments and other compliance issues associated with the Controls and Instrumentation Contract, and its Variation Orders for Units 1 and 2 at Kusile. The Company continues to cooperate fully with the authorities in their review of the Kusile project and is in discussions with them regarding a coordinated resolution. Although the Company believes that there could be an unfavorable outcome in one or more of these ongoing reviews, 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. 214 A B B A N N U A L R E P O R T 2 0 2 1 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 recognized At December 31, 2021 and 2020, the Company had aggregate liabilities of $104 million and $100 million, respectively, included in “Other provisions” and “Other non-current liabilities”, for the above regulatory, compliance and legal contingencies, and none of the individual liabilities recognized was significant. As it is not possible to make an informed judgment on, or reasonably predict, the outcome of certain matters and as it is not possible, based on information currently available to management, to estimate the maximum potential liability on other matters, there could be adverse outcomes beyond the amounts accrued. Guarantees General The following table provides quantitative data regarding the Company’s third-party guarantees. The maximum potential payments represent a “worst-case scenario”, and do not reflect management’s expected outcomes. December 31, ($ in millions) Performance guarantees Financial guarantees Indemnification guarantees(2) Total Maximum potential payments(1) 2021 4,540 52 136 4,728 2020 6,726 339 177 7,242 (1) Maximum potential payments include amounts in both continuing and discontinued operations. (2) Certain indemnifications provided to Hitachi in connection with the divestment of Power Grids are without limit. 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, 2021 and 2020, amounted to $156 million and $135 million, respectively, the majority of which is included in discontinued operations. The Company is party to various guarantees providing financial or performance assurances to certain third parties. These guarantees, which have various maturities up to 2035, 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 ten 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, 2021 and 2020, the maximum potential payable under these guarantees amounts to $911 million and $994 million, respectively, and these guarantees have various maturities ranging from five to ten years. The Company retained obligations for financial, performance and indemnification guarantees related to the Power Grids business sold on July 1, 2020 (see Note 3 for details). The performance and financial guarantees have been indemnified by Hitachi at the same proportion of its ownership in Hitachi Energy Ltd, formerly Hitachi ABB Power Grids (80.1 percent). These guarantees, which have various maturities up to 2035, primarily consist of bank guarantees, standby letters of credit, business performance guarantees and other trade-related guarantees, the majority of which have original maturity dates ranging from one to ten years. The maximum amount payable under these guarantees at December 31, 2021 and 2020, is approximately $3.2 billion and $5.5 billion, respectively, and the carrying amounts of liabilities (recorded in discontinued operations) at December 31, 2021 and 2020, amounted to $136 million and $135 million, respectively. A B B A N N U A L R E P O R T 2 0 2 1 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 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, 2021 and 2020, the total outstanding performance bonds aggregated to $3.6 billion and $4.3 billion, respectively, of which $0.1 billion and $0.3 billion, respectively, relate to discontinued operations. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2021 and 2020. Product and order-related contingencies The Company calculates its provision for product warranties based on historical claims experience and specific review of certain contracts. The reconciliation of the “Provisions for warranties”, including guarantees of product performance, was as follows: ($ in millions) Balance at January 1, Net change in warranties due to acquisitions, 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, 2021 1,035 1 (222) 226 (35) 2020 816 8 (209) 369 51 1,005 1,035 2019 948 (88) (310) 276 (10) 816 (1) Includes adjustments to the initial purchase price allocation recorded during the measurement period. In 2020, the Company determined that the provision for a product warranty related to a divested business was no longer sufficient to cover expected warranty costs in the remaining warranty period. Due to an unexpected level of product failure, the previously estimated product warranty provision was increased by $143 million during 2020. The corresponding increase was included in “Cost of sales of products”. As these costs relate to a divested business, in accordance with the definition of the Company’s primary measure of segment performance, Operational EBITA (see Note 23), the costs have been excluded from this measure. The warranty liability has been recorded based on the information currently available and is subject to change in the future. Related party transactions The Company conducts business with certain companies where members of the Company’s Board of Directors or Executive Committee act, or in recent years have acted, as directors or senior executives. The Company’s Board of Directors has determined that the Company’s business relationships with those companies do not constitute material business relationships. This determination was made in accordance with the Company’s related party transaction policy which was prepared based on the Swiss Code of Best Practice and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange. 216 A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P — Note 16 Income taxes “Income tax expense” consisted of the following: ($ in millions) Current taxes Deferred taxes Income tax expense allocated to continuing operations Income tax expense allocated to discontinued operations 2021 1,346 (289) 1,057 1 2020 776 (280) 496 322 2019 855 (83) 772 167 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, the weighted-average global tax rate of the Company results from enacted corporate income tax rates in foreign jurisdictions. The reconciliation of “Income 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 income taxes Weighted-average global tax rate Income taxes at weighted-average tax rate Items taxed at rates other than the weighted-average tax rate Unrecognized tax benefits Changes in valuation allowance, net Effects of changes in tax laws and enacted tax rates Non-deductible / non-taxable items Other, net Income tax expense from continuing operations Effective tax rate for the year 2021 5,787 23.7% 1,371 176 151 (95) 1 (542) (5) 1,057 18.3% 2020 841 2019 1,862 22.9% 18.3% 193 3 (38) 29 23 232 54 496 341 (7) 133 198 63 44 — 772 59.0% 41.5% The allocation of consolidated income from continuing operations, which is predominantly earned outside of Switzerland, impacts the “weighted-average global tax rate”. In 2021, gains on sales of businesses increased the weighted-average global tax rate by approximately 1 percent. 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 2021, “Items taxed at rates other than the weighted-average tax rate” included $107 million, for certain amounts related to the divestment of the Dodge business. In 2020 and 2019, the amount was not significant. In 2021, “Changes in valuation allowance, net” included positive impacts from changes in certain outlooks in Europe of $82 million. In 2020, “Changes in valuation allowance, net” predominantly reflects increases in the valuation allowance resulting from changes in the expectations at that time of future economic conditions due to impacts at that time on the Company’s business from the COVID-19 pandemic. In 2019, “Changes in valuation allowance, net” included 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 to the valuation allowance in certain operations in North America, including an amount to provide for certain deferred tax assets arising in 2019. A B B A N N U A L R E P O R T 2 0 2 1 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 There were no significant impacts from “Effects of changes in tax laws and enacted tax rates” in 2021. In 2020, the amount primarily reflects the impact of changes to tax rates in certain countries in Asia for $16 million. In 2019, the amount primarily reflects a change in tax law applicable to a country in Europe. The benefit in 2019 was mostly offset by a related change in the valuation allowance, resulting in a net benefit of $17 million. In 2021, “Non-deductible / non-taxable items” includes $567 million in benefits primarily due to impacts of divestments and internal reorganizations where the reported net gain from sale of businesses exceeded the related taxable gain as well as the impact of a recognition of previously unrecognized outside basis differences. In 2020, the negative impact was $232 million, and included $82 million for the impairment of non-deductible goodwill. In addition, the amount in 2020 includes $62 million relating to non-operational pension costs resulting from the settlement of certain defined benefit plans which were principally not deductible. “Non-deductible / non-taxable items” also includes other items that were deducted for financial accounting purposes but are typically not tax deductible, such as certain interest expense costs, local taxes on productive activities, disallowed amounts for meals and entertainment expenses and other similar items. The amounts in 2019 related primarily to these typically non-deductible items. In 2021 and 2019, “Unrecognized tax benefits” in the table above included a net cost of $150 million and $91 million, respectively, related to the interpretation for tax law and double tax treaty agreements by competent tax authorities. In 2020, “Unrecognized tax benefits” included a benefit of $20 million. In 2020, “Other, net” includes an expense of $54 million, related to finalization of tax audits in Europe. Deferred tax assets and liabilities (excluding amounts held for sale and in discontinued operations) consisted of the following: December 31, ($ in millions) Deferred tax assets: Unused tax losses and credits Provisions and other accrued liabilities Other current assets including receivables Pension Inventories Intangible 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 Intangible assets Other assets Pension Other liabilities Inventories Unremitted earnings of subsidiaries 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) 2021 2020 551 757 104 338 266 1,135 57 3,208 (1,263) 1,945 (245) (281) (107) (302) (175) (35) (308) 758 750 114 413 370 901 48 3,354 (1,518) 1,836 (275) (419) (107) (223) (268) (29) (333) (1,453) (1,654) 492 182 1,177 (685) 492 843 (661) 182 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. “Unused tax losses and credits” at December 31, 2021 and 2020, in the table above, included $93 million and $170 million, respectively, for which the Company has established a 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. 218 A B B A N N U A L R E P O R T 2 0 2 1 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 valuation allowance at December 31, 2021, 2020 and 2019, was $1,263 million, $1,518 million and $1,632 million, respectively. At December 31, 2021 and 2020, deferred tax liabilities totaling $308 million and $333 million, respectively, have been provided for withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on unremitted earnings which will be payable in foreign jurisdictions in the event of repatriation of the foreign 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 and 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 and these taxes cannot always be fully reclaimed by the Company’s relevant subsidiary receiving the dividend although the taxes have to be withheld and paid by the relevant subsidiary distributing such dividend. In 2021 and 2020, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow utilization of benefits. At December 31, 2021 and 2020, 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, 2021, net operating loss carry-forwards of $2,170 million and tax credits of $69 million were available to reduce future income taxes of certain subsidiaries. Of these amounts, $1,258 million of operating loss carry-forwards and $48 million of tax credits will expire in varying amounts through 2045, while the remainder are available for carryforward indefinitely. The largest amount of these carry-forwards related to the Company’s Europe operations. Unrecognized tax benefits consisted of the following: ($ in millions) Classification as unrecognized tax items on January 1, 2019 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 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, 2020, 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, 2021, which would, if recognized, affect the effective tax rate Unrecognized tax benefits Penalties and interest related to unrecognized tax benefits 961 11 202 (82) 163 (57) (83) (9) 1,106 1 298 (161) 390 (340) (59) 63 1,298 16 240 (42) 98 (175) (72) (41) 1,322 239 7 85 (63) 6 (8) (28) (5) 233 — 96 (57) 5 (75) (16) 6 192 (6) 58 (3) 7 (20) (22) (7) 199 Total 1,200 18 287 (145) 169 (65) (111) (14) 1,339 1 394 (218) 395 (415) (75) 69 1,490 10 298 (45) 105 (195) (94) (48) 1,521 A B B A N N U A L R E P O R T 2 0 2 1 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 219 In 2021, “Increase relating to current year tax positions” included a total of $72 million in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. In 2020 and 2019, “Increase relating to current year tax positions” included a total of $381 million and $163 million, respectively, in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. In 2020, $301 million of the $381 million is reported as Income tax expense in discontinued operations. In 2021, “Increase relating to prior year tax positions” included a total of $240 million related to the interpretation of tax law and double tax treaty agreements by competent tax authorities in Europe. In 2020, “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 in Europe, of which $73 million is reported as Income tax expense in discontinued operations. In 2021, “Decrease relating to prior year tax positions” included a total of $42 million related to tax risk assessments in Europe of $33 million. In 2020, “Decrease relating to prior year tax positions” included a total of $85 million related to a change of interpretation of tax law in Asia and changed tax risk assessments in Europe of $59 million. In 2021, “Decrease due to settlements with tax authorities” is predominantly related to tax assessments received in Europe. In 2020, “Decrease due to settlements with tax authorities” is predominantly related to closed tax audits in Europe. At December 31, 2021, the Company expected the resolution, within the next twelve months, of unrecognized tax benefits related to pending court cases amounting to $63 million for income 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, 2021, the earliest significant open tax years that remained subject to examination were the following: Region Europe United States Rest of Americas China Rest of Asia, Middle East and Africa Year 2015 2018 2017 2012 2011 220 A B B A N N U A L R E P O R T 2 0 2 1 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 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. At December 31, 2021, the Company’s most significant defined benefit pension plans are in Switzerland as well as in Germany, the United Kingdom, and the United States. 