20-F 1 maindocument001.htm 20-F  

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 20‑F

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001‑16429


ABB Ltd

(Exact name of registrant as specified in its charter)

Switzerland

(Jurisdiction of incorporation or organization)

Affolternstrasse 44

CH‑8050 Zurich, Switzerland

(Address of principal executive offices)

Richard A. Brown

Affolternstrasse 44

CH‑8050 Zurich, Switzerland

Telephone: +41‑43‑317‑7111

Facsimile: +41‑43‑317‑7992

(Name, Telephone, E‑mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

American Depositary Shares,
each representing one Registered Share

New York Stock Exchange

Registered Shares, par value CHF 0.12

New York Stock Exchange*


Securities registered or to be registered pursuant to Section 12(g) of the Act: None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 2,131,962,406 Registered Shares


Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes   No 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non‑accelerated filer 

Emerging growth company 

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.   

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ☒    International Financial Reporting Standards as issued by the International Accounting Standards Board   Other  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17   Item 18 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes   No 


*                 Listed on the New York Stock Exchange not for trading or quotation purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.

 


 

  

 

 


 

TABLE OF CONTENTS

 

 

Page

PART I

4

Item 1.

Identity of Directors, Senior Management and Advisers

4

Item 2.

Offer Statistics and Expected Timetable

4

Item 3.

Key Information

4

Item 4.

Information on the Company

17

Item 4A.

Unresolved Staff Comments

34

Item 5.

Operating and Financial Review and Prospects

34

Item 6.

Directors, Senior Management and Employees

82

Item 7.

Major Shareholders and Related Party Transactions

123

Item 8.

Financial Information

123

Item 9.

The Offer and Listing

124

Item 10.

Additional Information

125

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

137

Item 12.

Description of Securities Other than Equity Securities

138

PART II

139

Item 13.

Defaults, Dividend Arrearages and Delinquencies

139

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

139

Item 15.

Controls and Procedures

140

Item 16A.

Audit Committee Financial Expert

142

Item 16B.

Code of Ethics

142

Item 16C.

Principal Accountant Fees and Services

142

Item 16D.

Exemptions from the Listing Standards for Audit Committees

143

Item 16E.

Purchase of Equity Securities by Issuer and Affiliated Purchasers

143

Item 16F.

Change in Registrant’s Certifying Accountant

144

Item 16G.

Corporate Governance

144

Item 16H.

Mine Safety Disclosure

144

PART III

144

Item 17.

Financial Statements

144

Item 18.

Financial Statements

145

Item 19.

Exhibits

146

(i)


 

INTRODUCTION

ABB Ltd is a corporation organized under the laws of Switzerland. In this Annual Report on Form 20-F (Annual Report), “the ABB Group,” “ABB,” the “Company,” “we,” “our” and “us” refer to ABB Ltd and its consolidated subsidiaries (unless the context otherwise requires). We also use these terms to refer to ABB Asea Brown Boveri Ltd and its subsidiaries prior to the establishment of ABB Ltd as the holding company for the entire ABB Group in 1999, as described in this Annual Report under “Item 4. Information on the Company—Introduction—History of the ABB Group”. Our American Depositary Shares (each representing one registered share of ABB Ltd) are referred to as “ADSs”. The registered shares of ABB Ltd are referred to as “shares”. Our principal corporate offices are located at Affolternstrasse 44, CH‑8050 Zurich, Switzerland, telephone number +41‑43‑317‑7111.

FINANCIAL AND OTHER INFORMATION

The Consolidated Financial Statements of ABB Ltd, including the notes thereto, as of December 31, 2018 and 2017, and for each of the years in the three‑year period ended December 31, 2018 (our Consolidated Financial Statements) have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). ABB Ltd has separately prepared its statutory unconsolidated financial statements in accordance with the Swiss Code of Obligations.

In this Annual Report: (i) “$,” “U.S. dollar” and “USD” refer to the lawful currency of the United States of America; (ii) “CHF” and “Swiss franc” refer to the lawful currency of Switzerland; (iii) “EUR” and “euro” refer to the lawful currency of the participating member states of the European Economic and Monetary Union (Eurozone); (iv) “SEK” and “Swedish krona” refer to the lawful currency of Sweden; (v) “Chinese renminbi” refers to the lawful currency of the People’s Republic of China; (vi) “AED” refers to the lawful currency of the United Arab Emirates; (vii) “AUD” and “Australian dollar” refer to the lawful currency of Australia; and (viii) “INR” and “Indian Rupee” refer to the lawful currency of India.

Except as otherwise stated, all monetary amounts in this Annual Report are presented in U.S. dollars. Where specifically indicated, amounts in Swiss francs have been translated into U.S. dollars. These translations are provided for convenience only, and they are not representations that the Swiss franc could be converted into U.S. dollars at the rate indicated. These translations have been made using the twelve o’clock buying rate in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2018, unless otherwise indicated. The twelve o’clock buying rate for Swiss francs on December 31, 2018, was $1.00 = CHF 0.9832. The twelve o’clock buying rate for Swiss francs on March 22, 2019, was $1.00 = CHF 0.9940.

FORWARD‑LOOKING STATEMENTS

This Annual Report includes forward‑looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward‑looking statements can be identified by the use of forward‑looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will,” or “should” or, in each case, their negative, or other variations or comparable terminology. These forward‑looking statements include all matters that are not historical facts. They appear in a number of places throughout this Annual Report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, dispositions, strategies and the countries and industries in which we operate.

1 


 

These forward looking statements include, but are not limited to, statements about our financial condition and performance, operating results, liquidity and our ability to fund our business operations and initiatives, capital expenditure and debt service obligations, plans regarding our capital structure, ability to take advantage of market opportunities and drive growth, our products and service offerings and their anticipated performance and impact across various industries and consumer segments, anticipated benefits to the shareholders (including in connection with our share buyback program), acquisitions and integration, including the acquisition of General Electric Company’s Industrial Solutions business, and related synergies and other benefits, investment and risk management strategies, volatility in the credit markets, oil prices, foreign currency exchange rates and other market conditions, trends and opportunities, industry trends and expectations, including the Energy and Fourth Industrial Revolutions and changing consumer behavior and demands, our ability to respond to changing business and economic conditions, our comparative advantages, our commitments and contingencies, availability of raw materials, and other plans, goals, strategies, priorities and initiatives related to our business, including our brand management initiative, Next Level Strategy, and cost-saving measures, as well as, the following:

            statements in “Item 3. Key Information—Dividends and Dividend Policy” regarding our policy on future dividend payments,

            statements in “Item 3. Key Information—Risk Factors,”

            statements in “Item 5. Operating and Financial Review and Prospects” regarding our management objectives, including our outlook, as well as trends in results, prices, volumes, operations, margins and overall market trends, and

            statements in “Item 8. Financial Information—Legal Proceedings” regarding the outcome of certain legal and compliance matters.

By their nature, forward‑looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward‑looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the countries and industries in which we operate, may differ materially from those described in or suggested by the forward‑looking statements contained in this Annual Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the countries and industries in which we operate, are consistent with the forward‑looking statements contained in this Annual Report, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause actual results to differ materially from our expectations are contained in cautionary statements in this Annual Report and include, without limitation, the following:

            Our business is exposed to risks associated with the volatile global economic environment and political conditions.

            Illegal behavior by any of our employees or agents could have a material adverse impact on our consolidated operating results, cash flows, and financial position as well as on our reputation and our ability to do business.

            Our operations in emerging markets expose us to risks associated with conditions in those markets.

            Undertaking long‑term, technically complex projects or projects that are dependent upon factors not wholly within our control could adversely affect our profitability and future prospects.

            We operate in very competitive markets and could be adversely affected if we fail to keep pace with technological changes.

            Our multi-national operations expose us to the risk of fluctuations in currency exchange rates.

            Our hedging activities may not protect us against the consequences of significant fluctuations in exchange rates, interest rates or commodity prices on our earnings and cash flows.

2 


 

            Increases in costs or limitation of supplies of raw materials may adversely affect our financial performance.

            An inability to protect our intellectual property rights could adversely affect our business.

            Industry consolidation could result in more powerful competitors and fewer customers.

            We are subject to environmental laws and regulations in the countries in which we operate. We incur costs to comply with such regulations, and our ongoing operations may expose us to environmental liabilities.

            We may be the subject of product liability claims.

            The uncertainties surrounding the United Kingdom’s future relationship with the European Union may have a negative effect on global economic conditions, financial markets and our business.

            We may encounter difficulty in managing our business due to the global nature of our operations.

            If we are unable to obtain performance and other guarantees from financial institutions, we may be prevented from bidding on, or obtaining, some contracts, or our costs with respect to such contracts could be higher.

            Examinations by tax authorities and changes in tax regulations could result in lower earnings and cash flows.

            The recent comprehensive tax reform in the United States could adversely affect our financial condition and results of operations.

            If we are unable to attract and retain qualified management and personnel then our business may be adversely affected.

            Our business strategy may include making strategic divestitures. There can be no assurance that any divestitures will provide business benefit.

            Anticipated benefits of existing and potential future mergers, acquisitions, joint ventures or strategic alliances may not be realized.

            Increased information technology (IT) security threats and more sophisticated cyber‑attacks could pose a risk to our systems, networks, products, solutions and services.

            Failure to comply with evolving data privacy and data protection laws and regulations or to otherwise protect personal data, may adversely impact our business and financial results.

            We have identified a material weakness in our internal control over financial reporting that could, if not remediated, result in material inaccuracies in our consolidated financial statements and adversely affect our business and results of operations.

            There is no guarantee that our ongoing efforts to reduce costs will be successful.

            We could be affected by future laws or regulations enacted to address climate change concerns as well as the physical effects of climate change.

3 


 

We urge you to read the other important factors set forth under sections of this Annual Report entitled “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” for a more complete discussion of the important factors that could affect our future performance and the countries and industries in which we operate. In light of these risks, uncertainties and assumptions, the forward‑looking circumstances described in this Annual Report and the assumptions underlying them may not occur.

Except as required by law or applicable stock exchange rules or regulations, we undertake no obligation to update or revise publicly any forward‑looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward‑looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this Annual Report.

PART I

Item 1.  Identity of Directors, Senior Management and Advisers

Not applicable

 

Item 2.  Offer Statistics and Expected Timetable

Not applicable

 

Item 3.  Key Information

SELECTED FINANCIAL DATA

The following table presents our selected financial and operating information at the dates and for each of the periods indicated. We report our financial results in U.S. dollars. Due to our global operations, a significant amount of our revenues, expenses, assets and liabilities are denominated in other currencies. As a consequence, movements in exchange rates between currencies may affect our profitability, the comparability of our results between periods, as well as the reported carrying value of our assets and liabilities. You should read the following information together with the information contained in “Item 5. Operating and Financial Review and Prospects,” as well as our Consolidated Financial Statements and the Notes thereto, included elsewhere in this Annual Report.

4 


 

Our selected financial data are presented in the following tables in accordance with U.S. GAAP and have been derived from our published Consolidated Financial Statements. Our Consolidated Financial Statements as of and for the year ended December 31, 2018, were audited by KPMG AG. Our Consolidated Financial Statements as of December 31, 2017, and for each of the years ended December 31, 2017 and 2016, were audited by Ernst & Young AG. Our Consolidated Financial Statements as of December 31, 2016, and as of and for the years ended December 31, 2015 and 2014, have not been audited following the reclassification in 2018 of certain businesses between continuing operations and discontinued operations. Financial information previously reported in 2017, 2016, 2015 and 2014 has been recast to reflect the reclassification.

  

INCOME STATEMENT DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

unaudited

($ in millions, except per share data in $)

2018

 

2017

 

2016

 

2015

 

2014

Total revenues  

27,662

 

25,196

 

24,929

 

26,459

 

31,175

Total cost of sales(1)

(19,118)

 

(17,350)

 

(17,396)

 

(18,429)

 

(22,082)

Gross profit  

8,544

 

7,846

 

7,533

 

8,030

 

9,093

Selling, general and administrative expenses(1)

(5,295)

 

(4,765)

 

(4,532)

 

(4,769)

 

(5,179)

Non-order related research and development expenses(1)

(1,147)

 

(1,013)

 

(967)

 

(1,041)

 

(1,136)

Other income (expense), net

124

 

162

 

(105)

 

(102)

 

544

Income from operations  

2,226

 

2,230

 

1,929

 

2,118

 

3,322

Interest and dividend income

72

 

73

 

71

 

74

 

77

Interest and other finance expense

(262)

 

(234)

 

(201)

 

(240)

 

(311)

Non-operational pension (cost) credit(1)

83

 

33

 

(38)

 

(20)

 

(46)

Income from continuing operations before taxes  

2,119

 

2,102

 

1,761

 

1,932

 

3,042

Provision for taxes

(544)

 

(583)

 

(526)

 

(566)

 

(1,031)

Income from continuing operations, net of tax  

1,575

 

1,519

 

1,235

 

1,366

 

2,011

Income from discontinued operations, net of tax

723

 

846

 

799

 

689

 

707

Net income  

2,298

 

2,365

 

2,034

 

2,055

 

2,718

Net income attributable to noncontrolling interests

(125)

 

(152)

 

(135)

 

(122)

 

(124)

Net income attributable to ABB  

2,173

 

2,213

 

1,899

 

1,933

 

2,594

 

 

 

 

 

 

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

1,514

 

1,441

 

1,172

 

1,289

 

1,906

Income from discontinued operations, net of tax

659

 

772

 

727

 

644

 

688

Net income

2,173

 

2,213

 

1,899

 

1,933

 

2,594

 

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

0.71

 

0.67

 

0.54

 

0.58

 

0.83

Income from discontinued operations, net of tax

0.31

 

0.36

 

0.34

 

0.29

 

0.30

Net income

1.02

 

1.04

 

0.88

 

0.87

 

1.13

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

0.71

 

0.67

 

0.54

 

0.58

 

0.83

Income from discontinued operations, net of tax

0.31

 

0.36

 

0.34

 

0.29

 

0.30

Net income

1.02

 

1.03

 

0.88

 

0.87

 

1.13

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares outstanding (in millions)

 

 

 

 

 

 

 

 

 

used to compute:

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders

2,132

 

2,138

 

2,151

 

2,226

 

2,288

Diluted earnings per share attributable to ABB shareholders

2,139

 

2,148

 

2,154

 

2,230

 

2,295

 

5 


 

BALANCE SHEET DATA:

 

 

 

 

unaudited

 

December 31,

($ in millions)

2018

 

2017

 

2016

 

2015

 

2014

Cash and equivalents

3,445

 

4,526

 

3,644

 

4,565

 

5,443

Marketable securities and short-term investments

712

 

1,083

 

1,953

 

1,625

 

1,318

Total assets(2)

44,441

 

43,458

 

39,391

 

41,313

 

44,855

Long-term debt (excluding current maturities of long-term debt)

6,587

 

6,682

 

5,785

 

5,421

 

6,770

Total debt(3)

8,618

 

7,408

 

6,783

 

7,408

 

7,630

Common stock

188

 

188

 

192

 

1,440

 

1,725

Total stockholders’ equity (including noncontrolling interests)

14,534

 

15,349

 

13,897

 

14,988

 

16,815

 

CASH FLOW DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

unaudited

($ in millions)

2018

 

2017

 

2016

 

2015

 

2014

Operating activities:

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities - continuing operations

2,352

 

2,588

 

2,607

 

2,700

 

2,889

Net cash provided by operating activities - discontinued operations

572

 

1,211

 

1,236

 

1,118

 

956

Net cash provided by operating activities

2,924

 

3,799

 

3,843

 

3,818

 

3,845

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Net cash used in investing activities - continuing operations

(2,908)

 

(1,118)

 

(1,108)

 

(801)

 

(845)

Net cash used in investing activities - discontinued operations

(177)

 

(332)

 

(197)

 

(173)

 

(276)

Net cash used in investing activities

(3,085)

 

(1,450)

 

(1,305)

 

(974)

 

(1,121)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Net cash used in financing activities - continuing operations

(741)

 

(1,688)

 

(3,308)

 

(3,348)

 

(3,007)

Net cash used in financing activities - discontinued operations

(48)

 

(47)

 

(47)

 

(32)

 

(17)

Net cash used in financing activities

(789)

 

(1,735)

 

(3,355)

 

(3,380)

 

(3,024)


(1)           In January 2018, we adopted an accounting standard update which changes how employers that sponsor defined benefit pension plans and other postretirement plans present the net periodic benefit cost in the income statement. As a result, we have reclassified in prior periods certain net periodic pension and postretirement benefits costs/credits from Total cost of sales, Selling, general and administrative expenses and Non-order related research and development expenses to Non-operational pension (cost) credit. See “Note 2 Significant Accounting Policies - New accounting pronouncements” to our Consolidated Financial Statements.

