ABB LTD
20-Fs
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM
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
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report ____________________
Commission file number:
_________________________________________
(Exact name of registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
,
,
(Address of principal executive offices)
,
,
Telephone: +
-
-
Facsimile:
(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
Trading Symbol(s)
Name of each exchange on which registered
,
each representing one Registered Share
N/A
*
_________________________________________
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:
_________________________________________
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
☒
⬜
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
☐
☒
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.
☒
☐
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).
☒
☐
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.
☒
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 whether the registrant has filed a
report on and attestation to its management’s
assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15
U.S.C. 7262(b)) by the registered public accounting firm tha
t
prepared or issued its audit report.
Indicate by check mark which basis of accounting the registrant has
used to prepare the financial statements included in this filing:
☒
International Financial Reporting Standards as issued
by the International Accounting Standards Board
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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
☐
☐
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.
(i)
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
35
Item 6.
Directors, Senior Management and Employees
81
Item 7.
Major Shareholders and Related Party Transactions
133
Item 8.
Financial Information
133
Item 9.
The Offer and Listing
135
Item 10.
Additional Information
135
Item 11.
Quantitative and Qualitative
Disclosures About Market Risk
143
Item 12.
Description of Securities Other than Equity Securities
145
PART
II
146
Item 13.
Defaults, Dividend Arrearages and Delinquencies
146
Item 14.
Material Modifications to the Rights of Security Holders
and Use of Proceeds
146
Item 15.
Controls and Procedures
146
Item 16A.
Audit Committee Financial Expert
147
Item 16B.
Code of Ethics
147
Item 16C.
Principal Accountant Fees and Services
148
Item 16D.
Exemptions from the Listing Standards for Audit Committees
148
Item 16E.
Purchase of Equity Securities by Issuer and Affiliated
Purchasers
149
Item 16F.
Change in Registrant’s Certifying
Accountant
149
Item 16G.
Corporate Governance
149
Item 16H.
Mine Safety Disclosure
149
PART
III
150
Item 17.
Financial Statements
150
Item 18.
Financial Statements
150
Item 19.
Exhibits
151
1
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,”
“the 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, 2020 and
2019, and for each of the years in the three-year period
ended December 31, 2020, (our Consolidated Financial
Statements) have been prepared in accordance with United
States generally accepted accounting principles
(U.S. GAAP).
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” and “CNY” refer to the
lawful currency of the People’s
Republic of China; (vi) “AED” refers to the lawful
currency of the United Arab
Emirates; (vii) “INR” and “Indian Rupee”
refer to the lawful currency of India, and (viii) “HKD” refers to the
Hong
Kong dollar. Information
contained on, or that can be accessed through, our Web
site does not constitute a part of this
annual report and is not incorporated by reference herein.
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. 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
for Swiss francs on December 31,
2020,
was $1.00 = CHF 0.8841.
The
twelve o’clock buying rate for Swiss francs on February
19,
2021,
was $1.00 = CHF 0.8948.
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.
2
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, the impact of the
COVID-19 pandemic on our business, 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, planned divestments, acquisitions and integration,
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, the
implementation of ABB Way,
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:
Business, economic and industry risks
•
Our business is exposed to risks associated with the COVID
-19 pandemic.
•
Our business is exposed to risks associated with the volatile
global economic environment and political
conditions.
•
Our operations in emerging markets expose us
to risks associated with conditions in those markets.
•
We may encounter
difficulty in managing our business due to the global
nature of our operations.
•
We operate
in very competitive and rapidly changing markets and could
be adversely affected if we fail to
keep pace with technological changes.
•
Industry consolidation could result in more powerful
competitors and fewer customers.
•
Increases in costs or limitation of supplies of raw materials
may adversely affect our financial performance.
•
Our multi-national operations expose us to the risk of
fluctuations in currency exchange rates.
3
•
The uncertainties relating to the United Kingdom’s
new relationship with the European Union and its
potential impact on the relationship between Switzerland
and the European Union, may have a negative
effect on cross-border trade and our business.
Operational risks
•
Increased information technology (IT) security threats
and more sophisticated cyber‑attacks could pose a
risk to our systems, networks, products, solutions and
services.
•
Our business strategy may include making strategic
divestitures. There can be no assurance that any
divestitures will provide business benefit.
•
Anticipated benefits of historical, existing and potential
future mergers, acquisitions, joint ventures or
strategic alliances may not be realized.
•
There is no guarantee that our ongoing efforts
to reduce costs will be successful.
•
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.
•
We may be
the subject of product liability claims.
•
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.
•
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.
•
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.
Legal and regulatory risks
•
An inability to protect our intellectual property rights
could adversely affect our business.
•
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.
•
Examinations by tax authorities and changes in tax regulations
could result in lower earnings and cash
flows.
•
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 could be
affected by future laws or regulations enacted to address
climate change concerns as well as
the physical effects of climate change.
4
General risk factors
•
If we are unable to attract and retain qualified management
and personnel then our business may be
adversely affected.
•
Our business subjects us to considerable potential exposure
to litigation and legal claims and could be
materially adversely affected if we incur
legal liability.
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.
5
Our selected financial data in the following tables as well as financial
information in “Item 5. Operating and
Financial Review and Prospects” is presented in accordance
with U.S. GAAP and have been derived from our published
Consolidated Financial Statements. Our Consolidated
Financial Statements as of and for each of the years ended
December 31, 2020, 2019 and 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 have not been audited following the reclassification
in
2018 of the Power Grids business from continuing operations
to discontinued operations.
INCOME STATEMENT
DATA:
($ in millions, except per share data in $)
2020
2019
2018
2017
2016
Total
revenues
26,134
27,978
27,662
25,196
24,929
Total
cost of sales
(18,256)
(19,072)
(19,118)
(17,350)
(17,396)
Gross profit
7,878
8,906
8,544
7,846
7,533
Selling, general and administrative expenses
(4,895)
(5,447)
(5,295)
(4,765)
(4,532)
Non-order related research and development expenses
(1,127)
(1,198)
(1,147)
(1,013)
(967)
Impairment of goodwill
(311)
—
—
—
—
Other income (expense), net
48
(323)
124
162
(105)
Income from operations
1,593
1,938
2,226
2,230
1,929
Interest and dividend income
51
67
72
73
71
Interest and other finance expense
(240)
(215)
(262)
(234)
(201)
Losses from extinguishment of debt
(162)
—
—
—
—
Non-operational pension (cost) credit
(401)
72
83
33
(38)
Income from continuing operations before
taxes
841
1,862
2,119
2,102
1,761
Income tax expense
(496)
(772)
(544)
(583)
(526)
Income from continuing operations, net of
tax
345
1,090
1,575
1,519
1,235
Income from discontinued operations, net of tax
4,860
438
723
846
799
Net income
5,205
1,528
2,298
2,365
2,034
Net income attributable to noncontrolling interests
(59)
(89)
(125)
(152)
(135)
Net income attributable to ABB
5,146
1,439
2,173
2,213
1,899
Amounts attributable to ABB shareholders:
Income from continuing operations, net of tax
294
1,043
1,514
1,441
1,172
Income from discontinued operations, net of tax
4,852
396
659
772
727
Net income
5,146
1,439
2,173
2,213
1,899
Basic earnings per share attributable
to ABB shareholders:
Income from continuing operations, net of tax
0.14
0.49
0.71
0.67
0.54
Income from discontinued operations, net of tax
2.30
0.19
0.31
0.36
0.34
Net income
2.44
0.67
1.02
1.04
0.88
Diluted earnings per share attributable
to ABB shareholders:
Income from continuing operations, net of tax
0.14
0.49
0.71
0.67
0.54
Income from discontinued operations, net of tax
2.29
0.19
0.31
0.36
0.34
Net income
2.43
0.67
1.02
1.03
0.88
Weighted
-average number of shares outstanding
(in millions)
used to compute:
Basic earnings per share attributable to ABB shareholders
2,111
2,133
2,132
2,138
2,151
Diluted earnings per share attributable to ABB shareholders
2,119
2,135
2,139
2,148
2,154
6
BALANCE SHEET DATA:
unaudited
December 31,
($ in millions)
2020
2019
2018
2017
2016
Cash and equivalents and current restricted cash
3,601
3,544
3,445
4,526
3,644
Marketable securities and short-term investments
2,108
566
712
1,083
1,953
Restricted cash - non-current
300
—
—
—
—
Total assets
(1)
41,088
46,108
44,441
43,458
39,391
Long-term debt (excluding current maturities of long-term
debt)
4,828
6,772
6,587
6,682
5,785
Total debt
(2)
6,121
9,059
8,618
7,408
6,783
Common stock
188
188
188
188
192
Total stockholders’
equity (including noncontrolling interests)
15,999
13,980
14,534
15,349
13,897
CASH FLOW DATA:
($ in millions)
2020
2019
2018
2017
2016
Operating activities:
Net cash provided by operating activities — continuing operations
1,875
1,899
2,352
2,588
2,607
Net cash provided by (used in) operating activities — discontinued
operations
(182)
426
572
1,211
1,236
Net cash provided by operating activities
1,693
2,325
2,924
3,799
3,843
Investing activities:
Net cash used in investing activities — continuing operations
(2,272)
(651)
(2,908)
(1,118)
(1,108)
Net cash provided by (used in) investing activities — discontinued
operations
9,032
(164)
(177)
(332)
(197)
Net cash provided by (used in) investing activities
6,760
(815)
(3,085)
(1,450)
(1,305)
Financing activities:
Net cash used in financing activities — continuing operations
(8,206)
(1,328)
(741)
(1,688)
(3,308)
Net cash provided by (used in) financing activities — discontinued
operations
31
(55)
(48)
(47)
(47)
Net cash used in financing activities
(8,175)
(1,383)
(789)
(1,735)
(3,355)
(1)
Total assets
includes ass
ets held for
sale and in
discontinued
operations. See
“Note 3 - Discontinued
operations”
to our Consolidated
Financial Statements.
(2)
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
rising, sustainable annual
dividend per share over time.
The unconsolidated statutory financial statements of ABB Ltd
are prepared in accordance with the Swiss Code
of Obligations.
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, 2020, the total unconsolidated stockholders’ equity
of ABB Ltd was CHF 9,063 million,
including CHF 260 million representing share capital, CHF 12,032
million representing reserves and CHF 3,229 million
representing a reduction of equity for own shares (treasury
stock). Of the reserves, CHF 3,229 million relating to own
shares and CHF 52 million representing 20 percent of share
capital, are restricted and not available for distribution.
7
With respect to the years
ended December 31, 2016, 2017,
2018 and 2019,
ABB Ltd paid a dividend of
CHF 0.76 (USD 0.76) per share, CHF 0.78 (USD 0.81)
per share, CHF 0.80 (USD 0.79) per share and CHF 0.80
(USD 0.82)
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 months
in which the dividends were paid.
With respect to the year ended December
31, 2020,
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
2021 Annual General Meeting (AGM).
For further information on dividends and dividend policy
see “Item 6. Directors, Senior Management and
Employees—Shareholders—Shareholders’ rights—Shareho
lders’ 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”.
Business, economic and industry risks
Our business is exposed to risks associated with the COVID-19
pandemic.
The novel coronavirus (COVID-19)
pandemic has had, and continues to have, significant impacts on
the global
economy including on demand for products, operational
predictability, the movement
of people and products across
borders, supply chains and the cost of capital. Given the global
nature of our business, COVID-19 has adversely
impacted our revenues and operating margins
in all of our businesses and is expected to continue to do
so at least in the
short term. In particular, our service
businesses have been materially impacted and some customer
industries, most
notably cruise operators, are operating significantly below
their normal levels. The ultimate extent to which the
pandemic impacts our business, liquidity,
results of operations and financial condition will depend on
future
developments, which are highly uncertain and cannot
be predicted with confidence, including the availability and
effectiveness of vaccines, future mutations
of the COVID-19 virus and any resulting impact on the effectiveness
of
vaccines, the duration and extent of the pandemic and
waves of infection, travel restrictions and social distancing, the
duration and extent of business closures and business disruptions
and the effectiveness of actions taken to contain,
treat
and prevent the disease. If we or our customers experience
prolonged shutdowns or other business disruptions, our
business, liquidity,
results of operations and financial condition may be materially
adversely affected and our ability to
access the capital markets may be limited.
Our business is exposed to risks associated with the volatile global
economic environment and political conditions.
Adverse changes in economic or political conditions,
particularly in locations where our customers or
operations are located, as well as concerns about global
trade, global health crises, 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.
8
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 Businesses are affected by
the level of investments and demand 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 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.
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
,
including the trade tensions between the United States and
China in recent years.
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 2020,
our total revenues from business with countries identified by the
U.S.
government as state sponsors of terrorism represented significantly
less than 1 percent of our total revenues. Based on
the amount of revenues and other relevant quantitative and
qualitative factors, we have determined that our business in
2020 with countries identified by the U.S. government
as state sponsors of terrorism was not material.
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 2020, approximately 40 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,
•
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.
9
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.
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, 2020, employed about
105,600 people, of which approximately 47 percent were
located in the Europe region, approximately 27 percent in the
Asia, Middle East and Africa region and approximately
26 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. The laws and regulations to
which we are subject can change rapidly and in unexpected
directions. All of 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.
We operate in very
competitive and rapidly changing markets and could
be adversely affected if we fail to keep pace
with technological changes.
We operate
in very competitive and rapidly changing 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,
which may require us to modify our products and systems.
The continual development of advanced technologies for
new products and product enhancements is an important way
in which we remain competitive and maintain acceptable
pricing levels. If we fail to keep pace with technological
changes in the industrial sectors that we serve, we may
experience lower revenues, 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.
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,
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. Addi
tionally, as our customers
become larger and more
concentrated, they could exert pricing pressure on all suppliers,
including us. If we were to lose market share or
10
customers or face pricing pressure due to consolidation of
our customers, our results of operations and financial
condition could be adversely affected.
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.
The risk that we may not be able to obtain raw materials or other
components is increased by the COVID-19 pandemic. 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.
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.
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 expenses
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.
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.
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.
11
The uncertainties relating to the United Kingdom’s
new relationship with the European Union and its potential
impact on the relationship between Switzerland and the European
Union, may have a negative effect on cross-border
trade and our business.
The United Kingdom has withdrawn from the European
Union and has negotiated the terms of such departure
(the UK-EU Trade and Cooperation Agreement
or TCA). The TCA is subject to formal approval by
the European
Parliament and the Council of the European Union before
it comes into effect and has been applied provisionally since
January 1, 2021. Because the agreement merely sets forth
a framework in many respects and will require complex
additional bilateral negotiations between the United Kingdom
and the European Union as both parties continue to work
on the rules for implementation, significant political and
economic uncertainty remains and this has had and may
continue to have a material effect on cross-border
trade with the United Kingdom and with the European Union.
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 ou
r
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, the TCA 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.
Operational risks
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,
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. Despite our
efforts, we have experienced, and may in the future
experience,
cyber-attacks against us and we have
incurred and will continue to incur substantial costs to reduce
the cyber risks to our
systems, networks, products, solutions and services. Similarly,
we have observed a continued increase in attacks
generally against industrial control systems as well as against
our customers and the systems we supply
to them, which
pose a risk to the security of those systems and networks.
Future attacks could potentially lead to the compromising of
confidential information, disruption of our business, improper
use or downtime of our systems and networks or those we
supplied to our customers, manipulation, corruption,
inaccessibility and destruction of data, defective products
or
services, production downtimes and supply shortages. Such
attacks may also expose us to loss of business, claims or
regulatory action.
Any such impact in turn could adversely affect our reputation,
competitiveness and results of
operations. Our insurance coverage may not be adequate
to cover all the costs related to cyber security attacks or
disruptions resulting from such events. Due to the nature
of these security threats, the nature and scope of the impact
of
any future incident cannot be predicted.
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 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 also retain certain
obligations or grant indemnities in connection with a divestment.
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.
Whether we realize the anticipated benefits of a divestmen
t,
including our divestment in 2020 of 80.1 percent of the
Power Grids business, depends on whether we successfully
manage the related risks. 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 historical, existing and potential
future mergers, acquisitions, joint ventures or strategic
12
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 anticipat
ed
benefits,
including operating synergies and cost savings,
from these transactions, including our acquisition in 2018 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.
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. 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.
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 investigat
ion
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. We are
subject to certain ongoing
investigations by governmental agencies.
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 electricity-related
businesses 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.
13
•
If the products produced by our automation-related businesses
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.
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 the
ongoing COVID-19 pandemic and 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
14
•
loss of follow-on work.
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.
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 other defined 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.
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. 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.
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.
Legal and regulatory risks
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
15
goodwill of our products, promote our product recogni
tion, 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. We
also may
engage in legal action to protect our own intellectual property
rights, and enforcing our rights may require considerable
time, money and oversight, and existing laws in the various
countries in which we provide services or solutions may
offer only limited protection.
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 around the world
including the General Data Protection Regulation (GDPR)
in Europe as well as the California Data Privacy Act and
the
California Privacy Rights Act (effective in
January 2023) in the United States. 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
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 as 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. There
can be no assurance that any such actions will be sufficient
to prevent
cybersecurity breaches, disruptions, unauthorized release of
sensitive information or corruption of data. Despite such
actions,
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.
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
laws could result in a higher tax expense and higher
tax payments. Furthermore, this could materially impact
our tax-
related receivables and liabilities as well as deferred income
tax assets and liabilities. In addition, the uncertainty of
the
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 liabilities, returns 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.
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
and chloroparaffins 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
16
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.
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 and
any non-compliance could adversely affect
our reputation and result in significant fines. 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. Any such changes
could also impact our ability to achieve our 2030 Sustainability
targets as well as the related costs and resources
necessary to do so.
General risk factors
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 subjects us to considerable potential exposure
to litigation and legal claims and could be materially
adversely affected if we incur legal liability.
We are subject
to, and may become a party to, a variety of litigation or
other claims. Our business is subject to
the risk of claims involving current and former employees,
customers, partners, subcontractors, suppliers, competitors,
shareholders, government regulatory agencies or others through
private actions, class actions, whistleblower claims,
administrative proceedings, regulatory actions or other
proceedings. Our acquisition activities have in the
past and may
in the future be subject to litigation or other claims. While we
maintain insurance for certain potential liabilities, such
insurance does not cover all types and amounts of potential
liabilities and is subject to various exclusions as well as caps
on amounts recoverable.
17
Item 4.
Information on the Company
INTRODUCTION
About ABB
ABB is a leading global technology company that energizes
the transformation of society and industry to
achieve a more productive, sustainable future. By connecting
software to its electrification, robotics, automation and
motion product portfolio, ABB pushes the boundaries of
technology to drive performance to new levels. With
a history
of excellence stretching back more than 130 years, ABB’s
success is driven by about 106,000 employees
.
Our business is international in scope and we generate revenues in
numerous currencies. We
operate in over
100 countries across three regions: Europe, the Americas, and
Asia, Middle East and Africa. We
are headquartered in
Zurich, Switzerland.
We manage
our company through our four Business Areas: Electrification,
Industrial Automation, Motion and
Robotics & Discrete Automation. For a breakdown
of our consolidated revenues (i) by Business Area, (ii) by
geographic
region,
and (iii) by product type, see “Item 5. Operating and Financial Review
and Prospects—Analysis of Results of
Operations—Revenues” and “Note 23 - Operating segment
and geographic data” to our Consolidated Financial
Statements. Until June 30, 2020, we also operated the
Power Grids business, which is reported as discontinued
operations in the Consolidated Financial Statements (see “Discontinued
operations” section below). On July 1, 2020, we
completed the divestment of 80.1 percent of the Power
Grids business to Hitachi Ltd (Hitachi).
We retain a 19.9
percent
ownership interest through our investment in Hitachi
ABB Power Grids Ltd (Hitachi ABB Power Grids) which
beneficially owns or controls all the subsidiaries of the
Power Grids business.
Our principal corporate offices are located at Affolternstrasse
44, CH 8050 Zurich, Switzerland, telephone
number +41 43 317 7111.
Our agent for U.S. federal securities law purposes is ABB Holdings
Inc., located at
305 Gregson Drive, Cary,
North Carolina 27511. Our internet address is www.abb.com
or global.abb.
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.
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.
As described above, on July 1, 2020, we divested
80.1 percent
of our ownership in the Power Grids business to
Hitachi.
ABB Ltd shares are currently listed on the SIX Swiss Exchange,
the NASDAQ OMX Stockholm Exchange and
the New York
Stock Exchange (in the form of American Depositary Shares).
18
BUSINESSES
Our markets
ABB is a leading global technology company with a comprehensive
and increasingly digitalized offering of
electrification, motion and automation solutions.
ABB’s exposure to customers is geographically
balanced while
catering to multiple end-markets and segments. Through
a full business cycle, we estimate that our end-markets
combined grow at around two percent per annum.
We believe that our
portfolio is well positioned to benefit from secular
growth drivers, including urbanization, labor shortage,
shift to electrification, automation and robotization,
as well as
other data and digitalization trends.
The majority of our businesses are market leaders within
their respective segments with approximately
two-thirds of revenues coming from our Divisions where
we hold a number one or two position in the relevant market.
We believe market
leadership is critical, as it provides an opportunity for us to
be a cost leader in our markets and to also
have the ability to invest more than competitors in research
and development to sustain our technological leadership.
For
a discussion of the geographic distribution of our total
revenues, see “Item 5. Operating and Financial Review and
Prospects—Analysis of Results of Operations—Revenues
.”
Industry Market
Approximately half of our customers are industrial customers. We
serve production facilities and factories
all
around the world from process industries such as oil and
gas, pulp and paper as well as mining, to discrete industries
including automotive, food and beverage and consumer
electronics. Automation,
software and digital services that help
customers achieve improved safety,
uptime, energy efficiency and productivity
are key to the success of our offerings in
this market. The COVID-19 pandemic has served as a prominent
reminder for companies of the importance of simplicity
and flexibility in automated production and has accelerated
customer demand for the digital services and solutions we
offer.
Industrial end-markets were materially impacted by
the COVID-19 pandemic resulting in lower demand for our
products and services worldwide. Global travel restrictions
hindered our capability to execute our project and service
businesses even while customer acceptance of remote
digital services and solutions increased. In process industries,
oil
and gas customers, faced with a substantial decrease in
commodity prices, reduced planned capital expenditures,
which
impacted our order levels. Other process industries, such
as pulp and paper or mining were resilient in 2020.
In discrete industries, end-markets such as food
and beverage, and logistics were robust. Conversely,
investments in robotics
by the automotive industry continued to be challenged
by weak customer demand as well as
uncertainty around the timing and pace of transition from
traditional to electric vehicles.
Transport & Infrastructure
Market
Approximately one-third of our customers operate
in the transport & infrastructure market. Our expertise
provides efficient,
reliable and sustainable solutions for these customers, with a focus
on energy efficiency and reduced
operating costs.
Transport & infrastructure markets were
resilient in 2020. Demand in rail for electrification and
traction
solutions was strong over the year.
Data center markets continued to expand with ABB successful in offering
bundled
solutions
to hyperscale and co-location customers in particular.
Buildings activity was impacted by COVID-19
lockdowns. In the marine sector, we
saw continued strong order demand for our market-leading
electric propulsion
systems, while the services business particularly suffered
after the shutdown of the global cruise industry due to the
COVID-19 pandemic.
EV charging markets continued to expand
during the period.
We received
multiple orders from customers for
EV charging infrastructure, including for
our high-voltage direct-current (DC) fast‑charging
station, the Terra
HP.