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 local government and tax requirements. During 2020, the Company took steps to transfer the defined benefit pension risks in three International countries to external financial institutions. Two of these plans were settled entirely for accounting purposes while the third plan involved the settlement of specific obligations for certain former employees. In connection with these transactions, the Company made net payments of $309 million and recorded non-operational pension charges of $520 million which were included in net periodic benefit cost as curtailments, settlements and special termination benefits. The Company also made cash payments of $143 million and recorded non-operational pension charges of $101 million in 2020 for the settlement of pension obligations in discontinued operations. The Company recognizes in its Consolidated Balance Sheets the funded status of its defined benefit pension plans, postretirement plans and other employee-related benefits measured as the difference between the fair value of the plan assets and the benefit obligation. Unless otherwise indicated, the following tables include amounts relating to both continuing and discontinued operations. Obligations and funded status of the plans The change in benefit obligation, change in fair value of plan assets, and funded status recognized in the Consolidated Balance Sheets were as follows: ($ in millions) Benefit obligation at January 1, Service cost Interest cost Contributions by plan participants Benefit payments Settlements Benefit obligations of businesses acquired (divested) Actuarial (gain) loss Plan amendments and other Exchange rate differences Benefit obligation at December 31, Fair value of plan assets at January 1, Actual return on plan assets Contributions by employer Contributions by plan participants Benefit payments Settlements Plan assets of businesses acquired (divested) Plan amendments and other Exchange rate differences Fair value of plan assets at December 31, Funded status — overfunded (underfunded) Defined pension benefits Other postretirement benefits Switzerland International International 2021 3,870 61 (5) 36 (130) (124) — (140) — (134) 3,434 4,133 279 63 36 (130) (124) — — (144) 4,113 679 2020 4,308 74 6 72 (160) (101) (765) 71 — 365 3,870 4,189 191 228 72 (160) (101) (664) — 378 4,133 263 2021 5,527 47 72 8 (207) (84) (46) (15) 13 (200) 5,115 4,608 197 124 8 (207) (84) (50) 14 (147) 4,463 (652) 2020 7,878 92 111 12 (295) (2,542) (165) 214 (64) 286 5,527 6,246 375 611 12 (295) (2,542) (82) 62 221 4,608 (919) 2021 98 1 2 — (9) — (11) (8) (2) — 71 — — 9 — (9) — — — — — 2020 110 1 3 — (12) — (5) 4 (3) — 98 — — 12 — (12) — — — — — (71) (98) A B B A N N U A L R E P O R T 2 0 2 1 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 221 The amounts recognized in “Accumulated other comprehensive loss” and “Noncontrolling interests” were: Defined pension benefits Other postretirement benefits December 31, ($ in millions) 2021 2020 2019 2021 2020 2019 Net actuarial (loss) gain Prior service credit (1,540) (2,038) (2,782) 72 75 59 Amount recognized in OCI(1) and NCI(2) (1,468) (1,963) (2,723) Taxes associated with amount recognized in OCI and NCI Amount recognized in OCI and NCI, net of tax(3) 352 374 536 (1,116) (1,589) (2,187) 21 7 28 — 28 21 11 32 — 32 28 13 41 — 41 (1) OCI represents “Accumulated other comprehensive loss”. (2) NCI represents “Noncontrolling interests”. (3) NCI, net of tax, amounted to $0 million, $(1) million and $(1) million at December 31, 2021, 2020 and 2019. In addition, the following amounts were recognized in the Company’s Consolidated Balance Sheets: Defined pension benefits Other postretirement benefits Switzerland International International December 31, ($ in millions) Overfunded plans Underfunded plans — current Underfunded plans — non-current Funded status - overfunded (underfunded) 2021 683 — (4) 679 2020 267 — (4) 263 2021 208 (23) (837) (652) 2020 92 (22) (989) (919) 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 December 31, ($ in millions) Non-current liabilities Underfunded pension plans Underfunded other postretirement benefit plans Other employee-related benefits Pension and other employee benefits 2021 2020 — (7) (64) (71) — (9) (89) (98) 2021 2020 891 1 892 359 1 360 2021 2020 (23) (10) (8) (41) (22) (9) (11) (42) 2021 2020 (841) (62) (122) (993) (89) (149) (1,025) (1,231) 222 A B B A N N U A L R E P O R T 2 0 2 1 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 accumulated benefit obligation (ABO) for all defined benefit pension plans was $8,452 million and $9,310 million at December 31, 2021 and 2020, respectively. The projected benefit obligation (PBO), ABO and fair value of plan assets, for pension plans with a PBO in excess of fair value of plan assets or ABO in excess of fair value of plan assets, was: December 31, ($ 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 2021 2020 2021 12 12 8 13 13 9 2,994 2,917 2,133 2020 5,131 5,056 4,120 2021 2020 2021 12 12 8 13 13 9 2,979 2,905 2,119 2020 5,008 4,942 4,004 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) 2021 2020 2019 2021 2020 2019 2021 2020 2019 Operational pension cost: Service cost Operational pension cost Non-operational pension cost (credit): 61 61 74 74 76 76 47 47 92 92 113 113 Interest cost (5) 6 15 72 111 174 Expected return on plan assets (116) (123) (112) (178) (253) (276) Amortization of prior service cost (credit) Amortization of net actuarial loss Curtailments, settlements and special termination benefits (9) — 1 (11) (14) 7 6 — 11 (2) 67 7 Non-operational pension cost (credit) (129) (115) (100) (34) Net periodic benefit cost (68) (41) (24) 13 2 2 109 108 644 613 705 27 35 148 1 1 2 — (3) (2) — (3) (2) 1 1 3 — (2) (3) — (2) (1) 1 1 4 — (5) (3) (10) (14) (13) 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 Consolidated Income Statements. Net periodic benefit cost includes $121 million and $47 million in 2020 and 2019, 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 2021 2020 2021 2020 2021 2020 0.2 — — 1.0 — — — 1.0 2.1 1.5 1.7 2.1 1.6 1.0 1.4 2.1 2.6 0.3 — — 2.1 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. A B B A N N U A L R E P O R T 2 0 2 1 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 223 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 2021 2020 2019 2021 2020 2019 2021 2020 2019 — 0.3 0.8 1.6 1.9 2.8 2.1 2.8 3.9 3.0 — 1.0 3.0 — 1.0 3.0 — 1.0 4.0 1.0 2.1 4.3 2.2 1.6 4.9 2.4 1.6 — 0.2 — — 0.2 — — 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 2021 5.1% 4.5% 2026 2020 5.9% 4.9% 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 boards of trustees’ investment goal is to maximize the long-term returns of plan assets within specified risk parameters, while considering the future liabilities and liquidity needs of the individual plans. Risk measures taken into account include the funding ratio of the plan, the likelihood of extraordinary cash contributions being required, the risk embedded in each individual asset class, and the plan asset portfolio as a whole. 224 A B B A N N U A L R E P O R T 2 0 2 1 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 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 15 54 26 5 100 15 72 4 9 100 The actual asset allocations of the plans are in line with the target asset allocations. Equity securities primarily include investments in large-cap and mid-cap publicly traded companies. Fixed income assets primarily include corporate bonds of companies from diverse industries and government bonds. Both fixed income and equity assets are invested either via funds or directly in segregated investment mandates, and include an allocation to emerging markets. Real estate consists primarily of 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, 2021, is 3.4 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, 2021 and 2020, plan assets include ABB Ltd’s shares (as well as an insignificant amount of the Company’s debt instruments) with a total value of $8 million and $8 million, respectively. The fair values of the Company’s pension plan assets by asset class are presented below. For further information on the fair value hierarchy and an overview of the Company’s valuation techniques applied, see the “Fair value measures” section of Note 2. December 31, 2021 ($ 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 Total Level 1 Level 2 Not subject to leveling(1) Total fair value 124 314 75 1 1,049 218 1,366 3,121 428 74 158 65 513 6,480 125 1,049 218 1,680 3,121 428 1,326 74 233 322 8,576 1,326 257 1,583 A B B A N N U A L R E P O R T 2 0 2 1 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 225 December 31, 2020 ($ 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 Total Level 1 Level 2 Not subject to leveling(1) Total fair value 180 389 103 5 1,298 243 1,415 2,876 547 50 190 185 1,298 243 1,804 2,876 547 1,289 50 293 156 1 1,289 156 1 672 6,624 1,446 8,742 (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. Investments measured at NAV are primarily non exchange-traded commingled or collective funds in private equity and real estate where the fair value of the underlying assets is determined by the investment manager. Investments in private equity can never be redeemed, but instead the funds will make distributions through liquidation of the underlying assets. Total unfunded commitments for the private equity funds were approximately $125 million and $115 million at December 31, 2021 and 2020, respectively. The real estate funds are typically subject to a lock-in period of up to three years after subscribing. After this period, the real estate funds typically offer a redemption notice of three to twelve months. Contributions Employer contributions were as follows: Defined pension benefits Other postretirement benefits Switzerland International International ($ in millions) 2021 2020 2021 2020 2021 2020 Total contributions to defined benefit pension and other postretirement benefit plans Of which, discretionary contributions to defined benefit pension plans 63 — 228 152 124 61 611 520 9 — 12 — The total contributions included non-cash contributions totaling $53 million and $224 million, respectively, for 2021 and 2020, of available-for-sale debt securities to certain of the Company’s pension plans. The Company expects to contribute approximately $108 million to its defined benefit pension plans in 2022. Of these discretionary contributions, $5 million are expected to be non-cash contributions. The Company expects to contribute approximately $7 million to its other postretirement benefit plans in 2022. The Company also contributes to a number of defined contribution plans. The aggregate expense for these plans in continuing operations was $278 million, $205 million and $190 million in 2021, 2020 and 2019, respectively. Contributions to multi-employer plans were not significant in 2021, 2020 and 2019. 