(2)           As of January 1, 2018, we adopted an accounting standard update in which certain advances from customers, previously reported as a reduction in Inventories, were reclassified to liabilities. As a result, total assets at December 31, 2017, 2016, 2015 and 2014, have been restated. See “Note 2 Significant Accounting Policies - New accounting pronouncements” to our Consolidated Financial Statements.

(3)           Total debt is equal to the sum of short‑term debt (including current maturities of long‑term debt) and long‑term debt.

  

 

DIVIDENDS AND DIVIDEND POLICY

Payment of dividends is subject to general business conditions, ABB’s current and expected financial condition and performance and other relevant factors including growth opportunities. ABB’s current dividend policy is to pay a steadily rising, sustainable annual dividend over time.

The unconsolidated statutory financial statements of ABB Ltd are prepared in accordance with Swiss law. Based on these financial statements, dividends may be paid only if ABB Ltd has sufficient distributable profits from previous years or sufficient free reserves to allow the distribution of a dividend. As a holding company, ABB Ltd’s main sources of income are dividend and interest payments from its subsidiaries.

At December 31, 2018, the total unconsolidated stockholders’ equity of ABB Ltd was CHF 8,511 million, including CHF 260 million representing share capital, CHF 9,045 million representing reserves and CHF 794 million representing a reduction of equity for own shares (treasury stock). Of the reserves, CHF 794 million relating to own shares and CHF 52 million representing 20 percent of share capital, are restricted and not available for distribution.

6 


 

With respect to the year ended December 31, 2014, ABB Ltd distributed a total of CHF 0.72 per share to shareholders, which comprised a dividend of CHF 0.55 (USD 0.59) paid out of ABB Ltd’s capital contribution reserves and a distribution of CHF 0.17 (USD 0.18) by way of a nominal value reduction (a reduction of CHF 0.17 in the par value of each share from CHF 1.03 to CHF 0.86). With respect to the year ended December 31, 2015, ABB Ltd distributed a total of CHF 0.74 (USD 0.75) per share to shareholders by way of a nominal value reduction (a reduction of CHF 0.74 in the par value of each share from CHF 0.86 to CHF 0.12). With respect to the years ended December 31, 2016 and 2017, ABB Ltd paid a dividend of CHF 0.76 (USD 0.76) per share and CHF 0.78 (USD 0.81) per share, respectively. The USD amounts for each of the foregoing dividend payments made in CHF have been translated using the average rates of the month in which the dividends were paid.

With respect to the year ended December 31, 2018, ABB Ltd’s Board of Directors has proposed to pay a dividend of CHF 0.80 per share to shareholders. The distribution is subject to approval by shareholders at ABB Ltd’s 2019 Annual General Meeting (AGM).

For further information on dividends and dividend policy see “Item 6. Directors, Senior Management and Employees—Shareholders—Shareholders’ rights— Shareholders’ dividend rights”.

 

RISK FACTORS

You should carefully consider all of the information set forth in this Annual Report and the following description of risks and uncertainties that we currently believe may exist. Our business, financial condition or results of operations could be adversely affected by any of these risks. Additional risks of which we are unaware or that we currently deem immaterial may also impair our business operations. This Annual Report also contains forward‑looking statements that involve risks and uncertainties. Our results could differ materially from those anticipated in these forward‑looking statements as a result of certain factors, including those described below and elsewhere in this Annual Report. See “Forward‑Looking Statements”.

Our business is exposed to risks associated with the volatile global economic environment and political conditions.

Adverse changes in economic or political conditions as well as concerns about global trade, global health pandemics, developments in energy prices, and terrorist activities, could have a material adverse effect on our business, financial condition, results of operations and liquidity and may adversely impact the demand for our products and services. These and other factors may prevent our customers and suppliers from obtaining the financing required to pursue their business activities as planned, which may force them to modify, delay or cancel plans to purchase or supply our products or services. In addition, if our customers do not generate sufficient revenue, or fail to timely obtain access to the capital markets, they may not be able to pay, or may delay payment of, the amounts they owe us. Customers with liquidity issues may lead to additional bad debt expense for us, which may adversely affect our results of operations and cash flows. We are also subject to the risk that the counterparties to our credit agreements and hedging transactions may go bankrupt if they suffer catastrophic demand on their liquidity that prevents them from fulfilling their contractual obligations to us.

Our business environment is influenced also by numerous other economic or political uncertainties which may affect the global economy and the international capital markets. In periods of slow economic growth or decline, our customers are more likely to buy less of our products and services, and as a result we are more likely to experience decreased revenues. Our divisions are affected by the level of investments in the markets that we serve, principally utilities, industry and transport & infrastructure. At various times during the last several years, we also have experienced, and may experience in the future, gross margin declines in certain businesses, reflecting the effect of factors such as competitive pricing pressures, inventory write‑downs, charges associated with the cancellation of planned expansion, increases in pension and postretirement benefit expenses, and increases in component and manufacturing costs resulting from higher labor and material costs borne by our manufacturers and suppliers that, as a result of competitive pricing pressures or other factors, we are unable to pass on to our customers. Economic downturns also may lead to restructuring actions and associated expenses. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments.

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In addition, we are subject to the risks that our business operations in or with certain countries may be adversely affected by trade tariffs, trade or economic sanctions or other restrictions imposed on these countries.  These could lead to increased costs for us or for our customers or limit our ability to do business in or with certain countries.  In addition, actual or potential investors that object to certain of these business operations may adversely affect the price of our shares by disposing or deciding not to purchase our shares. These countries may from time to time include countries that are identified by the United States as state sponsors of terrorism. If any countries where or with whom we do business are subject to such sanctions or restrictions, our business, consolidated operating results, financial condition and the trading price of our shares may be adversely affected. In 2018, our total revenues from business with countries identified by the U.S. government as state sponsors of terrorism represented a very small percentage of our total revenues. Based on the amount of revenues and other relevant quantitative and qualitative factors, we have determined that our business in 2018 with countries identified by the U.S. government as state sponsors of terrorism was not material.

Illegal behavior by any of our employees or agents could have a material adverse impact on our consolidated operating results, cash flows, and financial position as well as on our reputation and our ability to do business.

Certain of our employees or agents have taken, and may in the future take, actions that violate or are alleged to violate the U.S. Foreign Corrupt Practices Act of 1977 (FCPA), legislation promulgated pursuant to the 1997 Organisation for Economic Co‑operation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, applicable antitrust laws and other applicable laws or regulations. For more information regarding investigations of past actions taken by certain of our employees, see “Item 8. Financial Information—Legal Proceedings”. Such actions have resulted, and in the future could result, in governmental investigations, enforcement actions, civil and criminal penalties, including monetary penalties and other sanctions, and civil litigation. It is possible that any governmental investigation or enforcement action arising from such matters could conclude that a violation of applicable law has occurred, and the consequences of any such investigation or enforcement action may have a material adverse impact on our consolidated operating results, cash flows and financial position. In addition, such actions, whether actual or alleged, could damage our reputation and ability to do business.

Further, detecting, investigating and resolving such actions could be expensive and could consume significant time and attention of our senior management. While we are committed to conducting business in a legal and ethical manner, our internal control systems at times have not been, and in the future may not be, completely effective to prevent and detect such improper activities by our employees and agents.

Our operations in emerging markets expose us to risks associated with conditions in those markets.

A significant amount of our operations is conducted in the emerging markets in South America, Asia, and the Middle East and Africa. In 2018, approximately 42 percent of our consolidated revenues were generated from these emerging markets. Operations in emerging markets can present risks that are not encountered in countries with well‑established economic and political systems, including:

          economic instability, which could make it difficult for us to anticipate future business conditions in these markets, cause delays in the placement of orders for projects that we have been awarded and subject us to volatile geographic markets,

          political or social instability, which could make our customers less willing to make cross‑border investments in such regions and could complicate our dealings with governments regarding permits or other regulatory matters, local businesses and workforces,

          boycotts and embargoes that may be imposed by the international community on countries in which we do business or where we seek to do business could adversely affect the ability of our operations in those countries to obtain the materials necessary to fulfill contracts and our ability to pursue business or establish operations in those countries,

          foreign state takeovers of our and our customers’ facilities,

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          significant fluctuations in interest rates and currency exchange rates,

          the imposition of unexpected taxes or other payments on our revenues in these markets,

          our inability to obtain financing and/or insurance coverage from export credit agencies, and

          the introduction of exchange controls and other restrictions by foreign governments.

Additionally, political and social instability resulting from increased violence in certain countries in which we do business has raised concerns about the safety of our personnel. These concerns may hinder our ability to send personnel abroad and to hire and retain local personnel. Such concerns may require us to increase security for personnel traveling to and working in affected countries or to restrict or wind-down operations in such countries, which may negatively impact us and result in higher costs and inefficiencies.

Consequently, our exposure to the conditions in or affecting emerging markets may adversely affect our business, financial condition, results of operations and liquidity.

Undertaking long‑term, technically complex projects or projects that are dependent upon factors not wholly within our control could adversely affect our profitability and future prospects.

We derive a portion of our revenues from long‑term, fixed price and turnkey projects and from other technically complex projects that can take many months, or even years, to complete. Such contracts typically involve substantial risks, including the possibility that we may underbid and consequently have no means of recouping the actual costs incurred, and the assumption of a large portion of the risks associated with completing related projects, including the warranty obligations. Some projects involve technological risks, including in cases where we are required to modify our existing products and systems to satisfy the technical requirements of a project, integrate our products and systems into the existing infrastructure and systems at the installation site, or undertake ancillary activities such as civil works at the installation site. Our revenue, cost and gross profit realized on such contracts can vary, sometimes substantially, from our original projections for numerous reasons, including:

          unanticipated issues with the scope of supply, including modification or integration of supplied products and systems that may require us to incur incremental expenses to remedy such issues,

          the quality and efficacy of our products and services cannot be tested and proven in all situations and environments and may lead to premature failure or unplanned degradation of products,

          changes in the cost of components, materials or labor,

          difficulties in obtaining required governmental permits or approvals,

          delays caused by customers, force majeure or local weather and geological conditions, including natural disasters,

          shortages of construction equipment,

          changes in law or government policy,

          supply bottlenecks, especially of key components,

          suppliers’, subcontractors’ or consortium partners’ failure to perform or delay in performance,

          diversion of management focus due to responding to unforeseen issues, and

          loss of follow-on work.

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These risks are exacerbated if a project is delayed because the circumstances upon which we originally bid and quoted a price may have changed in a manner that increases our costs or other liabilities relating to the project. In addition, we sometimes bear the risk of delays caused by unexpected conditions or events. Our project contracts often subject us to penalties or damages if we cannot complete a project in accordance with the contract schedule. In certain cases, we may be required to pay back to a customer all or a portion of the contract price as well as potential damages (which may significantly exceed the contract price), if we fail to meet contractual obligations.

We operate in very competitive markets and could be adversely affected if we fail to keep pace with technological changes.

We operate in very competitive markets where we regularly need to innovate and develop products, systems, services and solutions that address the business challenges and needs of our customers. The nature of these challenges varies across the geographic markets and product areas that we serve. The markets for our products and services are characterized by evolving industry standards (particularly for our automation technology products and systems), which may require us to modify our products and systems. When power transmission and distribution providers are privatized, their need typically increases for timely power product and solution innovations that improve efficiency and allow them to compete in a deregulated environment. Additionally, the continual development of advanced technologies for new products and product enhancements is an important way in which we maintain acceptable pricing levels. If we fail to keep pace with technological changes in the industrial sectors that we serve, we may experience price erosion and lower margins.

Our primary competitors are sophisticated companies with significant resources that may develop products and services that are superior to our products and services or may adapt more quickly than we do to new technologies, industry changes or evolving customer requirements. We are also facing increased competition from low cost competitors in emerging markets, which may give rise to increased pressure to reduce our prices. Our failure to anticipate or respond quickly to technological developments or customer requirements could adversely affect our business, results of operations, financial condition and liquidity.

Our multi‑national operations expose us to the risk of fluctuations in currency exchange rates.

Currency exchange rate fluctuations have had, and could continue to have, a material impact on our operating results, the comparability of our results between periods, the value of assets or liabilities as recorded on our Consolidated Balance Sheet and the price of our securities. Volatility in exchange rates makes it harder to predict exchange rates and perform accurate financial planning. Changes in exchange rates can unpredictably and adversely affect our consolidated operating results and could result in exchange losses.

Currency Translation Risk.  The results of operations and financial position of most of our non‑U.S. companies are initially recorded in the currency of the country in which each such company resides, which we call “local currency”. That financial information is then translated into U.S. dollars at the applicable exchange rates for inclusion in our Consolidated Financial Statements. The exchange rates between local currencies and the U.S. dollar can fluctuate substantially, which could have a significant translation effect on our reported consolidated results of operations and financial position.

Increases and decreases in the value of the U.S. dollar versus local currencies will affect the reported value of our local currency assets, liabilities, revenues and costs in our Consolidated Financial Statements, even if the value of these items has not changed in local currency terms. These translations could significantly and adversely affect our results of operations and financial position from period to period.

Currency Transaction Risk.  Currency risk exposure also affects our operations when our sales are denominated in currencies that are different from those in which our manufacturing or sourcing costs are incurred. In this case, if, after the parties agree on a price, the value of the currency in which the price is to be paid were to weaken relative to the currency in which we incur manufacturing or sourcing costs, there would be a negative impact on the profit margin for any such transaction. This transaction risk may exist regardless of whether there is also a currency translation risk as described above.

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Currency exchange rate fluctuations in those currencies in which we incur our principal manufacturing expenses or sourcing costs may adversely affect our ability to compete with companies whose costs are incurred in other currencies. If our principal expense currencies appreciate in value against such other currencies, our competitive position may be weakened.

Our hedging activities may not protect us against the consequences of significant fluctuations in exchange rates, interest rates or commodity prices on our earnings and cash flows.

Our policy is to hedge material currency exposures by entering into offsetting transactions with third‑party financial institutions. Given the effective horizons of our risk management activities and the anticipatory nature of the exposures intended to be hedged, there can be no assurance that our currency hedging activities will fully offset the adverse financial impact resulting from unfavorable movements in foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to a hedging instrument may not coincide with the timing of gains and losses related to the underlying economic exposures.

As a resource‑intensive operation, we are exposed to a variety of market and asset risks, including the effects of changes in commodity prices and interest rates. We monitor and manage these exposures as an integral part of our overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on our business. As part of our effort to manage these exposures, we may enter into commodity price and interest rate hedging arrangements. Nevertheless, changes in commodity prices and interest rates cannot always be predicted or hedged.

If we are unable to successfully manage the risk of changes in exchange rates, interest rates or commodity prices or if our hedging counterparties are unable to perform their obligations under our hedging agreements with them, then changes in these rates and prices could have an adverse effect on our financial condition and results of operations.

Increases in costs or limitation of supplies of raw materials may adversely affect our financial performance.

We purchase large amounts of commodity‑based raw materials, including steel, copper, aluminum and oil. Prevailing prices for such commodities are subject to fluctuations due to changes in supply and demand and a variety of additional factors beyond our control, such as global political and economic conditions. Historically, prices for some of these raw materials have been volatile and unpredictable, and such volatility is expected to continue. Therefore, commodity price changes may result in unexpected increases in raw material costs, and we may be unable to increase our prices to offset these increased costs without suffering reduced volumes, revenues or operating income. We do not fully hedge against changes in commodity prices and our hedging procedures may not work as planned.

We depend on third parties to supply raw materials and other components and may not be able to obtain sufficient quantities of these materials and components, which could limit our ability to manufacture products on a timely basis and could harm our profitability. For some raw materials and components, we rely on a single supplier or a small number of suppliers. If one of these suppliers were unable to provide us with a raw material or component we need, our ability to manufacture some of our products could be adversely affected until we are able to establish a new supply arrangement. We may be unable to find a sufficient alternative supply channel in a reasonable time period or on commercially reasonable terms, if at all. If our suppliers are unable to deliver sufficient quantities of materials on a timely basis, the manufacture and sale of our products may be disrupted, we may be required to assume liability under our agreements with customers and our sales and profitability could be materially adversely affected.

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An inability to protect our intellectual property rights could adversely affect our business.