As of
December 31, 2020, we have sold more than 17,000 ABB DC
fast-chargers across 80 countries.
19
Utilities Market
ABB delivers solutions mainly for distribution utilities and renewables
customers, while continuing to service
conventional power generation customers with our contro
l
and automation solutions. Following the divestment of our
Power Grids business to Hitachi on July 1, 2020, our exposure
to the utilities market has decreased significantly.
During 2020, business levels in the conventional power
generation and renewables markets were challenged by
global travel restrictions during the COVID-19 pandemic
as well as a lower general demand environment, particularly
for fossil fuels. Demand from electrical distribution utilities was resilient,
with ongoing investments to increase grid
reliability and resilience with integrating increased renewables.
We serve industry
,
transport & infrastructure and utilities through our operating
Divisions which are included
in our Business Areas. Developments in these Business Areas are
discussed in more detail below.
Revenue figures
presented in this Businesses section are before intersegment
eliminations.
Electrification Business Area
Overview
The products of the Electrification Business Area portfolio
are designed to enable safe, smart, and sustainable
electrification, with a full range of low- and medium
-voltage products and solutions, along with pre-engineered
packaged services and tailored solutions for intelligent protection
and connection.
The Electrification Business Area delivers products through
a global network of channel partners and end
customers. Most of the Business Area’s
revenue is derived from distributors and approximately a
quarter is derived from
direct sales to end-users. The remaining revenues
are generated from original equipment manufacturers (OEMs),
engineering, procurement, construction (EPC) contracting
companies, system integrators, utilities and panel builders.
The proportion of direct compared to channel partner
sales varies by segment, product technology and geographic
markets.
The Electrification Business Area had approximately 50,500
employees on December 31, 2020, and generated
$11.9 billion of revenues in 2020.
Customers
The Electrification Business Area serves a wide range of
customer segments, including residential, commercial,
and industrial buildings, electric utilities, oil and gas, chemicals,
data centers, e-mobility,
renewables, food and
beverage, and other industries and infrastructure.
Products and Services
The Electrification Business Area’s
products and services are delivered through five operating
Divisions.
20
The Distribution Solutions Division helps utility,
industry and transport & infrastructure customers improve
power quality and control, reduce outage time and
enhance operational reliability and efficiency.
The Division offers
products, solutions and services that largely
serve the power distribution sector,
often providing the requisite medium-
voltage link between high-voltage transmission systems and
low-voltage users. With ABB Ability
TM
solutions at its core, the offering includes low-voltage
switchgear (up to 1 kilovolt) and medium-voltage equipment
(1 to
66 kilovolts), indoor and outdoor circuit breakers, reclosers,
fuses, contactors, relays, instrument transformers, sensors,
motor control centers, as well as a wide range of air-
and gas-insulated switchgear. The
Division also produces indoor
and outdoor modular systems and other segment-specific
solutions to facilitate efficient and reliable distribution,
protection and control of power,
adding value through design, 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, enriched by advanced digital services for asset management.
Throughout the value chain, the Division
provides training, technical support and customized contracts.
The Smart Power Division helps protect, control,
and connect people, plants, and systems with a portfolio of
low-voltage products and systems. The product offering
includes electric vehicle charging infrastructure from
AC wall
boxes to DC fast charging,
molded-case and air-circuit breakers, safety products including
sensors, switches, contactors,
relays, and power protection solutions such as uninterruptible
power supply (UPS) solutions, status transfer switches and
power distribution units.
The Smart Buildings Division helps optimize efficiency,
safety, security,
and comfort in homes and other
buildings. The Division offers digitally enabled
controls for HVAC,
lighting, shutters, and security in addition to low-
voltage products including conventional wiring accessories,
industrial plugs and sockets, emergency lighting
,
DIN-rail
products, and enclosures ideal for single family homes, multiple
dwellings, commercial buildings, infrastructure and
industrial applications.
The Installation Products Division helps manage the connection,
protection and distribution of electrical power.
The Division’s products are
engineered to provide ease of installation and perform in demanding
and harsh conditions,
helping to ensure safety and continuous operation for
our customers and people around the world. The commercial
essentials product segment includes electrical junction
boxes, commercial fittings, strut and cable tray metal framing
systems for commercial and residential construction.
The premier industrial product segment includes multiple
product
lines, such as Ty
-Rap®, T&B Liquidtight Systems®, PVC coated and nylon
conduit systems, power connection and
grounding systems, cable protection systems of conduits and
fittings for harsh and industrial applications. The Division
also produces cable accessories and apparatus solutions
for medium-voltage applications including reclosers, switchgear,
capacitor switches, current limiting fuses, faulted current
indicators and distribution connectors, with products for
overhead and underground distribution.
The Power Conversion Division supplies innovative
critical power solutions to infrastructure customers and
manufacturers of a wide range of equipment. The Division
supports its customers in telecom/5G, networking, data
centers, and industrial applications (such as oil and gas,
utility, power generation,
and robotics) in rapidly changing,
disruptive environments where information, access and
response times are redefining the markets. The Power
Conversion Division also provides customers with reliable
and efficient power that supports increasing infrastructure
requirement, ensuring that data flows 24/7, while optimizing
footprint, energy costs and operations. The
Division
supports customers by providing the latest industry
insights and technology,
partnering to co-develop solutions to tackle
evolving challenges.
Sales and Marketing
The Electrification Business Area’s
global markets common sales and marketing organization
creates demand
across all channels and products, with a range of promotional activities
and support services including account, channel,
and segment sales management, commercial operations,
and digital expertise.
Competition
The Electrification Business Area’s
principal competitors vary by product group and include
Chint, Eaton,
Hubbell, Legrand, LS Electric, Panasonic, Rittal, Schneider
Electric and Siemens.
21
Capital Expenditures
The Electrification Business Area’s
capital expenditures for property,
plant and equipment totaled $276 million
in 2020, compared to $279 million in 2019. Investments
in 2020 were primarily related to footprint changes,
equipment
replacement and upgrades. Geographically,
in 2020, Europe represented 48 percent of the capital expenditures,
followed
by the Americas (41 percent) and Asia, Middle East and
Africa (11 percent).
Industrial Automation Business Area
Overview
The Industrial Automation Business Area offers
customers in process and maritime industries, a broa
d
range of
industry-specific integrated automation, electrification
and digital solutions that are designed to optimize the
productivity, energy
efficiency and safety of industrial processes and operations,
based on the Business Area’s deep
domain knowledge and expertise of each end market.
The solutions include turnkey engineering, control technologies,
software and lifecycle services, measurement and analytics
products, marine and turbocharging offerings,
Human
Machine Interfaces (HMI) and integrated safety technology
.
The systems can link various process and information flows
allowing customers to manage and control their entire
business process based on real-time information. Additionally,
the
systems and solutions enable customers to increase production
efficiency,
optimize assets and reduce environmental
impact.
The Industrial Automation Business Area’s
offerings are available as separately sold
products or as part of an
automation, electrification and/or instrumentation solution
.
For overall solutions, Industrial Automation integrates
products and solutions from the Electrification, Motion
and Robotics & Discrete Automation Business Areas. The
Business Area’s offering
s
are sold primarily through its direct sales force as well as third
-party channels.
The Business Area had approximately 21,500 employees
as of December 31, 2020, and generated revenues of
$5.8 billion in 2020.
Customers
The Industrial Automation Business Area’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 automation,
electrification,
instrumentation and digitalization offerings that
deliver value mainly through lower capital costs, increased
plant availability, lower
life-cycle costs and lower project
risks.
Products and Services
Industrial Automation offers an extensive portfolio
of products, solutions,
digital applications and services.
These offerings can be standalone basic control
to integrated collaborative systems for complex or critical processes.
Solutions,
such as Distributed Control
System (DCS) 800Xa, provide 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. 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 Automat
ion Sentinel, a subscription-based life cycle management
program that provides services to maintain and continually
advance and enhance ABB Ability
TM
control systems (e.g.
cyber security patches) and thus allows it to manage a
customer’s life-cycle costs. The ABB Ability
TM
Advanced
Services offering portfolio provides individual
software-based services to continuously improve automation and
processes. ABB Ability
TM
Genix supports industries to unlock value by contextualizing
and integrating data from a
variety of systems, further utilizing artificial intelligence
and analytics to provide deep meaningful actionable insights.
In addition, ABB Ability
TM
Edgenius, a cloud-managed edge platform,
makes real time operations data from a large
number of systems and devices at the point of production
available for visualization, analysis and action.
22
The Industrial Automation Business Area has five operating
Divisions selling their offerings into the
energy,
process and maritime industries.
The Energy Industries Division serves the energy
market with leading automation solutions for oil, gas,
chemicals, pharmaceuticals, and all types of power generation
.
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. The Division brings deep
industry domain expertise coupled with the ability to integrate
both automation
and electrical, resulting in faster start-up times, increased facility productivity
and reduced overall
capital and operating costs for customers. 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 aim to 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. For the power generation
market, the offering includes instrumentation,
excitation and control systems. Its technologies are designed to
help
optimize performance, improve reliability,
enhance efficiency and minimize environmental
impact throughout the plant
life cycle. In the pharmaceuticals and fine chemicals areas, the
Division offers applications to support manufacturing,
packaging, quality control and compliance with regulatory
agencies.
The Division also serves the water industry,
including applications such as pumping stations and desalination
plants.
The Process Industries Division serves the mining, minerals
processing, metals, aluminum, cement, pulp and
paper, and food and beverage, as well as their
associated service industries. The Division brings
deep industry domain
expertise coupled with the ability to integrate both automation
and electrical increased productivity and reduced overall
capital and operating costs for customers. For mining,
metals and cement customers, solutions include specialized
products and services, as well as total production systems.
The Division designs, plans, engineers, supplies, erects and
commissions integrated 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.
The offering for the pulp and paper industries includes control
systems,
quality control systems, drive systems, on-line sensors, actuators
and field instruments. Digitalization solutions,
including collaborative operations and augmented reality,
help improve plant and enterprise productivity,
and reduce
maintenance and energy costs.
The Marine & Ports Division serves the marine and
ports industry through its leading solutions for specialty
vessels, as well as container and bulk cargo handling.
For the shipping industry,
the Division 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 well positioned to help
improve the profitability of a customer’s business throughout
the entire life cycle of a fleet. The Division 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™ 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,
the Division delivers automation
and electrical systems for container and bulk cargo
handling, from ship to gate. These systems and services help
terminal
operators meet the challenge of larger ships,
taller cranes and bigger volumes per call, and make terminal
operations
safer, greener and more productive.
The Turbocharging Division
manufactures and maintains turbochargers
for diesel and gas engines having
power levels ranging from 500 kilowatts to over 80
megawatts. The Division provides engine builders and application
operators with advanced turbocharging solutions
and services for efficient and flexible application operations
and in
compliance with the most stringent environmental requirements.
The Measurement & Analytics Division 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.
23
Sales and Marketing
The Industrial Automation Business Area’s
sales are primarily made through its direct sales force
as well as
third-party channel partners, such as distributors, system
integrators and OEMs. The majority of revenues are derived
through the Business Area’s
own direct sales channels.
Competition
The Industrial Automation Business Area’s
principal competitors vary by industry or product group
.
Competitors include:
Emerson, Honeywell, Schneider Electric, Siemens, Yokogawa
,
General Electric,
Endress +
Hauser,
Kongsberg, Valmet
and Garrett.
Capital Expenditures
The Industrial Automation Business Area’s
capital expenditures for property,
plant and equipment totaled
$56 million in 2020,
compared to $64 million in 2019. Principal investments in 2020
were in Turbocharging and
the
Measurement & Analytics Divisions. Geographically,
in 2020,
Europe represented 70 percent of the capital
expenditures, followed by Asia, Middle East and
Africa (19 percent) and the Americas (11 percent).
Motion Business Area
Overview
The Motion Business Area provides pioneering technology,
products, solutions and related services to
industrial customers to increase energy efficiency,
improve safety and reliability,
and maintain precise control over
processes. The portfolio includes motors, generators
and drives for a wide range of applications in all industrial sectors.
The Motion Business Area had approximately 20,900
employees as of December 31, 2020, and generated
around $6.4 billion of revenues in 2020.
Products and Services
Motion manufactures and sells drives, motors, generators,
traction converters and mechanical power
transmission products. Building on long-standing experience
in electric powertrains, the Business Area combines
domain expertise and technology to deliver the optimum
solution for a wide range of applications for a comprehensive
range of industrial segments. In addition, the Business Area, along
with its channel partners, has an industry-leading
global service presence.
The Motion Business Area’s
products and services are delivered through six operating
Divisions.
The Motors & Generators Division offers a
comprehensive product portfolio of large AC motors and
generators, and IEC low-voltage (LV)
and NEMA motors. The Division provides a large range
of motors, from general
purpose, to highly customized designs, large
AC synchronous motors and high-voltage induction motors to
support high
efficiency,
reliability and availability across all major industries and applications.
The Division offers a full range of
energy efficient low-voltage IEC motors,
including SynRM (synchronous reluctance) motors to support customers
to
reduce power bills and cut emissions. The Division also provides
IEC LV
motor solutions that are designed to improve
reliability and productivity in severe applications. Baldor
-Reliance® NEMA industrial electric motors offer customers
quality, reliability
and efficiency.
Our investments in technology,
tools and processes aim to ensure the broad NEMA
offering of general purpose and application
-specific solutions perform as expected, every time. The Division
designs
and
builds
generators for a wide range of industries, including power generation,
marine, oil and gas, mining, and data
centers.
24
The Drive Products Division serves industries, infrastructure
and machine builders with state-of-the-art drives
and softstarters. With products, global
scale and local presence, the Division helps
customers to improve energy
efficiency,
productivity and safety.
The System Drives Division provides global supplies of
high-power, high-performance drives,
drive systems
and packages for industrial process and large infrastructure
applications. In addition, the Division offers
global support
to help customers, partners and equipment manufacturers with
asset reliability, performance
improvement and energy
efficiency in mission critical applications.
The Service Division serves customers worldwide and aims
to help customers by maximizing uptime,
extending life cycle and enhancing the performance and
energy efficiency of their electrical motion
solutions. The
Division is leading the way in digitalization by securely connecting
motors and drives to help customers prevent
expensive downtime while also optimizing operations’
profitably, safety and reliably
.
The Traction Division is a recognized
leader in traction technologies that drive innovation in rail and
e-
mobility. A comprehensive
range of high performance propulsion, auxiliary and energy
storage solutions help improve
energy efficiency and contributes to making
transportation more sustainable.
The Mechanical Power Transmission Division
offers the Dodge® brand of mounted bearings,
enclosed gearing
and power transmission components to help customers
in robust industries increase the safety,
productivity and
profitability of their operations. The Division offers
customized innovative solutions and advanced technologies
that
improve output, increase uptime, and enhance system value.
Customers
The Motion Business Area serves a wide range of
customers in different industrial segments such as pulp
and
paper, oil and gas, metals and
mining, food and beverage, transportation, power generation,
marine and offshore.
Sales and Marketing
Sales are made both through direct sales forces and through
channel partners, such as distributors and
wholesalers, as well as installers, OEMs and system integrators.
The proportion of direct sales to end users compared
to
channel partner sales varies among the different
industries, products and geographic markets.
Competition
The principal competitors of the Motion Business Area include
Schneider, Siemens, Toshiba,
WEG Industries,
SEW EURODRIVE and Danfoss.
Capital Expenditures
Capital expenditures in the Motion Business Area for
property, plant and
equipment totaled $93 million in
2020, compared to $110 million in
2019. Principal investments in 2020 were primarily related to
equipment
replacement, footprint adjustments and automation upgrades. Geographically,
in 2020, Europe represented 45 percent of
the capital expenditures, followed by the Americas (40
percent) and Asia, Middle East and Africa (15 percent).
Robotics & Discrete Automation Business Area
Overview
The Robotics & Discrete Automation Business Area provides robotics
,
and machine and factory automation
including products, software, solutions and services. Revenues
are generated both from direct sales to end users as well
as from indirect sales mainly through system integrators
and machine builders.
25
The Robotics & Discrete Automation Business Area had approximately
10,300 employees as of December 31,
2020 and generated $2.9 billion of revenues in 2020.
Products and Services
The Robotics & Discrete Automation Business Area’s
products and services are delivered through two
operating Divisions.
The Robotics Division offers a wide range
of products, solutions and services such as robots, robotics
application cells and smart systems, field services, spare parts, digital
services, engineering and operations software.
This offering provides productivity,
quality, flexibility and
simplicity for operations,
e.g. to meet the challenge of
making smaller lots of a larger number of
specific products in shorter cycles for today’s
dynamic global markets and
coping with increasing uncertainty.
Robots are also used in activities or environments which may
be hazardous to
employee health and safety,
such as repetitive or strenuous lifting, dusty,
hot or cold rooms, or painting booths and can
help customers overcome labor shortages. Robotics solutions
are used in a wide range of segments from automotive
OEMs, automotive suppliers, electronics, general
industry, consumer goods,
food and beverage, and warehouse/logistics
center automation. They are increasingly deployed in service applications
for health care, restaurants and retail. Typical
robotic applications include welding, material handling,
machine tending, machining, painting, picking, packing,
palletizing and assembly.
The Machine Automation Division offers integrated
automation solutions based on programmable logical
controllers, industrial PCs, servo motion, industrial transport
systems and machine vision. It also provides software
for
engineering and optimization. The range of solutions are
mainly used by machine builders for various types of series
machines, e.g. for plastics, metals, printing and packaging.
Customers
Robotics & Discrete Automation serves a wide range
of customers. The main customers are active in industries
such as automotive, machine building, metalworking,
electronics, food and beverage and logistics. They include
end-
users such as manufacturers, system integrators and machine
builders.
Sales and Marketing
Sales are made both through direct sales forces as well as through
third‑party channel partners, such as system
integrators and machine builders.
The proportion of direct sales compared to channel partner
sales varies among the
different industries, product technologies and
geographic markets.
Competition
Competitors of the Robotics & Discrete Automation Business
Area vary by offering.
They include companies
such as Fanuc, Kuka, Yaskawa
,
Epson,
Dürr, Stäubli, Universal Robots, Rockwell Automation
,
Siemens Digital
Factory,
Mitsubishi Electric and Beckhoff.
Capital Expenditures
The Robotics & Discrete Automation Business Area’s
capital expenditures for property,
plant and equipment
totaled $64 million in 2020, compared to $59 million
in 2019. Principal investments in 2020 were primarily related to
production capacity,
upgrades and equipment replacement. Geographically,
in 2020, Europe represented 81 percent of
the capital expenditures, followed by Asia, Middle East and
Africa (16 percent) and the Americas (3 percent).
26
Corporate and Other
Corporate and Other includes headquarters, central research
and development, real estate activities, Corporate
Treasury Operations, Global Business Services
(GBS), the investment in Hitachi ABB Power Grids 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, the historical business activities of certain divested
businesses are presented in Corporate and Other.
These include the high-voltage cables business, steel structures and
certain EPC contracts relating to the oil and gas industry.
Corporate headquarters and stewardship activities include
the operations of our corporate headquarters in
Zurich, Switzerland, as well as limited corporate‑related
activities in some countries. These activities cover staff
functions with group‑wide responsibilities, such as accounting
and financial reporting, corporate finance and corporate
treasury, taxes, financial
planning and analysis, internal audit, legal and integrity,
compliance, risk management and
insurance, corporate communications, information systems and
investor relations.
GBS operates shared service centers globally through
a network of five hubs and consists of both expert and
transactional services in the areas of human resources, finance,
information services, legal, real estate, procurement and
logistics, customer contact centers, global travel services
and other ancillary activities. GBS also staffs and maintains
front offices in most countries. The costs in GBS are
incurred primarily for the benefit of the Business Areas, who
are
charged
for their use of the services.
A significant portion of the costs for GBS and other
shared corporate overhead costs are charged to the
operating businesses. Up until the divestment of the
Power Grids business on July 1, 2020, overhead and other
management costs, including GBS costs, which would
have been allocated or charged to our Power Grids
business, and
which were not directly attributable to this business, have
not been allocated to the discontinued operation and are
included in Corporate and Other as “stranded costs”.
Corporate and Other had approximately 1,600 employees at
December 31, 2020.
DISCONTINUED OPERATIONS
In July 2020, we divested 80.1 percent of our Power
Grids business to Hitachi Ltd. As a result, the Power Grids
business is reported as discontinued operations
in the Consolidated Financial Statements for all years presented. See
“Note 3 - Discontinued operations” to our Consolidated
Financial Statements.
Power Grids business
The former Power Grids business of ABB delivered products, systems,
software and service solutions across
the power value chain for utility,
industry and transport & infrastructure customers.
The Power Grids business operated worldwide with
a globally diversified manufacturing,
engineering,
and
research and development footprint. Direct sales account
ed for the majority of total revenues generated by the
business
while external channel partners such as EPCs, wholesalers, distributors
and OEMs accounted for the rest.
Products and Services
The Grid Automation operation supplied
substation automation products, systems and services. It also provide
d
Supervisory Control and Data Acquisition (SCADA) systems for
transmission and distribution networks as well as a
range of wireless, fiber optic and powerline carrier-based
telecommunication technologies for mission-critical
applications and also offered grid-edge and
microgrid solutions. Its enterprise software portfolio provided
solutions for
managing and optimizing assets, operations, logistics, financials and
HR, reducing operating costs and improving
productivity for customers.
27
The Grid Integration operation was a leading provider
of integration and transmission solutions such as High
Voltage
Direct Current (HVDC). Another key part of the portfolio
was the Flexible Alternating Current Transmission
Systems (FACTS) business,
which comprises Static Var
Compensation (SVC) and static compensator (STAT
COM)
technologies to address stability and power quality issues. The
Grid Integration operation’s portfolio
also included
a
range of high-power semiconductors, a core technology
for power electronics deployed in HVDC, FACTS
and rail
applications. The Grid Integration operation also provided
transmission and distribution substations and associated
lifecycle services. These substations are used in utility and
non-utility applications including rail, data centers and
various industries. Battery energy storage solutions
and shore-to-ship power supply were also part of the customer
offering.
The High Voltage
products operation was a provider of high voltage switchgear
up to 1200 kV AC and 1100
kV DC with a portfolio spanning air-insulated,
gas-insulated and hybrid technologies. It also manufacture
d
generator
circuit breakers, a key product for integrating large
power plants into the grid. The portfolio also included
a broad range
of capacitors and filters that facilitate power quality,
instrument transformers and other substation components.
The Transformers operation supplied
transformers that are an integral component found across the power
value
chain, enabling the reliable, efficient and
safe conversion of voltage levels. The product range included
dry- and liquid-
distribution transformers, traction 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 had an extensive portfolio
of service offerings across the value chain
.
The
portfolio included 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 further enhanced the portfolio.
CAPITAL EXPENDITURES
Total capital expenditures
for property, plant and
equipment and intangible assets (excluding intangibles
acquired through business combinations) amounted to
$694
million,
$762 million and $772 million in 2020, 2019 and
2018, respectively.
In 2020 and 2019,
capital expenditures were 24 percent and 21 percent lower,
respectively, than
depreciation and amortization. Excluding acquisition
-related amortization, capital expenditures were 6 percent higher
in
2020 and 9 percent higher in 2019,
respectively,
than depreciation and amortization.