226 A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P Estimated future benefit payments The expected future cash flows to be paid by the Company’s plans in respect of pension and other postretirement benefit plans at December 31, 2021, are as follows: ($ in millions) Switzerland International International Defined pension benefits Other postretirement benefits 2022 2023 2024 2025 2026 Years 2027 - 2031 256 241 226 220 213 977 265 257 255 256 259 1,299 7 7 6 6 5 22 — Note 18 Share -based payment arrangements The Company has granted share-based instruments to its employees under 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 $59 million, $44 million and $46 million in 2021, 2020 and 2019, respectively, while compensation cost for cash-settled awards, recorded in Selling, general and administrative expenses, was not significant, as mentioned in the WARs, LTIP and Other share-based payments sections of this note. The total tax benefit recognized in 2021, 2020 and 2019 was not significant. At December 31, 2021, 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, 23 million of the 95 million shares held by the Company as treasury stock at December 31, 2021, 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. Management Incentive Plan Up to 2019, the Company offered, under the MIP, options and cash-settled WARs to key employees for no consideration. Starting in 2020, the employee group previously eligible to receive grants under the MIP were granted shares under the LTIP (see LTIP section below) and consequently no grants were made in 2021 and 2020 under the MIP. 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. A B B A N N U A L R E P O R T 2 0 2 1 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 227 Options The fair value of each option was estimated on the date of grant using a lattice model that used the assumptions noted in the table below. Expected volatilities were based on implied volatilities from equivalent listed warrants on ABB Ltd shares. The expected term of the options granted is the contractual six-year life of each option, based on the fact that after the vesting period, a participant can elect to sell the option rather than exercise the right to purchase shares, thereby also realizing the time value of the options. The risk-free rate was based on a six-year Swiss franc interest rate, reflecting the six-year contractual life of the options. In estimating forfeitures, the Company used data from previous comparable MIP launches. Expected volatility Dividend yield Expected term Risk-free interest rate 2019 19% 4.7% 6 years -0.9% 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) 336.1 (160.0) (1.7) 174.4 174.4 158.5 67.2 (32.0) (0.3) 34.9 34.9 31.7 Weighted- average exercise price (in Swiss francs)(2) Weighted- average remaining contractual term (in years) Aggregate intrinsic value (in millions of Swiss francs)(3) 21.16 20.25 20.31 22.00 22.00 22.30 2.4 2.4 2.3 450 450 400 Outstanding at January 1, 2021 Exercised(4) Forfeited Outstanding at December 31, 2021 Vested and expected to vest at December 31, 2021 Exercisable at December 31, 2021 (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. (4) The cash received upon exercise amounted to approximately $693 million. The shares were delivered out of treasury stock. At December 31, 2021, the total unrecognized compensation cost related to non-vested options granted under the MIP was not significant. The weighted-average grant-date fair value (per option) of options granted during 2019 was 0.34 Swiss francs. As mentioned previously, no options were granted in 2021 and 2020. In 2021 and 2020, the aggregate intrinsic value (on the date of exercise) of options exercised was approximately $313 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, 2021: Exercise price (in Swiss francs)(1) Number of options (in millions) Number of shares (in millions)(2) Weighted-average remaining contractual term (in years) 21.50 22.50 23.50 19.00 Total number of options and shares 9.3 63.4 61.6 40.1 174.4 1.9 12.7 12.3 8.0 34.9 0.7 1.6 2.7 3.7 2.4 (1) Information presented reflects the exercise price per share of ABB Ltd. (2) Information presented reflects the number of shares of ABB Ltd that can be received upon exercise. 228 A B B A N N U A L R E P O R T 2 0 2 1 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 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 records the changes in both the fair value and vested portion of the outstanding WARs. To hedge its exposure to fluctuations in the fair value of outstanding WARs, the Company purchased cash-settled call options, which entitle the Company to receive amounts equivalent to its obligations under the outstanding WARs. The cash-settled call options are recorded as derivatives measured at fair value (see Note 6), with subsequent changes in fair value recorded in Selling, general and administrative expenses to the extent that they offset the change in fair value of the liability for the WARs. The total impact in Selling, general and administrative expenses in 2021, 2020 and 2019 was not significant. The aggregate fair value of outstanding WARs was $29 million and $21 million at December 31, 2021 and 2020, 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, 2021 Exercised Forfeited Outstanding at December 31, 2021 Exercisable at December 31, 2021 Number of WARs 22.1 (12.6) (0.1) 9.4 3.8 The aggregate fair value at date of grant of WARs granted in 2019 was not significant. As mentioned previously, no grants were made in 2021 and 2020 under the MIP. In 2021 and 2020, share-based liabilities of $25 million and $13 million, respectively, were paid upon exercise of WARs by participants. The amounts in 2019 were not significant. Employee Share Acquisition Plan 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 2021 20% 2.9% 1 year -0.6% 2020 24% 3.8% 1 year -0.7% 2019 18% 4.1% 1 year -0.7% A B B A N N U A L R E P O R T 2 0 2 1 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 229 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, 2021 Granted Forfeited Exercised(4) Not exercised (savings returned plus interest) Outstanding at December 31, 2021 Vested and expected to vest at December 31, 2021 Exercisable at December 31, 2021 2.1 1.8 (0.1) (1.7) (0.3) 1.8 1.7 — 22.87 30.32 22.87 22.87 22.87 30.32 30.32 — 0.8 0.8 — 8.3 7.9 — (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 in 2021 from exercises was approximately $42 million. The shares were delivered out of treasury stock. The exercise prices per ABB Ltd share and per ADS of 30.32 Swiss francs and $33.35, respectively, for the 2021 grant, 22.87 Swiss francs and $24.93, respectively, for the 2020 grant, and 20.78 Swiss francs and $20.17, respectively, for the 2019 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, 2021, 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 2021, 2020 and 2019 was 1.96 Swiss francs, 1.67 Swiss francs and 1.05 Swiss francs, respectively. The total intrinsic value (on the date of exercise) of options exercised in 2021 was approximately $14 million, while in 2020 and 2019 it was not significant. Long-Term Incentive Plan The long-term incentive plan (LTIP) involves annual grants of the Company’s stock subject to certain conditions (Performance Shares) to members of the Company’s Executive Committee and selected other senior executives, as defined in the terms of the LTIP. Starting with 2020, certain of the employee group previously eligible to receive grants under the MIP have been included in the LTIP. The ultimate amount delivered under the LTIP’s Performance Shares grant 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 the participants at the end of this period. In addition, for certain awards to vest, the participant has to fulfill a three-year service condition as defined in the terms and conditions of the LTIP. The Performance Shares under the 2021, 2020 and 2019 LTIP launches include 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. For the relative total shareholder return component of the Performance Shares, 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 earnings per share performance component of the Performance Shares, 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. 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). 230 A B B A N N U A L R E P O R T 2 0 2 1 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 Under the 2019 LTIP launches, participants receive 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 the 2021 and 2020 LTIP launches, participants generally do not have the ability to receive any of the award in cash, subject to legal restrictions in certain jurisdictions. Presented below is a summary of activity under the Performance Shares of the LTIP: Nonvested at January 1, 2021 Granted Vested Forfeited Nonvested at December 31, 2021 Number of Performance Shares (in millions) Weighted-average grant-date fair value per share (Swiss francs) 1.3 0.9 (0.4) (0.3) 1.5 12.76 38.92 25.78 19.82 23.23 The aggregate fair value, at the dates of grant, of Performance Shares granted in 2021 and 2019 was $37 million and $18 million, respectively, while in 2020 it was not significant. The total grant-date fair value of shares that vested during 2019 was $21 million. The amounts in 2021 and 2020 were not significant. The weighted-average grant-date fair value (per share) of shares granted during 2021, 2020 and 2019 was 38.92 Swiss francs, 10.50 Swiss francs and 15.94 Swiss francs, respectively. Starting in 2020, key employees which were previously eligible to participate in the MIP and which were not included in the employee group granted the Performance Shares described above, were granted Restricted Shares of the Company under the LTIP. The Restricted Shares do not have performance conditions and vest over a three-year period from the grant date. Presented below is a summary of activity under the Restricted Shares of the LTIP: Nonvested at January 1, 2021 Granted Forfeited Nonvested at December 31, 2021 Number of Restricted Shares (in millions) Weighted-average grant-date fair value per share (Swiss francs) 1.2 0.9 (0.1) 2.0 15.80 26.39 18.09 20.61 The aggregate fair value, at the dates of grant, of Restricted Shares granted in 2021 and 2020 was $26 million and $22 million, respectively. The weighted-average grant-date fair value (per share) of shares granted during 2021 and 2020 was 26.39 Swiss francs and 15.76 Swiss francs, respectively. 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, 2021, total unrecognized compensation cost related to equity-settled awards under the LTIP was $59 million and is expected to be recognized over a weighted-average period of 2 years. The compensation cost recorded in 2021, 2020 and 2019 for cash-settled awards was not significant. A B B A N N U A L R E P O R T 2 0 2 1 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 231 For the relative total shareholder return component of the 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 earnings per share component of the LTIP launches, the fair value of granted shares is based on the market price of the ABB Ltd share at grant date for equity-settled awards and at each reporting date for cash-settled awards, as well as the probable outcome of the earnings per share achievement, 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 2021, 2020 and 2019 was not significant. — Note 19 Stockholders’ equity At December 31, 2021, the Company had 2,557 million authorized shares, of which 2,053 million were registered and issued. At December 31, 2020, the Company had 2,672 million authorized shares, of which 2,168 million were registered and issued. At the Annual General Meeting of Shareholders (AGM) in March 2021, the 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 $1,730 million with the Company disbursing a portion in March 2021 and the remaining amounts in April 2021. At the AGM in March 2020, the 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 $1,758 million and was paid in April 2020. At the AGM in March 2019, the 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. In July 2020, the Company announced it initially intends to buy 10 percent of its share capital (which at the time represented a maximum of 180 million shares, in addition to those already held in treasury) through the share buyback program that started in July 2020. The initial share buyback program was executed on a second trading line on the SIX Swiss Exchange and was completed in March 2021. Through this buyback program, the Company purchased a total of approximately 129 million shares for approximately $3.5 billion, of which approximately 20 million shares (resulting in an increase in Treasury stock of $628 million) were purchased in 2021 and approximately 109 million shares (resulting in an increase in Treasury Stock of $2,835 million) were purchased in 2020. At the AGM on March 25, 2021, shareholders approved the cancellation of 115 million of the shares purchased under this buyback program and the cancellation was completed in the second quarter of 2021, resulting in a decrease in Treasury stock of $3,157 million and a corresponding total decrease in Capital stock, Additional paid-in capital and Retained earnings. In March 2021, the Company announced a follow-up share buyback program of up to $4.3 billion. This buyback program, which was launched in April 2021, is being executed on a second trading line on the SIX Swiss Exchange and is planned to run until the Company’s AGM in March 2022. Through this follow-up buyback program, the Company purchased, in 2021, approximately 59 million shares, resulting in an increase in Treasury stock of $2,022 million. At the March 2022 AGM, the Company intends to request shareholder approval to cancel the shares purchased through this follow-up share buyback program as well as those shares purchased under the initial share buyback program that were not proposed for cancellation at the Company’s AGM in March 2021. 