Our intellectual property rights are fundamental to all of our businesses. We generate, maintain, utilize and enforce a substantial portfolio of trademarks, trade dress, patents and other intellectual property rights globally. Intellectual property protection is subject to applicable laws in various local jurisdictions where interpretations and protections vary or can be unpredictable and costly to enforce. We use our intellectual property rights to protect the goodwill of our products, promote our product recognition, protect our proprietary technology and development activities, enhance our competitiveness and otherwise support our business goals and objectives. However, there can be no assurance that the steps we take to obtain, maintain and protect our intellectual property rights will be adequate. Our intellectual property rights may fail to provide us with significant competitive advantages, particularly in foreign jurisdictions that do not have, or do not enforce, strong intellectual property rights. The weakening of protection of our trademarks, trade dress, patents and other intellectual property rights could adversely affect our business.

Industry consolidation could result in more powerful competitors and fewer customers.

Competitors in the industries in which we operate are consolidating. In particular, the automation industry is undergoing consolidation that is reducing the number but increasing the size of companies that compete with us. As our competitors consolidate, they likely will increase their market share, gain economies of scale that enhance their ability to compete with us and/or acquire additional products and technologies that could displace our product offerings.

Our customer base also is undergoing consolidation. Consolidation within our customers’ industries (such as the marine and cruise industry, the automotive, aluminum, steel, pulp and paper and pharmaceutical industries and the oil and gas industry) could affect our customers and their relationships with us. If one of our competitors’ customers acquires any of our customers, we may lose that business. Additionally, as our customers become larger and more concentrated, they could exert pricing pressure on all suppliers, including us. For example, in an industry such as power transmission, which historically has consisted of large and concentrated customers such as utilities, price competition has become a factor in determining which products and services will be selected by a customer. If we were to lose market share or customers or face pricing pressure due to consolidation of our customers, our results of operations and financial condition could be adversely affected.

We are subject to environmental laws and regulations in the countries in which we operate. We incur costs to comply with such regulations, and our ongoing operations may expose us to environmental liabilities.

Our operations are subject to U.S., European and other laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Our manufacturing facilities use and produce paint residues, solvents, metals, oils and related residues. We use petroleum‑based insulation in transformers, polyvinylchloride (PVC) resin to manufacture PVC cable and chloroparaffin as a flame retardant. We have manufactured and sold, and we are using in some of our factories, certain types of transformers and capacitors containing polychlorinated biphenyls (PCBs). These are considered to be hazardous substances in many jurisdictions in which we operate. We may be subject to substantial liabilities for environmental contamination arising from the use of such substances. All of our manufacturing operations are subject to ongoing compliance costs in respect of environmental matters and the associated capital expenditure requirements.

In addition, we may be subject to significant fines and penalties if we do not comply with environmental laws and regulations, including those referred to above. Some environmental laws provide for joint and several or strict liability for remediation of releases of hazardous substances, which could result in us incurring a liability for environmental damage without regard to our negligence or fault. Such laws and regulations could expose us to liability arising out of the conduct of operations or conditions caused by others, or for our acts which were in compliance with all applicable laws at the time the acts were performed. Additionally, we may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. Changes in the environmental laws and regulations, or claims for damages to persons, property, natural resources or the environment, could result in substantial costs and liabilities to us.

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We may be the subject of product liability claims.

We may be required to pay for losses or injuries purportedly caused by the design, manufacture or operation of our products and systems. Additionally, we may be subject to product liability claims for the improper installation of products and systems designed and manufactured by others.

Product liability claims brought against us may be based in tort or in contract, and typically involve claims seeking compensation for personal injury or property damage. Claims brought by commercial businesses are often made also for financial losses arising from interruption to operations. Depending on the nature and application of many of the products we manufacture, a defect or alleged defect in one of these products could have serious consequences. For example:

          If the products produced by our power technology divisions are defective, there is a risk of fire, explosions and power surges, and significant damage to electricity generating, transmission and distribution facilities as well as electrical shock causing injury or death.

          If the products produced by our automation technology divisions are defective, our customers could suffer significant damage to facilities and equipment that rely on these products and systems to properly monitor and control their manufacturing processes. Additionally, people could be exposed to electrical shock and/or other harm causing injury or death.

          If any of our products contain hazardous substances, then there is a risk that such products or substances could cause injury or death.

          If any of our protective products were to fail to function properly, there is a risk that such failure could cause injury or death.

If we were to incur a very large product liability claim, our insurance protection might not be adequate or sufficient to cover such a claim in terms of paying any awards or settlements, and/or paying for our defense costs. Further, some claims may be outside the scope of our insurance coverage. If a litigant were successful against us, a lack or insufficiency of insurance coverage could result in an adverse effect on our business, financial condition, results of operations and liquidity. Additionally, a well‑publicized actual or perceived issue relating to us or our products could adversely affect our market reputation, which could result in a decline in demand for our products and reduce the trading price of our shares. Furthermore, if we were required or we otherwise determined to make a product recall, the costs could be significant.

The uncertainties surrounding the United Kingdom’s future relationship with the European Union may have a negative effect on global economic conditions, financial markets and our business.

The United Kingdom has formally initiated the process to withdraw from the European Union and continues to negotiate the terms of such departure. This has had and may continue to have a material effect on global economic conditions and the stability of global financial markets. Lack of clarity about future United Kingdom laws and regulations, potentially divergent national laws, the possibility of increased regulatory complexities, or future developments in the European Union could depress economic activity, reduce demand for our products and services, restrict our access to capital, and diminish or eliminate barrier‑free access between the United Kingdom and other European Union member states or among the European economic area overall. Furthermore, discussions between the United Kingdom and the European Union may influence discussions on open trade and political matters between Switzerland and the European Union. Any of these factors could have an adverse effect on our business, financial condition and results of operations.

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We may encounter difficulty in managing our business due to the global nature of our operations.

We operate in approximately 100 countries around the world and, as of December 31, 2018, employed about 147,000 people, of which approximately 47 percent were located in the Europe region, approximately 29 percent in the Asia, Middle East and Africa region and approximately 24 percent in the Americas region. To manage our day‑to‑day operations, we must deal with cultural and language barriers and assimilate different business practices. Due to our global nature, we deal with a range of legal and regulatory systems some of which are less developed and less well‑enforced than others. This may impact our ability to protect our contractual, intellectual property and other legal rights. In addition, we are required to create compensation programs, employment policies and other administrative programs that comply with the laws of multiple countries. We also must communicate, monitor and uphold group‑wide standards and directives across our global network, including in relation to our suppliers, subcontractors and other relevant stakeholders. Our failure to manage successfully our geographically diverse operations could impair our ability to react quickly to changing business and market conditions and to enforce compliance with group‑wide standards and procedures.

If we are unable to obtain performance and other guarantees from financial institutions, we may be prevented from bidding on, or obtaining, some contracts, or our costs with respect to such contracts could be higher.

In the normal course of our business and in accordance with industry practice, we provide a number of guarantees including bid bonds, advance payment bonds or guarantees, performance bonds or guarantees and warranty bonds or guarantees, which guarantee our own performance. These guarantees may include guarantees that a project will be completed on time or that a project or particular equipment will achieve defined other performance criteria. If we fail to satisfy any defined criteria, we may be required to make payments in cash or in kind. Performance guarantees frequently are requested in relation to large projects in our power and automation businesses.

Some customers require that performance guarantees be issued by a financial institution. In considering whether to issue a guarantee on our behalf, financial institutions consider our credit ratings. In addition, the global financial crisis has made it more difficult and expensive to obtain these guarantees. If, in the future, we cannot obtain such a guarantee from a financial institution on commercially reasonable terms or at all, we could be prevented from bidding on, or obtaining, some contracts, or our costs with respect to such contracts could be higher, which would reduce the profitability of the contracts. If we cannot obtain guarantees on commercially reasonable terms or at all from financial institutions in the future, there could be a material impact on our business, financial condition, results of operations or liquidity.

Examinations by tax authorities and changes in tax regulations could result in lower earnings and cash flows.

We operate in approximately 100 countries and therefore are subject to different tax regulations. Changes in tax law could result in higher tax expense and payments. Furthermore, this could materially impact our tax receivables and liabilities as well as deferred tax assets and deferred tax liabilities. In addition, the uncertainty of tax environment in some regions could limit our ability to enforce our rights. As a globally operating organization, we conduct business in countries subject to complex tax rules, which may be interpreted in different ways. Future interpretations or developments of tax regimes may affect our tax liability, return on investments and business operations. We are regularly examined by tax authorities in various jurisdictions. An adverse decision by a tax authority could cause a material adverse effect on our business, financial condition and results of operations.

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The recent comprehensive tax reform in the United States could adversely affect our financial condition and results of operations.

The United States enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base) and (iv) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with the latter taxed at a lower rate. We are in the process of finalizing our assessment of the overall impact of the comprehensive tax legislation on our business and financial condition and it is possible that our profitability and our business may be adversely affected as a result of the U.S. tax law changes made by this legislation.

If we are unable to attract and retain qualified management and personnel then our business may be adversely affected.

Our success depends in part on our continued ability to hire, assimilate and retain highly qualified personnel, particularly our senior management team and key employees. Competition for highly qualified management and technical personnel remains intense in the industries and regions in which we operate. If we are unable to attract and retain members of our senior management team and key employees, including in connection with our ongoing organizational transformation, this could have an adverse effect on our business.

Our business strategy may include making strategic divestitures. There can be no assurance that any divestitures will provide business benefit.

Our strategy includes divesting certain non‑core businesses. The divestiture of an existing business could reduce our future profits and operating cash flows and make our financial results more volatile. We may not find suitable purchasers for our non‑core businesses and may continue to pay operating costs associated with these businesses. Failed attempts to divest non‑core businesses may distract management’s attention from other business activities, erode employee morale and customers’ confidence, and harm our business. A divestiture could also cause a decline in the price of our shares and increased reliance on other elements of our core business operations. In December 2018 we announced the sale of our power grids business into a minority-owned joint venture. The transaction may not obtain all relevant approvals or may face other issues that could delay or prevent the closing of the transaction. If we do not successfully manage the risks associated with a divestiture, our business, financial condition, and results of operations could be adversely affected.

Anticipated benefits of existing and potential future mergers, acquisitions, joint ventures or strategic alliances may not be realized.

As part of our overall strategy, we may, from time to time, acquire businesses or interests in businesses, including noncontrolling interests, or form joint ventures or create strategic alliances. Whether we realize the anticipated benefits from these transactions, including our recent acquisition of General Electric Company’s Industrial Solutions business, depends, in part, upon the integration between the businesses involved, the performance and development of the underlying products, capabilities or technologies, our correct assessment of assumed liabilities and the management of the operations in question. Accordingly, our financial results could be adversely affected by unanticipated performance and liability issues, transaction‑related charges, amortization related to intangibles, charges for impairment of long‑term assets and partner performance.

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Increased information technology (IT) security threats and more sophisticated cyber‑attacks could pose a risk to our systems, networks, products, solutions and services.

We have observed a global increase in IT security threats and more sophisticated cyber‑attacks, both in general and against us, which pose a risk to the security of systems and networks and the confidentiality, availability and integrity of data stored and transmitted on those systems and networks. While we attempt to mitigate these risks through a number of measures, including employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems such as firewalls and virus scanners, our systems, networks, products, solutions and services remain potentially vulnerable to attacks. Similarly, we have observed a continued increase in attacks generally against industrial control systems as well as against our customers and the systems we supplied to them, which pose a risk to the security of those systems and networks. Depending on their nature and scope, such attacks could potentially lead to the compromising of confidential information, improper use of our systems and networks or those we supplied to our customers, manipulation, corruption and destruction of data, defective products or services, production downtimes and supply shortages, any of which in turn could adversely affect our reputation, competitiveness and results of operations.

Failure to comply with evolving data privacy and data protection laws and regulations or to otherwise protect personal data, may adversely impact our business and financial results.

We are subject to many rapidly evolving privacy and data protection laws and regulations in Europe and around the world.  This requires us to operate in a complex environment where there are significant constraints on how we can process personal data across our business. The European General Data Protection Regulation (the GDPR), which became effective in May 2018, has established stringent data protection requirements for companies doing business in or handling personal data of individuals in the European Union. The GDPR imposes obligations on data controllers and processors including the requirement to maintain a record of their data processing and to implement policies and procedures as part of their mandated privacy governance framework. Breaches of the GDPR could result in substantial fines, which in some cases could be up to four percent of our worldwide revenue. In addition, a breach of the GDPR or other data privacy or data protection laws or regulations could result in regulatory investigations, reputational damage, orders to cease/change our use of data, enforcement notices, as well potential civil claims including class action type litigation. We have invested, and continue to invest, human and technology resources in our data privacy and data protection compliance efforts. Despite such efforts, there is a risk that we may be subject to fines and penalties, litigation and reputational harm if we fail to properly process or protect the data or privacy of third parties or comply with the GDPR or other applicable data privacy and data protection regimes.

We have identified a material weakness in our internal control over financial reporting that could, if not remediated, result in material inaccuracies in our consolidated financial statements and adversely affect our business and results of operations.

As described in “Item 15. Controls and Procedures,” we have concluded that our internal control over financial reporting was ineffective as of December 31, 2018, due to a material weakness in information technology general controls (ITGC), which resulted from a failure to select, develop, and monitor control activities in ITGC, specifically the user access and segregation of duties controls in certain applications in North America as well as for select Group applications. We did not maintain sufficient controls over user access to applications including managing validity of access and segregation of duties. As a result of the deficiencies identified, the process level controls dependent on the effected applications, could not be relied upon.

We are currently working to remediate the material weakness. We cannot be certain that the measures we have taken, and expect to take, will be sufficient to address the deficiencies identified or ensure that our internal control over financial reporting is effective. Moreover, other material weaknesses or deficiencies may develop or be identified in the future. If we are not able to remediate the deficiencies identified and strengthen our internal control over financial reporting, or in the event of any future material weakness, then there may be material inaccuracies in our consolidated financial statements and our business and results of operations may be materially adversely affected.

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There is no guarantee that our ongoing efforts to reduce costs will be successful.

We seek continued cost savings through operational excellence and supply chain management. We are also seeking cost savings in connection with our ongoing organizational transformation, including the elimination of our regional/country matrix structure. Lowering our cost base is important for our business and future competitiveness. However, there is no guarantee that we will achieve this goal. If we are unsuccessful and the shortfall is significant, there could be an adverse effect on our business, financial condition, and results of operations.

We could be affected by future laws or regulations enacted to address climate change concerns as well as the physical effects of climate change.

Existing or pending laws and regulations intended to address climate change concerns could materially affect us in the future. We have incurred, and may need to incur additional costs to comply with these laws and regulations. We could also be affected indirectly by increased prices for goods or services provided to us by companies that are directly affected by these laws and regulations and pass their increased costs through to their customers. At this time, we cannot estimate what impact such costs may have on our business, results of operations or financial condition. We could also be affected by the physical consequences of climate change itself, although we cannot estimate what impact those consequences might have on our business or operations.

 

Item 4.  Information on the Company

INTRODUCTION

About ABB

ABB is a pioneering technology leader in power grids, electrification products, industrial automation and robotics and motion, serving customers in utilities, industry and transport & infrastructure globally. Continuing a history of innovation spanning more than 130 years, ABB today is writing the future of industrial digitalization with two clear value propositions: bringing electricity from any power plant to any plug and automating industries from natural resources to finished products. ABB has approximately 147,000 employees.

Our business is international in scope and we generate revenues in numerous currencies. We operate in approximately 100 countries across three regions: Europe, the Americas, and Asia, Middle East and Africa (AMEA). We are headquartered in Zurich, Switzerland.

We manage our business based on a divisional structure, comprising Electrification Products, Industrial Automation and Robotics and Motion. For a breakdown of our consolidated revenues (i) by operating division (ii) by geographic region (iii) by end-customer markets and (iv) by product type, see “Item 5. Operating and Financial Review and Prospects—Analysis of Results of Operations—Revenues”. We also operate our Power Grids business, which is reported as discontinued operations in the Consolidated Financial Statements (see “Discontinued operations” section below).

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 Holdings Inc., located at 12040 Regency Parkway, Suite 200, Cary, North Carolina 27518. Our internet address is www.abb.com. The United States Securities and Exchange Commission (SEC) maintains a website at www.sec.gov which contains in electronic form each of the reports and other information that we have filed electronically with the SEC.

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History of the ABB Group

The ABB Group was formed in 1988 through a merger between Asea AB and BBC Brown Boveri AG. Initially founded in 1883, Asea AB was a major participant in the introduction of electricity into Swedish homes and businesses and in the development of Sweden’s railway network. In the 1940s and 1950s, Asea AB expanded into the power, mining and steel industries. Brown Boveri and Cie. (later renamed BBC Brown Boveri AG) was formed in Switzerland in 1891 and initially specialized in power generation and turbines. In the early to mid‑1900s, it expanded its operations throughout Europe and broadened its business operations to include a wide range of electrical engineering activities.