Capital expenditures in 2020 remained primarily focused
in mature markets, reflecting the geographic
distribution of our existing production facilities. Capital expenditures
in Europe and North America in 2020 were driven
primarily by upgrades and maintenance of existing production
facilities, mainly in the U.S., Switzerland, Germany,
Italy, Finland,
Sweden and Austria. Capital expenditure in the U.S. was primarily driven
by GEIS-related footprint
changes and product conversions in the Electrification Business Area
and upgrades
of existing production facilities in
the Motion Business Area.
Expenditures in Austria included continued investment
in the state-of-the-art innovation and
training campus, which is planned to become one of our
largest research and development centers for new automation
technologies. Additionally,
we started the construction of an upgraded facility in Switzerland
for our Motion Business
Area. This investment aims to expand our existing global
center of excellence for power electronics and also expand
related innovation capabilities. Capital expenditures in
emerging markets continued to remain primarily concentrated
in
China, India and Poland, and focus on increasing existing
production capacity.
The construction of an advanced,
automated and flexible robotics factory in China
continued and is expected to be completed in 2021. This factory 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
2020 and 2019 was 22 percent and 27 percent, respectively.
At December 31, 2020, construction in progress for
property, plant and equipment
was $505 million, mainly in
the U.S., Switzerland, Austria, Germany and China while
at December 31, 2019, construction in progress for property,
plant and equipment was $500 million, mainly in the U.S.,
Switzerland, Finland, Germany,
Austria and Sweden.
Our capital expenditures relate primarily to property,
plant and equipment. For 2021, we estimate the
expenditures for property,
plant and equipment will be lower than our annual depreciation
and amortization charge,
excluding acquisition-related amortization.
28
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 Business
Areas, Divisions and in key countries. Our supply chain
operations consists of a number of teams, each focusing on
different product categories. These category
teams take advantage of opportunities to leverage the scale of ABB on
a
global, Business Area and/or Division level, as appropriate,
to optimize the efficiency of our supply networks
in a
sustainable manner.
Our supply chain management organization
’s activities and objectives include
:
•
pool and leverage procurement of materials and services,
•
provide transparency of ABB’s global
spending through a comprehensive performance and reporting
system linked to our enterprise resource planning (ERP)
systems,
•
strengthen ABB’s supply
chain network by implementing an effective product
category management
structure and extensive competency‑based training, and
•
monitor and develop our supply base to ensure sustainability,
both in terms of materials and processes
used.
We buy many
categories of products which 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 derivative contracts.
For example, we manage copper,
silver 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 derivatives 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 2020, supply chain management personnel
in our businesses, and in the countries in which we
operate, along with the category teams, continued to focus
on value chain optimization efforts in all areas, while
maintaining and improving quality and delivery performance.
Each Business Area quickly implemented a COVID-19
task force both in operations and supply chain management.
The Business Areas experienced some delays and shortages
with suppliers due to the global pandemic, however we responded
to these shortages and took mitigating actions such as
building up larger buffer stocks, approving
new suppliers, changing supplier splits, combined with daily,
weekly and
monthly task force project follow up.
We have been able
to operate without significant disruption and support business
growth while maintaining delivery schedules to our customers.
In August 2012, the SEC issued its final rules regarding
“Conflict Minerals”, as required by section 1502 of the
Dodd‑Frank Wall
Street Reform and Consumer Protection Act. We
initiated conflict minerals processes in 2013 and
have continuously aimed at improving and tailoring the
processes to our value chain. We
continue to work with our
suppliers and customers, to enable us to comply with
the rules and disclosure obligations. Further information on ABB’s
Conflict Minerals policy and supplier requirements can
be found under “Material Compliance”
at
global.abb/group/en/about.supplying.
29
PATENTS
AND TRADEMARKS
While we are not materially dependent on any one of our
intellectual properties, as a technology-driven
company, we believe
that intellectual property rights are crucial to protect the
assets of our business. Over the past ten
years, we have continued to substantially add new applications
to our existing first patent filings, and we intend to
continue our aggressive approach to seeking patent protection.
As of December 31, 2020, we have approximately 23,900
patent applications and registrations, of which approximately
5,300 are pending applications. These patents include
more than 3,100 utility model and design applications
and registrations, of which approximately 250 are pending
applications. In 2020, we filed more than 1,600 patent
s, utility model and design applications for more than 600
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.
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.
30
Our eco-efficiency portfolio of products, solutions
and services continues to grow.
This portfolio delivers
positive use-phase impacts in three areas: energy
efficiency,
renewable energy and resource efficiency.
In 2020, ABB
set the target to support customers in reducing
their annual CO
2
responsible operations all reported measures are on track
to achieve the 2030 targets.
To manage environmen
tal 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 293 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 70 declarations for major
product lines are published on our Web
site www.abb.com
,
some of which have been externally certified.
In 2020, approximately 91 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 2020 are not yet covered by our environmental
reporting. We
expect that this reporting will be
implemented in 2021. 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 5 environmental incidents were reported in
2020, none of which had a material environmental impact.
In 2020, 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., several
European nations and certain other countries 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”.
31
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. ABB discontinued its Iranian
business on
November 4, 2018. ABB is completing minor work
on a long-term contract which is being performed in line with
applicable sanctions. The revenues attributable to these products
and services in 2020 amounted to approximately
$2 million.
ORGANIZATIONAL STRUCTURE
ABB Ltd is the ultimate parent company of the ABB Group.
It is the sole shareholder of 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, 2020, the name, place of incorporation
and ownership interest of the significant direct and indirect
subsidiaries of ABB Ltd, Switzerland. In addition, ABB Ltd
also owns 19.9 percent of Hitachi ABB Power Grids Ltd.
ABB’s operational group
structure is described above in the “Businesses” section of Item
4.
Company name/location
Country
ABB
interest %
ABB S.A., Buenos Aires
Argentina
100.00
ABB Australia Pty Limited, Moorebank, NSW
Australia
100.00
ABB Group Investment Management Pty. Ltd., Moorebank, NSW
Australia
100.00
ABB AG,
Wiener Neudorf
Austria
100.00
B&R Holding GmbH, Eggelsberg
Austria
100.00
B&R Industrial Automation GmbH, Eggelsberg
Austria
100.00
ABB N.V.
,
Zaventem
Belgium
100.00
ABB Automacao Ltda., Sorocaba
Brazil
100.00
ABB Eletrificacao Ltda., Sorocaba
Brazil
100.00
ABB Bulgaria EOOD, Sofia
Bulgaria
100.00
ABB Electrification Canada ULC, Edmonton, Alberta
Canada
100.00
ABB Inc., Saint-Laurent, Quebec
Canada
100.00
ABB S.A., Santiago
Chile
100.00
ABB (China) Investment Limited, Beijing
China
100.00
ABB (China) Ltd., Beijing
China
100.00
ABB Beijing Drive Systems Co. Ltd., Beijing
China
90.00
ABB Beijing Switchgear Limited, Beijing
China
60.00
ABB Electrical Machines Ltd., Shanghai
China
100.00
ABB Engineering (Shanghai) Ltd., Shanghai
China
100.00
ABB Shanghai Free Trade Zone Industrial Co., Ltd., Shanghai
China
100.00
ABB Shanghai Motors Co. Ltd., Shanghai
China
75.00
32
Company name/location
Country
ABB
interest %
ABB Xiamen Low Voltage
Equipment Co. Ltd., Xiamen
China
100.00
ABB Xiamen Switchgear Co. Ltd., Xiamen
China
66.52
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
B + R Industrie-Elektronik GmbH, Bad Homburg
Germany
100.00
Busch-Jaeger Elektro GmbH, Lüdenscheid
Germany
100.00
ABB Engineering Trading and Service Ltd., Budapest
Hungary
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
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
ABB B.V.,
Rotterdam
Netherlands
100.00
ABB Finance B.V.,
Rotterdam
Netherlands
100.00
ABB Holdings B.V.,
Rotterdam
Netherlands
100.00
ABB AS, Fornebu
Norway
100.00
ABB Electrification Norway AS, Skien
Norway
100.00
ABB Holding AS, Fornebu
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
99.93
ABB Industrial Solutions (Klodzko) Sp.z o.o., Klodzko
Poland
99.93
ABB Sp. z o.o., Warsaw
Poland
99.93
Industrial C&S of P.R.
LLC, San Juan
Puerto Rico
100.00
33
Company name/location
Country
ABB
interest %
ABB Ltd., Moscow
Russian Federation
100.00
ABB Electrical Industries Co. Ltd., Riyadh
Saudi Arabia
65.00
ABB Pte. Ltd., Singapore
Singapore
100.00
ABB Holdings (Pty) Ltd., Modderfontein
South Africa
100.00
ABB South Africa (Pty) Ltd., Modderfontein
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 Canada EL Holding GmbH, Zurich
Switzerland
100.00
ABB Capital AG, Zurich
Switzerland
100.00
ABB Information Systems Ltd., Zurich
Switzerland
100.00
ABB Investment Holding 2 GmbH, Zurich
Switzerland
100.00
ABB Management Services Ltd., Zurich
Switzerland
100.00
ABB Schweiz AG, Baden
Switzerland
100.00
ABB Ltd.,
Taipei
Taiwan (Chinese Taipei)
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 Installation Products International LLC., Wilmington, DE
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
Industrial Connections & Solutions LLC, Cary, NC
United States
100.00
(1) Company consolidated
as ABB exercises full management control.
34
DESCRIPTION OF PROPERTY
As of December 31, 2020, 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 is situated in the U.S.,
China, Germany, Finland,
Canada, Italy, India, Sweden,
Poland and Switzerland. 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. As a result of the divestment
of the Power Grids business to Hitachi Ltd, certain property,
plant and equipment previously owned by ABB which related to
the Power Grids business, was sold as part of the
divestment. In addition, certain property,
plant and equipment relating to the Power Grids business continues
to be
owned by ABB and is leased to Hitachi ABB Power Grids.
The net book value of our property,
plant and equipment at December 31, 2020, was $4,174 million,
of which
machinery and equipment represented $1,530 million,
land and buildings represented $2,139 million and construction
in
progress represented $505 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
35
Item 5.
Operating and Financial Review and Prospects
The discussion in Item 5 below provides a comparative
analysis between 2020 and 2019. See “Item 5.
Operating and Financial Review and Prospects” in our
Annual Report on Form 20-F for the year ended December 31,
2019,
for a comparative discussion and analysis between 2019
and 2018.
MANAGEMENT OVERVIEW
The year 2020 was unprecedented due to the COVID-19
pandemic. ABB prioritized the health and safety of its
employees while ensuring business continuity where
possible.
ABB responded to the challenges, adapting its operations
to keep the vast majority running during various levels
of government restrictions. This response allowed ABB to stay
close to customers and to keep, where possible, to order
delivery deadlines, particularly for critical infrastructure
applications. Going forward we
look to retain some portion of the more beneficial learnings from
COVID-19, for
example, by enhancing flexible working arrangements
and encouraging more virtual meetings with customers.
During 2020, additional steps were taken to sustainably
improve ABB’s future operating
performance. Some of
the key actions include the launch of the ABB Purpose, implementing
the operating model the ABB Way,
which
increases accountability,
transparency and speed by transferring operating decisions
closer to customers, a review of the
business portfolio as well as a review of the digital strategy.
The ABB Purpose
The ABB Purpose was launched mid-year in 2020 and
captures what we stand for today and what we aspire to
be in the future. We
believe that ABB’s technologies
and products are well aligned to key market trends and customer
needs such as the electrification of transport, automated
manufacturing, digital solutions and increased sustainable
productivity. The Group
is trusted by customers, holding number 1 or number 2 market
share positions in most of the
segments in which we operate. With our
Purpose at the core, ABB strives to create superior value for customers,
employees and shareholders. The ABB Purpose is summarized
as:
•
We succeed by
creating superior value.
•
We push the
boundaries of technology to drive performance to new levels.
•
We energize
the transformation of society and industry to achieve a more productive,
sustainable future.
The ABB Way
Under
the ABB Way,
we further evolve our decentralized business model in order
that the mandate and
accountability lie in our Divisions, strengthening performance
management, consistently putting stability and
profitability before growth, and driving active portfolio
management.
The ABB Way comprises
of a select number of common processes covering
our business model, our people
and culture, the ABB brand and
our governance framework. It sets the stage for accountability,
transparency and speed
at ABB.
Closeness to customers and domain expertise sit in the
Divisions, hence under the ABB Way
the Divisions
have been made the highest level at which operating
decisions are made, prioritizing stability and profitability
before
growth. A Division should not focus fully on growth
before having achieved a structurally stable business platform
and
a profitability level contributing to the Group’s
targeted financial framework.
Each Division within the four Business Areas of Electrification,
Industrial Automation, Motion and Robotics &
Discrete Automation, now has full accountability for its results
of operations and operating balance sheet. Each Division
carries the responsibility for business development and
research and development for leading technology to secure
a
number 1 or 2 market position.
36
The Divisions are free to collaborate where it adds efficiency,
for example by sharing select business services
or administrative functions. In line with this accountability,
commencing in 2021 there will no longer be any shared
services or functions operated centrally at a corporate
level requiring cost allocations to the Business Areas. The
corporate area will focus on necessary financial, strategic
and governance activities, with a reduced headcount of less
than 1,300 employees. Over the past two years, simplification
efforts have delivered meaningful cost benefits
to the
Group such that by the end of 2020, we achieved net annual
run rate cost savings exceeding $500 million.
Strong performance management is key in a decentralized
business model. In the middle of 2020,
a new
scorecard system for the Divisions and Business Areas was introduced,
based on a standardized set of Key Performance
Indicators. The system aids continuous improvement by increasing
transparency and accountability.
It is accompanied
by a mandatory target to make annual productivity
improvements of at least 3 percent each year.
Starting in 2021, the Annual Incentive Plans (AIPs) will be
aligned to Business Area and Divisional mandates
for stability and profitability before growth. For example,
AIP targets in a growth Division will have a higher
weighting
toward the delivery of targeted orders or
revenues growth, as well as the mandatory 3 percent productiv
ity improvement.
Business portfolio review
We have further
strengthened our portfolio review process to ascertain whether
ultimately ABB is the best
owner of businesses. Our systematic approach is based
on multiple factors within the three evaluation categories:
strategic attractiveness, value creation potential and
fit within ABB. During 2020, the Group’s
continuous portfolio
review process resulted in a decision to sell the businesses operated
by three Divisions: Turbocharging
in Industrial
Automation, Mechanical Power Transmission
in Motion, and Power Conversion in Electrification. Combined,
these
Divisions generated
approximately $1.6 billion revenues in 2020,
or about 6 percent of total revenues. The divestment
process will focus on seeking the best value-accretive solution
for ABB and those businesses with time being a critical
factor.
In addition, ABB’s active portfolio
management process will drive decisions within the Divisions to
improve or
exit areas of underperformance, supporting improved
performance ambitions. Further,
the Group intends to pursue
strategic partnerships as well as bolt-on acquisitions, and
plans to complete five or more such transactions each
year,
mainly in our Divisions with growth mandates.
Digital strategy
In line with our Purpose, the Group’s
digital strategy is focused on creating superior customer value. Our
digital offering is comprised of software-enabled
products and systems, as well as software and digital services,
and is
differentiated through our domain expertise.
Our deep understanding of customers’ needs and operations is based
on
decades-long history in a sector-focused approach,
our large installed base and the global leadership
position we have in
many sectors.
We intend to
accelerate the expansion of our digital offering that is tailore
d
to specific sectors or applications.
In line with the ABB Way
this will be led by our businesses that have already successfully
developed a comprehensive
digital offering.
Our digital strategy drives new revenues in software and
digital services that generally have a higher gross
margin and additionally pull-through some
of our traditional offering. Overall, this results in higher
quality of revenues
for the Group with improved margins and superior
returns.
We continue
to right-size our investments in technology according to
the need of each Division. In 2020, we
spent 4.3 percent of our revenues on non-order related
research and development. Within our
research and development
spend, we expect the focus on digitalization will grow
.
Already, out of approximately
7,000 employees in research and
development, more than 60 percent are focused on software
and digitalization. Our ambition is to grow revenues derived
from software and digital services at a double-digit rate going
forward.
37
Business progress
During 2020, our financial performance was impacted
by challenging general market conditions, influenced by
the effects of the COVID-19 pandemic. At the
same time, we focused on accelerating cost mitigation efforts,
which
aided profitability and cash flow generation during a
tough period. Throughout the COVID-19 pandemic, our top
priority has been the health and safety of our people. Substantially
all of our production facilities have remained fully or
partly operational and operations have been adapted as necessary
for the new environment.
Orders and revenues declined in all Business Areas driven by
pandemic induced headwinds and the steep drop
in the oil price. Demand decreased year-on-year in all
regions with the Americas seeing the largest declines,
while
AMEA was almost flat due to strength in China particularly
towards the end of the year. While
short-cycle product
demand recovered relatively quickly from the sharp downturn
seen at the onset of the pandemic,
project and service
activities continued through the year to be impacted by
various travel restrictions implemented by countries around
the
world.
As a result, the Electrification and Motion Business Areas, which
are both more product-focused,
showed a
relatively resilient performance with annual orders in
2020 declining 9 and 3 percent respectively.
Portfolio changes
adversely affected Electrification by about
3 percent. Industrial Automation and Robotics & Discrete Automation
faced
greater challenges in end-markets such as oil and gas,
conventional power generation, marine and automotive.
As a
result, annual orders
in Robotics & Discrete Automation declined 12 percent, while Industrial
Automation,
benefiting
from a few significant large orders in Marine
,
declined 4 percent in 2020.
Despite the market challenges faced by the
Group during 2020, our order backlog increased 7 percent
.
Group profitability showed good resilience, reflecting
cost reductions in all Business Areas, strong progress in
Electrification with the integration of the GEIS business
and turnaround of the Installation Products Division,
and cost
savings achieved through the ABB OS program,
particularly corporate costs declining,
as well as the elimination of
stranded costs. A significant amount of our cost reductions
were due to COVID-19 restrictions,
especially for
discretionary travel and certain marketing costs. The
Motion Business Area maintained its track record of solid
performance benefitting from a change in product
mix as well as cost savings efforts. Conversely,
in the Industrial
Automation Business Area, the segment profit was negatively
impacted by the amount recorded relating to the
settlement in South Africa with Eskom in relation
to the Kusile power generation project, as well as by an adverse
change in product mix due to reduced service revenues.
Profitability in the Robotics & Discrete Automation Business
Area was impacted by lower volumes and an adverse change
in product mix stemming from the continued downturn
in
its key end-markets such as automotive.
Within the Electrification Business Area,
the integration of GEIS progressed well. Since the acquisition
in
2018, we aim to deliver approximately $200 million
of cumulative annual cost synergies by 2022,
of which
approximately 80 percent is anticipated to come from
product and technology portfolio harmonization and footprint
optimization. To
support this transformation, we plan to expend approximately
$410 million for the GEIS business from
the acquisition date through 2022 and have, to date,
spent approximately $300 million. By the end of 2020, more
than
$140 million of cost synergies have been achieved
including the effects from a closure of 18 sites, primarily
production
plants as well as certain service facilities. Product substitutions
were on track with 52 new products introduced to the
market in 2020.
Several acquisitions and divestments were completed
in 2020, strengthening our portfolio. In March 2020, the
Electrification Business Area acquired a majority stake
in Shanghai Chargedot New Energy Technology
Co., Ltd, a
leading Chinese e-mobility solution provider,
and acquired Cylon Controls Ltd, enhancing its Smart Buildings
portfolio
in the commercial buildings segment. In October 2020,
the Robotics & Discrete Automation Business Area acquired
Codian Robotics B.V.,
a leading provider of delta robots, which are used primarily
for high-precision pick and place
applications. Codian Robotics’ offering includes
a hygienic design line, ideal for hygiene-sensitive industries including
food and beverage and pharmaceuticals. Additionally,
we completed the previously announced divestment of the solar
inverters business to FIMER S.p.A (Italy) in February
2020.
We continued
to make organic growth investments in a disciplined
manner, prioritizing research and
development while reducing administrative costs. Total
non-order related research and development was $1.1 billion
in
2020,
or 4.3 percent of revenues.
38
Capital allocation
The Board of Directors is proposing a dividend of
0.80 Swiss francs per share at the 2021 Annual Genera
l
Meeting (AGM).
Our sustained capital allocation priorities are unchanged:
•
funding organic growth, research and development,
and capital expenditures at attractive returns,
•
paying a rising, sustainable dividend per share over time,
•
investing in value-creating acquisitions, and
•
returning additional cash to shareholders.
Following the completion of the divestment of our Power
Grids business to Hitachi on July 1, 2020, and
consistent with our overall capital structure optimization
program, we launched a share buyback program on July
23,
2020. As part of our plan to return cash proceeds of $7.6
-7.8 billion from the sale of the Power Grids business we
initially intend to buy up to 10 percent of our issued share
capital. This initial program is planned to continue until our
AGM on March 25, 2021. At the AGM, we intend
to request shareholder approval to cancel the shares purchased
through this initial program and to announce the next steps.
As part of a capital structure optimization program, we have
also been reviewing our outstanding debt and
defined benefit pension structures during 2020. As a result,
we executed public tenders on two outstanding bonds and
redeemed and repaid outstanding amounts on two other
debt obligations. During 2020, we reduced our total debt
by
approximately $2.9 billion and completed the transfer of
certain of the Group’s defined benefit
pension plan obligations
to third parties, which contributed to a reduction in pension
underfunding by approximately $1.1 billion. In connection
with these transactions we recorded losses on extinguishment
of debt of $162 million and non-operational pension
costs
of $520 million. These transactions are an efficient
way to deleverage, significantly reducing the underfunding
of our
pension liabilities while reducing potential negative future
cash flow and income statement impacts, and improve our
financial flexibility.
Short-term outlook
Market uncertainty due to COVID-19 increased
through the fourth quarter of 2020.
The outlook remains muted
for segments such as oil and gas, conventional power
generation and marine, while raw materials costs are rising. That
said, there are signs of positive development in general
industry and machine builders’ segments, while end-markets
including buildings, distribution utilities, data centers,
consumer electronics and food and beverage are expected
to grow
robustly.
Financial framework mirrors ambition for
improved performance
During 2020, we have taken resourceful action to
sustainably improve the performance of ABB. We
look to
improve the quality of revenues, investing to expand
the Group’s exposure to high-growth
segments and the distributor
channel, as well as to expand our digital offering,
while continuing to exit high-risk EPC activities. We
have increased
accountability,
transparency and speed in decision making by transferring responsibilities to
our Divisions. This is
reflected in the targets within our financial framework,
which guides to:
•
3 to 5 percent annual average revenues growth through
economic cycle, of which approximately two-thirds
is anticipated to come from organic growth,
and approximately one-third from acquired growth,
•
Operational EBITA
margin of 13 to 16 percent,
•
Return on Capital Employed (ROCE) of 15 to 20 percent,
39
•
Cash conversion to net income of approximately 100
percent, and
•
Basic EPS growth above revenue growth.
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.
The preparation of our financial statements requires us to make
assumptions and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses and
the related disclosure of contingent assets and
liabilities. We evaluate
our estimates on an ongoing basis (see “Note 2 -
Significant accounting policies” to our
Consolidated Financial Statements for a listing of our most
significant accounting estimates). Where appropriate, we
base our estimates on historical experience and on various
other 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 subjective judgments,
often as a result of the need to make estimates regarding
matters that are inherently uncertain and material to our
Consolidated Financial Statements.
These policies should be
considered when reading our Consolidated Financial Statements.