232 A B B A N N U A L R E P O R T 2 0 2 1 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 addition to the ongoing share buyback program, in 2021 and 2020, the Company purchased 33 million and 13 million, respectively, of its own shares on the open market, mainly for use in connection with its employee share plans, resulting in an increase in Treasury stock of $1,032 million and $346 million, respectively. Upon and in connection with each launch of the Company’s MIP, the Company sold call options to a bank at fair value, giving the bank the right to acquire shares equivalent to the number of shares represented by the MIP 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, 2021, such call options representing 5.4 million shares and with strike prices ranging from 19.00 to 23.50 Swiss francs (weighted-average strike price of 21.93 Swiss francs) were held by the bank. The call options expire in periods ranging from August 2022 to August 2025. However, only 3.5 million of these instruments, with strike prices ranging from 19.00 to 23.50 Swiss francs (weighted-average strike price of 22.64 Swiss francs), could be exercised at December 31, 2021, under the terms of the agreement with the bank. In addition to the above, at December 31, 2021, the Company had further outstanding obligations to deliver: • up to 2 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, • up to 13 million shares relating to the options granted under the 2017 launch of the MIP, with a strike price of 22.50 Swiss francs, vested in August 2020 and expiring in August 2023, • up to 12 million shares relating to the options granted under the 2018 launch of the MIP, with a strike price of 23.50 Swiss francs, vested in August 2021 and expiring in August 2024, • up to 8 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 million shares relating to the ESAP, vesting and expiring in October 2022, • up to 8 million shares to Eligible Participants under the 2021, 2020 and 2019 launches of the LTIP, vesting and expiring in April 2024, April 2023 and May 2022, 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 2021 and 2020, the Company delivered approximately 36 million and 17 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 2021, 2020 and 2019, the Company delivered 1.7 million, 1.4 million and 0.5 million shares, respectively, out of treasury stock 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, 2021, the total unconsolidated stockholders’ equity of ABB Ltd was 6,837 million Swiss francs ($7,490 million), including 246 million Swiss francs ($270 million) representing share capital, 9,443 million Swiss francs ($10,345 million) representing reserves and 2,853 million Swiss francs ($3,125 million) representing a reduction of equity for own shares (treasury stock). Of the reserves, 2,853 million Swiss francs ($3,125 million) relating to own shares and 49 million Swiss francs ($54 million) representing 20 percent of share capital, are restricted and not available for distribution. In February 2022, the Company announced that a proposal will be put to the 2022 AGM for approval by the shareholders to distribute 0.82 Swiss francs per share to shareholders. Subsequent events Subsequent to December 31, 2021, and up to February 23, 2022, the Company purchased, under the follow-up share buyback program, an additional 21 million shares, for approximately $735 million, and, on the open market, an additional 9 million shares, for approximately $326 million. A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P 233 — Note 20 Earnings per share Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise outstanding written call options and outstanding options and shares granted subject to certain conditions under the Company’s share-based payment arrangements. In 2020 and 2019, outstanding securities representing a maximum of 79 million and 93 million shares, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would have been antidilutive. None were excluded in 2021. Basic earnings per share: ($ in millions, except per share data in $) 2021 2020 2019 Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 4,625 (79) 4,546 294 4,852 5,146 1,043 396 1,439 Weighted-average number of shares outstanding (in millions) 2,001 2,111 2,133 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Diluted earnings per share: 2.31 (0.04) 2.27 0.14 2.30 2.44 0.49 0.19 0.67 ($ in millions, except per share data in $) 2021 2020 2019 Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 4,625 (79) 4,546 294 4,852 5,146 1,043 396 1,439 Weighted-average number of shares outstanding (in millions) 2,001 2,111 2,133 Effect of dilutive securities: Call options and shares Adjusted weighted-average number of shares outstanding (in millions) Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 18 2,019 2.29 (0.04) 2.25 8 2 2,119 2,135 0.14 2.29 2.43 0.49 0.19 0.67 234 A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P — Note 21 Other comprehensive income The following table includes amounts recorded within “Total other comprehensive income (loss)” including the related income tax effects: ($ in millions) Foreign currency translation adjustments: Foreign currency translation adjustments Changes attributable to divestments Net change during the year Available-for-sale securities: Net unrealized gains (losses) arising during the year Reclassification adjustments for net (gains) losses included in net income Changes attributable to divestments 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 settlements and curtailments included in net income Changes attributable to divestments 2021 2020 2019 Before tax Tax effect Net of tax Before tax Tax effect Net of tax Before tax Tax effect Net of tax (521) (9) (530) — (521) — (9) 500 519 — (530) 1,019 (13) 3 (10) 31 (6) — (19) 1 — 4 (5) — (15) (18) (3) 10 (2) — (2) (7) 4 — (3) 498 519 (130) (2) — (130) — (2) 1,017 (132) — (132) 24 (14) (3) 7 16 1 — 17 (2) (1) — (3) 14 — — 14 2 (2) — 55 (12) 43 3 3 6 437 (26) 411 (243) 43 (200) (293) 73 (220) (14) — (14) (11) — (11) (25) (3) (28) 113 (25) 88 99 (31) 65 7 (8) 4 — 2 69 7 (6) 650 186 750 (132) (35) (161) 518 151 589 38 — (178) 2 (2) — — 2 2 2 — 2 20 (9) 11 68 32 — (142) 20 (9) 11 (249) (6) — 36 — — — 33 (17) (83) 1,779 (164) 1,615 (282) Net change during the year 489 (22) 467 Derivative instruments and hedges: Net gains (losses) arising during the year 7 1 8 Reclassification adjustments for net (gains) losses included in net income Net change during the year Total other comprehensive income (loss) (13) (6) (66) — (13) 1 (5) A B B A N N U A L R E P O R T 2 0 2 1 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 235 The following table shows changes in “Accumulated other comprehensive loss” (OCI) attributable to ABB, by component, net of tax: ($ in millions) Balance at January 1, 2019 Cumulative effect of changes in accounting principles(1) Other comprehensive (loss) income before reclassifications Amounts reclassified from OCI Total other comprehensive (loss) income Less: Amounts attributable to noncontrolling interests Balance at December 31, 2019 Other comprehensive (loss) income before reclassifications Amounts reclassified from OCI Total other comprehensive (loss) income Less: Amounts attributable to noncontrolling interests Balance at December 31, 2020 Other comprehensive (loss) income before reclassifications Amounts reclassified from OCI Total other comprehensive (loss) income Less: Amounts attributable to noncontrolling interests Balance at December 31, 2021(2) Foreign currency translation adjustments Unrealized gains (losses) on available- for-sale securities Pension and other post- retirement plan adjustments Derivative instruments and hedges Accumulated other compre- hensive loss (1,967) (16) (5,311) (4) — 14 — 14 — 10 24 (17) 7 — 17 (10) (5) (15) (36) (214) 72 (142) — (2,145) (157) 746 589 — (1,556) 411 56 467 (3,324) — (130) (2) (132) (6) (3,450) 498 519 1,017 27 (2,460) (521) (9) (530) 4 (2,993) — 20 (9) 11 — (5) 2 — 2 — (3) 8 (13) (5) — (8) (36) (310) 61 (249) (6) (5,590) 367 1,248 1,615 27 (4,002) (112) 29 (83) 4 (4,088) (1) Amounts relate to the adoption of an accounting standard update in 2019 regarding the Tax Cuts and Jobs Act of 2017. (2) Due to rounding, numbers presented may not add to the totals provided. — 2 — (1,089) 236 A B B A N N U A L R E P O R T 2 0 2 1 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 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 2021 2020 2019 Foreign currency translation adjustments: Changes attributable to divestments: - Losses (gains) on other divestments, net Other income (expense), net - Loss on solar inverters business (see Note 4) - Loss on Power Grids business (see Note 3) Amounts reclassified from OCI Other income (expense), net Income (loss) from discontinued operations, net of tax 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 settlements and curtailments Changes attributable to divestments: Non-operational pension (cost) credit(1) - Losses (gains) on other divestments, net Other income (expense), net - Loss on Power Grids business (see Note 3) Income (loss) from discontinued operations, net of tax(2) Total before tax Tax Changes in tax attributable to divestments: Income tax expense - Losses (gains) on other divestments, net Other income (expense), net - Loss on Power Grids business (see Note 3) Income (loss) from discontinued operations, net of tax(2) Amounts reclassified from OCI (9) — — (9) (14) 65 7 (8) — 50 4 2 — 56 — 99 420 519 (11) 113 650 — 186 938 (157) — (35) 746 (2) — — (2) (25) 99 38 — — 112 (40) — — 72 (1) Amounts in 2020 and 2019, include a total of $94 million and $6 million, respectively, reclassified from OCI to Income (loss) from discontin- ued operations (see Note 3). (2) Amounts represent the reclassification of OCI relating to pensions, including tax, on divestment of the Power Grids business. The amounts reclassified out of OCI in respect of Unrealized gains (losses) on available-for-sale securities and Derivative instruments and hedges were not significant in 2021, 2020 and 2019. — Note 22 Restructuring and related expenses OS program From December 2018 to December 2020, the Company executed a two-year restructuring program with the objective of simplifying its business model and structure through the implementation of a new organizational structure driven by its businesses. The program resulted in the elimination of the country and regional structures within the previous matrix organization, including the elimination of the three regional Executive Committee roles. The operating businesses are now responsible for both their customer-facing activities and business support functions, while the remaining Group-level corporate activities primarily focus on Group strategy, portfolio and performance management and capital allocation. As of December 31, 2020, the Company has incurred substantially all costs related to the OS program. A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P 237 Liabilities associated with the OS program are included primarily in Other provisions. The following table shows the activity from the beginning of the program to December 31, 2021: ($ 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 Expenses Cash payments Change in estimates Exchange rate differences Liability at December 31, 2020 Expenses, net of change in estimates Cash payments Exchange rate differences Liability at December 31, 2021 Employee severance costs Contract settlement, loss order and other costs — 65 65 111 (44) (30) (3) 99 119 (91) (10) 4 121 2 (65) (6) 52 — — — 1 (1) — — — 17 (15) — — 2 2 (3) — 1 Total — 65 65 112 (45) (30) (3) 99 136 (106) (10) 4 123 4 (68) (6) 53 The following table outlines the costs incurred in 2020 and 2019, and the cumulative costs incurred under the program per operating segment as well as Corporate and Other: ($ in millions) Electrification Motion Process Automation(1) Robotics & Discrete Automation Corporate and Other Total (1) Formerly named the Industrial Automation operating segment. Costs incurred in 2020 35 18 37 10 49 149 2019 18 6 3 8 54 89 Cumulative costs incurred up to December 31, 2020 85 25 61 18 114 303 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 2020 109 17 23 149 2019 81 1 7 89 Cumulative costs incurred up to December 31, 2020 255 18 30 303 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 2020 2019 38 37 4 70 149 8 46 1 34 89 238 A B B A N N U A L R E P O R T 2 0 2 1 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 restructuring-related activities In addition, during 2021, 2020 and 2019, the Company executed various other restructuring-related activities and incurred the following charges, net of changes in estimates: ($ in millions) Employee severance costs Estimated contract settlement, loss order and other costs Inventory and long-lived asset impairments Total 2021 101 31 24 156 2020 2019 164 18 12 194 55 37 22 114 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 2021 2020 2019 71 21 2 62 95 50 10 39 46 4 — 64 156 194 114 In 2021, the Company initiated a plan to fully exit a product group within one of its non-core businesses. The exit activities are expected to be completed by the end of 2022 and incur restructuring-related expenses of between $150 million and $200 million, primarily relating to contract settlements. The majority of these costs will be recorded in 2022 as certain required contractual elements will only be effective in 2022. At December 31, 2021 and 2020, $212 million and $233 million, respectively, was recorded for other restructuring-related liabilities and is primarily included in “Other provisions”. — 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 the following segments, based on products and services: Electrification, Motion, Process Automation and Robotics & Discrete Automation. The remaining operations of the Company are included in Corporate and Other. Effective January 1, 2021, the Industrial Automation segment was renamed the Process Automation segment. In addition, the Company changed its method of allocating real estate assets to its operating segments whereby these assets are now accounted for directly in the individual operating segment which utilizes the asset rather than as a cost recharged to the operating segment from Corporate