In January 1988, Asea AB and BBC Brown Boveri AG each contributed almost all of their businesses to the newly formed ABB Asea Brown Boveri Ltd, of which they each owned 50 percent. In 1996, Asea AB was renamed ABB AB and BBC Brown Boveri AG was renamed ABB AG. In February 1999, the ABB Group announced a group reconfiguration 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. 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).

  

 

DIVISIONS

Our markets

As a pioneering technology leader serving the utilities, industry, and transport & infrastructure markets, ABB is at the heart of the Energy and Fourth Industrial Revolutions. The Energy Revolution encompasses a shift toward low carbon energy generation, including a dramatic increase in wind and solar generation capacity; a major shift toward distributed generation as opposed to centralized generation systems, whereby consumers also become producers, or prosumers, of energy; and finally the introduction of smart grids that will enable more efficient use of energy. The number of feed‑in points from solar and wind is expected to continue to multiply, and transmissions are increasingly covering longer distances. At the same time, electricity demand is anticipated to rise, due to the accelerating take‑up of electric vehicles (EVs) and significant increases in data storage needs. As a result, electrical systems are expected to require new equipment, technology and smart solutions to ensure that electricity supply remains reliable and secure.

In addition to the shifts in the energy market, digitalization is driving the Fourth Industrial Revolution and touches upon all our customer segments, creating sizeable new market opportunities. More than 55 percent of ABB products are already digitalized and offer connectivity. With the end‑markets ABB serves still at an early stage of digitalization, including automotive, food and beverage, rail, buildings, oil and gas, chemicals, marine, utilities, and other discrete markets, ABB expects the demand for connected devices from the company’s existing customer base to grow significantly in the coming years.

ABB Ability™ is the company’s unified, cross‑industry digital portfolio, extending from device to edge to cloud on an open architecture platform. ABB Ability™ provides over 210 solutions utilizing latest software technologies, including artificial intelligence, to improve productivity, security, safety and reliability, ultimately unlocking value for customers. ABB Ability™ solutions cover the entire life‑cycle of assets, from planning and building to performance management. ABB Ability™ is a globally recognized market leader for control systems for process industries and for utility and mining‑related asset management software. ABB also has a leading offering in connected services, for example remote monitoring services for robots, motors and machinery and remote control solutions for buildings, EV charging networks and offshore platforms. Some of the more specialized offerings address energy management for data centers and navigation optimization and automation for maritime shipping fleets.

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Utilities Market

ABB focuses on delivering solutions that match the changing needs of utility customers with a complete offering for transmission and distribution. The Energy Revolution opens up numerous opportunities, and more than 30 percent of the market ABB operates in are high‑growth segments within the sector, such as grid automation, high‑voltage direct current (HVDC), software, grid control systems and micro‑grids. Generation, transmission and distribution are being unbundled, long‑standing monopolies now have competitors and new entrants (e.g. pension funds, insurance funds, project developers) are investing in the sector. Many traditional utilities have reinvented themselves; some now focus purely on renewables, others on providing additional energy services to the consumers they serve.

Utilities continued to make selective investments in 2018, adding new capacity in emerging markets, upgrading aging power infrastructure in mature markets and integrating new renewable energy capacity globally. They are also investing in automation and control solutions to enhance the stability of the grid and thus demand for services, including ABB Ability™ solutions, gained traction during the year.

ABB won orders in several key geographies, including Australia and New Zealand, to upgrade the control and protection system of existing HVDC links with advanced digitalization technologies. In addition, ABB was awarded multiple orders for ABB Ability™ digital substations, for example, to upgrade the world’s largest substation in Belarus. A significant framework agreement for grid integration and automation solutions was also won from Ørsted, the Danish power company currently installing the world’s largest offshore wind farm in the United Kingdom’s North Sea.

Industry Market

ABB serves production facilities and factories all around the world from process to discrete industries with a comprehensive automation portfolio including robotics. Industry customers are diverse in nature and may be publicly traded or privately held companies. Automation and digitalized solutions that achieve improved safety, uptime, energy efficiency and productivity are the intended hallmarks of ABB’s offerings in this customer segment. The need for cutting‑edge solutions to improve industrial performance continued to be an important demand driver for industry in 2018.

Investments in 2018 in robotics and machinery automation solutions from the automotive sector, notably for new EV manufacturing lines, from the food and beverage sector and other industries remained positive. Process industries, especially oil and gas, invested more in 2018 than in the prior year, although investments remained selective and concentrated on service and productivity improvements.

In robotics specifically, ABB’s customer markets are successfully expanding into new market areas, for example, the logistics sector and small and medium size enterprises, particularly in the AMEA region.

Transport & Infrastructure Market

ABB’s expertise provides efficient and reliable solutions for transport & infrastructure customers. We believe our offerings are key to transport customers that are focused on energy efficiency and reduced operating costs. Other major growth drivers for this customer segment are urbanization, the move to electrify transportation, and growth in data centers.

Demand in transport and infrastructure markets was solid in 2018. Demand for building automation solutions as well as solutions involving energy efficiency continued, while activity for specialty vessels, particularly cruise ships, was strong over the period. In rail, ABB won orders worth over $100 million from Swiss train manufacturer Stadler to supply traction equipment for more than 160 trains serving urban, regional and long distance routes in Europe and the United States. Demand for hyper‑scale data center solutions was strong during 2018, especially from U.S. and European based customers.

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The development of EV charging markets accelerated sharply during 2018. ABB received multiple orders from customers in several countries across Europe and North America for EV charging infrastructure, including for the company’s newest high voltage direct current (DC) fast‑charging station, the Terra HP. ABB now has more than 6,500 DC fast‑charging stations installed in 60 countries.

As a pioneering technology leader, we serve utilities, industry and transport & infrastructure customers through our business divisions. These markets and our divisions are discussed in more detail below. Revenue figures presented in this Divisions section are before interdivisional eliminations.

  

 

Electrification Products division

Overview

The Electrification Products division provides products, services and connected solutions throughout the electrical value chain from the substation to the point of consumption across the world. The innovations from this business enable safer and more reliable electricity flow, with a full range of low- and medium-voltage products and solutions for intelligent protection and connection as well as pre-engineered packaged services and solutions tailored to customers’ needs. The portfolio includes modular substation packages, distribution automation products, switchgear, circuit breakers, measuring and sensing devices, control products, solar power solutions, EV charging infrastructure, wiring accessories, and enclosures and cabling systems, including KNX systems (the recognized global standard for home and building control) and data communication networks.

The division delivers products to customers through a global network of channel partners and end-customers. Most of the division’s revenue is derived from sales through distributors, original equipment manufacturers (OEMs), engineering, procurement, construction (EPC) contracting companies, system integrators, utilities and panel builders, with some direct sales to end users (utilities, customers in industries, transport & infrastructure segments) and to other ABB divisions.

The Electrification Products division had approximately 55,100 employees on December 31, 2018, and generated $11.7 billion of revenues in 2018.

On June 30, 2018, ABB acquired General Electric Industrial Solutions (GEIS). The integration of GEIS into the Electrification Products division commenced during the second half of 2018.

Customers

The Electrification Products division serves a wide range of customers, including buildings, data centers, rail, wind and solar, distribution utilities, food and beverage, marine, oil and gas, and e-mobility.

Products and Services

The Protection and Connection business offers low-voltage system orientated products that protect, control and connect people, plants and systems. ABB offers solutions to restore power rapidly in case of a fault and helps provide optimum protection for people and electrical installations. The product offering includes molded‑case and air-circuit breakers, safety switches used for power distribution in factories and buildings, switchgear systems for short circuit and overload protection as well as cabling and connection components. It also offers power protection solutions such as uninterruptible power supply (UPS) solutions, status transfer switches and power distribution units. In addition, the business offers a range of contactors, proximity sensors, safety products for industrial protection, limit switches, along with electronic relays and overload relays.

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The Building Products business provides low-voltage smart home and intelligent building control systems, including voice activated KNX systems to optimize efficiency, safety and comfort through the automated management of lighting, shutters and security. In addition, the business supplies conventional wiring accessories, industrial plugs and sockets, DIN-rail products, and enclosures ideal for single family homes, multiple dwellings, commercial buildings, infrastructure and industrial applications, including electric vehicle charging infrastructure from AC wall boxes through to DC fast charging stations and on-demand electric bus charging systems.

The Installation Products business offers products for low-voltage wire and cable management, making the task of fastening, protecting, insulating and connecting wires easier and quicker for industrial applications, construction, communications, utility and OEM professionals, as well as do-it-yourself specialists. The business offers emergency lighting and lighting for explosive environments, as well as lightning protection and earth grounding apparatus.

The Distribution Solutions business helps utility, industry and transport & infrastructure customers to improve power quality and control, reduce outage time and enhance operational reliability and efficiency. The business offers products and services that largely serve the power distribution sector, often providing the requisite medium-voltage link between high‑voltage transmission systems and low‑voltage users. Its comprehensive offering includes medium‑voltage equipment (1 to 66 kilovolts), indoor and outdoor circuit breakers, reclosers, fuses, contactors, relays, instrument transformers, sensors, motor control centers, ring main units for primary and secondary distribution, as well as a range of air‑ and gas‑insulated switchgear. It also produces indoor and outdoor modular systems and other solutions to facilitate efficient and reliable power distribution, adding value through design, engineering, project management and service. The service offering spans the entire value chain, from the moment a customer makes the first inquiry to disposal and recycling of the product. Throughout the value chain, ABB provides training, technical support and customized contracts. All of this is supported by an extensive global sales and service network.  

The Solar business offers an extensive range of solar inverters for residential, commercial and utility applications designed to optimize the performance, reliability and return on investment of any solar installation. It also offers solar packages with integrated energy storage solutions, utility-scale turnkey solutions and microgrid solutions.

The new Industrial Solutions business includes the acquired GEIS business and offers product solutions, such as switchboards, panelboards, UPS and arc prevention technologies and engineered solutions, such as modular, cost‑saving medium‑voltage switchgear, motor control centers, vacuum circuit breakers, arc‑resistant switchgear for industrial applications and industry leading telecom DC power.

Sales and Marketing

Sales are primarily made through indirect sales channels such as distributors to end customers including installers and system integrators. Direct customers range from electrical installers to large utilities, industrial end‑users, customers transport & infrastructure segments, as well as other ABB divisions. The proportion of direct sales compared to channel partner sales varies among the different industries, product technologies and geographic markets. The business is focused on creating demand to support its channel sales, with a range of promotional activities and support services including configuration and digital solutions.

Competition

The Electrification Products division’s principal competitors vary by product line and include Eaton, Legrand, Schneider Electric, Siemens, Hubbell, Rittal and Chint.

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Capital Expenditures

The Electrification Products division’s capital expenditures for property, plant and equipment totaled $244 million in 2018, compared to $218 million and $215 million in 2017 and 2016, respectively. Investments in 2018 were primarily related to footprint changes, equipment replacement and upgrades. Geographically, in 2018, Europe represented 49 percent of the capital expenditures, followed by the Americas (36 percent) and AMEA (15 percent).

  

 

Industrial Automation division

Overview

The Industrial Automation division offers customers solutions that are designed to optimize the productivity, energy efficiency and safety of their industrial processes and operations by combining the division’s integrated control products, systems and service offerings with deep domain knowledge and expertise of each end market. Solutions include turnkey engineering, control systems, Human Machine Interfaces (HMI) and integrated safety technology, measurement products, lifecycle services, outsourced maintenance and industry-specific products such as electric propulsion for ships, Azipods, mine hoists, turbochargers and pulp and paper quality control equipment. The systems can link various processes and information flows allowing customers to manage their entire manufacturing and business process based on real-time facility or plant information. Additionally, the systems allow customers to increase production efficiency, optimize their assets and reduce environmental impact.

The Industrial Automation division offerings are available as separately sold products or as part of a total automation, electrification and/or instrumentation system. In this event, products and solutions from the Robotics and Motion and Electrification Products divisions are channeled through the Industrial Automation division. The division’s technologies are sold primarily through direct sales forces as well as third-party channels.

The division had approximately 25,700 employees as of December 31, 2018, and generated revenues of $7.4 billion in 2018.

Customers

The Industrial Automation division’s end customers include companies in the oil and gas, minerals and mining, metals, pulp and paper, chemicals, plastics, pharmaceuticals, food and beverage, power generation and maritime industries. These customers are looking for digitalized and automated offerings, instrumentation, and electrification solutions that deliver value mainly through lower capital costs, increased plant availability, lower life-cycle costs and reduced project costs.

Products and Services

Oil, gas and chemicals solutions cover the entire hydrocarbon value chain, from exploration and production to supply, transport and distribution, as well as refining, chemicals and petrochemicals. ABB specializes in mastering the control loop and transforming client operations through actionable insights that optimize performance in real time. From the well head to the refinery, ABB Ability™ solutions connect people with data to optimize performance, improve reliability, enhance efficiency and minimize environmental impact from project start-up throughout the entire plant life-cycle.

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Other process industry markets served include mining, minerals processing, metals, pharmaceuticals and pulp and paper as well as their associated service industries. The business’ added value is deep industry expertise coupled with the ability to integrate both automation and electronics, resulting in faster start-up times, increased plant productivity and reduced overall capital and operating costs for customers. For mining, metals and cement industries, solutions include specialized products and services, as well as total production systems. The business designs, plans, engineers, supplies, erects and commissions 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 applications and cement production. In the pharmaceuticals and fine chemicals areas, the business offers applications to support manufacturing, packaging, quality control and compliance with regulatory agencies. The offering for the pulp and paper industries includes quality control systems, control systems, drive systems, on-line sensors, actuators and field instruments.

ABB serves the power generation market with leading automation solutions for all types of power generation. With an offering that includes instrumentation, excitation and control systems, ABB technologies help optimize performance, improve reliability, enhance efficiency and minimize environmental impact throughout the plant life cycle. The business also serves the water industry, including applications such as pumping stations and desalination plants.

ABB serves the marine and ports business through its leading solutions for specialty vessels, container and bulk cargo handling. For the shipping industry, ABB offers an extensive portfolio of integrated marine systems and solutions that improve the flexibility, reliability and energy efficiency of vessels. By coupling power, automation and marine software, proven fuel-efficient technologies and services that ensure maximum vessel uptime, ABB is in the position to improve the profitability of a customer’s business throughout the entire life cycle of a fleet. ABB designs, engineers, builds, supplies and commissions automation and electrical systems for marine power generation, power distribution and electric propulsion, as well as turbochargers to improve efficiency. With ABB Ability™’s Collaborative Operations Centers around the world and marine software solutions, owners and operators can run their fleets at lower fuel and maintenance cost, while improving crew, passenger, and cargo safety and overall productivity of their operations. In addition, ABB delivers automation and electrical systems for container and bulk cargo handling, from ship to gate. These systems and services help terminal operators meet the challenge of larger ships, taller cranes and bigger volumes per call, and make terminal operations safer, greener and more productive.

ABB serves the hybrid and discrete market, focusing primarily on plastics, food and beverage, packaging and data centers. ABB combines state-of-the-art technology with advanced engineering to provide a wide range of customers with complete solutions for machine and factory automation, motion control, HMI and integrated safety technology. ABB is one of the largest providers focused on product- and software-based, open-architecture solutions for machine and factory automation worldwide.

ABB offers an extensive portfolio of products and software from stand-alone basic control to integrated collaborative systems for complex or critical processes. Solutions such as Distributed Control System (DCS) 800xA, provides a scalable extended automation system for process and production control, safety, and production monitoring. Freelance, another solution, is a full-fledged, easy-to-use DCS for small to medium size applications. The Programmable Logic Controller (PLC) automation portfolio offers a scalable range for small, middle and high-end applications. Components for basic automation solutions, process and safety controllers, field interfaces, panels, process recorders and HMI are available through our Compact Product Suite offering. The product portfolio is complemented by services such as Automation Sentinel, a subscription-based life-cycle management program that provides services to maintain and continually advance and enhance ABB Ability™ control systems (e.g. cyber security patches) and thus allows it to manage a customer’s life-cycle costs. The ABB Ability™ Advanced Services offering portfolio provides individual software-based services to continuously improve automation and processes. ABB also offers Manufacturing Execution Systems that enable agility and transparency for production processes by synchronizing and orchestrating a flow across individual automation islands.

The measurement and analytics business portfolio is designed to measure product properties, such as weight, thickness, color, brightness, moisture content and additive content and includes a full line of instrumentation and analytical products to analyze, measure and record industrial and power processes. Actuators allow the customer to make automatic adjustments during the production process to improve the quality and consistency of the product. Field instruments measure properties of the process, such as flow rate, chemical content and temperature.