Revenue recognition
A customer contract exists if collectability under the contract
is considered probable, the contract has
commercial substance, contains payment terms, the rights and
commitments of both 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 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.
The percentage‑of‑completion method of accounting involves the
use of assumptions and projections,
principally relating to future material, labor,
subcontractor and project‑related overhead costs as well as estimates of the
amount of variable consideration to which we expect
to be entitled. As a consequence, there is a risk that total contract
costs or the amount of variable consideration will, respectively,
either exceed or be lower than those we originally
estimated (based on all information reasonably available
to us) and the margin will decrease or the contract may
become
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,
40
•
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.
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.
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 $300 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 $289 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 2020 by $24 million.
41
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,
2020, our
defined benefit pension plans were $656 million underfunded
compared to an underfunding of $1,751 million at
December 31, 2019. Our other postretirement plans were
underfunded by $98 million and $110
million at December 31,
2020 and 2019, 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 5.9 percent per annum
for 2021, gradually declining to 4.9 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.
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 “Income
tax expense” in the Consolidated Income Statements unless the
change relates to discontinued operations, in which
case the change is recorded in “Income from discontinued
operations, net of tax”.
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 indefinitely 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.
42
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.
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 re-evaluate
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 income tax expense 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, divestments and equity-accounted
companies” as well as “Note 11
- Goodwill and intangible assets”,
to our Consolidated Financial Statements.
Investments in equity-accounted companies
We account
for investments where we have the ability to exercise significant
influence, but not control, under
the equity method of accounting. Income from equity-accounted
companies represents our proportionate share of net
income generated by the equity-accounted investees. Differences
in the basis of the investments and the separate net
asset value of the investees, if any,
are amortized into net income over the remaining useful lives of
the underlying
assets. Similar to the “Business combinations” section
above, in determining the fair value of these investments,
judgements and assumptions are inherent in our estimates of
(i) future revenues, expenses and cash flows, (ii)
discount
rates, and (iii) the valuation of certain intangible assets, etc. Investments
in equity-accounted companies are assessed for
impairment whenever changes in the facts and circumstances
indicate a loss in value has occurred, if the loss is deemed
to be other than temporary.
When the loss is deemed to be other than temporary,
the carrying value of the equity method
investment is written down to fair value. See “Note
4 - Acquisitions, divestments and equity-accounted companies
”, to
our Consolidated Financial Statements for details of
our investments in equity-accounted companies.
Goodwill and 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.
43
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 fair value of the reporting
unit include the projected level
of business operations, the reporting unit’s
weighted‑average cost of capital, the income tax rate and
the terminal growth
rate.
We adopted
ABB’s new operating model
,
the ABB Way,
on July 1, 2020, which resulted in a change to the
composition of reporting units. Previously,
the reporting units were the same as the operating segments for
Electrification, Motion and Robotics & Discrete Automation,
while for the Industrial Automation operating segment the
reporting units were determined to be at the Division level,
which is one level below the operating segment. The
ABB
Way provides
the Divisions with full ownership and accountability for their respective
strategies, performance and
resources and as a result we concluded that our reporting
units would then be the 18 Divisions. This change resulted
only in an allocation of goodwill within the operating
segments and thus there was no change to segment level goodwill.
As a result of the new composition of the reporting units and
reallocation of goodwill, an interim quantitative
impairment test was conducted before and after the change
as of July 1, 2020. In the “before” test, it was concluded
that
the fair value of our reporting units exceeded the carrying
value under the historical reporting unit structure.
We then performed
the impairment test immediately after the change in reporting
units and the fair value of
each was determined using a discounted cash flow
fair value estimate based on objective information at the
measurement date. The significant assumptions used to
develop the estimates of fair value for each reporting unit
included our best estimates of the expected future results and
discount rates specific to the reporting unit. Determining
the projected future cash flows required significant judgments and
estimates involving variables such as future sales
volumes, sales prices, production and other operating costs,
capital expenditures, net working capital requirements and
other economic factors such as the continued impact of
the COVID-19 pandemic. The fair value estimates were based
on assumptions that we believed to be reasonable,
but which were inherently uncertain and thus, actual
results may
differ from those estimates. Sensitivity analyses were
performed around certain of these assumptions in order
to assess
the reasonableness of the assumptions and the resulting
estimated fair values.
The interim quantitative impairment test indicated that,
with the exception of the Machine Automation
reporting unit within the Robotics & Discrete Automation
operating segment, the estimated fair values of our reporting
units were substantially in excess of their carrying value.
The contraction of the global economy in 2020, particularly
in
end-customer industries and considerable uncertainty around the
continued pace of macroeconomic recovery generally
led to a reduction in the fair values of the reporting units,
thus also affecting the Machine Automation repor
ting unit. At
the Division level, this reporting unit does not benefit
from shared cash flows generated within an entire operating
segment. In addition, the book value of the Machine Automation
Division includes
a significant amount of intangible
assets recognized in past acquisitions, resulting in a proportionately
higher book value than the other reporting unit
within the Robotics & Discrete Automation Business Area.
These factors led to the carrying value of the Machine
Automation reporting unit exceeding its fair value. During
2020, a goodwill impairment charge of $290
million was
recorded to reduce the carrying value of this reporting
unit to its implied fair value. The remaining goodwill for the
Machine Automation reporting unit was $554 million
as of December 31, 2020. Since the carrying value of this
reporting unit was reduced to its fair value as of July 1,
2020, any material adverse changes such as market deterioration
or changes in the competitive landscape could result in
future impairment charges.
At October 1, 2020 and 2019, respectively,
we performed qualitative assessments
and determined that it was
not more likely than not that the fair value for each
of these reporting units was below the carrying value.
As a result, 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 other than impairments
of goodwill in
“Other income (expense), net” in our Consolidated Income
Statements, unless they relate to a discontinued operation, in
which case the charges are recorded in “Income
from discontinued operations, net of tax”.
44
NEW ACCOUNTING PRONOUNCEMENTS
For a description of accounting changes and recent accounting
pronouncements, including the expected dates of
adoption and estimated effects, if any,
on our Consolidated Financial Statements, see “Note 2 -
Significant accounting
policies” to our Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
Each year, we invest significantly in
research and development. Our research and development focuses
on
developing and commercializing the technologies, products
and solutions of our businesses that are of strategic
importance to our future growth. In 2020, we invested
$1,127 million, or approximately 4.3 percent of our 2020
consolidated revenues, on research and development activities in
our continuing operations. We
also had expenditures of
$46 million, or approximately 0.2 percent of our 2020
consolidated revenues, on order‑related development activities.
These are customer‑ and project‑specific development
efforts that we undertake to develop or adapt equipment
and
systems to the unique needs of our customers in connection
with specific orders or projects.
In addition to continuous product development, and order
‑related engineering work, we develop platforms for
technology applications in our businesses in our research
and development laboratories, which operate on a global basis,
such as our ABB Ability™
platform.
Through active management of our investment in research and
development, we
seek to maintain a balance between short‑term and long‑term
research and development programs and optimize our
return on investment. We
protect these results by holding patents, copyrights and
other appropriate intellectual property
protection.
To complement
our business-focused product development, our businesses invest together
in collaborative
research activities covering topics such as artificial intelligence,
software, sensors, control and optimization,
mechatronics and robotics, power electronics, communication
technologies, material and manufacturing,
electrodynamics or electrical switching technologies. This
results in advancing the state-of-the-art technologies used in
our products and in common technology platforms that
can be applied in multiple product lines.
Universities are incubators of future technology,
and one task of our research and development teams
is to
transform university research into industry‑ready technology
platforms. We
collaborate with multiple universities and
research institutions to build research networks and foster
new technologies. We
believe these collaborations shorten the
amount of time required to turn basic ideas into viable
products, and they additionally help us to recruit and train
new
personnel. We
have built numerous university collaborations in several continents,
including long-term, strategic
relationships with a number of leading institutions in the
U.S., the United Kingdom, Sweden, Germany,
Switzerland,
Poland, India and China.
We are also leveraging
our ecosystem to enhance our innovation efforts
and gain speed with strategic partners
with complementary competencies. In addition, we invest and
collaborate
with start-ups worldwide via our corporate
venture arm ABB Technology
Ventures
and our start-up collaboration arm SynerLeap.
The result of our investment in research and development
is that ABB is widely recognized for its world-class
technology. Technology
has been deeply embedded in our DNA since our founding
and has carried us through our
century-long history.
It is one of the main reasons why customers and partners turn to
us for help on their biggest
challenges. Together
with them, we continuously push technology frontiers to make
things possible that were not
possible before. We
are committed to stay ahead to help our customers address the
world’s energy challenges,
transform
industries to reach new levels of performance and embed
sustainability, all to leav
e
behind a world for future
generations that is at least as healthy and prosperous as
the one we inherited.
45
ACQUISITIONS AND DIVESTMENTS
Acquisitions
There were no significant acquisitions in 2020 or 2019.
Divestments
Divestment of Power Grids
On July 1, 2020,
ABB completed the divestment of 80.1 percent of its former
Power Grids business to Hitachi.
As this divestment represented a strategic shift that had
a major effect on the Company’s
operations and financial
results, the results of operations for this business are
presented as discontinued operations and the assets and liabilities
are reflected as held for sale for all periods presented.
For more information on the divestment of the Power Grids
business see “Note 3 - Discontinued operations”
to our Consolidated Financial Statements.
Divestment of solar inverters
In February 2020, ABB completed the sale of its solar
inverters business to FIMER S.p.A. (Italy) for no
consideration. Under the agreement,
which was reached in July 2019, ABB was obligated to transfer
$143 million of
cash to the buyer on the closing date. In addition, further
payments totaling EUR 132 million ($145 million at the
divestment date) are required to be transferred to the buyer
from 2020 through 2025. In connection with this divestment,
in 2019, we recorded a loss of $421 million,
representing the excess of the carrying value over the
estimated fair value
of this business. In 2020, a further $33 million was recorded
for additional changes in fair value occurring prior to
the
date of sale. Both amounts, in the respective years are
reported in “Other income (expense), net”. The assets and
liabilities of this business are included within assets and
liabilities held for sale in our Consolidated Balance Sheet
as at
December 31, 2019. For more information on assets held for sale,
see “Note 4 - Acquisitions, divestments and equity-
accounted companies” to our Consolidated Financial Statements.
Other
In 2019, we recorded net gains (including transaction costs)
of $55 million, primarily due to the divestment of
two businesses in China.
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.
46
While we operate globally and report our financial results
in USD, exchange rate movements between the USD
and the EUR, the CNY and the CHF are of particular
importance to us due to (i) the location of our significant
operations and (ii) our corporate headquarters being
in Switzerland.
The exchange rates between the USD and the EUR,
the USD and the CHF and the USD and the CNY at
December 31, 2020, 2019 and 2018, were as follows:
Exchange rates into $
2020
2019
2018
EUR 1.00
1.23
1.12
1.15
CHF 1.00
1.14
1.03
1.02
CNY 1.00
0.15
0.14
0.15
The average exchange rates between the USD and the
EUR, the USD and the CHF and the USD and the CNY
for the years ended December 31, 2020, 2019 and 2018, were as follows:
Exchange rates into $
2020
2019
2018
EUR 1.00
1.14
1.12
1.18
CHF 1.00
1.07
1.01
1.02
CNY 1.00
0.14
0.14
0.15
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 2020,
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 15 percent.
In 2020,
approximately 74 percent of our cost of sales and selling, general
and administrative expenses were
reported in currencies other than the USD. The following
percentages of consolidated cost of sales and selling, general
and administrative expenses were reported in the following
currencies:
•
Euro, approximately 22 percent, and
•
Chinese renminbi, approximately 13 percent.
We also incur
expenses other than cost of sales and selling, general and
administrative expenses in various
currencies.
The results of operations and financial position of our subsidiaries
outside of the U.S. are generally accounted
for in the currencies of the countries in which those
subsidiaries are located. We
refer to these currencies as “local
currencies”. Local currency financial information is then
translated into USD at applicable exchange rates for 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.
47
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 future revenues we expect to generate from
our orders at any point in time is represented by our
order backlog.
The level of orders fluctuates from year to year.
Portions of our business involve orders for long‑term projects
that can take months or years to complete and many large
r
orders result in revenues in periods after the order is booked.
Consequently, the
level of orders generally cannot be used to accurately predict
future revenues or operating
performance. Orders that have been placed can often be cancelled,
delayed or 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 operating segments 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, related and implementation costs,
•
changes in the amount recorded for obligations related to
divested businesses occurring after the
divestment date (changes in obligations related to
divested businesses),
•
changes in estimates relating to opening balance sheets of
acquired businesses (changes in pre‑acquisition
estimates),
•
gains and losses from sale of businesses (including fair
value adjustment on assets and liabilities held for
sale),
•
acquisition-
and divestment-related expenses and integration costs,
•
other income/expense relating to the Power Grids joint
venture,
48
•
certain other non-operational items, as well as
•
foreign exchange/commodity timing differences
in income from operations consisting of: (a) unrealized
gains and losses on derivatives (foreign exchange, commodities,
embedded derivatives), (b) realized gains
and losses on derivatives where the underlying hedged
transaction has not yet been realized, and
(c) unrealized foreign exchange movements on receivables/payables
(and related assets/liabilities).
Certain other non-operational items generally includes:
certain regulatory, compliance
and legal costs, certain
asset write downs/impairments (including impairment
of goodwill) and certain other fair value changes, as well
as other
items which are determined by management on a case-by-case basis.
See “Note 23 - Operating segment and geographic
data” to our Consolidated Financial Statements for a
reconciliation of the total Operational EBITA
to income from continuing operations before taxes.
49
ANALYSIS OF
RESULTS
OF OPERATIONS
Our consolidated results from operations were as follows:
INCOME STATEMENT
DATA:
($ in millions, except per share data in $)
2020
2019
2018
Revenues
26,134
27,978
27,662
Cost of sales
(18,256)
(19,072)
(19,118)
Gross profit
7,878
8,906
8,544
Selling, general and administrative expenses
(4,895)
(5,447)
(5,295)
Non-order related research and development expenses
(1,127)
(1,198)
(1,147)
Impairment of goodwill
(311)
—
—
Other income (expense), net
48
(323)
124
Income from operations
1,593
1,938
2,226
Interest and dividend income
51
67
72
Interest and other finance expense
(240)
(215)
(262)
Losses from extinguishment of debt
(162)
—
—
Non-operational pension (cost) credit
(401)
72
83
Income tax expense
(496)
(772)
(544)
Income from continuing operations, net of
tax
345
1,090
1,575
Income from discontinued operations, net of tax
4,860
438
723
Net income
5,205
1,528
2,298
Net income attributable to noncontrolling interests
(59)
(89)
(125)
Net income attributable to ABB
5,146
1,439
2,173
Amounts attributable to ABB shareholders:
Income from continuing operations, net of tax
294
1,043
1,514
Income from discontinued operations, net of tax
4,852
396
659
Net income
5,146
1,439
2,173
Basic earnings per share attributable
to ABB shareholders:
Income from continuing operations, net of tax
0.14
0.49
0.71
Income from discontinued operations, net of tax
2.30
0.19
0.31
Net income
2.44
0.67
1.02
Diluted earnings per share attributable
to ABB shareholders:
Income from continuing operations, net of tax
0.14
0.49
0.71
Income from discontinued operations, net of tax
2.29
0.19
0.31
Net income
2.43
0.67
1.02
A more detailed discussion of the orders, revenues, income
from operations and Operational EBITA
for our
Business Areas follows in the sections of “Business analysis
”
below for Electrification, Industrial Automation, Motion,
Robotics & Discrete Automation and Corporate and
Other. Orders and revenues of
our businesses include intersegment
transactions which are eliminated in the “Corporate and
Other” line in the tables below.
50
Orders
% Change
($ in millions)
2020
2019
2018
2020
2019
Electrification
11,884
13,050
11,867
(9)%
10%
Industrial Automation
6,144
6,432
6,697
(4)%
(4)%
Motion
6,574
6,782
6,725
(3)%
1%
Robotics & Discrete Automation
2,868
3,260
3,808
(12)%
(14)%
Total
Business Areas
27,470
29,524
29,097
(7)%
1%
Corporate and Other
Non-core and divested businesses
(31)
(91)
364
n.a.
n.a.
Intersegment eliminations and other
(927)
(845)
(871)
n.a.
n.a.
Total
26,512
28,588
28,590
(7)%
0%
In 2020, total orders decreased 7 percent compared to 2019
(7 percent in local currencies). Total
orders reflect
the decline across all Business Areas as the COVID-19 pandemic
affected most of our businesses across all regions.
Measures taken by governments worldwide to contain
the virus severely restrained investments, travel and
consumption.
The decrease was most significant in the Robotics & Discrete Automation
Business Area, recording a significant
decrease in orders due to COVID-19 disruptions
and strong headwinds in discrete markets. The order decreas
e
in the
Electrification, Industrial Automation and Motion Business Areas
was moderate. The decline in orders
was most
significant in the second quarter of the year,
with variable recovery levels during the second half of 2020
.
In particular,
in the Asia, Middle East and Africa region, order levels
showed signs of a full recovery by the end of 2020 in
most
businesses. For additional information about individual
Business Area order performance, refer to the relevant
sections
of “Business analysis” below.
We determine
the geographic distribution of our orders based on the location
of the ultimate destination of the
products’ end use, if known, or the location of the customer.
The geographic distribution of our consolidated orders
was
as follows:
% Change
($ in millions)
2020
2019
2018
2020
2019
Europe
9,618
10,509
10,725
(8)%
(2)%
The Americas
7,956
9,057
8,243
(12)%
10%
of which: United States
5,971
6,804
6,135
(12)%
11%
Asia, Middle East and Africa
8,938
9,022
9,622
(1)%
(6)%
of which: China
4,121
4,118
4,201
0%
(2)%
Total
26,512
28,588
28,590
(7)%
0%
In 2020, orders declined in all regions,
reflecting the global impact of the COVID-19 pandemic. In the
Americas orders declined 12 percent (11
percent in local currencies) and declined in all Business Areas. Orders
declined
in the U.S., Canada, Brazil, Mexico, Argentina
and Peru, while they remained flat in Chile, driven by large
orders in the
Industrial Automation Business Area. In Europe,
orders decreased 8 percent (9 percent in local currencies) with
all
Business Areas reporting order declines.
Orders decreased in Germany,
Switzerland, Italy, Finland
and Norway while
they increased in most Business Areas in Sweden,
reflecting lighter local COVID-19 restrictions. In Asia, Middle
East
and Africa orders declined 1 percent (1 percent in local
currencies) and were lower in the Robotics & Discrete
Automation and Electrification Business Areas, while in the Industrial
Automation and Motion Business Areas
orders
increased, driven by the growth in China. Total
orders decreased in India, Singapore and Japan while they
increased in
South Korea and Australia driven by large
orders in the Motion and Industrial Automation Business Areas. Orders
from
China remained flat.
51
Order backlog
December 31,
% Change
($ in millions)
2020
2019
2018
2020
2019
Electrification
4,358
4,488
4,113
(3)%
9%
Industrial Automation
5,805
5,077
4,986
14%
2%
Motion
3,320
2,967
2,740
12%
8%
Robotics & Discrete Automation
1,403
1,356
1,438
3%
(6)%
Total
Business Areas
14,886
13,888
13,277
7%
5%
Corporate and Other
Non-core and divested businesses
139
192
555
(28)%
(65)%
Intersegment eliminations
(722)
(756)
(748)
n.a.
n.a.
Total
14,303
13,324
13,084
7%
2%
At December 31, 2020, consolidated order backlog was 7
percent higher (3 percent in local currencies)
compared to December 31, 2019. Order backlog increased
significantly in the Industrial Automation and Motion
Business Areas,
increased moderately in Robotics & Discrete Automation
Business Area, while it decreased slightly in
the Electrification Business Area. The increase in the
Motion Business Area was driven by strong order growth in
long-
cycle businesses. Order backlog also increased in the
Industrial Automation Business Area due to orders
relating to
specialty marine vessels. The order backlog in the Robotics &
Discrete Automation Business Area increased slightly,
benefiting from order intake in the 3C and automotive
and automotive-related sectors.
Revenues
% Change
($ in millions)
2020
2019
2018
2020
2019
Electrification
11,924
12,728
11,686
(6)%
9%
Industrial Automation
5,792
6,273
6,500
(8)%
(3)%
Motion
6,409
6,533
6,463
(2)%
1%
Robotics & Discrete Automation
2,907
3,314
3,611
(12)%
(8)%
Total
Business Areas
27,032
28,848
28,260
(6)%
2%
Corporate and Other
Non-core and divested businesses
(6)
37
273
n.a.
(86)%
Intersegment eliminations and other
(892)
(907)
(871)
n.a.
n.a.
Total
26,134
27,978
27,662
(7)%
1%
In 2020, revenues decreased 7 percent (6 percent in
local currencies). Revenues decreased across all Business
Areas with the impacts of the COVID-19 pandemic
resulting in a reduction in business activity and a substantial
drop in
book-and-bill activities. Despite these challenges,
revenues in the Electrification and Motion Business Areas reflected
good execution of the order backlog as well as resilience
in the short-cycle businesses, particularly in the
second half of
the year. For additional analysis of
revenues for each of the Business Areas,
refer to the relevant sections of Business
analysis below.
52
We determine
the geographic distribution of our revenues based on the
location of the ultimate destination of
the products’ end use, if known, or the location of the customer.
The geographic distribution of our consolidated
revenues was as follows:
% Change
($ in millions)
2020
2019
2018
2020
2019
Europe
9,764
10,097
10,129
(3)%
0%
The Americas
7,949
8,955
8,042
(11)%
11%
of which: United States
6,027
6,753
6,005
(11)%
12%
Asia, Middle East and Africa
8,421
8,926
9,491
(6)%
(6)%
of which: China
4,098
4,047
4,910
1%
(18)%
Total
26,134
27,978
27,662
(7)%
1%
In 2020, revenues decreased across all regions,
reflecting the impact of the COVID-19 pandemic.
In the
Americas revenues decreased 11 percent
(9 percent in local currencies) and were lower across all Business Areas.
Revenues declined in the U.S., Canada, Brazil, Mexico,
Argentina, Chile and Peru. In Europe revenues decreased
3 percent (4 percent in local currencies),
partly due to the sale of the solar inverters business in 2020.
In Europe,
revenues
decreased across all Business Areas except in the Motion Business Area
,
reflecting lower sales volumes in
Germany, Switzerland,
Italy, Norway and the
United Kingdom while revenues
grew in Sweden and Finland with robust
execution of orders, especially in short-cycle businesses and
due to lighter COVID-19 restrictions in Sweden. In
Asia,
Middle East and Africa revenues decreased 6 percent
(5 percent in local currencies) and decreased across all Business
Areas except the Motion Business Area which remained flat.
Revenues decreased in Saudi Arabia, India, Australia,
South Korea and Singapore while they increased in China
and in Japan due to a strong execution of the order backlog
and generally lower lockdown restrictions
over the year,
benefiting the Robotics & Discrete Automation Business Area.
Cost of sales
Cost of sales consists primarily of labor,
raw materials and component costs but also includes indirect
production costs, expenses for warranties, contract and
project charges, as well as order‑related development
expenses
incurred in connection with projects for which corresponding
revenues have been recognized.
In 2020,
cost of sales decreased 4 percent (4 percent in local currenc
ies) to $18,256 million and cost of sales as
a percentage of revenues increased from 68.2 percent to 69.9 percent
in 2020,
a reduction in the gross margin percentage
of 1.7 percent, partially due to the impact on sales volumes
of the COVID-19 pandemic.