and Other. As a result, while this change had no impact on segment revenues or profits (Operational EBITA), certain real estate assets (including corresponding depreciation and capital expenditure), previously reported within Corporate and Other have been allocated to the total segment assets of each individual operating segment. Certain segment information for 2020 and 2019, as well as Total assets at December 31, 2020 and 2019, have been recast to reflect this allocation change. A B B A N N U A L R E P O R T 2 0 2 1 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 239 A description of the types of products and services provided by each reportable segment is as follows: • Electrification: manufactures and sells electrical products and solutions which are designed to provide safe, smart and sustainable electrical flow from the substation to the socket. The portfolio of increasingly digital and connected solutions includes electric vehicle charging infrastructure, renewable 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. The products and services are delivered through six operating Divisions: Distribution Solutions, Smart Power, Smart Buildings, E-mobility, Installation Products and Power Conversion. • Motion: manufactures and sells drives, motors, generators, traction converters and mechanical power transmission products that are driving the low-carbon future for industries, cities, infrastructure and transportation. These products, digital technology and related services enable industrial customers to increase energy efficiency, improve safety and reliability, and achieve precise control of their processes. Building on over 130 years of cumulative experience in electric powertrains, the Business Area combines domain expertise and technology to deliver the optimum solution for a wide range of applications in all industrial segments. In addition, the Business Area, along with partners, has leading global service presence. These products and services are delivered through eight operating Divisions: Large Motors & Generators, IEC LV Motors, NEMA Motors, Drive Products, System Drives, Service, Traction and, until October 2021, Mechanical Power Transmission. • Process Automation: develops and sells a broad range of industry-specific, integrated automation and electrification and digital systems and solutions, as well as digital solutions, lifecycle services, advanced industrial analytics and artificial intelligence applications and suites for the process, marine and hybrid industries. Products and solutions include process and discrete control technologies, advanced process control software and manufacturing execution systems, sensing, measurement and analytical instrumentation, marine propulsion systems and large turbochargers. In addition, the Business Area offers a comprehensive range of services ranging from repair to advanced services such as remote monitoring, preventive maintenance, asset performance management, emission monitoring and cybersecurity services. The products, systems and services are delivered through five operating Divisions: Energy Industries, Process Industries, Marine & Ports, Turbocharging, and Measurement & Analytics. • Robotics & Discrete Automation: delivers its products, solutions and services through two operating Divisions: Robotics and Machine Automation. Robotics includes: industrial robots, software, robotic solutions and systems, field services, spare parts, and digital services. Machine Automation specializes in solutions based on its programmable logic controllers (PLC), industrial PCs (IPC), servo motion, transport systems and machine vision. Both Divisions offer engineering and simulation software as well as a comprehensive range of digital solutions. Corporate and Other: includes headquarter costs, the Company’s corporate 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 acquisition (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, • other income/expense relating to the Power Grids joint venture, • certain other non-operational items, as well as 240 A B B A N N U A L R E P O R T 2 0 2 1 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/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 (including impairment of goodwill) and certain other fair value changes, 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 2021, 2020 and 2019: ($ in millions) Electrification Motion 2021 Process Automation Robotics & Discrete Automation Corporate and Other Geographical markets Europe The Americas of which: United States Asia, Middle East and Africa of which: China Product type Products Systems Services and software Third-party revenues Intersegment revenues Total revenues 4,517 4,465 3,304 3,975 2,087 12,957 10,706 1,367 884 12,957 12,957 230 13,187 2,015 2,346 1,952 2,111 1,156 6,472 5,555 — 917 6,472 6,472 453 6,925 2,416 1,431 833 2,367 740 6,214 1,496 1,802 2,916 6,214 6,214 45 6,259 1,578 439 308 1,270 949 3,287 2,159 645 483 3,287 3,287 10 3,297 3 5 — 7 — 15 4 11 — 15 15 (738) (723) ($ in millions) Electrification Motion 2020 Process Automation Robotics & Discrete Automation Corporate and Other Geographical markets Europe The Americas of which: United States Asia, Middle East and Africa of which: China Product type Products Systems Services and software Third-party revenues Intersegment revenues(1) Total revenues 4,008 4,050 3,093 3,506 1,820 11,564 9,951 743 870 11,564 11,564 360 11,924 1,934 2,173 1,846 1,807 926 5,914 5,040 — 874 5,914 5,914 495 6,409 2,322 1,321 805 2,038 628 5,681 1,263 1,665 2,753 5,681 5,681 111 5,792 1,429 385 270 1,024 714 2,838 1,635 780 423 2,838 2,838 69 2,907 15 7 5 7 3 29 26,026 53 (24) — 29 29 (927) (898) 17,942 3,164 4,920 26,026 26,026 108 26,134 Total 10,529 8,686 6,397 9,730 4,932 28,945 19,920 3,825 5,200 28,945 28,945 — 28,945 Total 9,708 7,936 6,019 8,382 4,091 A B B A N N U A L R E P O R T 2 0 2 1 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 241 ($ in millions) Electrification Motion 2019 Process Automation Robotics & Discrete Automation Corporate and Other Geographical markets Europe The Americas of which: United States Asia, Middle East and Africa of which: China Product type Products Systems Services and software Third-party revenues Intersegment revenues(1) Total revenues 4,039 4,568 3,522 3,665 1,729 12,272 10,315 958 999 12,272 12,272 456 12,728 1,879 2,315 1,972 1,827 876 6,021 5,152 — 869 6,021 6,021 512 6,533 2,416 1,582 948 2,153 608 6,151 1,439 1,648 3,064 6,151 6,151 122 6,273 1,634 453 290 1,157 825 3,244 1,785 968 491 3,244 3,244 70 3,314 36 1 3 40 1 77 65 12 — 77 77 (947) (870) Total 10,004 8,919 6,735 8,842 4,039 27,765 18,756 3,586 5,423 27,765 27,765 213 27,978 (1) Intersegment revenues until June 30, 2020, 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. In 2021, 2020 and 2019 the United States and China are the only countries where revenue exceeded 10 percent of Total revenues. In each of 2021, 2020 and 2019 more than 98 percent of the Company’s total revenues were generated from customers outside Switzerland. 242 A B B A N N U A L R E P O R T 2 0 2 1 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 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 2021, 2020 and 2019, as well as Total assets at December 31, 2021, 2020 and 2019: ($ in millions) Operational EBITA: Electrification Motion Process Automation 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 Other income/expenses relating to the Power Grids joint venture 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(2) Executive Committee transition costs Favorable resolution of an uncertain purchase price adjustment Gain on sale of investments Certain other fair value changes, including asset impairments(3) Other non-operational items Income from operations Interest and dividend income Interest and other finance expense Losses from extinguishment of debt Non-operational pension (cost) credit Income from continuing operations before taxes 2021 2020 2019 2,121 1,183 801 355 (39) — (299) 4,122 (250) (160) (9) 6 2,193 — (132) (34) (54) (2) 20 — — (92) (3) 6 — 119 (12) 5,718 51 (148) — 166 5,787 1,681 1,075 451 237 (133) (40) (372) 2,899 (263) (410) (218) (11) (2) (33) (74) (20) 67 26 (33) (86) (7) (37) (1) 36 — (239) (1) 1,593 51 (240) (162) (401) 841 1,688 1,082 732 393 (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) Amounts in 2020 and 2019 include $67 million and $97 million, respectively, of implementation costs in relation to the OS program. (2) Amounts in 2021 includes ABB Way process transformation costs of $80 million. (3) Amount in 2020 includes goodwill impairment charges of $311 million. A B B A N N U A L R E P O R T 2 0 2 1 0 4 F I N A N C I A L R E V I E W O F A B B G R O u P 243 ($ in millions) Electrification Motion Process Automation Robotics & Discrete Automation Corporate and Other Consolidated Depreciation and amortization(1) Capital expenditures(1), (2) Total assets(1), (2), (3) at December 31, 2021 2020 2019 2021 2020 2019 2021 2020 2019 425 172 83 144 69 893 411 182 80 131 111 915 444 183 72 129 133 961 345 230 85 96 64 820 316 118 75 65 120 694 298 12,831 12,800 12,318 79 126 62 197 762 5,936 5,009 6,495 5,008 6,378 4,914 4,860 4,794 4,784 11,624 11,991 17,714 40,260 41,088 46,108 (1) Amounts in 2020 and 2019 have been restated to reflect the reallocation of certain real estate assets, previously reported in Corporate and Other, to the individual operating segments utilizing these assets. (2) Capital expenditures and Total assets are after intersegment eliminations and therefore reflect third-party activities only. (3) At December 31, 2021, 2020 and 2019, Corporate and Other includes $136 million, $282 million and $9,840 million, respectively, of assets in the Power Grids business which is reported as discontinued operations (see Note 3). In addition, at December 31, 2021 and 2020, Corporate and Other includes $1,609 million and $1,710 million related to the equity investment in Hitachi Energy Ltd (see Note 4). Other geographic information Geographic information for long-lived assets was as follows: ($ in millions) Europe The Americas Asia, Middle East and Africa Total Long-lived assets at December 31, 2021 2,670 1,260 1,009 4,939 2020 2,822 1,382 940 5,144 Long-lived assets represent “Property, plant and equipment, net” and “Operating lease right-of-use assets” and are shown by location of the assets. At December 31, 2021, approximately 19 percent, 12 percent and 11 percent of the Company’s long-lived assets were located in the United States, China and Switzerland, respectively. At December 31, 2020, approximately 21 percent, 10 percent and 11 percent of the Company’s long-lived assets were located in the United States, China and Switzerland, respectively. 05 ABB Ltd Statutory Financial Statements A B B A N N U A L R E P O R T 2 0 2 1 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 245 246 ABB Ltd Management Report 2021 247 Financial Statements 2021 248 Notes to Financial Statements 260 Proposed appropriation of available earnings 261 Report of the Statutory Auditor on the Financial Statements 246 A B B A N N U A L R E P O R T 2 0 2 1 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 2021 ABB Ltd is the holding company of the ABB Group, owning directly or indirectly all subsidiaries globally. In 2022, the Company will continue to operate as the holding company of the ABB Group. No change of business is expected. February 24, 2022 The major business activities during 2021 can be summarized as follows: Management services The Company provided management services to a Group company for CHF 17 million. Share transactions • share deliveries in relation to employee share programs of CHF 963 million • share cancellations of CHF 2,778 million: those shares were repurchased under a share buyback program in 2020-2021 • further share repurchases of CHF 2,425 million for cancellation purposes • share repurchases for employee share programs of CHF 939 million Dividend payment to external shareholders • from retained earnings of CHF 1,436 million Divestment of the Power Grids business Further to its sale of 80.1% of the shares of Hitachi Energy Ltd on July 1, 2020, the Company transferred in 2021 ABB Power Technology Services Private Limited, India, ABB Power Products And Systems India Limited, India, and ABB Power Grids South Africa (Pty) Ltd to Hitachi Energy Ltd. Other information In 2021, the Company employed on average 19 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 activities. A B B A N N U A L R E P O R T 2 0 2 1 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 247 — Financial Statements 2021 Income Statement Year ended December 31 (CHF in thousands) Dividend income Finance income Other operating income Finance expense Personnel expenses Other operating expenses Write down of participation Gain and Loss on sale of participation Net income before taxes Income taxes Net income Balance Sheet December 31 (CHF in thousands) Cash Cash deposit with ABB Capital Ltd Non-trade receivables Non-trade receivables – Group Short-term loans – Group Accrued income and prepaid expenses Accrued income and prepaid expenses – Group Other short-term assets Total current assets Long-term loans – Group Participations Other long-term assets Total non-current assets Total assets Interest-bearing liabilities Interest-bearing liabilities – Group Non-trade payables Non-trade payables – Group Deferred income and accrued expenses Deferred income and accrued expenses – Group Short-term provisions Total current liabilities Interest-bearing liabilities Interest-bearing liabilities – Group Long-term provisions Total non-current liabilities Total liabilities Share capital Legal reserves Legal other reserves Legal reserves from retained earnings Free reserves Retained earnings Net income Own shares Total stockholders' equity Total liabilities and stockholders’ equity Note 2021 2020 7 8 1,768,705 8,045,320 177,551 107,326 68,357 83,603 (299,024) (100,778) (45,441) (42,142) (22,850) (65,101) 2 (110,836) (3,263,742) 74,336 (308,073) 1,610,798 4,456,413 — (906) 1,610,798 4,455,507 Note 2021 570 2020 781 292,883 3,573,027 926 17,985 22,819 699 46 2,306 7,878 22,026 631 4,155 2 10,644 266,281 346,572 3,877,085 319,462 330,394 2 7,088,533 7,086,247 289,897 266,143 7,697,892 7,682,784 8,044,464 11,559,869 4 4 2 2 4 4 6 6 6 6 — 350,000 22,819 22,026 107,419 145,435 5,360 36,713 26,079 908 533,787 50,367 221,120 349,453 419,510 1,451,976 450,210 450,251 319,462 330,394 18,712 264,315 788,384 1,044,960 1,207,894 2,496,936 246,378 260,178 — 30,430 1,000,000 1,000,000 6,832,045 6,545,827 1,610,798 4,455,507 6 (2,852,651) (3,229,009) 6,836,570 9,062,933 8,044,464 11,559,869 248 A B B A N N U A L R E P O R T 2 0 2 1 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 — 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. 