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ABB manufactures and maintains turbochargers for diesel and gas engines having power levels ranging from 500 kilowatts to over 80 megawatts. The business provides engine builders and application operators with advanced turbocharging solutions for efficient and flexible application operations and in compliance with the most stringent environmental requirements.

Sales and Marketing

The Industrial Automation division primarily uses its direct sales force as well as third-party channel partners, such as distributors, system integrators and OEMs. The majority of revenues are derived through the division’s own direct sales channels.

Competition

The Industrial Automation division’s principal competitors vary by industry or product line. Competitors include Emerson, Honeywell, Valmet, Rockwell Automation, Beckhoff Automation, Schneider Electric, Siemens, Voith, and Yokogawa Electric Corporation.

Capital Expenditures

The Industrial Automation division’s capital expenditures for property, plant and equipment totaled $104 million in 2018, compared to $71 million and $53 million in 2017 and 2016, respectively. Principal investments in 2018 were in the Machine and Factory Automation, Turbocharging and the Measurement and Analytics businesses. Geographically, in 2018, Europe represented 82 percent of the capital expenditures, followed by the Americas (10 percent) and AMEA (8 percent).

  

 

Robotics and Motion division

Overview

The Robotics and Motion division provides products, solutions and related services that increase industrial productivity and energy efficiency. Our key products such as motors, generators, drives and robotics provide power, motion and control for a wide range of automation applications.

Revenues are generated both from direct sales to end users as well as from indirect sales through distributors, machine builders, system integrators, and OEMs.

The Robotics and Motion division had approximately 27,600 employees as of December 31, 2018, and generated $9.1 billion of revenues in 2018.

Products and Services

The Robotics business offers robots, controllers, software systems, as well as complete robot automation solutions and a comprehensive range of advanced services for automotive and Tier One OEMs as well as for general industry. These provide flexibility for manufacturers to meet the challenge of making smaller lots of a larger number of specific products in shorter cycles for today’s dynamic global markets, while also improving quality, productivity and reliability. Robots are also used in activities or environments which may be hazardous to employee health and safety, such as repetitive or strenuous lifting, dusty, hot or cold rooms, or painting booths. In the automotive industry, robot products and systems are used in such areas as press shop, body shop, paint shop, power train assembly, trim and final assembly. General industry segments in which robotics solutions are used range from metal fabrication, foundry, plastics, food and beverage, chemicals and pharmaceuticals, electronics and warehouse/logistics center automation. Typical robotic applications in general industry include welding, material handling, machine tending, painting, picking, packing, palletizing and small parts assembly automation.

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The Motors and Generators business supplies a comprehensive range of electrical motors, generators, and mechanical power transmission products. The range of electrical motors includes high efficiency motors that conform to leading environmental and Minimum Energy Performance Standards (MEPS). Efficiency is an important selection criterion for customers, because electric motors account for nearly two‑thirds of the electricity consumed by industrial plants. The business unit manufactures synchronous motors for the most demanding applications and a full range of low‑ and high‑voltage induction motors, for both IEC (International Electrotechnical Commission) and NEMA (National Electrical Manufacturers Association) standards. The business unit offers digitalized asset management solutions that monitor motor performance and provide vital intelligence on key operating parameters. These products and solutions help customers improve uptime, extend motor lifetimes, and increase productivity while becoming or remaining digitally connected.

The Drives business provides low‑voltage and medium‑voltage drives and systems for industrial, commercial and residential applications. Drives provide speed, torque and motion control for equipment such as fans, pumps, compressors, conveyors, centrifuges, mixers, hoists, cranes, extruders, printing and textile machines. They are used in industries such as building automation, marine, power, transportation, food and beverage, metals, mining, and oil and gas. The business unit also supplies traction converters (propulsion converters and auxiliary converters) for the transportation industry and wind converters.

The division offers services that complement its products and solutions, including design and project management, engineering, installation, training and life cycle care, energy efficiency appraisals, preventive maintenance and digital services such as remote monitoring and software tools.

Customers

The Robotics and Motion division serves a wide range of customers. Customers include machinery manufacturers, process industries such as pulp and paper, oil and gas, and metals and mining companies, hybrid and batch manufacturers such as food and beverage companies, transportation equipment manufacturers, discrete manufacturing companies such as “3C” (computer, communication and consumer electronic), logistics, utilities as well as customers in the automotive industry.

Sales and Marketing

Sales are made both through direct sales forces as well as through third‑party channel partners, such as distributors, wholesalers, installers, machine builders and OEMs, and system integrators. The proportion of direct sales compared to channel partner sales varies among the different industries, product technologies and geographic markets.

Competition

The Robotics and Motion division’s principal competitors vary by product line but include Fanuc, Kuka Robotics, Rockwell Automation, Schneider Electric, Siemens, Yaskawa, WEG Industries, SEW-EURODRIVE and Danfoss.

Capital Expenditures

The Robotics and Motion division’s capital expenditures for property, plant and equipment totaled $123 million in 2018, compared to $118 million and $112 million in 2017 and 2016, respectively. Principal investments in 2018 were primarily related to equipment replacement, footprint adjustments and automation upgrades. Geographically, in 2018, Europe represented 45 percent of the capital expenditures, followed by the Americas (31 percent) and AMEA (24 percent).

  

 

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Corporate and Other

Corporate and Other includes headquarters, central research and development, real estate activities, Group Treasury Operations, Global Business Services (GBS) and other minor business activities. The remaining activities of certain EPC projects which we are completing and are in a wind down phase are also reported in Corporate and Other. In addition, we have classified the historical business activities of significant divested businesses in Corporate and Other. These include the high-voltage cables business, the EPC business for turnkey electrical AC substations and certain EPC contracts relating to the oil & gas industry.

Corporate headquarters and stewardship activities include the operations of our corporate headquarters in Zurich, Switzerland, as well as corporate‑related activities in various countries. These activities cover staff functions with group‑wide responsibilities, such as accounting and financial reporting, corporate finance and taxes, planning and controlling, internal audit, legal and integrity, compliance, risk management and insurance, corporate communications, information systems, investor relations and human resources.

Corporate research and development primarily covers our research activities, as our development activities are organized under our divisions. We have two global research laboratories, one focused on power technologies and the other focused on automation technologies, which both work on technologies relevant to the future of our business. Each laboratory works on new and emerging technologies and collaborates with universities and other external partners to support our divisions in advancing relevant technologies and in developing cross‑divisional technology platforms. We have corporate research centers in seven countries (China, India, Germany, Poland, Sweden, Switzerland and the United States).

GBS operates in several hub locations and consists of shared services in the area of accounting, human resources, information systems and supply chain management.

A significant portion of the costs for GBS and other shared corporate overhead costs are allocated to the operating divisions. Overhead and other management costs, including GBS costs, which would have been allocated to our Power Grids business, and which are not directly attributable to this business, are not allocated to the discontinued operation and are included in Corporate and Other.

Corporate and Other had approximately 5,500 employees at December 31, 2018.

  

 

DISCONTINUED OPERATIONS

The Power Grids business is reported as discontinued operations in the Consolidated Financial Statements for all years presented. See “Note 3 Changes in presentation of financial statements” to our Consolidated Financial Statements.

  

 

Power Grids Business

The Power Grids business is a global leader in power technologies and aspires to be the partner of choice for enabling a stronger, smarter and greener grid. The Power Grids business provides product, system, software and service solutions across the power value chain that are designed to meet the growing demand for electricity with minimum environmental impact. These solutions support utility, industry and transport & infrastructure customers to plan, build, operate and maintain their power infrastructure. They are designed to facilitate the safe, reliable and efficient integration, transmission and distribution of bulk and distributed energy generated from conventional and renewable sources.

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Approximately two-thirds of the revenues in the business are generated from utility customers and the remaining portion is generated from industry and transport & infrastructure customers. Power Grids has a worldwide customer base, with a wide geographic spread of revenues across the Americas, Europe and AMEA. The business also has a globally diversified and well-balanced manufacturing and engineering footprint. Direct sales account for the majority of total revenues generated by the business while external channel partners such as EPCs, wholesalers, distributors and OEMs account for the rest.

Products and Services

The Grid Automation operation is at the forefront of grid automation and digitalization. It supplies substation automation products, systems and services. It also provides Supervisory Control and Data Acquisition (SCADA) systems for transmission and distribution networks as well as a range of wireless, fiber optic and power line carrier-based telecommunication technologies for mission critical applications. The operation offers microgrid solutions that are being increasingly deployed for remote and partially grid-connected applications. Also included in this operation is ABB Ability™  Ellipse, an industry leading software solution for managing and optimizing assets, operations, logistics, financials and HR, reducing operating costs and improving productivity for customers.

The Grid Integration operation is among the world’s leading providers of transmission and distribution substations, associated life-cycle services and HVDC systems. The substations are used in utility and non‑utility applications including renewables, rail, data centers, various industries, battery energy storage and shore-to-ship power supply. The HVDC systems use Line Commutated Converter (HVDC Classic) technology or Voltage Sourced Converter (HVDC Light) technology. The Grid Integration portfolio also includes the Flexible Alternating Current Transmission Systems (FACTS) business, which comprises Static Var Compensation (SVC) and static compensator (STATCOM) technology. These systems stabilize voltages, minimize losses, and keep power quality in accordance with grid codes. The Grid Integration business’ portfolio also includes a range of high power semiconductors, a core technology for power electronics deployed in HVDC, FACTS and rail applications.

The High Voltage products operation is a global leader in high voltage switchgear up to 1200 kV AC and 1100 kV DC with a portfolio spanning air-insulated, gas-insulated and hybrid technologies. It manufactures generator circuit breakers, a key product for integrating large power plants into the grid. The portfolio also includes a broad range of capacitors and filters that facilitate power quality, instrument transformers and other substation components.

The Transformers operation supplies transformers that are an integral component found across the power value chain, enabling the efficient and safe conversion of electricity to different voltages. The product range is designed for reliability, durability and efficiency with a portfolio that includes dry- and liquid-distribution transformers, traction transformers for rail applications and special application transformers plus related components, for example, insulation kits, bushings and other transformer accessories.

The Power Grids business also has an extensive portfolio of service offerings. This is a growing focus area, leveraging the significant installed product base. The portfolio includes spare parts, condition monitoring and maintenance services, on- and off‑site repairs as well as retrofits and upgrades. Advanced software-based monitoring and advisory services are being added to the portfolio to enable digitalization of grids. ABB Ability™, the company’s unified, cross‑industry digital capability enables the business’ specific connected solutions portfolio.

 

  

 

Simplification of business model and structure

In December 2018, we announced our intention to simplify our organizational structure through the discontinuation of the existing legacy matrix, country and regional structures, including regional Executive Committee roles. Effective April 1, 2019, our new organization will provide each business with full operational ownership of products, support functions, research and development, and geographic territories. The businesses will be the single interface to customers, maximizing proximity and speed.

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Corporate activities will focus on Group strategy, portfolio and performance management, capital allocation, core technologies and the ABB Ability™ platform.

In line with the simplification, as of April 1, 2019, we will operate four customer-focused, entrepreneurial businesses: Electrification, Industrial Automation, Motion and Robotics & Discrete Automation.

  

 

CAPITAL EXPENDITURES

Total capital expenditures for property, plant and equipment and intangible assets (excluding intangibles acquired through business combinations) amounted to $772 million, $752 million and $632 million in 2018, 2017 and 2016, respectively. In 2018, 2017 and 2016, capital expenditures were 16 percent, 10 percent and 27 percent lower, respectively, than depreciation and amortization. Excluding acquisition-related amortization, capital expenditures were 20 percent, 24 percent and 1 percent higher, respectively, than depreciation and amortization.

Capital expenditures in 2018 remained at a significant level in mature markets, reflecting the geographic distribution of our existing production facilities. Capital expenditures in Europe and North America in 2018 were driven primarily by upgrades and maintenance of existing production facilities, mainly in the U.S., Finland, Italy, Sweden and Austria, including a state-of-the-art innovation and training campus in Austria, which will become one of our largest research and development centers. Capital expenditures in emerging markets were highest in China, Poland and India. Capital expenditures in emerging markets were made primarily to increase production capacity by investing in new or expanded facilities. We are planning to build an advanced, automated and flexible robotics factory in China, which is designed to combine our connected digital technologies, state-of-the-art collaborative robotics and innovative artificial intelligence research. The share of emerging markets capital expenditures as a percentage of total capital expenditures in 2018, 2017 and 2016 was 31 percent, 28 percent and 36 percent, respectively.

At December 31, 2018, construction in progress for property, plant and equipment was $464 million, mainly in the U.S., China, Sweden, Finland and Germany. At December 31, 2017, construction in progress for property, plant and equipment was $511 million, mainly in China, the U.S., Switzerland, Sweden and Germany, while at December 31, 2016, construction in progress for property, plant and equipment was $342 million, mainly in China, the U.S., Germany, Sweden and Switzerland.

Our capital expenditures relate primarily to property, plant and equipment. For 2019, we estimate the expenditures for property, plant and equipment will be higher than our annual depreciation and amortization charge, excluding acquisition-related amortization.

 

SUPPLIES AND RAW MATERIALS

We purchase a variety of supplies and products which contain raw materials for use in our production 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 businesses and key countries. Our supply chain management network consists of a number of teams, each focusing on different product categories. These category teams, on a global, divisional and/or regional level, take advantage of opportunities to leverage the scale of ABB and to optimize the efficiency of our supply networks, in a sustainable manner.

Our supply chain management organization’s activities have continued to expand in recent years, to:

          pool and leverage procurement of materials and services,

          provide transparency of ABB’s global spending through a comprehensive performance and reporting system linked to our ERP systems,

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          strengthen ABB’s supply chain network by implementing an effective product category management structure and extensive competency‑based training, and

          monitor and develop our supply base to ensure sustainability, both in terms of materials and processes used.

 

We buy many categories of products which contain steel, copper, aluminum, crude oil and other commodities. Continuing global economic growth in many emerging economies, coupled with the volatility in foreign currency exchange rates, has led to significant fluctuations in these raw material costs over the last few years. While we expect global commodity prices to remain highly volatile, we expect to offset some market volatility through the use of long‑term contracts and global sourcing.

We seek to mitigate the majority of our exposure to commodity price risk by entering into hedges. For example, we manage copper and aluminum price risk using principally swap contracts based on prices for these commodities quoted on leading exchanges. ABB’s hedging policy is designed to safeguard margins by minimizing price volatility and providing a stable cost base during order execution. In addition to using hedging to reduce our exposure to fluctuations in raw materials prices, in some cases we can reduce this risk by incorporating changes in raw materials prices into the prices of our end products (through price escalation clauses).

Overall, during 2018 supply chain management personnel in our businesses, and in the countries in which we operate, along with the global category teams, continued to focus on value chain optimization efforts in all areas, while maintaining and improving quality and delivery performance.

In August 2012, the SEC issued its final rules regarding “Conflict Minerals”, as required by section 1502 of the Dodd‑Frank Wall Street Reform and Consumer Protection Act. We initiated conflict minerals processes in 2013 and have continuously improved and tailored the processes to our value chain. We continue to work with our suppliers and customers, to enable us to comply with the rules and disclosure obligations. Further information on ABB’s Conflict Minerals policy and supplier requirements can be found under “Material Compliance” at new.abb.com/about/supplying

 

PATENTS AND TRADEMARKS

While we are not materially dependent on any one of our intellectual properties, as a technology-driven company, we believe that 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. Currently, we have approximately 30,500 patent applications and registrations, of which more than 8,800 are pending applications. In addition to these patents, we have more than 4,100 utility model and design applications and registrations, of which approximately 400 are pending applications. In 2018, we filed more than 800 patent, utility model and design applications for more than 1,700 new 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 aggressively defend our intellectual property rights to safeguard the reputation associated with the ABB technology and brand. While these intellectual property rights are fundamental to all of our businesses, there is no dependency of the business on any single patent, utility model or design application.

 

SUSTAINABILITY ACTIVITIES

Sustainability management is one of our highest business priorities. We seek to address sustainability issues in all our business operations in order to improve our social, health, safety and environmental performance continuously, and to enhance the quality of life in the communities and countries where we operate.