The decrease in gross margin
percentage also reflects additional losses for projects in
non-core businesses and warranty charges relating
to a divested
business. In the Business Areas, the gross margin
percentage was steady in the Electrification
Business Area,
benefiting
from favorable changes in commodity prices in 2020.
Gross margin percentages in the Robotics & Discrete Automation
Business Area and the Industrial Automation Business Area
were lower in 2020 compared to 2019, while in the Motion
Business Area they were steady.
For ABB, the gross margin did benefit partially from
the results of savings from supply
chain, operational excellence and the results of OS initiatives.
Selling, general and administrative expenses
The components of selling, general and administrative
expenses were as follows:
($ in millions)
2020
2019
2018
Selling expenses
3,087
3,383
3,228
General and administrative expenses
1,808
2,064
2,067
Total
4,895
5,447
5,295
53
In 2020, general and administrative expenses decreased
by 12 percent compared to 2019 (12 percent in local
currencies). As a percentage of revenues, general and
administrative expenses decreased to 6.9% from 7.4% in 2019.
General and administrative expenses were impacted by
$152 million of restructuring and implementation expenses
for
the OS program and administrative expenses from the
integration of the acquired GEIS business compared to
$240 million in 2019.
General and administrative expenses in 2020 did benefit from
a $185 million reduction of
stranded corporate costs compared to 2019 but continue
s
to include those ongoing costs required to deliver services to
Hitachi ABB Power Grids
under transition service agreements, for which we are compensated
and recorded $91 million
in Other income and expense,
net, during 2020. Stranded costs were overhead and other
management costs which could
previously be allocated to the Power Grids business and
were lower in 2020 as a large portion of the central
costs
supporting that business were transferred directly to the business.
We had a decrease
of general corporate function costs,
including the impact of a significant reduction in travel expenses.
In 2020, selling expenses decreased 9 percent compared
to 2019 (9 percent in local currencies) mainly driven
by significantly reduced sales activities and related travel
expenses as virtual sales meetings have been introduced
to
substitute face-to-face customer visits, due to the COVID-19
pandemic.
This resulted in lower selling expenses across
all Business Areas. These factors resulted in decreasing
selling expenses as a percentage of orders received from 11.8
percent to 11.6 percent.
Non‑order related research
and development expenses
In 2020, non‑order related research and development
expenses decreased 6 percent (7 percent in local
currencies) compared to 2019. Non‑order related research
and development expenses decreased mainly as a result of a
reduction in the number of research and development
employees, due to both restructuring efforts and transfer
of
employees to Hitachi ABB Power Grids.
In 2020, non‑order related research and development
expenses as a percentage of revenues remained
unchanged at 4.3 percent compared to the previous year.
Impairment of goodwill
In 2020, as a result of the new composition of the reporting
units and reallocation of goodwill, we recorded an
impairment charge of $311
million, the majority of which related to our Machine Automation
Division within the
Robotics & Discrete Automation Business Area. See “Note 11
- Goodwill and intangible assets”
to our Consolidated
Financial Statements.
54
Other income (expense), net
($ in millions)
2020
2019
2018
Income (loss) from equity-accounted companies
(66)
8
6
Income from provision of services under transition services agreement
91
—
—
Brand income from Hitachi ABB Power Grids
60
—
—
Net gain from sale of property,
plant and equipment
37
51
57
Gain (loss) from change in fair value of investments in
equity securities
71
(5)
(6)
Favorable resolution of an uncertain purchase price adjustment
36
92
—
Net gain (loss) from sale of businesses
(2)
55
57
Gain on liquidation of foreign subsidiary
—
—
31
Restructuring and restructuring-related expenses
(1)
(87)
(69)
(37)
Fair value adjustment on assets and liabilities held for sale
(33)
(421)
—
Asset impairments
(35)
(56)
(30)
Other income (expense)
(24)
22
46
Total
48
(323)
124
(1) Excluding
asset impairments
In 2020, Other income (expense), net, was a gain of $48
million while it was a loss of $323 million in 2019.
In
2020,
the amount includes the brand income from Hitachi ABB Power Grids
and an income of $91 million related to
services provided to Hitachi ABB Power Grids as part of transitional
service agreements. The amount also includes fair
value adjustments of investments in our ABB Technology
Ventures
portfolio of $73 million. Partially offsetting this
were costs for restructuring and restructuring-related
expenses, asset impairments and net losses of $66 million from
equity-accounted companies.
The net loss from equity-accounted companies primarily
reflects the loss from the Hitachi
ABB Power Grids joint venture (see “Note 4 - Acquisitions,
divestments and equity-accounted companies” to our
Consolidated Financial Statements for additional information)
.
Other income (expense), net in 2019 included a loss of $421
million for the fair value adjustment to the net
assets of the solar inverters business. This was partially offset
by a gain of $92 million resulting from a favorable
resolution of an uncertain purchase price adjustment
related to the acquisition of GEIS.
Income from operations
% Change
($ in millions)
2020
2019
2018
2020
2019
Electrification
1,335
1,049
1,290
27%
(19)%
Industrial Automation
344
700
853
(51)%
(18)%
Motion
989
1,009
924
(2)%
9%
Robotics & Discrete Automation
(163)
298
456
n.a.
(35)%
Total
Business Areas
2,505
3,056
3,523
(18)%
(13)%
Corporate and Other
(927)
(1,113)
(1,302)
n.a.
n.a.
Intersegment elimination
15
(5)
5
n.a.
n.a.
Total
1,593
1,938
2,226
(18)%
(13)%
In 2020 and 2019, changes in income from operations
were a result of the factors discussed above and in
“Business analysis” below.
Financial income and expenses
Financial income and expenses include “Interest and
dividend income”, “Interest and other finance
expense”
and “Losses from extinguishment of debt”.
55
“Interest and other finance expense” includes interest
expense on our debt, the amortization of upfront
transaction costs associated with long‑term debt and
committed credit facilities, commitment fees on credit facilities,
foreign exchange gains and losses on financial items and
gains and losses on marketable securities. In addition, interest
accrued relating to uncertain tax positions is included
within interest expense. “Interest and other finance expense”
excludes interest expense which has been allocated to
discontinued operations.
($ in millions)
2020
2019
2018
Interest and dividend income
51
67
72
Interest and other finance expense
(240)
(215)
(262)
Losses from extinguishment of debt
(162)
—
—
In 2020,
“Interest and other finance expense” increased compared to 2019. Although
we incurred lower interest
charges on outstanding debt due to lower interest rates
and a reduction of debt outstanding, this was offset
by higher
foreign currency exchange losses.
In 2020, we redeemed the full amount outstanding
for two bonds according to the terms of the instruments and
executed public tenders for two additional bonds resulting
in a partial reduction of the principal outstanding. These
transactions resulted in losses on extinguishment of debt totaling
$162 million (see “Note 12 - Debt” to our Consolidated
Financial Statements).
Non-operational pension (cost) credit
A non-operational pension cost of $401 million was incurred in
2020 compared to a $72 million credit in 2019.
In 2020, we incurred charges of $520 million for
certain settlements of international pension plans (see “Note
17 -
Employee benefits” to our Consolidated Financial Statements).
Income tax expense
($ in millions)
2020
2019
2018
Income from continuing operations before taxes
841
1,862
2,119
Income tax expense
(496)
(772)
(544)
Effective tax rate for the year
59.0%
41.5%
25.7%
In 2020, the effective tax rate increased from
41.5 percent to 59.0 percent due to several factors. First, in 2020,
the distribution of income within the Group resulted in
a 5 percent higher weighted-average global tax rate.
Additionally, the
tax rate was negatively impacted by 9 percent due to the impairment
of non-deductible goodwill and
10 percent due to non-deductible charges relating
to the settlement of certain defined benefit pension plans
in 2020. The
rate was also negatively impacted by 5 percent due
to losses from extinguishment of debt which were incurred in
jurisdictions with a full valuation allowance. These negative
impacts
were partially offset by the favorable
resolution of
an uncertain tax position in Asia which reduced the
tax rate by 10 percent and the positive impact due to the
reorganization of a business of 2 percent.
In 2019 there were impacts
on the effective tax rate from recording a loss for
the planned sale of the solar
inverters business which reduced the weighted-average global tax
rate by approximately 2 percent and an increase in the
effective tax rate by 6 percent due to a change in
a valuation allowance. During 2019, the effective tax
rate also was
negatively impacted due to amounts for the planned
divestment of the Power Grids business, primarily non-deductible
expenses, taxes payable due to the reorganization
of the business in connection with the planned sale, changes
to
valuation allowances and additional taxes for unremitted
earnings. Additionally, the
effective tax rate was also higher
due to changes
in valuation allowances and changes in taxes due to interpretation
of tax law and double tax treaty
agreements by competent tax authorities. See “Note 16
- Income taxes” to our Consolidated Financial Statements for
additional information.
56
Income from continuing operations, net of
tax
As a result of the factors discussed above, income from
continuing operations, net of tax, in 2020 decreased by
$745 million compared to 2019 to $345 million.
Income from discontinued operations, net of
tax
Income from discontinued operations, net of tax, in
2020, 2019 and 2018 was as follows:
($ millions)
2020
2019
2018
Total revenues
4,008
9,037
9,698
Total cost of sales
(3,058)
(6,983)
(7,378)
Gross profit
950
2,054
2,320
Expenses
(808)
(1,394)
(1,326)
Net gain recognized on sale of the Power Grids business
5,141
—
—
Income from operations
5,282
660
994
Net interest and other finance expense
(5)
(61)
(55)
Non-operational pension (cost) credit
(94)
5
12
Income from discontinued operations before
taxes
5,182
605
951
Income tax expense
(322)
(167)
(228)
Income from discontinued operations, net of
tax
4,860
438
723
On July 1, 2020, we completed the divestment of
80.1 percent of our former Power Grids business to Hitachi.
As a result of the sale, substantially all Power Grids related assets and
liabilities have been sold. As this divestment
represented a strategic shift that would have a major effect
on our operations and financial results, the results of
operations for this business have been presented as discontinued
operations for all periods presented. In addition,
consistent with the presentation of the business as discontinued
operations, during 2019 and up to the sale in 2020, we
did not record depreciation or amortization on the property,
plant
and equipment, and intangible assets reported as
discontinued operations.
In 2020, as a result of the sale of the Power Grids business,
we recognized a net gain of $5,141 million, net of
transaction costs, for the sale of the entire Power Grids
business which is included in Income from discontinued
operations, net of tax. Included in the net gain was a cumulative
translation loss relating to the Power Grids business of
$420 million which was reclassified from accumulated
other comprehensive loss (see “Note 21 - Other comprehensive
income” to our Consolidated Financial Statements). Certain amounts
included in the net gain are estimated or otherwise
subject to change in value and, as a result, we may
record additional adjustments to the gain in future periods which
are
not expected to have a material impact on the Consolidated
Financial Statements.
Until the date of the divestment, Income from discontinued
operations excluded
certain costs which were
previously able to be allocated to the former Power Grids business.
As a result, $40 million and $225 million for
2020
and 2019, respectively,
of allocated overhead and other management costs (stranded
corporate costs), which were
previously able to be included in the measure of segment profit
for the Power Grids business were reported as part
of
Corporate and Other.
The amounts shown in the table above for the full-year 2020
primarily represent the operations of the Power
Grids business for six months, compared to a full year
of operations for 2019 and 2018. Income from discontinued
operations for 2020 and 2019 included income from operations
,
before tax, of $5,182 million and $605 million,
respectively. The
results in 2020 reflect the unfavorable impact of COVID-19
on the Power Grids business in the first
half of the year, higher expenses when
compared to the first half of 2019 and the non-operational pension
cost related to
the settlement of a defined benefit pension plan in 2020.
In addition, in 2020 and 2019 we recorded $322 million and
$167 million, respectively,
as income tax expense within discontinued operations. In
2020, this included $262 million in
Income tax expense within discontinued operations in
connection with the reorganization of the legal entity
structure of
the Power Grids business required to facilitate its sale.
57
For additional information on the divestment and discontinued
operations,
see “Note 3 - Discontinued
operations”
to our Consolidated Financial Statements.
Net income attributable to ABB
As a result of the factors discussed above, net income
attributable to ABB in 2020 increased by $3,707 million
compared to 2019 to $5,146 million.
Earnings per share attributable to ABB shareholders
(in $)
2020
2019
2018
Basic earnings per share attributable
to ABB shareholders:
Income from continuing operations, net of tax
0.14
0.49
0.71
Income from discontinued operations, net of tax
2.30
0.19
0.31
Net income
2.44
0.67
1.02
Diluted earnings per share attributable
to ABB shareholders:
Income from continuing operations, net of tax
0.14
0.49
0.71
Income from discontinued operations, net of tax
2.29
0.19
0.31
Net income
2.43
0.67
1.02
Basic earnings per share is calculated by dividing income
by the weighted‑average number of shares
outstanding during the year.
Diluted earnings per share is calculated by dividing income by the
weighted‑average
number of shares outstanding during the year,
assuming that all potentially dilutive securities were exercised,
if dilutive.
Potentially dilutive securities comprise: outstanding written
call options and outstanding options and shares granted
subject to certain conditions under our share‑based payment
arrangements. See “Note 20 - Earnings per share”
to our
Consolidated Financial Statements.
58
Business analysis
Electrification Business Area
The financial results of our Electrification Business Area, including
the operations of GEIS which was acquired
in June 2018, were as follows:
% Change
($ in millions)
2020
2019
2018
2020
2019
Orders
11,884
13,050
11,867
(9)%
10%
Order backlog at December 31,
4,358
4,488
4,113
(3)%
9%
Revenues
11,924
12,728
11,686
(6)%
9%
Income from operations
1,335
1,049
1,290
27%
(19)%
Operational EBITA
1,681
1,688
1,626
0%
4%
Orders
Approximately two-thirds of the Business Area’s
orders are for products with short delivery times; orders
are
usually recorded and delivered within a three-month period
and thus are generally considered as short-cycle. The
remainder of orders is comprised of smaller projects that
require longer lead times, as well as larger solutions
requiring
engineering and installation. Approximately half of the
Business Area’s orders are received
via third-party distributors;
as a consequence, end-customer market data is based parti
ally on management estimates.
In 2020, orders decreased 9 percent (9 percent in local currencies)
as the global COVID-19 pandemic
negatively impacted demand across all Divisions. Measures taken
by governments worldwide to contain the virus
severely restrained private consumption, investment, trade
and travel. Orders decreased 3 percent due to the impact of
the divestment of the solar inverters business in the first quarter
of 2020, as well as the divestment of two joint ventures
in China in the end of 2019. Investment in oil and gas related
projects decreased
significantly, reflecting
the current
economic uncertainty.
Demand in the building segment was significantly impacted
by global lockdowns and COVID-19
related restrictions across various markets,
while residential activities showed signs
of recovery during the fourth
quarter.
Commercial and industrial buildings suffered from weaker
market conditions, which contributed to the overall
order decrease. A lower level of large
orders from the utility sector negatively impacted orders in the
Distribution
Solutions
Division in 2020.
The demand for data centers benefited from a positive momentum
with strong contribution
from colocation,
cloud-based customers and hyperscale investments. Demand for
electric vehicle infrastructure and
urban mobility (E-bus, AC-DC chargers, Metro
trains) was strong, with investment in all regions. Rail investments
continued to be robust throughout the year.
The geographic distribution of orders for our Electrification
Business Area was as follows:
($ in millions)
2020
2019
2018
Europe
4,149
4,281
4,225
The Americas
4,033
4,653
3,771
of which: United States
3,065
3,501
2,746
Asia, Middle East and Africa
3,702
4,116
3,871
of which: China
1,819
1,885
1,776
Total
11,884
13,050
11,867
59
In 2020, orders decreased in all regions. Orders in Europe
decreased 3 percent (3 percent in local currencies) as
robust order intake in Germany and Sweden partially compensated
lower order volumes
in Italy, France and Spain
due
to the current market contraction.
Demand in Asia, Middle East and Africa decreased 10 percent (10
percent in local
currencies) despite a recovery in China during the second
half of the year which substantially offset the COVID-19
related order drop in the first half of the year.
The COVID-19 pandemic impacted total orders in the Americas
significantly,
decreasing 13 percent (12 percent in local currencies). Orders
in the U.S., Brazil and Mexico decreased
substantially.
Orders in Canada were also lower but showed signs of recovery
in the fourth quarter.
Order backlog
In 2020, the order backlog decreased 3 percent (5 percent
in local currencies). The order backlog decreased
2 percent due to the impact of the divestment of the solar
inverters business in the first quarter of 2020. The remaining
order backlog decreased by 1 percent, partly due to strong
backlog execution in the Distribution Solutions Division,
but
also reflecting the weaker order intake in most Divisions during
the year.
Revenues
In 2020, revenues decreased 6 percent (6 percent in
local currencies). Revenues declined across all Divisions
reflecting the challenging market condition and operational
environment caused by the COVID-19 pandemic. Revenues
decreased 3 percent due to the impact of the divestment
of the solar inverters business in the first quarter of 2020, as
well as the divestment of two joint ventures in China in
the end of 2019. Revenues from long-cycle businesses were
impacted by COVID-19 related execution challenges such
as restrictions to access customer sites, as well as customer
driven delays in receiving finished goods. Revenues from
data centers, e-mobility,
power distribution and mining were
more robust than oil and gas, and conventional power
generation. Revenues from short-cycle product businesses were
negatively affected by COVID-19 and decreased
across most end-user segments,
including residential and commercial
buildings. Revenues for the Installation Products and Power
Conversion Divisions,
which have a high dependence on the
North American market,
were particularly challenged.
The geographic distribution of revenues for our Electrification
Business Area was as follows:
($ in millions)
2020
2019
2018
Europe
4,190
4,251
4,136
The Americas
4,093
4,635
3,715
of which: United States
3,115
3,555
2,724
Asia, Middle East and Africa
3,641
3,842
3,835
of which: China
1,858
1,749
1,752
Total
11,924
12,728
11,686
In 2020, revenues in the Americas were strongly impacted
by the COVID-19 pandemic and decreased
12 percent (11 percent in local currencies)
with significant declines in the U.S., Brazil and Mexico.
Revenues in Europe
were robust, decreasing 1 percent (2 percent in local currencies).
Lower revenues in Switzerland, Italy and Spain were
partially offset by growth in Germany,
Sweden, Finland and Netherlands.
Revenues decreased 5 percent
(5 percent in
local currencies)
in Asia, Middle East and Africa,
as the recovery in China during the second half of the year could
not
fully compensate revenue declines within the region, such
as in India,
caused by lower demand and COVID-19
pandemic driven lockdowns.
60
Income from operations
In 2020, income from operations increased 27 percent,
mainly due to both the comparative loss of $421 million
recognized in 2019 to record the solar inverters business at fair
value net of the higher gain in 2019 of $92 million
relating the receipt of cash from General Electric for a
favorable resolution of an uncertainty with respect to the
price
paid to acquire GEIS. The COVID-19 pandemic negatively
affected the Business Area with lower revenues,
higher costs
of underutilized manufacturing facilities as well as higher costs
for various necessary safety measures and protective
equipment. This was partly offset by government
grants, furlough measures and a significant reduction of travel
and
other discretionary expenses. Income from operations
in 2020 benefited from a reduction in acquisition-related expenses
and integration costs compared to 2019,
mainly relating to GEIS. The Business Area also benefited
from lower
commodity prices in 2020, although commodity
headwinds gradually increased during the year.
Product pricing actions
across the product businesses and the benefits of savings
realized from ongoing restructuring and cost savings programs
also had a positive impact on operating margin
s. However, the Distribution Solutions
Division experienced negative
impacts from pricing pressure,
and OS related implementation costs were higher in 2020
compared to 2019.
Restructuring related expenses in our operating Divisions
were steady,
and changes in foreign currencies, including the
impacts from FX/commodity timing differences
,
had no significant impact on 2020 compared to 2019.
Operational EBITA
The reconciliation of Income from operations to Operational
EBITA for
the Electrification Business Area was
as follows:
($ in millions)
2020
2019
2018
Income from operations
1,335
1,049
1,290
Acquisition-related amortization
115
115
106
Restructuring, related and implementation costs
145
112
98
Changes in obligations related to divested businesses
15
—
—
Changes in pre-acquisition estimates
11
22
19
Gains and losses from sale of businesses
4
(42)
(81)
Fair value adjustment on assets and liabilities held for sale
33
421
—
Favorable resolution of an uncertain purchase price adjustment
(36)
(92)
—
Acquisition-
and divestment-related expenses and integration costs
71
119
168
Certain other non-operational items
9
3
(2)
FX/commodity timing differences in income
from operations
(21)
(19)
28
Operational EBITA
1,681
1,688
1,626
In 2020,
Operational EBITA
remained flat (1 percent lower excluding the impacts from
changes in foreign
currencies) compared to 2019, primarily due to the reasons
described under “Income from operations”, excluding the
explanations related to the reconciling items in the
table above.
Industrial Automation Business Area
The financial results of our Industrial Automation
Business Area were as follows:
% Change
($ in millions)
2020
2019
2018
2020
2019
Orders
6,144
6,432
6,697
(4)%
(4)%
Order backlog at December 31,
5,805
5,077
4,986
14%
2%
Revenues
5,792
6,273
6,500
(8)%
(3)%
Income from operations
344
700
853
(51)%
(18)%
Operational EBITA
451
732
914
(38)%
(20)%
61
Orders
In 2020, orders decreased 4 percent (4 percent in local currencies)
compared to 2019 reflecting the combined
effects of the COVID-19 pandemic and a
lower oil price. Those effects negatively impacted orders
in the Measurement
& Analytics, Turbocharging
,
Energy Industries and Process Industries Divisions
while orders in Marine & Ports
Division were up primarily due to large capital
investment orders, specifically for the liquefied natural
gas (LNG) sector.
This increase could not offset the significant
decline in orders, in particular in the ongoing service business which
was
driven by mobility constraints caused by extensive lockdown
restrictions as well as lower demand from customers
to
invest in the current uncertain environment. Customer
investment decreased significantly in cruise, conventional power
generation, oil and petrochemical,
and mining sectors.
The geographic distribution of orders for our Industrial
Automation Business Area was as follows:
($ in millions)
2020
2019
2018
Europe
2,365
2,599
2,867
The Americas
1,360
1,627
1,564
of which: United States
770
995
990
Asia, Middle East and Africa
2,419
2,206
2,266
of which: China
559
631
564
Total
6,144
6,432
6,697
Orders in Europe decreased 9 percent (9 percent in
local currencies) driven by lower orders in the Energy
Industries Division due to the effect of a
depressed oil price and mobility constraints, and in the
Marine & Ports Division
due to lower cruise orders. Orders in Asia, Middle East and
Africa increased 10 percent (10 percent in local currencies)
due to larger orders related to capital investments in
LNG in the Marine & Ports Division. The remaining
end-markets in
Asia, Middle East and Africa were subdued. China orders
were down in the Energy Industries, Marine & Ports
and
Process Industries Divisions. Orders in the Americas decreased by
16 percent (14 percent in local currencies) and
decreased in all Divisions
except the Marine & Ports Division.
Orders in the U.S. were down in all Divisions except for
the Marine & Ports Division due to a large
specialty marine vessel order.