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. — Note 2 Participations Company name Purpose Domicile 2021 2021 2020 ABB Asea Brown Boveri Ltd. Holding CH-Zurich CHF 2,767,880,000 100.00% CHF 2,767,880,000 Hitachi Energy Ltd. Holding CH-Zurich CHF 1,250,000 19.90% CHF 1,250,000 2020 100.00% 19.90% Share capital Ownership and voting rights Share capital Ownership and voting rights Development of participations Opening balance January 1 Additions(1) Disposals Write offs Closing balance December 31 CHF in thousands 2021 2020 7,086,247 8,973,229 681,827 6,917,922 (568,705) (5,541,042) (110,836) (3,263,862) 7,088,533 7,086,247 (1) thereof dividend in kind from ABB Asea Brown Boveri Ltd CHF 568,705 in 2021 and CHF 6,745,619 in 2020 The participation is valued at the lower of cost or fair value, using generally accepted valuation principles. On July 1, 2020, the Company completed the sale of 80.1 percent of Hitachi Energy Ltd (formerly Hitachi ABB Power Grids Ltd). The transaction was executed through the sale of 80.1 percent of the shares of Hitachi Energy Ltd. Cash consideration received directly by the Company at the closing date was USD 5,674 million (CHF 5,376 million) and USD 1,176 million (CHF 1,114 million) restricted cash. The Company also obtained a put option allowing the Company to require Hitachi to purchase the remaining interest for fair value, subject to a minimum floor price equivalent to a 10 percent discount compared to the total price paid for the initial 80.1 percent. The put option can be exercised commencing April 2023. It is not recognized in the accounts of the Company. The book value of the retained 19.9 percent investment for Hitachi Energy Ltd was CHF 1,379 million and CHF 1,377 million, as of December 31, 2021 and 2020, respectively. A B B A N N U A L R E P O R T 2 0 2 1 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 249 Liabilities for estimated payments Deferred income (1) Short-term provisions (2) Accrued expenses - Group (3) Closing balance December 31 (1) Delayed closing countries (2) Retention Bonus, Transitional Service Agreement, Working Capital (only in 2020) (3) Internal cost reimbursement CHF in thousands 2021 2,541 221,120 8,611 232,272 2020 449,925 349,453 45,569 844,947 For certain entities of the Power Grids business, the legal process or other regulatory delays resulted in the Company not having transferred legal title to Hitachi as at the date of this report. The proceeds for these entities are included in Other short-term assets of CHF 11 million and CHF 266 million at December 31, 2021 and 2020, respectively. In 2021, the Company transferred ABB Power Technology Services Private Limited, India, and ABB Power Products And Systems India Limited, India, and ABB Power Grids South Africa (Pty) Ltd to Hitachi Energy Ltd. The remaining Power Grids entity ABB Engg. Technologies Co. (KSCC) in Kuwait is expected to be transferred by the first half of 2022. — Note 3 Indirect Participations The following table sets 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, 2021 and 2020. Company ownership and voting rights % 2021 Share capital in thousands 2021 Company ownership and voting rights % 2020 Share capital in thousands 2020 Currency Company name/location ABB S.A., Buenos Aires ABB Australia Pty Limited, Moorebank ABB Group Holdings Pty. Ltd., Moorebank ABB Group Investment Management Pty. Ltd., Moorebank ABB AG, Wiener Neudorf B&R Holding GmbH, Eggelsberg B&R Industrial Automation GmbH, Eggelsberg ABB N.V., Zaventem ABB Automacao Ltda, Sorocaba ABB Eletrificacao Ltda, Sorocaba ABB Bulgaria EOOD, Sofia ABB Electrification Canada ULC, Edmonton ABB Inc., Saint-Laurent ABB S.A., Santiago ABB (China) Investment Limited, Beijing ABB (China) Ltd., Beijing ABB Beijing Drive Systems Co. Ltd., Beijing ABB Beijing Switchgear Limited, Beijing ABB Electrical Machines Ltd., Shanghai ABB Engineering (Shanghai) Ltd., Shanghai ABB LV Installation Materials Co. Ltd. Beijing, Beijing ABB Shanghai Free Trade Zone Industrial Co., Ltd., Shanghai ABB Shanghai Motors 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 Country Argentina Australia Australia Australia Austria Austria Austria Belgium Brazil Brazil Bulgaria Canada Canada Chile China China China China China China China China China China China China 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 278,860 131,218 552,982 505,312 15,000 35 1,240 34,308 196,554 268,759 65,110 —(1) —(1) 100.00 100.00 —(3) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 278,860 131,218 —(3) 505,312 15,000 35 1,240 34,308 196,554 268,759 65,110 —(1) —(1) 100.00 5,484,348 100.00 5,484,348 100.00 95,000 100.00 95,000 100.00 140,000 100.00 140,000 90.00 60.00 100.00 100.00 85.70 100.00 75.00 100.00 66.52 90.00 5,000 16,500 14,400 40,000 17,100 6,500 11,217 15,800 29,500 6,200 90.00 60.00 100.00 100.00 —(3) 100.00 75.00 100.00 66.52 90.00 5,000 16,500 14,400 40,000 —(3) 6,500 11,217 15,800 29,500 6,200 ABB s.r.o., Prague Czech Republic 100.00 400,000 100.00 400,000 ARS AUD AUD AUD EUR EUR EUR EUR BRL BRL BGN CAD CAD CLP USD USD USD USD USD USD USD CNY USD USD USD USD CZK 250 A B B A N N U A L R E P O R T 2 0 2 1 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 Company name/location 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 ABB Engineering Trading and Service Ltd., Budapest Industrial C&S Hungary Kft., Budapest ABB Global Business Services and Contracting India Private Limited, Bangalore ABB Global Industries and Services Private Limited, Bangalore(5) ABB India Limited, Bangalore ABB S.p.A., Milan ABB K.K., Tokyo ABB Ltd., Seoul ABB Electrical Control Systems S. de R.L. de C.V., Monterrey ABB Mexico S.A. de C.V., San Luis Potosi Asea Brown Boveri S.A. de C.V., San Luis Potosi ABB B.V., Rotterdam ABB Finance B.V., Rotterdam ABB Holdings B.V., Rotterdam ABB AS, Fornebu ABB Electrification Norway AS, Skien ABB Holding AS, Fornebu ABB Business Services Sp. z o.o., Warsaw ABB Industrial Solutions (Bielsko-Biala) Sp. z o.o., Bielsko-Biala ABB Industrial Solutions (Klodzko) Sp. z o.o., Klodzko ABB Sp. z o.o., Warsaw Company ownership and voting rights % 2021 Share capital in thousands 2021 Company ownership and voting rights % 2020 Share capital in thousands 2020 Currency Country Denmark 100.00 100,000 100.00 100,000 DKK Egypt Egypt Estonia Finland France France Germany Germany Germany Germany Germany Germany Germany Hungary Hungary 100.00 100.00 100.00 100.00 99.83 100.00 100.00 —(4) —(4) 100.00 100.00 100.00 100.00 100.00 100.00 353,479 166,000 1,663 10,003 25,778 45,921 167,500 —(4) —(4) 61,355 7,500 358 1,535 100.00 100.00 100.00 100.00 99.83 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 353,479 166,000 1,663 10,003 25,778 45,921 167,500 15,000 10,620 61,355 7,500 358 1,535 436,281 100.00 26,436,281 3,000 100.00 3,000 EGP USD EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR HUF HUF India 100.00 5,200,100 —(3) —(3) INR India India Italy 100.00 366,923 100.00 366,923 75.00 423,817 75.00 423,817 100.00 110,000 100.00 110,000 Japan 100.00 1,000,000 100.00 1,000,000 Korea, Republic of 100.00 23,670,000 100.00 23,670,000 Mexico Mexico Mexico Netherlands Netherlands Netherlands Norway Norway Norway Poland 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 315,134 683,418 667,686 9,200 20 363 134,550 60,450 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 315,134 683,418 667,686 9,200 20 119 134,550 60,450 100.00 240,000 100.00 240,000 99.94 24 99.93 24 INR INR EUR JPY KRW MXN MXN MXN EUR EUR EUR NOK NOK NOK PLN Poland 99.94 328,125 99.93 328,125 PLN Poland Poland 99.94 99.94 50 245,461 99.93 99.93 50 245,461 Industrial C&S of P.R. LLC, San Juan Puerto Rico 100.00 —(1) 100.00 —(1) ABB Ltd., Moscow Russian Federation 100.00 23,000 100.00 5,686 ABB Electrical Industries Co. Ltd., Riyadh Saudi Arabia 65.00 181,000 65.00 181,000 ABB Pte. Ltd., Singapore ABB Holdings (Pty) Ltd., Modderfontein ABB Investments (Pty) Ltd, Modderfontein ABB South Africa (Pty) Ltd., Modderfontein Asea Brown Boveri S.A., Madrid ABB AB, Västerås ABB Electrification Sweden AB, Västerås ABB Norden Holding AB, Västerås ABB Canada EL Holding GmbH, Zurich ABB Capital AG, Zurich ABB Information Systems Ltd., Zurich ABB Investment Holding 2 GmbH, Zurich ABB Management Services Ltd., Zurich ABB Schweiz AG, Baden ABB Ltd., Taipei Singapore South Africa South Africa South Africa 100.00 100.00 51.00 74.91 32,797 217,758 56,000 200,001 Spain 100.00 33,318 100.00 200,000 100.00 10,000 100.00 100.00 —(3) 74.91 100.00 100.00 —(3) 32,797 4,050 —(3) 1 33,318 200,000 —(3) Sweden Sweden Sweden Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Taiwan (Chinese Taipei) 100.00 2,344,783 100.00 2,344,783 100.00 100.00 100.00 100.00 100.00 100.00 1,000 100 500 20 571 55,000 100.00 100.00 100.00 100.00 100.00 100.00 1,000 100 500 20 571 55,000 100.00 195,000 100.00 195,000 TWD PLN PLN USD RUB SAR SGD ZAR ZAR ZAR EUR SEK SEK SEK CHF CHF CHF CHF CHF CHF A B B A N N U A L R E P O R T 2 0 2 1 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 251 Company name/location ABB Elektrik Sanayi A.S., Istanbul ABB Industries (L.L.C.), Dubai ABB Holdings Limited, Warrington ABB Limited, Warrington ABB Finance (USA) Inc., Wilmington, DE ABB Holdings Inc., Cary, NC ABB Inc., Cary, NC ABB Installation Products Inc, Memphis, TN ABB Installation Products International LLC., Wilmington, DE ABB Motors and Mechanical Inc, Fort Smith, AR ABB Treasury Center (USA), Inc., Wilmington, DE Edison Holding Corporation, Wilmington, DE Company ownership and voting rights % 2021 Share capital in thousands 2021 Company ownership and voting rights % 2020 Share capital in thousands 2020 Currency Country Turkey 99.99 13,410 99.99 13,410 TRY United Arab Emirates United Kingdom United Kingdom United States United States United States United States United States United States United States United States 49.00(2) 5,000 49.00(2) 5,000 100.00 100.00 100.00 100.00 100.00 100.00 —(3) 100.00 100.00 100.00 100.00 226,014 120,000 1 2 1 1 —(3) —(1) 1 —(1) —(1) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 226,014 120,000 1 2 1 1 — —(1) 1 —(1) —(1) AED GBP GBP USD USD USD USD USD USD USD USD USD Industrial Connections & Solutions LLC, Cary, NC United States (1) Shares without par value. (2) Company consolidated as ABB exercises full management control. (3) Based on the internally defined thresholds, these indirect participations are considered not significant, and therefore no details to these participa- tions are disclosed in the respective year. (4) Participation was either sold, liquidated or merged in 2021. (5) Participation was renamed from ABB Substations Contracting India Private Limited, Bangalore in 2021. — Note 4 Interest-bearing liabilities December 31 (CHF in thousands) Bonds 2011–2021 2.25% coupon Bonds 2019–2024 0.3% coupon Bonds 2019–2029 1.0% coupon Loan 2016-2024 USD 375 million (in 2020 USD 400 million) Total 2021 2020 nominal value — 350,000 nominal value 280,000 280,000 premium on issuance 54 75 nominal value 170,000 170,000 premium on issuance 156 176 342,281 352,420 792,491 1,152,671 During 2021, the Company repaid its 2.25% bonds at maturity. The bonds paid interest annually in arrears. The Company had, through ABB Capital Ltd, entered into an interest rate swap with a bank to effectively convert those bonds into floating rate obligations. The interest swap was treated as an off-balance sheet item and was therefore not recorded. The swap agreement ended upon repayment of the bonds. 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. Further, the Company has the option to redeem the above bonds prior to maturity, in whole but not in part, at par plus accrued interest, if 85% or more of the aggregate principal amount of the relevant bond issue has been redeemed or purchased and cancelled at the time of the option exercise notice. In 2016, the Company entered into a borrowing agreement of USD 500 million with ABB Capital Ltd that expires in 2024 (with an amortization schedule of USD 25 million per annum) to hedge the USD 500 million loan granted to a Group company. In each of 2021 and 2020, the Company repaid USD 25 million. The average interest in 2021 and 2020 was 1.08% and 1.89%, respectively. 252 A B B A N N U A L R E P O R T 2 0 2 1 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 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. No amount was issued under this letter at December 31, 2021, compared with CHF 889.9 million as of December 31, 2020. 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 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 4,371.2 million as of December 31, 2021 and CHF 4,144.0 million as of December 31, 2020. 