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Our social, health, safety and environmental efforts include:

          implementing sustainability objectives covering all relevant parts of our operations,

          joining initiatives that foster economic, environmental, social and educational development, and strengthen observance of human rights in business practice,

          making positive contributions in the communities where we operate so they welcome us and consider ABB a good neighbor, an attractive employer and a good investment,

          offering our customers eco‑efficient products that save energy and are safe to use, that optimize the use of natural resources, minimize waste and reduce environmental impact over their complete life cycles,

          applying non‑financial risk assessment to key business decision‑making processes, and to projects,

          sharing our latest technologies with emerging markets by, for example, helping customers in developing countries implement environmentally sound processes and technologies and providing environmental awareness and safety training to our business partners,

          ensuring that our operations and processes comply with applicable environmental and health and safety standards and social legislation. Specifically, every operating unit must implement an environmental management system that seeks to continuously improve its environmental performance and a health and safety management system that similarly seeks to continuously improve health and safety performance,

          ensuring that our social, health and safety and environmental policies are communicated and implemented,

          working towards achieving best practices in occupational health and safety, and ensuring the health and safety of our employees, contractors and others involved in or affected by our activities,

          ensuring that suppliers have sustainability policies and systems that are comparable with our own, and

          continuing our program to decontaminate sites that were polluted by historical manufacturing processes.

To manage environmental aspects of our own operations, we have implemented environmental management systems according to the ISO 14001 standard at our manufacturing and service sites. For non‑manufacturing sites we have implemented an adapted environmental management system in order to ensure management of environmental aspects and continual improvement of performance. Globally, operations at 397 sites and offices are covered by externally certified environmental management systems.

We have Environmental Product Declarations to communicate the environmental performance of our core products. These describe the significant environmental aspects and impacts of a product line, viewed over its complete life cycle. Declarations are based on Life Cycle Assessment studies, created according to the international standard ISO/TR 14025. Approximately 68 declarations for major product lines are published on our Web site (www.abb.com), some of which have been externally certified.

In 2018, approximately 85 percent of our employees were covered by confirmed data gathered through ABB’s formal environmental reporting system that is verified by an independent verification body. The operations of companies acquired during 2018 are not yet covered by our environmental reporting. We expect that this reporting will be implemented in 2019. The remaining parts of our business that are not yet covered by our environmental reporting system, mainly sales, have very limited environmental exposure. A total of 43 environmental incidents were reported in 2018, none of which had a material environmental impact.

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In 2018, substantially all of our employees were covered by confirmed data gathered through ABB’s formal social reporting system that is verified by an independent verification body. The remaining parts of our business that are not yet covered by our social reporting system, mainly sales offices in countries where we do not perform manufacturing, have very limited social exposure.

 

REGULATION

Our operations are subject to numerous governmental laws and regulations including those governing antitrust and competition, corruption, the environment, securities transactions and disclosures, import and export of products, currency conversions and repatriation, taxation of foreign earnings and earnings of expatriate personnel and use of local employees and suppliers.

As a reporting company under Section 12 of the Exchange Act, we are subject to the FCPA’s anti‑bribery provisions with respect to our conduct around the world.

Our operations are also subject to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The convention obliges signatories to adopt national legislation that makes it a crime to bribe foreign public officials. Those countries which have adopted implementing legislation and have ratified the convention include the U.S. and several European nations in which we have significant operations.

We conduct business in certain countries known to experience governmental corruption. While we are committed to conducting business in a legal and ethical manner, our employees or agents have taken, and in the future may take, actions that violate the U.S. FCPA, legislation promulgated pursuant to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, antitrust laws or other laws or regulations. These actions have resulted and could result in monetary or other penalties against us and could damage our reputation and, therefore, our ability to do business. For more information, see “Item 8. Financial Information—Legal Proceedings”.

The U.S. Iran Threat Reduction and Syria Human Rights Act of 2012 requires U.S. listed companies to disclose information relating to certain transactions with Iran. In 2018, certain non-U.S. subsidiaries of ABB, in accordance with applicable laws, provided electrical equipment, automation systems and on-site services to OEMs, distributors, panel builders, EPC contracting companies and other customers for Iranian business. The revenues attributable to these products and services in 2018 amounted to approximately $81 million, of which $31 million is attributable to our discontinued operations. ABB discontinued its Iranian business in 2018, except for minor work on a few long-term contracts which is being performed in line with applicable sanctions.

 

ORGANIZATIONAL STRUCTURE

ABB Ltd is the ultimate parent company of the ABB Group. Its sole shareholding is in ABB Asea Brown Boveri Ltd which directly or indirectly owns the other companies in the ABB Group. The table below both sets forth, as of December 31, 2018, the name, place of incorporation and ownership interest of the significant direct and indirect subsidiaries of ABB Ltd, Switzerland. ABB’s operational group structure is described above in the “Divisions” section of Item 4.

Company name/location

Country

ABB interest %

ABB Australia Pty Limited, Moorebank, NSW

Australia

100.00

 

ABB Group Investment Management Pty. Ltd., Moorebank, NSW

Australia

100.00

 

B&R Holding GmbH, Eggelsberg

Austria

100.00

 

B&R Industrial Automation GmbH, Eggelsberg

Austria

100.00

 

ABB Industrial Solutions (Belgium) BVBA, Gent

Belgium

100.00

 

Company name/location

Country

ABB interest %

ABB N.V., Zaventem

Belgium

100.00

 

ABB Ltda., São Paulo

Brazil

100.00

 

ABB Bulgaria EOOD, Sofia

Bulgaria

100.00

 

ABB Canada Holding Limited Partnership, Saint-Laurent, Quebec

Canada

100.00

 

ABB Inc., Saint-Laurent, Quebec

Canada

100.00

 

ABB Installation Products Ltd., Saint-Jean-sur-Richelieu, Quebec

Canada

100.00

 

ABB (China) Ltd., Beijing

China

100.00

 

ABB Beijing Drive Systems Co. Ltd., Beijing

China

90.00

 

ABB Electrical Machines Ltd., Shanghai

China

100.00

 

ABB Engineering (Shanghai) Ltd., Shanghai

China

100.00

 

ABB High Voltage Switchgear Co., Ltd. Beijing, Beijing

China

60.00

 

ABB Shanghai Free Trade Zone Industrial Co., Ltd., Shanghai

China

100.00

 

ABB Xiamen Low Voltage Equipment Co. Ltd., Xiamen

China

100.00

 

ABB Xiamen Switchgear Co. Ltd., Xiamen

China

64.30

 

ABB Xinhui Low Voltage Switchgear Co. Ltd., Xinhui

China

90.00

 

ABB s.r.o., Prague

Czech Republic

100.00

 

ABB A/S, Skovlunde

Denmark

100.00

 

ABB for Electrical Industries (ABB ARAB) S.A.E., Cairo

Egypt

100.00

 

Asea Brown Boveri S.A.E., Cairo

Egypt

100.00

 

ABB AS, Jüri

Estonia

100.00

 

ABB Oy, Helsinki

Finland

100.00

 

ABB France, Cergy Pontoise

France

99.83

 

ABB SAS, Cergy Pontoise

France

100.00

 

ABB AG, Mannheim

Germany

100.00

 

ABB Automation GmbH, Mannheim

Germany

100.00

 

ABB Automation Products GmbH, Ladenburg

Germany

100.00

 

ABB Beteiligungs- und Verwaltungsges. mbH, Mannheim

Germany

100.00

 

ABB Stotz-Kontakt GmbH, Heidelberg

Germany

100.00

 

Busch-Jaeger Elektro GmbH, Lüdenscheid

Germany

100.00

 

Industrial C&S Hungary Kft., Budapest

Hungary

100.00

 

ABB Global Industries and Services Private Limited, Bangalore

India

100.00

 

ABB India Limited, Bangalore

India

75.00

 

ABB S.p.A., Milan

Italy

100.00

 

Power-One Italy S.p.A., Terranuova Bracciolini (AR)

Italy

100.00

 

ABB K.K., Tokyo

Japan

100.00

 

ABB Ltd., Seoul

Korea, Republic of

100.00

 

ABB Electrical Control Systems S. de R.L. de C.V., Monterrey

Mexico

100.00

 

ABB Mexico S.A. de C.V., San Luis Potosi SLP

Mexico

100.00

 

Asea Brown Boveri S.A. de C.V., San Luis Potosi SLP

Mexico

100.00

 

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32 


 

Company name/location

Country

ABB interest %

ABB B.V., Rotterdam

Netherlands

100.00

 

ABB Capital B.V., Rotterdam

Netherlands

100.00

 

ABB Finance B.V., Rotterdam

Netherlands

100.00

 

ABB Holdings B.V., Rotterdam

Netherlands

100.00

 

ABB Investments B.V., Rotterdam

Netherlands

100.00

 

ABB AS, Billingstad

Norway

100.00

 

ABB Holding AS, Billingstad

Norway

100.00

 

ABB Business Services Sp. z o.o., Warsaw

Poland

99.93

 

ABB Industrial Solutions (Bielsko‑Biala) Sp. z o.o., Bielsko‑Biala

Poland

99.99

 

ABB Sp. z o.o., Warsaw

Poland

99.93

 

Industrial C&S of P.R. LLC, San Juan

Puerto Rico

100.00

 

ABB Ltd., Moscow

Russian Federation

100.00

 

ABB Contracting Company Ltd., Riyadh

Saudi Arabia

95.00

 

ABB Electrical Industries Co. Ltd., Riyadh

Saudi Arabia

65.00

 

ABB Holdings Pte. Ltd., Singapore

Singapore

100.00

 

ABB Pte. Ltd., Singapore

Singapore

100.00

 

ABB Holdings (Pty) Ltd., Longmeadow

South Africa

100.00

 

ABB South Africa (Pty) Ltd., Longmeadow

South Africa

74.91

 

Asea Brown Boveri S.A., Madrid

Spain

100.00

 

ABB AB, Västerås

Sweden

100.00

 

ABB Norden Holding AB, Västerås

Sweden

100.00

 

ABB Asea Brown Boveri Ltd, Zurich

Switzerland

100.00

 

ABB Information Systems Ltd., Zurich

Switzerland

100.00

 

ABB Investment Holding GmbH, Zurich

Switzerland

100.00

 

ABB Management Services Ltd., Zurich

Switzerland

100.00

 

ABB Schweiz AG, Baden

Switzerland

100.00

 

ABB Turbo Systems AG, Baden

Switzerland

100.00

 

ABB LIMITED, Bangkok

Thailand

100.00

 

ABB Elektrik Sanayi A.S., Istanbul

Turkey

99.99

 

ABB Industries (L.L.C.), Dubai

United Arab Emirates

49.00(1)

 

ABB Holdings Limited, Warrington

United Kingdom

100.00

 

ABB Limited, Warrington

United Kingdom

100.00

 

ABB Finance (USA) Inc., Wilmington, DE

United States

100.00

 

ABB Holdings Inc., Cary, NC

United States

100.00

 

ABB Inc., Cary, NC

United States

100.00

 

ABB Installation Products Inc, Memphis, TN

United States

100.00

 

ABB Motors and Mechanical Inc, Fort Smith, AR

United States

100.00

 

ABB Treasury Center (USA), Inc., Wilmington, DE

United States

100.00

 

Edison Holding Corporation, Wilmington, DE

United States

100.00

 

 

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Company name/location

Country

ABB interest %

Industrial Connections & Solutions LLC, Cary, NC

United States

100.00

 

Verdi Holding Corporation, Wilmington, DE

United States

100.00

 

 

(1)                   Company consolidated as ABB exercises full management control.

 

 

 

 

DESCRIPTION OF PROPERTY

As of December 31, 2018, we occupy real estate in around 100 countries throughout the world. The facilities consist mainly of manufacturing plants, office buildings, research centers and warehouses. A substantial portion of our production and development facilities are situated in the U.S., China, Germany, Italy, Finland, Sweden, Switzerland, Canada, Poland and India. We also own or lease other properties, including office buildings, warehouses, research and development facilities and sales offices in many countries. We own substantially all of the machinery and equipment used in our manufacturing operations.

From time to time, we have a surplus of space arising from acquisitions, production efficiencies and/or restructuring of operations. Normally, we seek to sell such surplus space which may involve leasing property to third parties for an interim period.

The net book value of our property, plant and equipment at December 31, 2018, was $4,133 million, of which machinery and equipment represented $1,575 million, land and buildings represented $2,094 million and construction in progress represented $464 million. We believe that our current facilities are in good condition and are adequate to meet the requirements of our present and foreseeable future operations.

 

Item 4A.  Unresolved Staff Comments

None

Item 5.  Operating and Financial Review and Prospects

MANAGEMENT OVERVIEW

ABB reached the conclusion of its Next Level strategy in 2018. The strategy, in execution since 2014, has focused on three areas: profitable growth, relentless execution and business-led collaboration. During this period ABB transitioned its portfolio and operations to create a streamlined and strengthened company with two value propositions: bringing electricity from any power plant to any plug and automating industries from natural resources to finished products. ABB has driven profitable growth through its entrepreneurial divisions, continuing to invest in sales, research and development, and its leading digital solutions portfolio, ABB Ability. In 2018, the Group was better positioned in a better market compared to 2017.   

Profitable growth

During 2018, ABB recorded solid order growth across all divisions and regions as the company’s pioneering technology leadership in digital industries advanced. Also during 2018, ABB Ability solutions were recognized as global leaders in Distributed Control Systems and Enterprise Asset Management software by industry analyst Arc Advisory Group.

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ABB shifted its center of gravity significantly through ongoing portfolio management, driving towards greater competitiveness, higher growth and lower risk. The integration of Bernecker + Rainer Industrie-Elektronik GmbH (B&R) into ABB’s Industrial Automation division to form its global Machine & Factory Automation business unit is on track to increase mid-term revenues in the business unit to a target of more than $1 billion. In September 2018, ABB acquired Intrion, which is headquartered in Belgium. The transaction will advance ABB’s logistics robotics offering to gain a strong foothold in a market that offers strong growth opportunities. Also in September, ABB completed its acquisition of AB Rotech, a privately owned company headquartered in Bursa, Turkey. AB Rotech has 20 years’ experience in robotic welding solutions and services for the automotive industry. The acquisition will boost ABB’s robotic welding solutions for all tiers in the growing automotive segment. In August 2018, ABB sold its terminal block business, Entrelec, further demonstrating ABB’s commitment to active portfolio management. 

At the end of June 2018, ABB completed the acquisition of General Electric’s (GE) global electrification solutions business, GEIS. GEIS sells to more than 100 countries and has an established installed base with strong roots in North America. This purchase strengthens ABB’s position as a global leader in electrification and expands its access to the attractive North American market and early-cycle business. The integration of GEIS into ABB’s Electrification Products division as its Industrial Solutions business unit (EPIS) is well underway. ABB continues to work to bring EPIS’ margin up to peer levels through an extensive turnaround plan that prioritizes product and technology portfolio harmonization, footprint optimization, supply chain savings and other selling and administrative cost reduction to deliver approximately $200 million of annual cost synergies by year five. The transaction includes a long-term strategic supply relationship with GE and allows ABB long-term use of the GE brand.

ABB continues to invest to drive organic growth in a disciplined manner. Building on the integration of B&R, ABB announced, in April 2018, a 100 million investment to build a state-of-the-art research center in Eggelsberg, Austria. The new campus will go into operation in 2020. ABB also inaugurated its advanced innovation and manufacturing hub in Xiamen, China, in November 2018. The hub is expected to cost $300 million to develop and, at 425,000 square meters, is ABB’s largest innovation and manufacturing site, employing 3,500 people and covering the full range of business activities. In November, ABB further announced its intent to invest $150 million to build a factory-of-the-future for robotics in Shanghai, China. ABB is China’s number one robotics manufacturer, employing more than 2,000 engineers, technology experts and operational leaders in 20 locations across the country. The new factory will combine connected digital technologies, state-of-the-art collaborative robotics and cutting-edge artificial intelligence research, and is expected to be commissioned by the end of 2020.

Relentless execution

Further to the completion of the business model change for EPC, a non-core business unit was established within Corporate and Other effective January 1, 2018, reporting directly to the CFO to manage the wind down of remaining EPC activities. Related to this, in September 2018, ABB commenced transferring certain projects in its turnkey AC Substation business to Linxon, a new joint venture with SNC-Lavalin. SNC-Lavalin has a majority and controlling interest in the joint venture.

ABB is building on the achievements of the 1,000-day programs that were completed at the end of 2017 with a continued strong focus on Supply Chain Management and Operations Quality. Gaps in performance, informed by customer feedback, are rigorously identified and addressed using Lean Six Sigma methods. ABB has about 1,500 continuous improvement projects underway, led from within each division.

ABB continues to benefit from its ongoing cost management and productivity efforts. Savings outpaced price impacts and commodity effects, including those driven by the introduction of trade tariffs, in particular in the United States, during 2018.

Business-led collaboration

ABB continues to strengthen its brand. Effective March 1, 2018, ABB integrated Baldor Electric Company into its global brand. On October 1, 2018, Thomas & Betts was also officially migrated into the ABB global brand.