Order backlog
The order backlog at the end of 2020 was 14 percent
higher (9 percent in local currencies) than at the end of
2019. All Divisions registered an increase in backlog except
the Turbocharging Division
which was impacted by the
marine and conventional onshore oil and gas markets. The
Marine & Ports Division benefited from orders for
specialty
marine vessels which are executed over multiple years.
The Energy Industries Division’s
backlog increase reflected
select orders for LNG solutions and the Process Industries Division’s
backlog benefited from the receipt of a large
order
in the mining market.
Revenues
In 2020, revenues decreased 8 percent (7 percent in
local currencies). Revenues were lower across all Divisions
compared to 2019,
reflecting subdued level of book-and-bill activities. Revenues in
shorter cycle businesses were
particularly impacted due to the COVID-19 pandemic and
service was significantly down, due to mobility constraints
and difficulties in executing services described
above.
62
The geographic distribution of revenues for our Industrial
Automation Business Area was as follows:
($ in millions)
2020
2019
2018
Europe
2,395
2,494
2,534
The Americas
1,329
1,595
1,479
of which: United States
808
950
944
Asia, Middle East and Africa
2,068
2,184
2,487
of which: China
629
612
616
Total
5,792
6,273
6,500
In 2020,
revenues were 4 percent lower (4 percent in local currencies)
in Asia, Middle East and Africa,
17 percent lower (15 percent in local currencies) in the
Americas and 5 percent weaker (5 percent in local currencies)
in
Europe compared to 2019. In Asia, Middle East and Africa,
the Process Industries, Marine & Ports and Turbocharging
Divisions registered strong growth in 2020.
The Process Industries, Marine & Ports and Turbocharging
Divisions grew
strongly in China while revenues in the Energy
Industries Division were negatively impacted by project-related
challenges in the Kusile power generation project in
South Africa. In Europe, revenues decreased across all Divisions
except in the Process Industries Division. In the Americas
,
revenues were negatively impacted across all Divisions.
Revenues in the U.S. declined significantly,
reflecting the downturn in the oil and gas and cruise market
segments.
Income from operations
In 2020, income from operations decreased 51 percent
compared to 2019 on weaker sales volumes in all
Divisions, project-related challenges in the Kusile power
generation project in South Africa and legacy projects in India,
and higher restructuring charges of approximately
$100 million. Income from operations was also impacted
by legal
costs relating to challenges in certain projects, unfavorable
pricing and product mix. The Business Area benefited from
the positive results of ongoing business rationalization efforts
and other cost saving measures especially lower sales
expenses. The changes in foreign currencies, including
the effect from changes in the FX/commodity timing
differences
summarized in the table below,
increased
income from operations by 4 percent compared to 2019.
Operational EBITA
The reconciliation of Income from operations to Operational
EBITA for
the Industrial Automation Business
Area was as follows:
($ in millions)
2020
2019
2018
Income from operations
344
700
853
Acquisition-related amortization
4
4
6
Restructuring, related and implementation costs
125
21
35
Gains and losses from sale of businesses
—
—
3
Acquisition-
and divestment-related expenses and integration costs
2
—
4
Certain other non-operational items
1
2
3
FX/commodity timing differences in income
from operations
(25)
5
10
Operational EBITA
451
732
914
In 2020, Operational EBITA
decreased 38 percent (39 percent excluding the impacts from
changes in foreign
currencies) compared to 2019. The change is due
to the reasons described under “Income from operations”, excluding
the explanations related to the reconciling items in
the table above.
63
Motion Business Area
The financial results of our Motion Business Area were as follows:
% Change
($ in millions)
2020
2019
2018
2020
2019
Orders
6,574
6,782
6,725
(3)%
1%
Order backlog at December 31,
3,320
2,967
2,740
12%
8%
Revenues
6,409
6,533
6,463
(2)%
1%
Income from operations
989
1,009
924
(2)%
9%
Operational EBITA
1,075
1,082
1,023
(1)%
6%
Orders
In 2020, orders declined 3 percent (2 percent in local currencies)
compared to 2019, reflecting the impact of the
COVID-19 pandemic.
Orders development had a mixed performance across the market
segments. The Business Area
benefited from rising demand in the rail sector,
mainly in the Traction Division and an
increase in demand in the water
and waste water sector in the System Drives and Drive
Products Divisions, with stable demand from traditional heavy
industries such as mining and minerals and pulp and paper
as well as slower demand from oil, gas and chemicals.
The geographic distribution of orders for our Motion Business Area
was as follows:
($ in millions)
2020
2019
2018
Europe
2,219
2,355
2,260
The Americas
2,276
2,437
2,490
of which: United States
1,898
2,048
2,105
Asia, Middle East and Africa
2,079
1,990
1,975
of which: China
1,077
987
929
Total
6,574
6,782
6,725
In 2020, in Europe orders decreased 6 percent (6 percent
in local currencies)
as orders declined in Finland,
Russia, France, Italy and Spain. In Asia, Middle East and
Africa, orders increased 4 percent (6 percent in local
currencies) driven by growth in China, especially in the
Drive Products
Division and was partly offset by other markets
.
In the Americas, orders declined 7 percent (6 percent
in local currencies) mainly as a result of decreased orders
in the
U.S., reflecting the impact of the COVID-19 pandemic
.
Order backlog
The order backlog in 2020 increased 12 percent (6 percent
in local currencies) compared to 2019. The order
backlog increased driven by strong long-cycle order
growth.
Revenues
In 2020, revenues declined 2 percent (2 percent in local
currencies) compared to 2019, and were lower across
most Divisions, resulting from the impacts of the COVID-19
pandemic. However, revenues reflected
strong execution
from the order backlog especially in the System Drive
s
Division as well as resilience in the short-cycle business,
particularly in the second half of the year.
64
The geographic distribution of revenues for our Motion
Business Area was as follows:
($ in millions)
2020
2019
2018
Europe
2,196
2,162
2,169
The Americas
2,225
2,378
2,436
of which: United States
1,867
2,009
2,044
Asia, Middle East and Africa
1,988
1,993
1,858
of which: China
1,040
955
940
Total
6,409
6,533
6,463
In 2020, revenues in Europe increased 2 percent (1 percent
in local currencies) driven by increases in Poland,
Spain and Sweden while sales volumes
declined in Germany and Norway.
In Asia, Middle East and Africa revenues
remained stable as revenue growth was strong in China
,
partially offset by decreases
in India and Saudi Arabia. In the
Americas,
revenues decreased 6 percent (5 percent in local currencies)
mainly as a result of lower revenues in the U.S.,
especially in the book-and-bill business in the Motors
& Generators and Mechanical Power Transmission
Divisions.
Income from operations
In 2020, income from operations decreased 2 percent
compared to 2019 driven primarily by lower revenues.
The lower business volumes reflect the impacts of the COVID-19
pandemic on customer demand and product deliveries.
These impacts were mitigated partially by continued cost
discipline, lower travel expenses and a focus on operational
performance. In 2020, the Motion Business Area was also impacted
by higher restructuring and restructuring-related
expenses. Changes in foreign currencies, including
the impacts from FX/commodity timing differences summarized
in
the table below,
positively impacted income from operations by 3 percent.
Operational EBITA
The reconciliation of Income from operations to Operational
EBITA for
the Motion Business Area was as
follows:
($ in millions)
2020
2019
2018
Income from operations
989
1,009
924
Acquisition-related amortization
52
53
61
Restructuring, related and implementation costs
44
12
17
Gains and losses from sale of businesses
—
—
4
Acquisition-
and divestment-related expenses and integration costs
—
—
2
Certain other non-operational items
17
14
10
FX/commodity timing differences in income
from operations
(27)
(6)
5
Operational EBITA
1,075
1,082
1,023
In 2020, Operational EBITA
decreased 1 percent (1 percent excluding
the impact from changes in foreign
currency exchange rates) primarily due to the reasons
described under “Income from operations”, excluding the
explanations related to the reconciling items in the
table above.
65
Robotics & Discrete Automation Business Area
The financial results of our Robotics & Discrete Automation
Business Area were as follows:
% Change
($ in millions)
2020
2019
2018
2020
2019
Orders
2,868
3,260
3,808
(12)%
(14)%
Order backlog at December 31,
1,403
1,356
1,438
3%
(6)%
Revenues
2,907
3,314
3,611
(12)%
(8)%
Income (loss) from operations
(163)
298
456
n.a.
(35)%
Operational EBITA
237
393
528
(40)%
(26)%
Orders
In 2020, orders decreased 12 percent (12 percent in local
currencies). Demand levels in the Robotics and
Machine Automation Divisions were negatively impacted
by the COVID-19 pandemic. During the second quarter,
both
Divisions suffered a significant decrease in
demand when activity levels declined
across key end-markets, including
traditional automotive and automotive-related sectors, machine
builders and electronics markets. Orders showed signs
of
recovery
in the second half of the year benefiting from select robotics
investments in the 3C and automotive sectors,
mostly in China, food and beverage, and logistics markets
.
The geographic distribution of orders for our Robotics & Discrete
Automation Business Area was as follows:
($ in millions)
2020
2019
2018
Europe
1,424
1,717
1,870
The Americas
388
457
493
of which: United States
277
310
311
Asia, Middle East and Africa
1,056
1,086
1,445
of which: China
781
729
1,019
Total
2,868
3,260
3,808
In 2020, order intake for Asia, Middle East and Africa
decreased 3 percent (2 percent in local currencies)
compared
to 2019. Strong demand in China was partially offset by
order decreases
in India and Japan.
Demand in
Europe declined 17 percent (18 percent in local currencies)
as a result of the impacts from the COVID-19 pandemic,
with a strong decline in orders in Germany,
Italy and France. The orders in the Americas declined 15
percent (12 percent
in local currencies) as a result of the large
decrease of orders in the U.S. in both Divisions.
Order backlog
In 2020, the order backlog increased 3 percent (2 percent
lower in local currencies) compared to 2019. In local
currencies, the backlog decreased despite a recovery
in order levels in both Divisions in the second half of the year
,
impacted by the positive momentum in 3C and automotive
and automotive-related sectors.
Revenues
In 2020, revenues decreased 12 percent (13 percent
in local currencies) compared to 2019.
Revenues decreased
in both Divisions due to lower volumes from book-and-bill
business, impacted by the COVID-19 pandemic.
Service
revenues also decreased, driven by weak demand from
automotive and automotive-related sectors partially offset
by an
increase in consumer segments.
66
The geographic distribution of revenues for our Robotics &
Discrete Automation Business Area was as
follows:
($ in millions)
2020
2019
2018
Europe
1,481
1,680
1,777
The Americas
389
464
482
of which: United States
273
293
313
Asia, Middle East and Africa
1,037
1,170
1,352
of which: China
719
829
991
Total
2,907
3,314
3,611
In 2020, revenues decreased in all regions.
The revenues from Asia, Middle East and Africa decreased
11 percent (12 percent in local currencies)
compared to 2019 due to lower book-and-bill revenues and lower
execution
of orders in China. Revenues in Europe decreased 12 percent
(13 percent in local currencies) with Italy and Germany
performing poorly while revenues grew slightly in
the United Kingdom and France. In the Americas,
revenues declined
16 percent (13 percent in local currencies) due to a slight
decrease in revenues in the U.S. in both Divisions, negatively
impacted by the COVID-19 pandemic.
Income (loss) from operations
In 2020, the Business Area recorded a loss from operations
of $163 million compared to an income of
$298 million in 2019, reflecting both the impact of an
impairment of goodwill in 2020 in the Machine Automation
Division of $290 million and a decrease in underlying operating
performance. The operational performance was affected
by lower sales volumes, an adverse change in the revenue
mix, partially offset by benefits of cost reduction measures
(especially selling costs) and lower travel expenses. Changes in
foreign currencies, including the impacts from
FX/commodity timing differences summarized
in the table below, negatively
impacted the loss from operations by
approximately 7 percent.
Operational EBITA
The reconciliation of Income (loss) from operations to
Operational EBITA for
the Robotics & Discrete
Automation Business Area was as follows:
($ in millions)
2020
2019
2018
Income (loss) from operations
(163)
298
456
Acquisition-related amortization
78
77
82
Restructuring, related and implementation costs
26
12
4
Changes in pre-acquisition estimates
—
—
(11)
Acquisition-
and divestment-related expenses and integration costs
—
1
—
Impairment of goodwill
290
—
—
Certain other non-operational items
5
4
1
FX/commodity timing differences in income
from operations
1
1
(4)
Operational EBITA
237
393
528
In 2020, Operational EBITA
decreased 40 percent (40 percent excluding the impact from changes
in foreign
currency exchange rates) compared to 2019, primarily
due to the reasons described under “Income (loss) from
operations”, excluding the explanations related to the
reconciling items in the table above.
67
Corporate and Other
Net loss from operations for Corporate and Other was as follows:
($ in millions)
2020
2019
2018
Corporate headquarters and stewardship
(334)
(334)
(391)
Costs for divestment of Power Grids
(86)
(141)
—
Income (loss) from equity-accounted companies
(68)
1
—
Corporate research and development
(49)
(185)
(183)
Restructuring
(46)
(60)
(18)
Digital
(45)
(33)
(46)
OS implementation costs
(24)
(83)
(11)
Net gain (loss) from sale of businesses
(2)
13
(17)
Fair value adjustment on equity securities
71
(5)
(6)
Corporate brand income from Hitachi ABB Power Grids
60
—
—
Corporate real estate
54
60
75
Other corporate costs
(61)
43
—
Stranded corporate costs
(40)
(225)
(297)
Divested businesses and other non-core activities
(342)
(164)
(408)
Total
Corporate and Other
(912)
(1,113)
(1,302)
In 2020, the net loss from operations within Corporate
and Other decreased by $201 million to $912 million
compared to 2019.
This reflected a reduction in stranded corporate costs and
other costs eliminated due to the
divestment of the Power Grids business. In 2020, we incurred
significantly lower restructuring and implementation costs
for the OS program and also lower costs relating to
the divestment of the Power Grids business. Additionally,
costs also
declined for corporate research and development expenses.
This was partially offset by higher losses in
the non-core
businesses compared to 2019 as well as the impact of recording
the equity-method loss relating to the Hitachi ABB
Power Grids joint venture in the second half of the year.
In 2020, Corporate brand income of $60 million was recorded
relating to the use of the ABB brand by the Hitachi ABB Power
Grids joint venture.
Corporate
In 2020, corporate headquarters and stewardship costs remained
flat, benefiting from savings generated from
results of the OS restructuring program efforts
,
offset by costs for current strategic projects. Costs were lower
in
corporate functions including: communications, finance, human
resources, tax, treasury and information technology.
Lower costs reflect the benefits of the reduction in country
-level general management costs, spending controls adopted
due to the impact of the COVID-19 pandemic and the
impact of lower travel expenses and certain marketing costs.
Our investment in the Hitachi ABB Power Grids joint venture
is accounted for using the equity method. Income
(loss) from equity-accounted companies in 2020 primarily
reflects the loss recorded from this joint venture commencing
in July 2020. The equity-method loss from the joint
venture reflects the amortization of the notional
purchase price
accounting adjustments (net of tax) which were recorded
due to the fair value accounting applied on initial investment
in
the joint venture (see “Note 4 - Acquisitions, divestments and
equity-accounted companies” to our Consolidated
Financial Statements for information on the accounting
for the investment in Hitachi ABB Power Grids).
Corporate research and development costs declined
significantly compared to 2019. This was primarily due to
the transfer of resources to the Power Grids business as well as
headcount reductions resulting from restructuring
initiatives under the OS program.
For further information on the OS Program see “Restructuring
and other cost savings initiatives” below as well
as “Note 22 - Restructuring and related expenses” to our
Consolidated Financial Statements.
During 2020, we recorded net revaluation gains totaling
$71 million on investments in equity securities in our
equity ventures investment portfolio.
68
Corporate brand income results from the granting of
the use of the ABB brand to Hitachi ABB Power Grids,
the fair value of which was initially determined on the
date of the divestment. A portion of the proceeds received
for the
sale of the Power Grids business was allocated to the fair
value of the granting of the use of the brand and is being
amortized over the expected period of use by Hitachi ABB Power
Grids.
Corporate real estate primarily includes income from property
rentals and gains from the sale of real estate
properties. In 2020,
income from operations in Corporate real estate included gains
from the sale of real estate properties
of $27 million compared to $48 million in 2019.
Other corporate costs consists of operational costs of our
Corporate Treasury Operations and certain
other
charges such as costs and penalties associated with legal
cases and environmental expenses.
Stranded corporate costs includes the amount of
allocated general and administrative and other overhead costs
previously included in the measure of segment profit (Operational
EBITA) for
the Power Grids business which is
presented as discontinued operations. These allocated costs
do not qualify for being reported as costs within the
discontinued operation. During 2020, stranded costs were
recorded until the sale of the Power Grids business and the
lower relative costs reflect the effects of transferring
centralized functions directly to the Power Grids business. The
remaining underlying cost base which we continue to
maintain for the benefit of Hitachi ABB Power Grids is subject to
transition services agreements.
Other - Divested businesses and other non-core activities
The results of operations for certain divested businesses and other
non‑core activities are presented in
Corporate and Other.
Divested businesses include the high-voltage cables business, steel structures
business as well as
the oil & gas EPC business. Other continuing non‑core
activities include the execution and wind‑down of certain
legacy
EPC and other contracts.
In both 2020 and 2019, the amounts represent charges
and losses relating to divested businesses and the
winding down of the remaining EPC projects. In 2020, we
recorded $143 million for certain retained warranty
obligations relating to the steel structures business and also
recorded charges for certain retained commitments and
guarantees in connection with the oil & gas EPC business. The
loss in 2020 also reflects further operational challenges
and customer obligations relating to several legacy projects
including the full train retrofit business, substations and
offshore wind. In 2019, we recorded additional
losses for legacy substations,
plant electrification EPC contracts and the
full train retrofit business, which were driven by additional
project cost overruns.
At December 31, 2020, our remaining non‑core activities primarily
include the completion of the remaining
EPC contracts for substations and oil & gas as well as the
completion of the remaining obligations for the full
train
retrofit business.
Restructuring and other cost savings initiatives
OS program
In December 2018, ABB announced a two-year restructuring program
with the objective of simplifying its
business model and structure through the implementation
of a new organizational structure driven
by its businesses. The
program resulted in the elimination of the country and
regional structures within the previous matrix organization,
including the elimination of the three regional Executive
Committee roles. The operating businesses are now responsible
for both their customer-facing activities and business
support functions, while the remaining Group-level
corporate
activities primarily focus on Group strategy,
portfolio and performance management and capital allocation. As
of
December 31, 2020, we have incurred substantially all restructuring
and related expenses related to the OS program.
69
During the course of the program, we implemented and
executed various restructuring initiatives across all
business support functions and all operating segments.
The cumulative restructuring and related expenses under this
program, originally estimated to be $350 million, were
reduced by $41 million to $309 million, mainly due to the
reductions in both estimated costs and number of projects planned.
The following table outlines the costs incurred in 2020,
2019,
2018 and the cumulative costs incurred under the
program per operating segment and Corporate and Other
as of December 31, 2020:
Cumulative costs
Costs incurred in
incurred up to
($ in millions)
2020
2019
2018
December 31, 2020
Electrification
35
18
32
85
Industrial Automation
37
3
21
61
Motion
18
6
1
25
Robotics & Discrete Automation
10
8
—
18
Corporate and Other
49
54
11
114
Total
149
89
65
303
ABB completed and has incurred substantially all costs related
to the OS program as of December 31, 2020.
The restructuring program resulted in run-rate cost savings of
approximately $590 million, impacting all Business Areas
and Corporate and Other.
These cost savings were realized mainly as reductions in cost of sales, selling,
general and
administrative expenses, and non-order related research
and development expenses.
The majority of the remaining cash outlays as of December
31, 2020,
primarily for employee severance
benefits, are expected to occur in 2021.
LIQUIDITY AND CAPITAL
RESOURCES
Principal sources of funding
We meet our
liquidity needs principally using cash from operations, proceeds
from the issuance of debt
instruments (bonds and commercial paper), and short‑term
bank borrowings. In 2020, we also received significant funds
from the sale of the Power Grids business, which was completed
on July 1, 2020.
Our net debt is shown in the table below:
December 31,
($ in millions)
2020
2019
Short-term debt and current maturities of long-term debt
1,293
2,287
Long-term debt
4,828
6,772
Cash and equivalents
(3,278)
(3,508)
Restricted cash - current
(323)
(36)
Marketable securities and short-term investments
(2,108)
(566)
Restricted cash - non-current
(300)
—
Net debt
(defined as the sum of the above lines)
112
4,949
70
During 2020, we significantly deleveraged the Company,
driven by the receipt of $9,241 million initial net
proceeds from the sale of the Power Grids business. As a result,
we reduced net debt to $112
million at December 31,
2020, from $4,949 million at December 31, 2019.
This change was also supported by cash flows from
operating
activities during 2020 of $1,693 million and by the
sale of treasury stock in relation to our employee share plans
for
$412
million. Partially offsetting these items were amounts
for purchases of treasury shares of $3,048 million including
$2,702 million relating to the announced buyback of our
shares as well as $1,736 million for the payment of the
dividend to our shareholders.
We made net
purchases of property,
plant and equipment and intangible assets of
$580 million (for both continuing and discontinued operations)
and made payments of dividends to noncontrolling
shareholders totaling $82 million.
In addition, net debt increased by $269 million due to moveme
nts in foreign exchange
rates. See “Financial position”, “Investing activities” and
“Financing activities” for further details.
During March 2020, as a result of the reaction of global
financial markets
to the COVID-19 pandemic, access
to commercial paper markets was limited.
However, the bond and bank
credit markets continued to be accessible at
temporarily increased credit spreads. To
support our short-term liquidity needs at that time, we entered
into a bank-
funded short-term EUR 2 billion Revolving Credit Agreement
and received the proceeds on March 31, 2020, amounting
to $2,183 million, net of issuance costs. We
repaid this borrowing after the completion of the sale of the
Power Grids
business at which time the agreement was terminated.
Financial markets quickly stabilized and we were again able
to
access the commercial paper markets with costs commensurate
to our credit rating. Through the rest of the year,
we did
not require access to the commercial paper markets for
funding.
Our Corporate Treasury Operations is responsible
for providing a range of treasury management services
to our
group companies, including investing cash in excess of
current business requirements. At December 31, 2020 and 2019,
the proportion of our aggregate “Cash and equivalents” and
“Marketable securities and short‑term investments”
managed by our Corporate Treasury Operations
amounted to approximately 53 percent and 34 percent, respectively.
Our investment strategy for cash (in excess of current
business requirements) has generally been to invest in
short-term time deposits with maturities of less than 3
months, supplemented at times by investments in money market
funds, and in some cases, government securities. We
primarily invested the proceeds received from the sale
of the Power
Grids business in money market funds and reduced
these funds over the rest of 2020 to execute our share buyback
activities and to pay back maturing debt and retire other
debts in advance.
We actively monitor
credit risk in our
investment portfolio and derivative portfolio. Credit risk
exposures are controlled in accordance with policies approved
by our senior management to identify,
measure, monitor and control credit risks. We
have minimum rating requirements
for our counterparts and closely monitor developments
in the credit markets making appropriate changes to our
investment policy as deemed necessary.
In addition to minimum rating criteria, we have strict investment
parameters and
specific approved instruments as well as restrictions on the
types of investments we make. These parameters are
closely
monitored on an ongoing basis and amended as we consider
necessary.
Our cash is held in various currencies around the world.