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 CHF 72.8 million as per December 31, 2021 and CHF 70.3 million as per December 31, 2020. 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. The Company exercised its option in 2021 to extend the maturity of the facility to 2026. No amounts were drawn under this Group Facility at December 31, 2021 and 2020. 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 risk of 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. A B B A N N U A L R E P O R T 2 0 2 1 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 253 — Note 6 Stockholders’ equity (CHF in thousands) Opening balance as of January 1, 2021 Legal reserves Free reserves Share capital Other reserves from retained earnings from retained earnings Net income Own shares Total 260,178 30,430 1,000,000 6,545,827 4,455,507 (3,229,009) 9,062,933 Allocation to retained earnings 4,455,507 (4,455,507) Cancellation of shares (13,800) (30,430) (2,733,599) 2,777,829 — — 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, 2021 (1,435,690) (1,435,690) (3,364,344) (3,364,344) 962,873 962,873 1,610,798 1,610,798 246,378 — 1,000,000 6,832,045 1,610,798 (2,852,651) 6,836,570 Share capital as of December 31, 2021 Issued shares Contingent shares Authorized shares Share capital as of December 31, 2020 Issued shares Contingent shares Authorized shares Number of registered shares 2,053,148,264 304,038,800 200,000,000 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 0.12 246,378 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 2021 and 2020, a loss from the delivery of own shares of CHF 155 million and CHF 14 million, respectively, was recorded in the Income Statement under Finance expense. During 2021, 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 2015, 2016 and 2019 by the Group company that facilitates the MIP at fair value and had a strike price of CHF 19.50, CHF 21.50 and CHF 19.00, respectively. At issuance, the Group company had entered into an intercompany option agreement with the Company, having the same terms and conditions to enable it to meet its future obligations. As a result of the exercise by the bank, the Company delivered 17,507,403 shares at CHF 19.50, 14,194,305 shares at CHF 21.50 and 4,217,913 shares at CHF 19.00, out of own shares. During 2020, a bank holding call options related to ABB Group’s MIP exercised a portion of these options. Such options had been issued in 2014 by the Group company that facilitates the MIP at fair value and had a strike price of CHF 21.00. 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 16,431,565 shares at CHF 21.00, 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 2021, the Company delivered, out of own shares, to the Group company 1,458,128 shares at CHF 32.24 and 270,504 shares at USD 34.88. In 2020, the Company delivered, out of own shares, to the Group company 1,149,891 shares at CHF 24.91 and 237,259 shares at USD 27.27. In 2021 and 2020, the Company transferred 949,795 and 1,389,715 own shares at an average acquisition price per share of CHF 25.50 and CHF 21.97, respectively, to fulfill its obligations under other share-based arrangements. 254 A B B A N N U A L R E P O R T 2 0 2 1 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 In 2021, the Company purchased 33 million shares, for CHF 939 million, to support its employee share programs globally and 78 million shares, for CHF 2,425 million, as part of its share buyback program for capital reduction purposes as publicly disclosed on April 8, 2021, and July 22, 2020. In 2020, the Company purchased 13 million shares, for CHF 312 million, to support its employee share programs globally and 109 million shares, for CHF 2,578 million, as part of its share buyback program for capital reduction purposes as publicly disclosed on July 22, 2020. At the AGM in March 2021, shareholders approved the proposal of the Board of Directors to reduce the share capital of the Company by cancelling 115,000,000 treasury shares which were acquired under the share buyback program. This cancellation was completed in June 2021, resulting in a decrease in Treasury stock (own shares) of CHF 2,778 million and a corresponding combined decrease in share capital and retained earnings. The movement in the number of own shares during the year was as follows: 2021 2020 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 Purchases for employee share programs Purchases for intended cancellation Cancellation Delivery for employee share programs Closing balance as of December 31 Thereof pledged for MIP 137,314,095 32,668,987 78,418,830 (115,000,000) (38,598,048) 94,803,864 5,604,519 23.52 28.74 30.93 24.16 24.95 30.09 34,647,153 13,046,013 108,829,359 (19,208,430) 137,314,095 9,866,402 21.94 23.95 23.69 21.97 23.52 — Note 7 Dividend income The Company received in 2021, dividend payments from ABB Asea Brown Boveri Ltd of CHF 1.2 billion in cash and CHF 569 million in kind (see note 2). The Company received in 2020, a dividend payment from ABB Asea Brown Boveri Ltd of CHF 1.3 billion in cash and CHF 6.7 billion in kind (see note 2). — Note 8 Other operating income Other operating income includes mainly outgoing charges for Business Area and Division management services, income from share deliveries and guarantee compensation fees to Group companies. — Note 9 Shareholders Shareholder structure As of December 31, 2021, the total number of shareholders directly registered with ABB Ltd was approximately 96,000 and another 513,000 shareholders held shares indirectly through nominees. In total as of that date, ABB had approximately 609,000 shareholders. Significant shareholders Investor AB, Sweden, held 265,385,142 ABB shares as of December 31, 2021 (refer to Investor’s year-end 2021 report available at https://www.investorab.com/investors-media/reports-presentations). This A B B A N N U A L R E P O R T 2 0 2 1 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 255 holding represented 12.9 percent of ABB’s total share capital and voting rights as registered in the Commercial Register on December 31, 2021. 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. The Capital Group Companies Inc., USA, disclosed that as of July 1, 2021, it, together with its direct and indirect affiliates, held 115,841,336 ABB shares (refer to https://www.ser-ag.com/en/resources/ notifications-market-participants/significant-shareholders.html#/shareholder-details/TAL7600020). This holding represented 5.64 percent of ABB’s total share capital and voting rights as registered in the Commercial Register at that time. Cevian Capital II GP Limited, Jersey, disclosed that as of August 3, 2020, it held 105,988,662 ABB shares (refer to https://www.sec.gov/Archives/edgar/data/1091587/000090266420002862/p20-1467sc13da. htm). This holding represented 4.89 percent of ABB’s total share capital and voting rights as registered in the Commercial Register at that time. 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 https://www.ser-ag.com/en/resources/ notifications-market-participants/significant-shareholders.html#/shareholder-details/TAH91000F4). This holding represented 3.36 percent of ABB’s total share capital and voting rights as registered in the Commercial Register at that time. At December 31, 2021, to the best of ABB’s knowledge, no other shareholder held 3 percent or more of ABB’s total share capital and voting rights as registered in the Commercial Register on 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 notifications made by shareholders during 2021 can be found via the search facility on the platform of the Disclosure Office of the SIX Swiss Exchange: https://www. ser-ag.com/en/resources/notifications-market-participants/significant-shareholders.html#/. Under ABB’s Articles of Incorporation (available at https://new.abb.com/about/corporate-governance), each registered share represents one vote. Significant shareholders do not have different voting rights. To our knowledge, we are not directly or indirectly owned or controlled by any government or by any other corporation or person. 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 Incorporation (available at https://new.abb.com/about/ corporate-governance). Right to vote ABB has one class of shares and each registered share carries one vote at the general meeting. Voting rights may be exercised only after a shareholder has been registered in the share register of ABB as a shareholder with the right to vote, or with Euroclear Sweden AB (Euroclear), which maintains a subregister of the share register of ABB. A shareholder may be represented at the Annual General Meeting by its legal representative, by another shareholder with the right to vote or by the independent proxy elected by the shareholders (unabhängiger Stimmrechtsvertreter). If the Company does not have an independent proxy, the Board of Directors shall appoint the independent proxy for the next General Meeting of Shareholders. All shares held by one shareholder may be represented by one representative only. For practical reasons shareholders must be registered in the share register no later than 6 business days before the general meeting in order to be entitled to vote. Except for the cases described under “Limitations on transferability of shares and nominee registration” below, there are no voting rights restrictions limiting ABB’s shareholders’ rights. 256 A B B A N N U A L R E P O R T 2 0 2 1 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 Annual General Meeting/COVID-19 ABB’s top priority is protecting the health of its shareholders and employees. Therefore, due to the extraordinary circumstances and in accordance with applicable Swiss COVID-19 legislation, shareholders were not able to attend ABB’s Annual General Meeting 2021 in person, but could exercise their shareholder rights via the independent proxy only. The Board of Directors has resolved that for ABB’s Annual General Meeting 2022, in accordance with applicable Swiss COVID-19 legislation, the same procedures shall apply. In addition, ABB will offer shareholders the opportunity to address questions on agenda items to the Board of Directors in writing ahead of the meeting. — Note 10 Shareholdings of Board and Executive Committee At December 31, 2021 and 2020, the members of the Board of Directors as of that date, held the following numbers of shares (or American Depository Shares (ADSs) representing such shares): Board ownership of ABB shares (audited) Name Peter Voser(1) Jacob Wallenberg Matti Alahuhta(2) Gunnar Brock David Constable Frederico Curado Lars Förberg Jennifer Xin-Zhe Li Geraldine Matchett David Meline(3) Satish Pai Total (1) Includes 2,000 shares held by spouse. (2) Matti Alahuhta did not stand for re-election at ABB’s Annual General Meeting in March 2021. (3) Includes 3,150 shares held by spouse. Total number of shares held December 31, 2021 191,946 239,878 December 31, 2020 314,648 234,246 n.a. 33,399 38,185 40,301 59,916 37,580 25,196 37,780 28,432 93,408 26,951 33,978 32,382 49,992 33,721 19,800 33,774 24,618 732,613 897,518 A B B A N N U A L R E P O R T 2 0 2 1 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 257 At December 31, 2021, 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 Long-term Incentive Plan (LTIP) and options (either vested or unvested as indicated) under the MIP and unvested shares in respect of other compensation arrangements. Vested at December 31, 2021 Unvested at December 31, 2021 d l e h s e r a h s f o r e b m u n l a t o T 1 2 0 2 , 1 3 r e b m e c e D t a 10,000 150,440 1,200 26,006 1,360 51,472 118,056 100,440 51,912 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 — — — — — — — — — I P M e h t r e d n u d l e h s n o i t p o d e t s e v n u f o r e b m u N 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 ) 1 ( 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 0 2 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 ) 1 ( 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 1 2 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 ) 1 ( 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 ) 2 ( l 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 ) 2 ( l 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 2022) (vesting 2022) (vesting 2023) (vesting 2024) (vesting 2022) (vesting 2023) — — — — 148,750 — — — — — 131,715 95,901 130,150 18,904 49,071 49,071 36,480 — — — — — 6,209 49,587 41,323 26,326 — 15,044 30,087 44,422 46,488 34,976 41,323 41,323 30,087 36,158 38,740 30,087 — — — — — — — — — — — — — — — — 510,886 — 148,750 220,561 354,869 298,988 130,150 18,904 Name Björn Rosengren Timo Ihamuotila Carolina Granat (EC member as of January 1, 2021)(3) Maria Varsellona(4) Theodor Swedjemark(3)(5) Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod Total Executive Committee members at December 31, 2021 (1) The final LTIP 2019 award will be settled 65 percent in shares and 35 percent in cash. This applies to both performance factors (EPS and TSR). However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. The final LTIP 2020 award and LTIP 2021 award will be settled 100 percent in shares, with an automatic sell-to-cover in place for employees who are subject to withholding taxes. (2) It is expected that the replacement share grants will be settled 65 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. (3) This includes shares held by the spouse. (4) Unvested share grants were forfeited as a result of the resignation provided and removed from the shareholding overview. (5) In addition, his spouse holds unvested shares and options granted in connection with her role in the company. 