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Strategic partnership developments included the formation of a global alliance to provide industrial grade edge data center solutions between ABB, Hewlett Packard Enterprise and Rittal, building on the success of prior co-operation and a software alliance for collaborative robotics with Kawasaki Heavy Industries. Further, in October 2018, ABB and the Shanghai municipal government signed a comprehensive strategic co-operation agreement focused on supporting industry, energy, transport and infrastructure in the Shanghai region of China, and to support the “Made in Shanghai” manufacturing initiative.

In January 2018, ABB announced a ground breaking multi-year partnership agreement with the Formula E electric car motor racing series, now known as the “ABB FIA Formula E Championship”. ABB FIA Formula E serves as a competitive platform to develop and test e-mobility relevant electrification and digitalization technologies.

Strategy update: shaping a leader focused in digital industries

On December 17, 2018, ABB announced its new strategy, with the company proposing fundamental actions to focus, simplify and lead in digital industries, for enhanced customer value and shareholder returns. ABB also  announced an agreed sale of its Power Grids business, expanding its existing partnership with Hitachi Ltd (Hitachi) and enabling ABB to increase its focus on digital industries, which is a rapidly developing market offering attractive growth prospects. Starting April 1, 2019, ABB intends to simplify the group’s business model through the discontinuation of the legacy matrix structure, as well as shaping four leading businesses aligned with customer patterns: Electrification, Industrial Automation, Motion and Robotics & Discrete Automation.

The new ABB is expected to generate around $29 billion in annual revenues and have around 110,000 employees. Its four, customer-focused, entrepreneurial businesses are either the global number one or two player in revenue terms in their respective markets. ABB’s addressable market is expected to grow by 3.5 to 4.0 percent per year, growing by $140 billion to reach $550 billion by 2025. Driving this demand will be the growing influence of electric mobility, data centers and robotics.

ABB’s new organization will provide each business with full entrepreneurial ownership of operations, functions, research and development, and territories. ABB’s new operating model, ABB-OS™, will provide a common framework across the group governing management processes, such as market validation, budgeting and portfolio management, in order to facilitate clear decision making and a balanced approach to value creation.

Under ABB-OS™, the businesses will be the single interface to customers, maximizing proximity and speed. The corporate center will be further streamlined, while existing country and regional structures including regional Executive Committee roles will be discontinued after the closing of the Power Grids transaction. Existing resources at the country level will strengthen the new businesses.

Further, ABB expects the ABB-OS™ simplification program to drive approximately $500 million annual run-rate cost reductions across the group, with the full run-rate targeted during 2021. Approximately $300 million of savings are planned to be realized from the businesses, for example through a reduction of areas of business responsibility through combining businesses and eliminating management layers, and optimizing ABB’s manufacturing footprint. Approximately $200 million of savings are planned to come from Group functions and a leaner corporate center.

ABB plans to demonstrate improved commercial quality of business and enhance exposure to faster growing markets with a greater emphasis on high value-add solutions, lower risk, less large-order volatility and more recurring revenue streams through digital solutions, software and services.

ABB’s investment proposition is reflected in a new medium-term target framework for the Group:

          3 to 6 percent annual comparable revenue growth, based on current economic outlook,

          Operational EBITA margin of 13 to 16 percent,

          Return on Capital Employed (ROCE) of 15 to 20 percent,

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          Cash conversion to net income of approximately 100 percent, and

          Basic EPS growth above revenue growth.

Capital allocation

The Board of Directors is proposing a tenth consecutive increase in the dividend to 0.80 Swiss francs per share at the 2019 Annual General Meeting.

ABB’s sustained capital allocation priorities are unchanged:

          funding organic growth, research and development, and capital expenditures at attractive cash returns,

          paying a rising, sustainable dividend,

          investing in value-creating acquisitions, and

          returning additional cash to shareholders.

Following the expected completion of the sale of 80.1 percent of our Power Grids business to Hitachi in the first half of 2020, valuing the business at $11 billion, ABB intends to return 100 percent of the net cash proceeds to shareholders in an expeditious and efficient manner. ABB intends to maintain the level of dividend per share post close and aims to maintain its “single A” credit rating long term.

Outlook

Macroeconomic signs are mixed in Europe but are trending positively in the United States, and growth is expected to continue in China. The overall global market is growing, with rising geopolitical uncertainties in various parts of the world. Oil prices and foreign exchange translation effects are expected to continue to influence the company’s results.

The attractive long-term demand outlook in ABB’s three major customer sectors — utilities, industry and transport & infrastructure — is driven by the Energy and Fourth Industrial Revolutions. We believe ABB is well-positioned to tap into these opportunities for long-term profitable growth with its market-leading digital offering ABB Ability, strong market presence, broad geographic and business scope, technology leadership and financial strength.

 

APPLICATION OF CRITICAL ACCOUNTING POLICIES

General

We prepare our Consolidated Financial Statements in accordance with U.S. GAAP and present these in U.S. dollars unless otherwise stated.

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The preparation of our financial statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including, but not limited to, those related to: gross profit margins of performance obligations satisfied over time; costs of product guarantees and warranties; provisions for bad debts; recoverability of inventories, investments, fixed assets, goodwill and other intangible assets; the fair values of assets and liabilities assumed in business combinations; income tax expenses and provisions related to uncertain tax positions; pensions and other postretirement benefit assumptions; and legal and other contingencies. Where appropriate, we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates and assumptions.

We deem an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. We also deem an accounting policy to be critical when the application of such policy is essential to our ongoing operations. We believe the following critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. These policies should be considered when reading our Consolidated Financial Statements.

  

 

Revenue recognition

A customer contract exists if collectability under the contract is considered probable, the contract has commercial substance, contains payment terms, as well as the rights and commitments of both parties, and has been approved. By analyzing the type, terms and conditions of each contract or arrangement with a customer, we determine which revenue recognition method applies.

We offer arrangements with multiple performance obligations to meet our customers’ needs. These arrangements may involve the delivery of multiple products and/or performance of services (such as installation, training and maintenance) and the 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. We allocate 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.

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 services. Control is transferred when the customer has the ability to direct the use and obtain the benefits from the goods or services.

Control transfer for non-customized products is not considered to have occurred, and therefore no revenues are recognized, until the customer has taken title to the products and assumed the risks and rewards of ownership of the products specified in the purchase order or sales agreement. Generally, the transfer of title and risks and rewards of ownership are governed by the contractually defined shipping terms. We use various International Commercial shipping terms (as promulgated by the International Chamber of Commerce) in our sales of products to third party customers, such as Ex Works (EXW), Free Carrier (FCA) and Delivered Duty Paid (DDP).

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We generally recognize revenues for the sale of customized products, including integrated automation and electrification systems and solutions, on an over time basis using the percentage‑of‑completion method of accounting. These systems are generally accounted for as a single performance obligation as we are required to integrate equipment and services into one 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 our right to payment for work performed or by the customer’s ownership of the work in process. We use the cost‑to‑cost method to measure progress towards completion on contracts. Under this method, progress of contracts is measured by actual costs incurred in relation to management’s best estimate of total estimated costs, which are reviewed and updated routinely for contracts in progress. The cumulative effect of any change in estimate is recorded in the period in which the change in estimate is determined.

The percentage‑of‑completion method of accounting involves the use of assumptions and projections, principally relating to future material, labor and project‑related overhead costs as well as estimates of the amount of variable consideration to which we expect to be entitled to. As a consequence, there is a risk that total contract costs or the amount of variable consideration will either exceed or be lower than, respectively, those we originally estimated (based on all information reasonably available to us) and the margin will decrease or the contract may become unprofitable. This risk increases if the duration of a contract increases because there is a higher probability that the circumstances upon which we originally developed our estimates will change, resulting in increased costs that we may not recover. Factors that could cause costs to increase include:

          unanticipated technical problems with equipment supplied or developed by us which may require us to incur additional costs to remedy,

          changes in the cost of components, materials or labor,

          difficulties in obtaining required governmental permits or approvals,

          project modifications creating unanticipated costs,

          suppliers’ or subcontractors’ failure to perform, and

          delays caused by unexpected conditions or events.

Changes in our initial assumptions, which we review on a regular basis between balance sheet dates, may result in revisions to estimated costs, current earnings and anticipated earnings. We recognize these changes in the period in which the changes in estimates are determined. By 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 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.

Revenues from service transactions are recognized as services are performed. For long‑term service contracts, revenues are recognized on a straight‑line basis over the term of the contract or, if the performance pattern is other than straight‑line, as the services are provided. Service revenues reflect revenues earned from our activities in providing services to customers primarily subsequent to the sale and delivery of a product or complete system. Such revenues consist of maintenance‑type contracts, field service activities that include personnel and accompanying spare parts, training and installation and commissioning of products as a stand‑alone service or as part of a service contract.

Revenues are reported net of customer rebates, early settlement discounts, and similar incentives. Rebates are estimated based on sales terms, 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 us and our customers, such as sales, use, value‑added and some excise taxes, are excluded from revenues.

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Accounts receivable from customer contracts are regularly reviewed for collectability and allowances are calculated to estimate those receivables that will not be collected. These reserves assume a level of default based on historical information, as well as knowledge about specific invoices and customers. The risk remains that actual defaults will vary in number and amount from those originally estimated. As such, the amount of revenues recognized might exceed the amount which will be collected, resulting in a change in earnings in the future. The risk of deterioration is likely to increase during periods of significant negative industry, economic or political trends.

As a result of the above policies, judgment in the selection and application of revenue recognition methods must be made.

  

 

Contingencies

As more fully described in “Item 8. Financial Information—Legal Proceedings” and in “Note 15 Commitments and contingencies” to our Consolidated Financial Statements, we are subject to proceedings, litigation or threatened litigation and other claims and inquiries related to environmental, labor, product, regulatory, tax (other than income tax) and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue, often with assistance from both internal and external legal counsel and technical experts. The required amount of a provision for a contingency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution.

We record provisions for our contingent obligations when it is probable that a loss will be incurred and the amount can be reasonably estimated. Any such provision is generally recognized on an undiscounted basis using our best estimate of the amount of loss or at the lower end of an estimated range when a single best estimate is not determinable. In some cases, we may be able to recover a portion of the costs relating to these obligations from insurers or other third parties; however, we record such amounts only when it is probable that they will be collected.

We provide for anticipated costs for warranties when we recognize revenues on the related products or contracts. Warranty costs include calculated costs arising from imperfections in design, material and workmanship in our products. We generally make individual assessments on contracts with risks resulting from order‑specific conditions or guarantees and assessments on an overall, statistical basis for similar products sold in larger quantities. There is a risk that actual warranty costs may exceed the amounts provided for, which would result in a deterioration of earnings in the future when these actual costs are determined.

  

 

Pension and other postretirement benefits

As more fully described in “Note 17 Employee benefits” to our Consolidated Financial Statements, we have a number of defined benefit pension and other postretirement plans and recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in our Consolidated Balance Sheets. We measure such a plan’s assets and obligations that determine its funded status as of the end of the year.

Significant differences between assumptions and actual experience, or significant changes in assumptions, may materially affect the pension obligations. The effects of actual results differing from assumptions and the changing of assumptions 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 participants if the plan is comprised of all or almost all inactive participants. Otherwise, the actuarial gain or loss is not recognized in the Consolidated Income Statements.

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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 increase in the PBO and in pension costs. Conversely, an increase in the discount rates results in a decrease in the PBO and in pension costs. The mortality assumptions are reviewed annually by management. Decreases in mortality rates result in an increase in the PBO and in pension costs. Conversely, an increase in mortality rates results in a decrease in the PBO and in pension costs.

Holding all other assumptions constant, a 0.25 percentage point decrease in the discount rate would have increased the PBO related to our defined benefit pension plans by $390 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 $370 million.

The expected return on plan assets is reviewed regularly and considered for adjustment annually based upon the target asset allocations and represents the long‑term return expected to be achieved. Decreases in the expected return on plan assets result in an increase to pension costs. Holding all other assumptions constant, an increase or decrease of 0.25 percentage points in the expected long‑term rate of asset return would have decreased or increased, respectively, the net periodic benefit cost in 2018 by $26 million.

The funded status, which can increase or decrease based on the performance of the financial markets or changes in our assumptions, does not represent a mandatory short‑term cash obligation. Instead, the funded status of a defined benefit pension plan is the difference between the PBO and the fair value of the plan assets. At December 31, 2018, our defined benefit pension plans were $1,677 million underfunded compared to an underfunding of $1,413 million at December 31, 2017. Our other postretirement plans were underfunded by $120 million and $132 million at December 31, 2018 and 2017, respectively.

We have multiple non‑pension postretirement benefit plans. Our health care plans are generally contributory with participants’ contributions adjusted annually. For purposes of estimating our health care costs, we have assumed health care cost increases to be 6.7 percent per annum for 2019, gradually declining to 5.0 percent per annum by 2028 and to remain at that level thereafter.

  

 

Income taxes

In preparing our Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. Tax expense from continuing operations is reconciled from the weighted‑average global tax rate (rather than from the Swiss domestic statutory tax rate) as the parent company of the ABB Group, ABB Ltd, is domiciled in Switzerland. Income which has been generated in jurisdictions outside of Switzerland (hereafter “foreign jurisdictions”) and has already been subject to corporate income tax in those foreign jurisdictions is, to a large extent, tax exempt in Switzerland. Therefore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries. There is no requirement in Switzerland for a parent company of a group to file a tax return of the group determining domestic and foreign pre‑tax income and as our consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines our global weighted‑average tax rate.

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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 recognize a deferred tax asset when it is more likely than not that the asset will be realized. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. To the extent we increase or decrease this allowance in a period, we recognize the change in the allowance within “Provision for taxes” in the Consolidated Income Statements unless the change relates to discontinued operations, in which case the change is recorded in “Income from discontinued operations, net of tax”. Unforeseen changes in tax rates and tax laws, as well as differences in the projected taxable income as compared to the actual taxable income, may affect these estimates.

Certain countries levy withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. Switzerland has concluded double taxation treaties with many countries in which we operate. These treaties either eliminate or reduce such withholding taxes on dividend distributions. It is our policy to distribute retained earnings of subsidiaries, insofar as such earnings are not permanently reinvested or no other reasons exist that would prevent the subsidiary from distributing them. No deferred tax liability is set up, if retained earnings are considered as permanently reinvested, and used for financing current operations as well as business growth through working capital and capital expenditure in those countries.

We operate in numerous tax jurisdictions and, as a result, are regularly subject to audit by tax authorities. We provide for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Contingency provisions are recorded based on the technical merits of our filing position, considering the applicable tax laws and OECD guidelines and are based on our evaluations of the facts and circumstances as of the end of each reporting period. Changes in the facts and circumstances could result in a material change to the tax accruals. Although we believe that our tax estimates are reasonable and that appropriate tax reserves have been made, the final determination of tax audits and any related litigation could be different than that which is reflected in our income tax provisions and accruals.

An estimated loss from a tax contingency must be accrued as a charge to income if it is more likely than not that a tax asset has been impaired or a tax liability has been incurred and the amount of the loss can be reasonably estimated. We apply a two‑step approach to recognize and measure uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. The required amount of provisions for contingencies of any type may change in the future due to new developments.

  

 

Business combinations

The amount of goodwill initially recognized in a business combination is based on the excess of the purchase price of the acquired company over the fair value of the assets acquired and liabilities assumed. The determination of these fair values requires us to make significant estimates and assumptions. For instance, when assumptions with respect to the timing and amount of future revenues and expenses associated with an asset are used to determine its fair value, but the actual timing and amount differ materially, the asset could become impaired. In some cases, particularly for large acquisitions, we may engage independent third‑party appraisal firms to assist in determining the fair values.

Critical estimates in valuing certain intangible assets include but are not limited to: future expected cash flows of the acquired business, brand awareness, customer retention, technology obsolescence and discount rates.

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In addition, uncertain tax positions and tax‑related valuation allowances assumed in connection with a business combination are initially estimated at the acquisition date. We reevaluate these items quarterly, based upon facts and circumstances that existed at the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the twelve‑month measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax‑related valuation allowances will affect our provision for income taxes in our Consolidated Income Statements and could have a material impact on our results of operations and financial position. The fair values assigned to the intangible assets acquired are described in “Note 4 Acquisitions and business divestments” as well as “Note 11 Goodwill and other intangible assets”, to our Consolidated Financial Statements.

  

 

Goodwill and other intangible assets

We review goodwill for impairment annually as of October 1, or more frequently if events or circumstances indicate the carrying value may not be recoverable.