Approximately 31 percent of our cash and cash
equivalents held at December 31, 2020, was in U.S. dollars,
while other significant amounts were held in Chinese
renminbi (23 percent) and euro (21 percent).
We believe the
ongoing cash flows generated from our business, supplemented,
when necessary, through
access to the capital markets (including short‑term commercial
paper) and our credit facilities are sufficient
to support
business operations, capital expenditures, business acquisitions,
the payment of dividends to shareholders and
contributions to pension plans. Consequently,
we believe that our ability to obtain funding from these sources
will
continue to provide the cash flows necessary to satisfy our
working capital and capital expenditure requirements, as well
as meet our debt repayments and other financial commitments for
the next 12 months. See “Disclosures about
contractual obligations and commitments”.
Due to the nature of our operations, including the timing
of annual incentive payments to employees, our cash
flow from operations generally tends to be weaker in the
first half of the year than in the second half of the year.
71
Debt and interest rates
Total outstanding
debt was as follows:
December 31,
($ in millions)
2020
2019
Short-term debt and current maturities of long-term debt
1,293
2,287
Long-term debt:
Bonds
4,580
6,587
Other long-term debt
248
185
Total
debt
6,121
9,059
The decrease in short‑term debt in 2020 was due to the
repayment at maturity of both the USD 300 million
2.8% Notes and the EUR 1,000 million floating rate
Notes as well as a net reduction of outstanding commercial paper
of
$676 million. This was partially offset by the
reclassification to short-term of the USD 650 million 4.0% Notes
and the
CHF 350 million 2.250% Bonds.
At December 31, 2020,
Long-term debt decreased $1,944 million compared to the end
of 2019
due partly to the
reclassifications to short-term described above. We
also reduced through public tenders or otherwise redeemed debt
having a combined outstanding principal of $1,208 million.
This included partial public tenders of both our USD
750
million 3.8% Notes due 2028 and our USD 750 million
4.375% Notes due 2042 and as well as full redemptions of our
USD 250 million 5.625% Notes due 2021 and our USD
450 million 3.375% Notes due 2023.
Our debt has been obtained in a range of currencies and maturities
and with various interest rate terms. For
certain of our debt obligations, we use derivatives to manage
the fixed interest rate exposure. For example, we use
interest rate swaps to effectively conv
ert fixed rate debt into floating rate liabilities. After considering
the effects of
interest rate swaps, at December 31, 2020, the effective
average interest rate on our floating rate long‑term debt
(including current maturities) of $3,330 million and our
fixed rate long‑term debt (including current maturities) of
$2,638 million was 0.2 percent and 3.3 percent, respectively.
This compares with an effective rate of 1.1 percent
for
floating rate long‑term debt of $2,221 million and 2.4
percent for fixed rate long‑term debt of $6,000 million
at
December 31, 2019.
For a discussion of our use of derivatives to modify
the interest characteristics of certain of our individual bond
issuances, see “Note 12 - Debt” to our Consolidated Financial
Statements.
Credit facility
In December 2019, we replaced our previous multicurrency
revolving credit facility with a new $2 billion
multicurrency revolving credit facility,
maturing in 2024. In 2020,
we exercised our option to extend the maturity to
2025 and retain an option which we can exercise in 2021
to further extend the maturity to 2026. No amount was drawn
under the facility at December 31, 2020 and 2019. The facility is available
for general corporate purposes and contains
cross‑default clauses whereby an event of default would
occur if we were to default on indebtedness, as defined in the
facility, at or above
a specified threshold.
The credit facility does not contain financial covenants that would
restrict our ability to pay dividends or raise
additional funds in the capital markets. For further details of
the credit facility,
see “Note 12 - Debt” to our Consolidated
Financial Statements.
Commercial paper
At December 31, 2020,
we had two commercial paper programs in place:
•
a $2 billion commercial paper program for the private
placement of U.S. dollar denominated commercial
paper in the United States, and
72
•
a $2 billion Euro‑commercial paper program for the issuance of
commercial
paper in a variety of
currencies.
At December 31, 2020,
$32 million was outstanding under the $2 billion program
in the United States,
compared to $708 million outstanding at December 31,
2019.
At December 31, 2020 and 2019, no amount was outstanding
under the $2 billion Euro‑commercial paper
program.
European program for the issuance of
debt
The European program for the issuance of debt
allows the issuance of up to the equivalent of $8 billion in
certain debt instruments. The terms of the program do
not obligate any third party to extend credit to us and the terms
and possibility of issuing any debt under the program
are determined with respect to, and as of the date of issuance
of,
each debt instrument. At December 31, 2020,
two bonds (principal amount of EUR 700 million, du
e
in 2023 and
principal amount of EUR 750 million, due in 2024) having
a combined carrying amount of $1,821 million were
outstanding under the program. At December 31, 2019, the carrying
amount of these bonds was $1,658 million.
In January 2021, we issued one additional bond under
this program having a principle amount of
EUR 800 million at zero interest, and a term of 9 years.
Credit ratings
Credit ratings are assessments by the rating agencies of
the credit risk associated with ABB and are based on
information provided by us or other sources that the rating
agencies consider reliable. Higher ratings generally result in
lower borrowing costs and increased access to capital markets. Our
ratings are of “investment grade” which is defined as
Baa3 (or above) from Moody’s
and BBB− (or above) from Standard & Poor’s.
At December 31, 2020,
our long‑term debt was rated A3 with a Stable outlook
by Moody’s compared to A2
at
the end of 2019. At December 31, 2020, our long-term
debt was rated A- with a Stable outlook by Standard &
Poor’s
compared to A at the end of 2019.
Limitations on transfers of funds
Currency and other local regulatory limitations related
to the transfer of funds exist in a number of countries
where we operate, including: China, Egypt, India, Indones
ia, Kazakhstan, Malaysia, South Korea, Taiwan
(Chinese
Taipei), Thailand
,
Turkey and Viet
Nam. Funds, other than regular dividends, fees
or loan repayments, cannot be readily
transferred offshore from these countries and are
therefore deposited and used for working capital needs in those
countries. In addition, there are certain countries where,
for tax reasons, it is not considered optimal to transfer the cash
offshore. As a consequence, these funds are
not available within our Corporate Treasury
Operations to meet short‑term
cash obligations outside the relevant country.
The above described funds are reported as cash in our Consolidated
Balance Sheets, but we do not consider these funds immediately
available for the repayment of debt outside the
respective countries where the cash is situated, including
those described above. At December 31, 2020 and 2019, the
balance of “Cash and equivalents” and “Marketable
securities and other short‑term investments” under such limitations
(either regulatory or sub‑optimal from a tax perspective)
totaled approximately $1,751 million and $1,843 million,
respectively.
During 2020, we continued to direct our subsidiaries in countries with
restrictions to place such cash with our
core banks or investment grade banks, in order to minimize
credit risk on such cash positions. We
continue to closely
monitor the situation to ensure bank counterparty risks are minimized.
73
FINANCIAL POSITION
Balance sheets
December 31,
($ in millions)
2020
2019
% Change
Current assets
Cash and equivalents
3,278
3,508
(7)%
Restricted cash
323
36
n.a.
Marketable securities and short-term investments
2,108
566
272%
Receivables, net
6,820
6,434
6%
Contract assets
985
1,025
(4)%
Inventories, net
4,469
4,184
7%
Prepaid expenses
201
191
5%
Other current assets
760
674
13%
Assets held for sale and in discontinued operations
282
9,840
(97)%
Total
current assets
19,226
26,458
(27)%
For a discussion on Cash and equivalents, see sections “Liquidity
and Capital Resources—Principal sources of
funding” and “Cash flows” for further details.
The increase in restricted cash relates to certain amounts
received on the sale of the Power Grids business
which are being held in escrow pending the finalization
of legal transfer of certain entities of that business to Hitachi
ABB Power Grids. See “Note 3 - Discontinued operations”
to our Consolidated Financial Statements.
Marketable securities and short‑term investments increased
as a significant portion of the proceeds received for
the sale of the Power Grids business are invested in money
market funds (see “Note 5 - Cash and equivalents,
marketable securities and short-term investments” to our
Consolidated Financial Statements).
Receivables, net, increased 6 percent primarily due to
currency exchange movements. In local currency,
Receivables, net, increased 2 percent.
Contract assets decreased 4 percent (9 percent in local
currencies). The decrease reflects lower amounts in the
non-core businesses and the Motion Business Area. This
was partially offset by higher levels in the Industrial
Automation and Robotics & Discrete Automation Business Areas.
Inventories, net, increased 7 percent primarily due
to movements in exchange rates. In local currencies,
inventory decreased 1 percent.
Current assets held for sale and in discontinued operations
decreased to $282 million from $9,840 million due
to the sale in 2020 of both the solar inverters and Power
Grids businesses. The balance at December 31, 2020, relates
primarily to working capital balances of certain contracts
in the Power Grids business which ABB is executing for
the
benefit of Hitachi ABB Power Grids. For the details of
the assets of the Power Grids business see “Note 3 -
Discontinued operations” to our Consolidated Financial
Statements.
74
December 31,
($ in millions)
2020
2019
% Change
Current liabilities
Accounts payable, trade
4,571
4,353
5%
Contract liabilities
1,903
1,719
11%
Short-term debt and current maturities of long-term debt
1,293
2,287
(43)%
Current operating leases
270
305
(11)%
Provisions for warranties
1,035
816
27%
Other provisions
1,519
1,375
10%
Other current liabilities
4,181
3,761
11%
Liabilities held for sale and in discontinued operations
644
5,650
(89)%
Total
current liabilities
15,416
20,266
(24)%
Accounts payable, trade, increased 5 percent due primaril
y
to currency exchange rate movements. Excluding
movements in exchange rates, the balance was steady.
The decrease in Short-term debt and current maturities of
long-term debt was primarily due to repayment at
maturity of both the USD 300 million 2.8% Notes and
the EUR 1,000 million floating rate Notes. In addition,
we
reduced the amount outstanding on the U.S. commercial
paper program by $676 million. This was partially offset
by a
reclassification to Short-term debt and current maturities
of long-term debt of the USD 650 million Notes and
the
CHF 350 million Bonds.
Current operating leases includes the portion of the operating
lease liabilities that are due to be paid in the next
12 months. For a summary of operating lease liabilities, see
“Note 14 - Leases” to our Consolidated Financial
Statements.
Provisions for warranties increased 27 percent (20 percent
in local currencies).
The increase is mainly due to an
increase of $143 million in the warranty provision
related to a divested business. For details on the change
in the
Provision for warranties, see “Note 15 - Commitments and
contingencies” to our Consolidated Financial Statements.
Current liabilities held for sale and in discontinued operations decreased
to $644 million from $5,650 million
due to the sale in 2020 of both the solar inverters and Power
Grids businesses. The amount at December 31, 2020,
relates to certain working capital balances of the Power
Grids business as described above. For the details of the
liabilities of the Power Grids business see “Note 3 - Discontinued
operations” to our Consolidated Financial Statements.
December 31,
($ in millions)
2020
2019
% Change
Non-current assets
Restricted cash, non-current
300
—
n.a.
Property, plant and
equipment, net
4,174
3,972
5%
Operating lease right-of-use assets
969
994
(3)%
Goodwill
10,850
10,825
0%
Intangible assets, net
2,078
2,252
(8)%
Prepaid pension and other employee benefits
360
133
171%
Investments in equity-accounted companies
1,784
33
n.a.
Deferred taxes
843
910
(7)%
Other non-current assets
504
531
(5)%
Total
non-current assets
21,862
19,650
11%
Restricted cash at December 31, 2020, represents certain
amounts received on the sale of the Power Grids
business which have been placed in escrow,
pending resolution of certain of our contractual obligations to Hitachi
Ltd.
See “Note 3 - Discontinued operations” to our Consolidated
Financial Statements.
75
In 2020, Property,
plant and equipment, net, increased 5 percent (flat in local
currencies) as net capital
expenditures (purchases net of disposals for property,
plant and equipment) were at a similar level to the annual
depreciation recorded in 2020.
In 2020, Goodwill was flat (decreased 2 percent in local
currencies). The decrease in local currencies includes
the impact of recording goodwill impairments of $311
million in 2020.
Intangible assets, net, decreased 8 percent (11
percent in local currencies) due to the amortization recorded
during the year. For additional
information on goodwill and intangible assets see “Note 11
- Goodwill and intangible
assets” to our Consolidated Financial Statements.
The balance for Investment in equity-accounted
companies at December 31, 2020, primarily represents our
remaining 19.9 percent interest in the Hitachi ABB Power Grids
joint venture. For additional information on investment
in equity-accounted companies see “Note 4 - Acquisitions,
divestments and equity-accounted companies” to our
Consolidated Financial Statements.
Prepaid pension and other employee benefits increased
171 percent reflecting changes in the funding status for
pension plans primarily in Switzerland due to discretionary
contributions made in 2020.
For additional information on
Pension and employee benefits see “Note 17 - Employee
benefits” to our Consolidated Financial Statements.
In 2020, Deferred taxes, decreased 7 percent (18 percent
in local currencies). For details on deferred tax assets
see “Note 16 - Income taxes” to our Consolidated Financial
Statements.
December 31,
($ in millions)
2020
2019
% Change
Non-current liabilities
Long-term debt
4,828
6,772
(29)%
Non-current operating leases
731
717
2%
Pension and other employee benefits
1,231
1,793
(31)%
Deferred taxes
661
911
(27)%
Other non-current liabilities
2,025
1,669
21%
Liabilities held for sale and in discontinued operations
197
—
n.a.
Total
non-current liabilities
9,673
11,862
(18)%
Long-term debt decreased 29 percent. The decrease in
2020 reflects the reclassifications to short-term of the
bonds and notes described above. In addition, we reduced
our outstanding debt by $508
million in connection with cash
tender offers
to the noteholders of our USD 750 million Notes, due 2028,
and our USD 750 million Notes, due 2042. We
also exercised our early redemption options on the full
amounts outstanding of our USD 250 million Notes due 2021
and
our
USD 450 million Notes due 2023 under the original terms of these
instruments. During 2020, Long-term debt
increased 4 percent due to movements in foreign exchange
rates. For additional information on Long-term debt, see
“Liquidity and Capital Resources—Debt and interest rates”
as well as “Note 12 - Debt” to our Consolidated Financial
Statements.
Non-current operating leases includes the portion
of the operating
lease liabilities that are due to be paid in
more than 12 months.
Pension and employee benefits decreased 31 percent
(37 percent in local currencies).
The decrease in 2020
primarily reflects the settlement of certain defined benefit pension
obligations during 2020. For additional information
on Pension and employee benefits see “Note 17 - Employee
benefits” to our Consolidated Financial Statements.
For a breakdown of Other non‑current liabilities, see “Note
13 - Other provisions, other current liabilities and
other non-current liabilities” to our Consolidated Financial
Statements.
76
Non-current liabilities held for sale and in discontinued
operations relate to the sale in 2020 of the Power Grids
business. The amount at December 31, 2020, relates to certain amounts
which are expected to be payable in more than
one year. For the details of
the liabilities of the Power Grids business see “Note 3 - Discontinued
operations” to our
Consolidated Financial Statements.
Cash flows
The Consolidated Statements of Cash Flows are shown
on a continuing operations basis, with the effects of
discontinued operations shown in aggregate for each major
cash flow activity and also include the impact from changes
in restricted cash.
The Consolidated Statements of Cash Flows can be summarized
as follows:
($ in millions)
2020
2019
2018
Net cash provided by operating activities
1,693
2,325
2,924
Net cash provided by (used in) investing activities
6,760
(815)
(3,085)
Net cash used in financing activities
(8,175)
(1,383)
(789)
Effects of exchange rate changes on cash and
equivalents
79
(28)
(131)
Net change in cash and equivalents and restricted cash
357
99
(1,081)
Operating activities
($ in millions)
2020
2019
2018
Net income
5,205
1,528
2,298
Less: Income from discontinued operations, net of tax
(4,860)
(438)
(723)
Depreciation and amortization
915
961
916
Total adjustments
to reconcile net income to net cash provided by
operating activities (excluding depreciation and amortization)
263
220
(189)
Total changes
in operating assets and liabilities
352
(372)
50
Net cash provided by operating activities —
continuing operations
1,875
1,899
2,352
Net cash provided by (used in) operating activities
— discontinued
operations
(182)
426
572
Cash flows from operating activities of continuing operations
in 2020 provided net cash of $1,875 million, a
decrease of 1 percent from 2019. In 2020, lower cash
effective net income (i.e. net income from continuing
operations
adjusted for depreciation, amortization and other non
-cash items) which included the impacts of the cash payments made
to settle certain international pension plans in 2020 as well
as payments for certain project and legal settlements was
offset by higher cash generated from a reduction
in working capital during the year.
In 2020, net cash provided by
operating activities benefited from a reduction of inventory
levels (in local currencies) and a more favorable timing of
cash flows on long-term projects.
Cash flows from operating activities of discontinued
operations in 2020 decreased to a net outflow of
$182 million compared to an inflow of $426 million
in 2019. This primarily reflects the timing of the divestment
of the
Power Grids business in July 2020, with 2020 primarily
reflecting the cash flows in the first half of the year.
This
business typically generated most of its operating cash flows in
the second half of the year and thus the two years are
not
comparable.
77
Investing activities
($ in millions)
2020
2019
2018
Purchases of investments
(5,933)
(748)
(322)
Purchases of property,
plant and equipment and intangible assets
(694)
(762)
(772)
Acquisition of businesses (net of cash acquired) and
increases in cost- and equity-accounted companies
(121)
(22)
(2,664)
Proceeds from sales of investments
4,341
749
567
Proceeds from maturity of investments
11
80
160
Proceeds from sales of property,
plant and equipment
114
82
72
Proceeds from sales of businesses (net of transaction costs and
cash
disposed) and cost- and equity-accounted companies
(136)
69
113
Net cash from settlement of foreign currency derivatives
138
(76)
(30)
Other investing activities
8
(23)
(32)
Net cash used in investing activities — continuing operations
(2,272)
(651)
(2,908)
Net cash provided by (used in) investing activities
— discontinued
operations
9,032
(164)
(177)
Net cash used in investing activities for continuing
operations in 2020 was $2,272 million compared to
$651 million in 2019. The amount in 2020 reflects primarily the
net investment in money market funds of amounts
received from the sale of the Power Grids
business as well as cash payments for purchases of property,
plant and
equipment. In 2020, we also recorded net investing
cash flows of $138 million for settlements of derivatives compared
to net outflows of $76 million in 2019.
The following presents purchases of property,
plant and equipment and intangible assets by significant asset
category:
($ in millions)
2020
2019
2018
Construction in progress
493
536
523
Purchase of machinery and equipment
134
156
152
Purchase of land and buildings
17
26
28
Purchase of intangible assets
50
44
69
Purchases of property,
plant and equipment and intangible assets
694
762
772
In 2020 there were no significant business acquisitions. The
divestment of the solar inverters business resulted
in a net cash outflow of $143 million in 2020.
In 2020, we divested the Power Grids business and recorded
net proceeds of $9,168 million (net of transaction
costs and purchase price related repayments) which are included
in cash provided by investing activities from
discontinued operations.
78
Financing activities
($ in millions)
2020
2019
2018
Net changes in debt with maturities of 90 days or less
(587)
164
221
Increase in debt
343
2,406
1,914
Repayment of debt
(3,459)
(2,156)
(830)
Delivery of shares
412
10
42
Purchase of treasury stock
(3,048)
—
(250)
Dividends paid
(1,736)
(1,675)
(1,717)
Dividends paid to noncontrolling shareholders
(82)
(90)
(86)
Other financing activities
(49)
13
(35)
Net cash used in financing activities — continuing operations
(8,206)
(1,328)
(741)
Net cash provided by (used in) financing activities
— discontinued
operations
31
(55)
(48)
Our financing cash flow activities primarily include
debt transactions (both from the issuance of debt securities
and borrowings directly from banks), share transactions
and payments of distributions to controlling and noncontrolling
shareholders. Net cash from financing activities for discontinued
operations represents primarily distributions paid to
noncontrolling shareholders of certain subsidiaries classified in
discontinued operations and in 2020, also includes net
borrowings of the discontinued operation.
In 2020, the net outflow for debt with maturities of
90 days or less related to net repayments of amounts
outstanding under the U.S. commercial paper program
.
In 2020, “Repayment of debt”
includes the repayment at maturity of the USD 300
million 2.8% Notes and the
EUR 1,000 million floating rate Notes. We
also made payments of $1,376 million in connection
with early retirement of
bonds including partial public tenders of both our USD 750
million 3.8% Notes due 2028 and our USD 750 million
4.375% Notes due 2042 as well as full redemptions of
our USD 250 million 5.625% Notes due 2021 and our
USD 450 million 3.375% Notes due 2023.
“Delivery of shares” in 2020 reflects cash received primarily
from the exercise of options in connection with
our Management Incentive
Plan (resulting in a delivery of 16.5 million shares) and in connection
with our Employee
Share Acquisition Plan (resulting in a delivery of 1.4 million
shares). All shares were delivered out of Treasury
stock.
In 2020, “Purchase of treasury stock” reflects $2,702
million of cash payments to purchase 109 million of our
own shares in connection with the announced share buyback
program. It also reflects $346 million paid to purchase
13 million shares on the open market during 2020.
79
Disclosures about contractual obligations and
commitments
The contractual obligations presented in the table below
represent our estimates of future payments under fixed
contractual obligations and commitments. These amounts may
differ from those reported in our Consolidated
Balance
Sheet at December 31, 2020.
Changes in our business needs, cancellation provisions and
changes in interest rates, as
well as actions by third parties and other factors, may
cause these estimates to change. Therefore, our actual payments
in
future periods may vary from those presented below.
The following table summarizes certain of our contractual
obligations and principal and interest payments under
our debt instruments, leases and purchase obligations at
December 31, 2020:
Total
Less than
1 - 3
3 - 5
More than
($ in millions)
1 year
years
years
5 years
Payments due by period
Long-term debt obligations
5,730
1,108
2,115
1,321
1,186
Interest payments related to long-term debt obligations
842
128
148
94
472
Operating lease obligations
(1)
1,083
282
371
210
220
Finance lease obligations
(1)
230
38
63
49
80
Purchase obligations
3,264
2,701
458
80
25
Total
11,149
4,257
3,155
1,754
1,983
(1) Lease obligations
represent total
cash payments
to be made in
the future,
and include
an implied interest
expense, being
the differen
ce
between undiscounted
cash flows and
discounted cash
flows,
of $82 million
and $43
million,
for operating and
finance leases,
respectively
.
See “Note 14 -
Leases” to our
Consolidated
Financial Statements.
In the table above, the Long‑term debt obligations reflect
the cash amounts to be repaid upon maturity of those
debt obligations. The cash obligations above will differ
from Long‑term debt due to the impacts of fair value hedge
accounting adjustments and premiums or discounts on
certain debt. In addition, finance lease obligations are shown
separately in the table above while they are combined
with long‑term debt amounts in our Consolidated Balance Sheets.
We have determined
the interest payments related to long‑term debt obligations
by reference to the payments
due under the terms of our debt obligations at the time
such obligations were incurred. However,
we use interest rate
swaps to modify the interest characteristics of certain
of our debt obligations. The net effect of these swaps may
be to
increase or decrease the actual amount of our cash interest payme
nt obligations, which may differ from those
stated in
the above table. For further details on our debt obligations
and the related hedges, see “Note 12 - Debt” to our
Consolidated Financial Statements.