258 A B B A N N U A L R E P O R T 2 0 2 1 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, 2020, the members of the Executive Committee, as of that date, held the following number of shares (or ADSs representing such shares), the conditional rights to receive ABB shares under the LTIP and options (either vested or unvested as indicated) under the MIP and unvested shares in respect of other compensation arrangements. Vested at December 31, 2020 d l e h s e r a h s f o r e b m u n l a t o T 0 2 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, 2020 I P M e h t r e d n u d l e h s n o i t p o d e t s e v n u f o r e b m u N 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 ) 1 ( 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 ) 1 ( 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 0 2 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 ) 1 ( 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 ) 2 ( l 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 ) 2 ( l 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 ) 2 ( l 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/ 2022) (vesting 2021) (vesting 2022) (vesting 2023) (vesting 2021) (vesting 2022) (vesting 2023) Name Björn Rosengren (EC member as of January 27, 2020, CEO as of March 1, 2020) Timo Ihamuotila Theodor Swedjemark (EC member as of August 1, 2020)(3) Sami Atiya Tarak Mehta Peter Terwiesch Morten Wierod Total Executive Committee members at December 31, 2020 5,000 171,610 — — — — Sylvia Hill 2,265 796,875 318,750 Maria Varsellona — — — — — 37,217 49,071 49,071 36,158 37,707 — — — — 41,323 41,323 40,010 40,009 — — 131,715 — 130,150 18,904 480 102,000 250,750 — — 6,209 42,778 179,636 142,338 1,544 — — — — — — — — 23,301 49,587 41,323 34,790 44,422 46,488 37,379 41,323 41,323 15,292 36,158 38,740 — — — — — — — — — — — — — — — — — — 545,651 898,875 569,500 147,979 298,042 433,899 40,010 170,159 18,904 (1) The final LTIP 2018 award and LTIP 2019 award will be settled 65 percent in shares and 35 percent in cash. This applies to both performance factors (EPS and TSR). However, the participants have the possibility to elect to receive 100 percent of the vested award in shares. The final LTIP 2020 award will be settled 100 percent in shares, with an automatic sell-to-cover in place for employees who are subject to withholding taxes. (2) 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. (3) In addition, his spouse holds unvested shares and options granted in connection with her role in the company. — Note 11 Full time employees During each of 2021 and 2020, the Company employed on average 19 employees. At ABB, we believe that a culture of diversity, inclusion and equal opportunity is critical to our business success and makes us stronger. ABB has non-discriminatory pay policies which play an important part in minimizing any pay disparities based on gender. As part of its Diversity and Inclusion Strategy 2030 and in line with national legislation, ABB carried out an equal pay analysis for its Swiss entities with at least 100 employees. It showed that three of the in scope entities meet the equal pay requirements and are within the applicable thresholds and the fourth entity, the smallest, meets the equal pay requirements for salary and slightly underachieves the parity level for overall compensation (salary plus actual bonus). A B B A N N U A L R E P O R T 2 0 2 1 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 259 — Note 12 Subsequent events Subsequent to December 31, 2021, and up to February 23, 2022, the Company purchased, under the follow-up share buyback program, an additional 21 million shares, for approximately CHF 677 million, and, on the open market, an additional 9 million shares, for approximately CHF 300 million. The purchases were partially financed via borrowings from ABB Capital Ltd. 260 A B B A N N U A L R E P O R T 2 0 2 1 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 — Proposed appropriation of available earnings Proposed appropriation of retained earnings (CHF in thousands) Net income for the year Carried forward from previous year Cancellation of shares Retained earnings available to the Annual General Meeting Gross dividend of CHF 0.80 per share paid directly by the Company(1) Gross dividend of CHF 0.82 per share on total number of registered shares(1) Balance to be carried forward 2021 1,610,798 9,565,644 (2,733,599) 8,442,843 2020 4,455,507 6,545,827 — 11,001,334 — (1,435,690) (1,683,582) 6,759,261 — 9,565,644 (1) No dividend will be paid on own shares held by ABB Ltd. Shareholders who are resident in Sweden participating in the established dividend access facility will receive an amount in Swedish kronor from ABB Participation AB which corresponds to the dividend resolved on a regis- tered share of ABB Ltd without deduction of the Swiss withholding tax. This amount however is subject to taxation according to Swedish law. On February 3, 2022, the Company announced that the Board of Directors will recommend for approval at the March 24, 2022, Annual General Meeting that a dividend of CHF 0.82 per share be distributed out of the retained earnings available, to be paid in March 2022 and in April 2022 for residents in Sweden participating in the dividend access facility. 261 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 and notes to financial statements (pages 247 to 259) for the year ended December 31, 2021. 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, 2021 comply with Swiss law and the company’s articles of incorporation. 262 Report on Key Audit Matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. We have determined that there are no key audit matters to communicate in our report. Report on Other Legal Requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. KPMG AG Hans-Dieter Krauss Mohammad Nafeie Licensed Audit Expert Auditor in Charge Zurich, Switzerland February 24, 2022 KPMG AG, Badenerstrasse 172, CH-8036 Zurich © 2022 KPMG AG, a Swiss corporation, is a subsidiary of KPMG Holding AG, which is a member of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 263 — E M P T Y PAG E A D D E D I N T E N T I O N A L LY 06 Supplemental information 266 Supplemental information 266 A B B A N N U A L R E P O R T 2 0 2 1 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 measures used to evaluate ABB’s operating performance. These financial measures are re- ferred to in this Annual Report and are not defined under United States generally accepted account- ing principles (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 nature and not as a substitute for the related financial information prepared in accordance with U.S. GAAP. For a full reconciliation of ABB’s non-GAAP mea- sures, please refer to Supplemental Reconciliations and Definitions, ABB Q4 2021 Financial Information on global.abb/group/en/ investors/results-and-reports/2021. business was divested in the period when the decision to cease business activities was taken. We do not adjust for portfolio changes where the relevant business has 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 Comparable growth rates below), • restructuring, related and implementation costs (as defined below), • 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, • other income/expense relating to the Power Grids joint venture, • 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). Growth rates for certain key figures may be presented and discussed on a “comparable” basis. The comparable growth rate measures growth on a constant currency basis. Since we are a global company, the comparability of our operating results reported in U.S. dollars is affected by foreign currency exchange rate fluctuations. We calculate the impacts from foreign currency fluctuations by translating the current-year periods’ reported key figures into U.S. dollar amounts using the exchange rates in effect for the comparable periods in the previous year. Comparable growth rates are also adjusted for changes in our business portfolio. Adjustments to our business portfolio occur due to acquisitions, divestments, or by exiting specific business activities or customer markets. The adjustment for portfolio changes is calculated as follows: where the results of any business acquired or divested have not been consolidated and reported for the entire duration of both the current and comparable periods, the reported key figures of such business are adjusted to exclude the relevant key figures of any corresponding quarters which are not comparable when computing the compa- rable growth rate. Certain portfolio changes which do not qualify as divestments under U.S. GAAP have been treated in a similar manner to divestments. Changes in our portfolio where we have exited certain business activities or cus- tomer markets are adjusted as if the relevant A B B A N N U A L R E P O R T 2 0 2 1 0 6 S u P P L E M E N TA L I N F O R M AT I O N 267 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 free cash flow divided by Adjusted net income attributable to ABB. Adjusted net income attributable to ABB Adjusted net income attributable to ABB is calcu- lated as net income attributable to ABB adjusted for: (i) impairment of goodwill, (ii) losses from extinguishment of debt, and (iii) the gains arising on the sale of both the Mechanical Power Trans- mission Division (Dodge) and Power Grids business, the latter being included in discontin- ued operations. Free cash flow Free cash flow is calculated as net cash provided by operating activities adjusted for: (i) purchases of property, plant and equipment and intangible assets, and (ii) proceeds from sales of property, plant and equipment. Certain other non-operational items generally includes: certain regulatory, compliance and legal costs, certain asset impairments (including impairment of goodwill) and certain other fair value changes, as well as other items which are determined by management on a case-by-case basis. 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 relating to the implementation of group-wide restructuring programs. Other income/expense relating to the Power Grids joint venture Other income/expense relating to the Power Grids joint venture consists of amounts recorded in Income from continuing operations before taxes relating to the divested Power Grids busi- ness including the income/loss under the equity method for the investment in Hitachi Energy Ltd. (Hitachi Energy), amortization of deferred brand income as well as changes in value of other obli- gations relating to the divestment. Operational revenues We present Operational revenues solely for the purpose of allowing the computation of Opera- tional EBITA margin. Operational revenues are Total revenues adjusted for foreign exchange/ commodity timing differences in Total revenues of: (i) unrealized gains and losses on derivatives, (ii) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (iii) unrealized foreign 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. 268 A B B A N N U A L R E P O R T 2 0 2 1 0 6 S u P P L E M E N TA L I N F O R M AT I O N Adjusted Group effective tax rate The Adjusted Group effective tax rate is com- puted by dividing an adjusted income tax expense by an adjusted pre-tax income. Certain amounts recorded in income before taxes and the related income tax expense (primarily due to gains and losses from sale of businesses) are removed from the reported amounts when computing these adjusted amounts. Certain other amounts re- corded in income tax expense are also excluded from the computation to determine the Adjusted Group effective tax rate Book-to-bill ratio Book-to-bill ratio is calculated as Orders received divided by Total revenues. Return on Capital employed (ROCE) Return on Capital employed (ROCE) Return on Capital employed is calculated as Operational EBITA after tax, divided by the aver- age of the period’s opening and closing Capital employed, adjusted to reflect impacts from the timing of significant acquisitions/divestments occurring during the period. Capital employed Capital employed is calculated as the sum of Adjusted 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 liabilities 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 current liabilities (excluding primarily: (a) income taxes payable, (b) current derivative liabilities, (c) pension and other employee benefits), (d) pay- ables under the share buyback program and (e) liabilities related to the divestment of the Power Grids business); and including the amounts related to these accounts which have been pre- sented as either assets or liabilities held for sale but excluding any amounts included in discontin- ued operations. Notional tax on Operational EBITA The Notional tax on Operational EBITA is com- puted using the adjusted group effective tax rate multiplied by Operational EBITA. Parts of the ABB annual report 2021 have been translated into German. 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 2021 includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We have based these forward-looking statements largely on current expectations, estimates and projections about the factors that may affect our future performance, including global economic conditions as well as the economic conditions of the regions and the industries that are major markets for ABB. The words “believe,” “may,” “will,” “estimate,” “continue,” “target,” “anticipate,” “intend,” “expect”, “plan” 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. White — The Space for Invention White — The Space for Invention — ABB Ltd Corporate Communications Affolternstrasse 44 8050 Zurich Switzerland Tel: +41 (0)43 317 71 11 Fax: +41 (0)43 317 79 58 www.abb.com © C o p y r i g h t 2 0 2 1 A B B . A l l r i g h t s r e s e r v e d 

Continue reading text version or see original annual report in PDF format above