We use either a qualitative or quantitative assessment method for each reporting unit. The qualitative assessment involves determining, based on an evaluation of qualitative factors, whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on this qualitative assessment, it is determined to be more likely than not that the reporting unit’s fair value is less than its carrying value, then a quantitative impairment test is performed. If we elect not to perform the qualitative assessment for a reporting unit, then we perform the quantitative impairment test.

Our reporting units are the same as our business divisions for Electrification Products and Robotics and Motion. For the Industrial Automation division, we determined the reporting units to be one level below the division, as the different products produced or services provided by this division do not share sufficiently similar economic characteristics to permit testing of goodwill on a total division level.

When performing the qualitative assessment, we first determine, for a reporting unit, factors which would affect the fair value of the reporting unit including: (i) macroeconomic conditions related to the business, (ii) industry and market trends, and (iii) the overall future financial performance and future opportunities in the markets in which the business operates. We then consider how these factors would impact the most recent quantitative analysis of the reporting unit’s fair value. Key assumptions in determining the value of the reporting unit include the projected level of business operations, the weighted‑average cost of capital, the income tax rate and the terminal growth rate.

If, after performing the qualitative assessment, we conclude that events or circumstances have occurred which would indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value, or if we have elected not to perform a qualitative assessment, then a quantitative impairment test is performed. First, we calculate the fair value of the reporting unit (using an income approach whereby the fair value is calculated based on the present value of future cash flows applying a discount rate that represents our weighted‑average cost of capital) and compare it to the reporting unit’s carrying value. Where the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. However, if the carrying value of the net assets assigned to the reporting unit is equal to or exceeds the reporting unit’s fair value, we would record an impairment loss equal to the difference, up to the full amount of goodwill. Any goodwill impairment losses would be recorded as a separate line item in the income statement in continuing operations, unless related to a discontinued operation, in which case the losses would be recorded in “Income from discontinued operations, net of tax”.

In 2018, we performed a quantitative impairment test for all of our reporting units to reflect new assumptions and forecasts resulting from our newly developed strategic plan for the period from 2019 to 2023. The quantitative test concluded that the estimated fair values for each of our reporting units exceeded their respective carrying values by more than 20 percent and hence we concluded that none of the reporting units were “at risk” of failing the goodwill impairment test.

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The projected future cash flows used in the 2018 fair value calculation for all reporting units, except for Machine and Factory Automation within the Industrial Automation division, were based on approved business plans for the reporting units which covered a period of five years plus a calculated terminal value. The after-tax weighted-average cost of capital of 8 percent was based on variables such as the risk-free rate derived from the yield of 10 year U.S. treasury bonds as well as an ABB-specific risk premium. The terminal value growth rate was assumed to be 1 percent. The mid-term tax rate used in the test was 27 percent.

For Machine and Factory Automation, which includes the acquisition in 2017 of B&R, the projected future cash flows used in the 2018 fair value calculation were based on an approved business plan which covered a period of eight years plus a calculated terminal value. The business plan covered a longer projected period due to a higher growth trajectory as well as a longer term view for the business which was available following the acquisition process. The terminal value growth rate was assumed to be 3 percent and the after tax weighted-average cost of capital (WACC) was 9.4 percent. The mid-term tax rate used in the test was 25 percent which is based on tax rates in countries where the business is primarily operating.

Determining the projected future cash flows required significant judgments and estimates involving variables such as future sales volumes, sales prices, awards of large orders, production and other operating costs, capital expenditures, net working capital requirements and other economic factors.

We based our fair value estimates on assumptions we believed to be reasonable, but which were inherently uncertain. Consequently, actual future results may differ from those estimates.

We assessed the reasonableness of the fair value calculations of our reporting units by reconciling the sum of the fair values for all our reporting units to our total market capitalization. The assumptions used in the fair value calculation were stressed (through the use of sensitivity analysis) to determine the impact on the fair value of the reporting units. Our sensitivity analysis in 2018 showed that, holding all other assumptions constant, a 1 percentage point increase in the discount rate would have reduced the calculated fair value by approximately 13.0 percent, while a 1 percentage point decrease in the terminal value growth rate would have reduced the calculated fair value by approximately 9.3 percent.

In 2017, we performed a qualitative assessment and determined that it was not more likely than not that the fair value for each of these reporting units was below the carrying value. As a result, we concluded that it was not necessary to perform the quantitative impairment test.

Intangible assets are reviewed for recoverability upon the occurrence of certain triggering events (such as a decision to divest a business or projected losses of an entity) or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We record impairment charges in “Other income (expense), net”, in our Consolidated Income Statements, unless they relate to a discontinued operation, in which case the charges are recorded in “Income from discontinued operations, net of tax”.

  

 

NEW ACCOUNTING PRONOUNCEMENTS

For a description of accounting changes and 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.

 

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RESEARCH AND DEVELOPMENT

Each year, we invest significantly in research and development. Our research and development focuses on developing and commercializing the technologies of our businesses that are of strategic importance to our future growth. In 2018 we invested $1,147 million, or approximately 4.2 percent of our 2018 consolidated revenues, on research and development activities in our continuing operations. We also had expenditures of $57 million, or approximately 0.2 percent of our 2018 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. Order‑related development amounts are initially recorded in inventories as part of the work in process of a contract and then are reflected in cost of sales at the time revenue is recognized in accordance with our accounting policies.

In addition to continuous product development, and order‑related engineering work, we develop platforms for technology applications in our automation and power businesses in our research and development laboratories, which operate on a global basis. Through active management of our investment in research and development, we seek to maintain a balance between short‑term and long‑term research and development programs and optimize our return on investment.

Universities are incubators of future technology, and a central task of our research and development team is to transform university research into industry‑ready technology platforms. We collaborate with a number of universities and research 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 recruit and train new personnel. We have built numerous university collaborations in the U.S., Europe and Asia, including long‑term, strategic relationships with the Carnegie Mellon University, North Carolina State University, Virginia Polytechnic Institute and State University, Massachusetts Institute of Technology, Imperial College London, ETH Zurich, Royal Institute of Technology (KTH) Stockholm, Cambridge University, Dresden University of Technology, Huazhong University of Science & Technology (HUST) and Xi’an Jiaotong University (XJTU). Our collaborative projects include research on materials, sensors, micro‑engineered mechanical systems, robotics, controls, manufacturing, distributed power and communication. Common platforms for power and automation technologies are developed around advanced materials, efficient manufacturing, information technology and data communication, as well as sensor and actuator technology.

Common applications of basic power and automation technologies can also be found in power electronics, electrical insulation, and control and optimization. Our power technologies, including our insulation technologies, current interruption and limitation devices, power electronics, flow control and power protection processes, apply as much to large, reliable, blackout‑free transmission systems as they do to everyday household needs. Our automation technologies, including our control and optimization processes, power electronics, sensors and microelectronics, mechatronics and wireless communication processes, are designed to improve efficiency in plants and factories around the world, including our own.

  

 

ACQUISITIONS AND DIVESTMENTS

Acquisitions

During 2018, 2017 and 2016, ABB paid $2,638 million, $1,992 million and $13 million to purchase three, four and one businesses, respectively. The amounts exclude increases in investments made in cost‑ and equity‑accounted companies.

The principal acquisition in 2018 was GE Industrial Solutions (GEIS), GE’s global electrification solutions business, which was acquired in June. GEIS, headquartered in the United States, has approximately 13,500 employees and provides technologies that distribute and control electricity and support the commercial, data center, health care, mining, renewable energy, oil and gas, water and telecommunications sectors.

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The principal acquisition in 2017 was B&R, which was acquired in July. B&R is a worldwide provider of product- and software-based, open-architecture solutions for machine and factory automation and employs more than 3,000 people, including about 1,000 research and development, and application engineers. It operates across 70 countries in the machine and factory automation market segment.

The acquisition in 2016 was not significant.

  

 

Divestments

On March 1, 2017, ABB divested its high-voltage cable system business. Total cash proceeds from all business divestments during 2017 amounted to $605 million, net of transaction costs and cash disposed.

There were no significant divestments in 2016 and 2018.

Planned divestment of Power Grids

In December 2018, ABB announced an agreement to divest 80.1 percent of its Power Grids business to Hitachi, valuing the business at $11 billion. The business also includes certain real estate properties which were previously reported within Corporate and Other. The divestment is expected to be completed in the first half of 2020, following the receipt of customary regulatory approvals. As this divestment represents a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations for this business have been presented as discontinued operations and the assets and liabilities are reflected as held-for-sale for all periods presented. For more information on our discontinued operations, see “Note 3 Changes in presentation of financial statements” to our Consolidated Financial Statements.

For more information on our acquisitions and divestments, see “Note 4 Acquisitions and business divestments” to our Consolidated Financial Statements.

  

 

EXCHANGE RATES

We report our financial results in U.S. dollars. Due to our global operations, a significant amount of our revenues, expenses, assets and liabilities are denominated in other currencies. As a consequence, movements in exchange rates between currencies may affect: (i) our profitability, (ii) the comparability of our results between periods, and (iii) the reported carrying value of our assets and liabilities.

We translate non‑USD denominated results of operations, assets and liabilities to USD in our Consolidated Financial Statements. Balance sheet items are translated to USD using year‑end currency exchange rates. Income statement and cash flow items are translated to USD using the relevant monthly average currency exchange rate.

Increases and decreases in the value of the USD against other currencies will affect the reported results of operations in our Consolidated Income Statements and the value of 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 significantly affect the comparability of our reported results of operations between periods and result in significant changes to the reported value of our assets, liabilities and stockholders’ equity.

While we operate globally and report our financial results in USD, exchange rate movements between the USD and both the EUR and the CHF are of particular importance to us due to (i) the location of our significant operations and (ii) our corporate headquarters being in Switzerland.

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The exchange rates between the USD and the EUR and the USD and the CHF at December 31, 2018, 2017 and 2016, were as follows:

Exchange rates into $

2018

2017

2016

EUR 1.00             

1.15

1.20

1.05

CHF 1.00             

1.02

1.02

0.98

 

The average exchange rates between the USD and the EUR and the USD and the CHF for the years ended December 31, 2018, 2017 and 2016, were as follows:

Exchange rates into $

2018

2017

2016

EUR 1.00             

1.18

1.13

1.10

CHF 1.00             

1.02

1.02

1.01

 

When we incur expenses that are not denominated in the same currency as the related revenues, foreign exchange rate fluctuations could affect our profitability. To mitigate the impact of exchange rate movements on our profitability, it is our policy to enter into forward foreign exchange contracts to manage the foreign exchange transaction risk of our operations.

In 2018, approximately 76 percent of our consolidated revenues were reported in currencies other than the USD. The following percentages of consolidated revenues were reported in the following currencies:

          Euro, approximately 23 percent, and

          Chinese renminbi, approximately 14 percent

In 2018, approximately 73 percent of our cost of sales and selling, general and administrative expenses were reported in currencies other than the USD. The following percentages of consolidated cost of sales and selling, general and administrative expenses were reported in the following currencies:

          Euro, approximately 22 percent, and

          Chinese renminbi, approximately 12 percent

 

We also incur expenses other than cost of sales and selling, general and administrative expenses in various currencies.

The results of operations and financial position of many of our subsidiaries outside of the United States are reported in the currencies of the countries in which those subsidiaries are located. We refer to these currencies as “local currencies”. Local currency financial information is then translated into USD at applicable exchange rates for inclusion in our Consolidated Financial Statements.

The discussion of our results of operations below provides certain information with respect to orders, revenues, income from operations and other measures as reported in USD (as well as in local currencies). We measure period‑to‑period variations in local currency results by using a constant foreign exchange rate for all periods under comparison. Differences in our results of operations in local currencies as compared to our results of operations in USD are caused exclusively by changes in currency exchange rates.

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While we consider our results of operations as measured in local currencies to be a significant indicator of business performance, local currency information should not be relied upon to the exclusion of U.S. GAAP financial measures. Instead, local currencies reflect an additional measure of comparability and provide a means of viewing aspects of our operations that, when viewed together with the U.S. GAAP results, provide a more complete understanding of factors and trends affecting the business. As local currency information is not standardized, it may not be possible to compare our local currency information to other companies’ financial measures that have the same or a similar title. We encourage investors to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

  

 

ORDERS

Our policy is to book and report an order when a binding contractual agreement has been concluded with a customer covering, at a minimum, the price and scope of products or services to be supplied, the delivery schedule and the payment terms. The reported value of an order corresponds to the undiscounted value of revenues that we expect to recognize following delivery of the goods or services subject to the order, less any trade discounts and excluding any value added or sales tax. The value of orders received during a given period of time represents the sum of the value of all orders received during the period, adjusted to reflect the aggregate value of any changes to the value of orders received during the period and orders existing at the beginning of the period. These adjustments, which may in the aggregate increase or decrease the orders reported during the period, may include changes in the estimated order price up to the date of contractual performance, changes in the scope of products or services ordered and cancellations of orders.

The undiscounted value of revenues we expect to generate from our orders at any point in time is represented by our order backlog. Approximately 6.6 percent of the value of total orders we recorded in 2018 were “large orders”, which we define as orders from third parties involving a value of at least $15 million for products or services. Approximately 47 percent of the total value of large orders in 2018 were recorded in our Industrial Automation division. The other divisions as well as our non-core business activities accounted for the remainder of the total large orders recorded during 2018. The remaining portion of total orders recorded in 2018 was “base orders”, which we define as orders from third parties with a value of less than $15 million for products or services.

The level of orders fluctuates from year to year. Portions of our business involve orders for long‑term projects that can take months or years to complete and many large orders result in revenues in periods after the order is booked. Consequently, the level of large orders and orders generally cannot be used to accurately predict future revenues or operating performance. Orders that have been placed can be cancelled, delayed or modified by the customer. These actions can reduce or delay any future revenues from the order or may result in the elimination of the order.

  

 

PERFORMANCE MEASURES

We evaluate the performance of our divisions based on orders received, revenues and Operational EBITA.

Operational EBITA represents income from operations excluding:

          amortization expense on intangibles arising upon acquisitions (acquisition-related amortization),

          restructuring and restructuring-related expenses,

          changes in the amount recorded for obligations related to divested businesses occurring after the divestment date (changes in obligations related to divested businesses),

          changes in estimates relating to opening balance sheets of acquired businesses (changes in pre‑acquisition estimates),

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          gains and losses from sale of businesses,

          acquisition- and divestment-related expenses and integration costs,

          certain other non-operational items, as well as

          foreign exchange/commodity timing differences in income from operations consisting of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (c) unrealized foreign exchange movements on receivables/payables (and related assets/liabilities).

Certain other non-operational items generally includes: certain regulatory, compliance and legal costs, certain asset write downs/impairments as well as other items which are determined by management on a case by case basis.

See “Note 23 Operating segment and geographic data” to our Consolidated Financial Statements for a reconciliation of the total consolidated Operational EBITA to income from continuing operations before taxes.

  

 

49 


 

ANALYSIS OF RESULTS OF OPERATIONS

Our consolidated results from operations were as follows:

  

ORDERS AND ORDER BACKLOG:

 

 

 

 

 

 

($ in millions)

2018

 

2017

 

2016

Orders

28,590

 

25,034

 

23,658

Order backlog at December 31,

13,084

 

12,491

 

12,950

 

 

 

 

 

 

 

 

 

 

 

 

INCOME STATEMENT DATA:

 

 

 

 

 

 

($ in millions, except per share data in $)

 

 

 

 

 

Revenues

27,662

 

25,196

 

24,929

Cost of sales

(19,118)

 

(17,350)

 

(17,396)

Gross profit  

8,544

 

7,846

 

7,533

Selling, general and administrative expenses

(5,295)

 

(4,765)

 

(4,532)

Non-order related research and development expenses

(1,147)

 

(1,013)

 

(967)

Other income (expense), net

124

 

162

 

(105)

Income from operations  

2,226

 

2,230

 

1,929

Net interest and other finance expense

(190)

 

(161)

 

(130)

Non-operational pension (cost) credit

83

 

33

 

(38)

Provision for taxes

(544)

 

(583)

 

(526)

Income from continuing operations, net of tax  

1,575

 

1,519

 

1,235

Income from discontinued operations, net of tax

723

 

846

 

799

Net income  

2,298

 

2,365

 

2,034

Net income attributable to noncontrolling interests

(125)

 

(152)

 

(135)

Net income attributable to ABB  

2,173

 

2,213

 

1,899

 

 

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

1,514

 

1,441

 

1,172

Income from discontinued operations, net of tax

659

 

772

 

727

Net income

2,173

 

2,213

 

1,899

 

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

0.71

 

0.67

 

0.54

Income from discontinued operations, net of tax

0.31

 

0.36

 

0.34

Net income

1.02

 

1.04

 

0.88

 

 

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

0.71

 

0.67

 

0.54

Income from discontinued operations, net of tax

0.31