Of the total of $1,455 million unrecognized tax benefits (net
of deferred tax assets) at December 31, 2020,
it is
expected that $32 million will be paid within less than
a year. However,
we cannot make a reasonably reliable estimate
as to the related future payments for the remaining amount.
Off‑balance sheet arrangements
Commercial commitments
We disclose the maximum
potential exposure of certain guarantees, as well as possible recourse
provisions that
may allow us to recover from third parties amounts paid
out under such guarantees. The maximum potential exposure
does not allow any discounting of our assessment of actual
exposure under the guarantees. The information below
reflects our maximum potential exposure under the guarantees,
which is higher than our assessment of the expected
exposure.
80
Guarantees
The following table provides quantitative data regarding
our third‑party guarantees. The maximum potential
payments represent a worst‑case scenario, and do not reflect
our expected outcomes.
December 31,
2020
2019
Maximum potential
($ in millions)
payments
(1)
Performance guarantees
6,726
1,860
Financial guarantees
339
10
Indemnification guarantees
(2)
177
64
Total
7,242
1,934
(1)
Maximum potential payments include amounts in both continuing
and discontinued operations.
(2)
Certain indemnifications provided to Hitachi in connection with
the divestment of Power Grids are without limit.
The carrying amount of liabilities recorded in the Consolidated
Balance Sheets reflects our best estimate of
future payments, which we may incur as part of fulfilling
our guarantee obligations. In respect of the above guarantees,
the carrying amounts of liabilities at December 31, 2020,
amounted to $135 million, which was included in discontinued
operations, while at December 31, 2019, balances were
not significant.
In addition, in the normal course of bidding for and executing certain
projects, we have entered into standby
letters of credit, bid/performance bonds and surety bonds
(collectively “performance bonds”) with various financial
institutions. Customers can draw on such performance
bonds in the event that we do not fulfill our contractual
obligations. We
would then have an obligation to reimburse the financial
institution for amounts paid under the
performance bonds. At December 31, 2020 and 2019,
the total outstanding performance bonds aggregated to
$4.3 billion
and $6.8 billion, respectively,
of which $0.3 billion and $3.7 billion, respectively,
relate to discontinued operations.
There have been no significant amounts reimbursed to
financial institutions under these types of arrangements in
2020,
2019 and 2018.
For additional descriptions of our performance,
financial and indemnification guarantees see “Note 15
-
Commitments and contingencies” to our Consolidated Financial
Statements.
81
Item 6.
Directors, Senior Management and Employees
SUMMARY OF CORPORATE
GOVERNANCE APPROACH
Corporate governance - general principles
ABB is committed to the highest international standards
of corporate governance and this is reinforced in its
structure, processes and rules as outlined in this section of
the Annual Report. In line with this, ABB complies with the
general principles as set forth in the Swiss Code of Best Practice
for Corporate Governance, as well as those of the
capital markets where its shares are listed and traded. In
addition to the provisions of the Swiss Code of Obligations,
ABB’s key principles and
rules on corporate governance are laid down in ABB’s
Articles of Incorporation, the ABB Ltd
Board Regulations & Corporate Governance Guidelines (which
includes the regulations of ABB’s Board
committees
and the ABB Ltd Related Party Transaction
Policy, which was prepared
based on the Swiss Code of Best Practice for
Corporate Governance and the independence criteria set
forth in the corporate governance rules of the New York
Stock
Exchange), and the ABB Code of Conduct. These documents
are available on ABB’s website
at
https://new.abb.com/about/corporate
-governance
. It is the duty of ABB’s Board of
Directors (the Board) to review and
amend or propose amendments to those documents from
time to time to reflect the most recent developments and
practices, as well as to ensure compliance with applicable
laws and regulations. Shareholders and other interested parties
may communicate with the Chairman of the Board or
the independent directors by writing to ABB Ltd (Attn:
Chairman
of the Board / independent directors), at Affolternstrasse
44, CH-8050 Zurich, Switzerland.
Compensation governance and Board and EC compensation
Information about ABB’s compensation
governance as well as Board and Executive Committee (EC)
compensation and shareholdings is provided in the
Compensation Report that can be found in the section titled
"Compensation" below.
BOARD OF DIRECTORS
Board and Board committees (2020 - 2021 board term)
Board of Directors
Chairman:
Matti Alahuhta
Jennifer Xin-Zhe Li
Vice‑Chairman:
Gunnar Brock
Geraldine Matchett
David Constable
David Meline
Frederico Fleury Curado
Satish Pai
Lars Förberg
Finance, Audit and Compliance
Committee
Governance and Nomination
Committee
Compensation
Committee
David Meline (chairman)
Jacob Wallenberg
(chairman)
David Constable (chairman)
Gunnar Brock
Matti Alahuhta
Frederico Fleury Curado
Geraldine Matchett
Lars Förberg
Jennifer Xin‑Zhe Li
Satish Pai
82
Board governance
The Board
The Board defines the ultimate direction of the business of
ABB and issues the necessary instructions. It
determines the organization of the ABB Group
and appoints, removes and supervises the persons entrusted
with the
executive management and representation of ABB. The internal
organizational structure and the definition of the
areas
of responsibility of the Board, as well as the information
and control instruments vis-à-vis the Executive Committee are
set forth in the ABB Ltd Board Regulations & Corporate
Governance Guidelines (available at
https://new.abb.com/about/corporate
-governance
).
The Board takes decisions as a whole, supported by its three
committees: the Finance, Audit and Compliance
Committee (FACC),
the Governance and Nomination Committee (GNC), and the
Compensation Committee (CC).
These committees assist the Board in its tasks and
report regularly to the Board. The members of the Board committees
either are required to be independent or are elected
directly by the shareholders. The Board and its committees
meet
regularly throughout the year.
The directors and officers of a Swiss corporation
are bound, as specified in the Swiss Code of Obligations,
to
perform their duties with all due care, to safeguard the
interests of the corporation in good faith and to extend equal
treatment to shareholders in like circumstances.
The Swiss Code of Obligations does not specify what
standard of due care is required of the directors of a
corporate board. However, it is generally
held by Swiss legal scholars and jurisprudence that the directors
must have the
requisite capability and skill to fulfill their function, and
must devote the necessary time to the discharge
of their duties.
Moreover, the directors must exercise
all due care that a prudent and diligent director would have
taken in like
circumstances. Finally,
the directors are required to take actions in the best interests
of the corporation and may not take
any actions that may be harmful to the corporation.
Although the Swiss Code of Obligations does not discuss specifically
conflicts of interest for board members,
the ABB Ltd Board Regulations & Corporate Governance
Guidelines (available at
https://new.abb.com/about/corporate
-governance
) state that board members shall avoid entering into any situation
in
which their personal or financial interest may conflict
with the interests of ABB.
Chairman of the Board
The Chairman is elected by the shareholders to represent
their interests in creating sustainable value through
effective governance. In addition, the Chairman
(1) takes provisional decisions on behalf of the Board on urgent
matters
where a regular Board decision cannot be obtained,
(2) calls for Board meetings and sets the related agendas,
(3)
interacts with the CEO and other EC members on a more
frequent basis outside of Board meetings and (4)
represents
the Board internally and in the public sphere.
Vice-Chairman
of the Board
The Vice‑Chairman
is elected by the Board and handles the responsibilities of the Chairman
to the extent the
Chairman is unable to do so or would have a conflict of
interest in doing so. He also acts as counselor/advisor to the
Chairman on any matters that are Company or Board relevant
and as appropriate or as the Chairman may require
and
with a particular focus on strategic aspects related to the
Company and its business in general. In addition, the
Vice‑Chairman takes such
other actions as may be decided by the Board or requested
by the Chairman.
Finance, Audit and Compliance Committee
The FACC is responsible
for overseeing (1) the integrity of ABB’s
financial statements, (2)
ABB’s compliance
with legal, tax and regulatory requirements, (3)
the independent auditors’ qualifications and independence, (4)
the
performance of ABB’s internal
audit function and external auditors, and (5)
ABB’s capital structure,
funding
requirements and financial risk and policies.
83
The FACC must comprise
three or more independent directors who have a thorough
understanding of finance
and accounting. The Chairman of the Board and, upon
invitation by the committee’s
chairman, the CEO or other
members of the Executive Committee may participate
in the committee meetings, provided that any potential conflict
of
interest is avoided and confidentiality of the discussions is maintained.
In addition, the chief integrity officer,
the head of
internal audit and the external auditors participate in the
meetings as appropriate. The Board has determined that
each
member of the FACC
is an audit
committee financial expert as such term is defined
in Form 20-F.
Governance and Nomination Committee
The GNC is responsible for (1)
overseeing corporate governance practices within ABB, (2)
overseeing
corporate social responsibility (including health, safety and
environment as well as sustainability), (3) nominating
candidates for the Board, the role of CEO and other
positions on the Executive Committee, and (4) succession planning
and employment matters relating to the Board and the
Executive Committee. The GNC is also responsible for
maintaining an orientation program for new Board members
and an ongoing education program for existing Board
members.
The GNC must comprise three or more independent directors.
The Chairman of the Board (unless he is already
a member) and, upon invitation by the committee’s
chairman, the CEO or other members of the Executive Committee
may participate in the committee meetings, provided that
any potential conflict of interest is avoided and confidentiality
of the discussions is maintained.
Compensation Committee
The CC is responsible for compensation matters relating
to the Board and the Executive Committee.
The CC must comprise three or more directors who are
elected by the shareholders. The Chairman of the Board
and, upon invitation by the committee’s
chairman, the CEO or other members of the Executive Committee
may
participate in the committee meetings, provided that any
potential conflict of interest is avoided and confidentiality
of
the discussions is maintained.
Board membership
Board composition
In proposing individuals to be elected to the Board, the
Board seeks to align the composition and skills of the
Board with the Company’s
strategic needs, business portfolio, geographic reach and culture.
The Board must be diverse
in all aspects including gender, nationalities,
geographic/regional experience and business experience.
In addition, the
average tenure of the members of the Board should be
well‑balanced. The Board also considers the number
of other
mandates of each Board member to ensure that he/she will
have sufficient time to dedicate to his/her role as
an ABB
Board member.
Elections and term of office
The members of the Board of Directors and the Chairman
of the Board as well as the members of the
Compensation Committee are elected by shareholders
at the general meeting of shareholders for a term of office
extending until completion of the next ordinary general
meeting of shareholders. Members whose terms of office
have
expired shall be immediately eligible for re‑election.
Our Articles of Incorporation (available at
https://new.abb.com/about/corporate
-governance
) do not provide for the retirement of directors based on
their age.
However, an age limit for members
of the Board is set forth in the ABB Ltd Board Regulations &
Corporate
Governance Guidelines (although waivers are possible
and subject to Board discretion) (available at
https://new.abb.com/about/corporate
-governance
). If the office of the Chairman of the Board of
Directors or any
position on the Compensation Committee becomes vacant
during a Board term, the Board of Directors may appoint
(shall appoint in the case of the Chairman of the Board) another
individual from among its members to that position for
the remainder of that term. The Board of Directors shall consist of
no less than 7 and no more than 13 members.
84
Members of the Board (2020-2021 board term)
Peter R. Voser
ABB’s Chief Executive Officer
from April 2019 to February 2020.
He is a member of the board of directors of IBM
Corporation (U.S.).
He is also a member of the board of directors of Temasek
Holdings (Private) Limited (Singapore) as
well as chairman of the board of PSA International
Pte Ltd (Singapore), one of its subsidiaries.
In addition, he is the
chairman of the board of trustees of the St. Gallen Foundation
for International Studies. He was previously the chief
executive officer of Royal Dutch Shell plc (The
Netherlands). Mr. Voser
was born in 1958 and is a Swiss citizen.
Jacob Wallenberg
April 2015. He is the chairman of the board of Investor
AB (Sweden). He is vice‑chairman of the boards of
Telefonaktiebolaget
LM Ericsson, FAM AB and
Patricia Industries (all Sweden). He is also a member of the
boards
of
directors of Nasdaq, Inc. (U.S.) and the Knut and Alice Wallenberg
Foundation (Sweden) as well as a member of the
nomination committee of SAS AB (Sweden). Mr.
Wallenberg
was born in 1956 and is a Swedish citizen.
Matti Alahuhta
board of DevCo Partners Oy and vice-chairman of the
board of Metso Outotec Corporation (both Finland). He is also a
member of the boards of directors of KONE Corporation
(Finland) and AB Volvo
(Sweden). He was previously the
president and chief executive officer of KONE
Corporation and he served in several executive positions at Noki
a
Corporation (Finland). Mr.
Alahuhta was born in 1952 and is a Finnish citizen.
Gunnar Brock
the boards of Neptunia Invest AB, Mölnlycke Health Care
AB and Stena AB (all Sweden). He is a member of the
boards
of directors of Investor AB and Patricia Industries (both
Sweden). He was formerly president and chief executive officer
of Atlas Copco AB (Sweden).
Mr. Brock was born in
1950 and is a Swedish citizen.
David Constable
was appointed chief executive officer of
Fluor Corporation (U.S.), for which he continues to serve as a
member of the
board of directors. He was a member of the boards of directors
of Rio Tinto plc (U.K.) and Rio Tinto
Limited (Australia)
until the end of 2020.
He was formerly the chief executive
officer and president as well as a member of
the board of
directors of Sasol Limited (South Africa). He joined
Sasol after more than 29 years with Fluor Corporation (U.S.). Mr.
Constable was born in 1961 and is a Canadian and U.S. citizen.
85
Frederico Fleury Curado
executive officer of Ultrapar Participações S.A. (Brazil)
,
the holding company of the Ultra Group of companies.
Mr. Curado is a member
of the board of directors of Transocean Ltd.
(Switzerland). He was formerly the chief executive
officer of Embraer S.A. (Brazil). Mr.
Curado was born in 1961 and is a Brazilian and Portuguese citizen.
Lars Förberg
managing partner of Cevian Capital. Mr.
Förberg was born in 1965 and is a Swedish and
Swiss citizen.
Jennifer Xin-Zhe Li
a member of the
board of directors of Flex Ltd (Singapore/U.S.) as well
as, through May 2021, of the boards of directors of Philip Morris
International Inc. (U.S.) and The Hongkong and Shanghai
Banking Corporation Limited (Hong Kong). Ms. Li is a
founder and general partner of Changcheng Investment Partners
(P.R.C.),
a private investment fund. From 2008 to 2018,
she served as chief financial officer of Baidu Inc.
(P.R.C.)
and chief executive officer of Baidu Capital (P.R.C.)
.
Prior to
that, Ms. Li spent 14 years with General Motors, holding
various senior finance positions, including chief financial
officer of GM China and corporate controller for
GMAC North American Operations.
Ms. Li was born in 1967 and is a
Canadian citizen.
Geraldine Matchett
the co-chief
executive officer (since February 2020), the chief
financial officer and a member of the managing
board of Royal DSM
N.V.
(The Netherlands).
She was previously chief financial officer of SGS Ltd
(Switzerland). Prior to joining SGS she
worked as an auditor at Deloitte Ltd (Switzerland) and
KPMG LLP (U.K.). Ms. Matchett was born in 1972 and is a
Swiss, British and French citizen.
David Meline
officer of Moderna Inc. (U.S.). From 2014
through 2019, Mr. Meline was the chief
financial officer of Amgen Inc.
(U.S.). He was formerly with the 3M Company (U.S.), where
he served as chief financial officer.
Prior to joining 3M,
Mr. Meline worked for more
than 20 years for General Motors Company (U.S.). Mr.
Meline was born in 1957 and is a
U.S. and Swiss citizen.
Satish Pai
member of the board of directors of Hindalco Industries Ltd.
(India). He joined Hindalco in 2013 after 28 years with
Schlumberger Limited (U.S.). Mr.
Pai was born in 1961 and is an Indian citizen.
As of December 31, 2020, none of the Board members
held any official functions or political posts. Further
information on ABB’s Board members
can be found by clicking on the ABB Board of Directors link
(available at
https://new.abb.com/about/corporate
-governance
).
Board meetings and attendance
The Board and its committees have regularly scheduled
meetings throughout the year.
These meetings are
supplemented by additional meetings (either in person
or by conference call), as necessary.
Board meetings are
convened by the Chairman or upon request by any other
board member or the CEO. Documentation covering
the various
items of the agenda for each Board meeting is sent out
in advance to each Board member in order to allow each
member
time to study the covered matters prior to the meetings.
Each board meeting has a private session without management
or others being present. Decisions made at the Board meetings
are recorded in written minutes of the meetings. Some
decisions are also taken by circular resolution.
2020 was an intensive year for the Board and its committees.
The table below shows the number of meetings
held during 2020 by the Board and its committees, their
average duration, as well as the attendance of the individual
Board members. The Board meetings shown include a strategic
retreat attended by the members of the Board and the
EC.
86
2020 Board and Board
Committee Meetings
Pre annual general meeting 2020
Post annual general meeting 2020
Board
FACC
GNC
CC
Board
FACC
GNC
CC
Meetings and attendance
Mtg.
Conf. Call
Mtg.
Conf. Call
Average duration (hours)
10
1
2.75
1.5
1.75
8.5
1
3.25
1.5
1.6
Number of meetings
1
1
2
2
2
4
3
5
3
6
Meetings attended:
Peter R. Voser
1
1
4
3
Jacob Wallenberg
1
1
2
4
3
3
Matti Alahuhta
1
1
2
4
3
3
Gunnar Brock
1
1
2
4
3
5
David Constable
1
1
2
4
3
6
Frederico Fleury Curado
1
1
2
4
3
6
Lars Förberg
1
1
2
4
3
3
Jennifer Xin-Zhe Li
1
1
2
4
3
6
Geraldine Matchett
1
1
2
4
2
5
David Meline
1
1
2
4
3
5
Satish Pai
1
1
2
4
3
5
Mandates of Board members outside the ABB Group
No member of the Board may hold more than ten additional
mandates of which no more than four may be in
listed companies. Certain types of mandates, such as
those in our subsidiaries, those in the same group of companies
and
those in non‑profit and charitable institutions, are not
subject to those limits. Additional details can be found in
Article 38 of ABB’s Articles of
Incorporation (available at
https://new.abb.com/about/corporate
-governance
).
Business relationships between ABB and its Board members
This section describes important business relationships between
ABB and its Board members, or companies
and organizations represented by them. This determination
has been made based on ABB Ltd's Related Party
Transaction Policy.
This policy is contained in the ABB Ltd Board Regulations
& Corporate Governance Guidelines
(available at
https://new.abb.com/about/corporate
-governance
).
IBM Corporation (IBM) is an important supplier to
ABB. IBM supplies ABB primarily with IT related
hardware, software and services. Peter Voser
is a director of IBM.
After reviewing the level of purchases from IBM, the Board
has determined that ABB’s business
relationship
with IBM is not unusual in its nature or conditions and
does not constitute a material business relationship. As a result,
the Board concluded that all members of the Board are considered
to be independent directors. This determination was
made in accordance with ABB Ltd's Related Party Transaction
Policy which was prepared based on the Swiss Code of
Best Practice for Corporate Governance and the independence criteria
set forth in the corporate governance rules of the
New York
Stock Exchange
.
87
Information and control systems of the
Board vis-à-vis the Executive Committee
Information from the Executive Committee
In accordance with the ABB Board Regulations and
Corporate Governance Guidelines (available at
https://new.abb.com/about/corporate
-governance
), the CEO reports regularly to the Board about ABB’s
overall business
and when circumstances require on any extraordinary
events that may arise. This includes:
•
Reports on financial results (including profit and loss, balance
sheet and cash flows);
•
Changes in key members of management;
•
Information that may affect the supervisory
or monitoring function of the Board (including on matters of
strategy and compliance);
and
•
Significant developments in legal matters.
At each Board meeting, Board members are briefed
by the Chairman, CEO, CFO and other EC members on
ABB’s business performance
and on material developments affecting ABB. Outside
of Board meetings, Board members
generally channel any requests for information through
the Chairman. Board members also obtain information through
offsite retreats with the Executive Committee and
visits to ABB sites. In addition, Board members obtain information
through the Board committees in which they participate
and which are also attended by relevant EC members and
management representatives from human resources, finance,
legal and the business.
Internal Audit
ABB has an Internal Audit team that provides independent
objective assurance and other services to help
ensure that ABB operates in accordance with applicable
laws as well as internal policies and procedures. Internal Audit
reports to the FACC
and to the CFO. The FACC
reviews and approves the internal audit plan, and material
changes to
the plan. Investigations of potential fraud and inappropriate
business conduct are an integral part of the internal audit
process. Depending on circumstances,
Internal Audit may act together with ABB’s
Office of Special Investigations,
which is part of ABB’s integrity
function. Internal Audit reports on a regular basis its main observations
and
recommendations to the relevant members of the EC and
to the FACC as appropriate
.
Risk Management
ABB has an enterprise risk management program (ERM)
in place which takes into account ABB’s
size and
complexity. ERM
provides the EC and the Board with a comprehensive and
holistic view of the risks facing the
business. ERM involves managing the acceptance of risk
to achieve the objectives of the business. The ERM process is
typically cyclical in nature, conveying the idea of continuous
refinement of the risk management approach in a dynamic
business environment. Furthermore, ABB runs a mitigation
process for the identified risks that is key to the success
of
this process. ERM assessments are both top down and
bottom up. They cover strategic, financial, and operational
risks,
both current and long term. Key risks identified and
managed in 2020 were those related to the COVID-19 pandemic,
as
well as those related to the finalization of both the
transformation of the Group and the separation of the Power
Grids
business. ERM results are reported to the FACC
and the entire Board. This information becomes
part of the overall
strategic and risk discussions by the Board to help create
value for stakeholders.
88
Information to the Board and the Finance, Audit and Compliance
Committee
Supervisory and control instruments vis-à-vis
the auditors
Our auditors, KPMG, attend each meeting of the
FACC and each meeting
includes a private session between
the auditors and the FACC
without the management being present. In 2020,
the FACC had 7 meetings
(either in person
or via telephone call). On at least an annual basis, the
FACC reviews and
discusses with the external auditors all
significant relationships that the auditors have with the
Company that could impair their independence. The FACC
reviews the auditor engagement letter and the audit plan including
discussion of scope, staffing, locations and
general
audit approach. The FACC
also reviews and evaluates the auditors’ judgment on
the quality and appropriateness of the
Company’s accounting
principles as applied in the financial reporting. In addition,
the FACC approves in
advance any
non-audit services to be performed by the auditors.
At least annually,
the FACC obtains and
reviews a report by the auditors that includes discussion on:
•
The Company’s internal
control procedures;
•
Material issues, if any,
raised by the most recent internal quality control review;
•
Critical accounting policies and practices of the Company;
•
All alternative accounting treatments of financial information
that were discussed between the auditors and
management as well as the related ramifications; and
•
Material communications between the auditors and
management such as any management letter or
schedule of audit differences.
Taking into account
the opinions of management the FACC
evaluates the qualifications, independence and
performance of the auditors. The FACC
reports the material elements of its supervision
of the auditors to the Board and
on an annual basis recommends to the Board the auditors
to be proposed for election at the shareholders meeting.
89
EXECUTIVE COMMITTEE
Composition of the Executive Committee (at December
31, 2020)
Björn Rosengren
Chief Executive Officer
Corporate Officers
Business Area Presidents
Timo Ihamuotila
Tarak Mehta
Chief Financial Officer
Electrification
Sylvia Hill
Peter Terwiesch
Chief Human Resources Officer
Industrial Automation
Maria Varsellona
Morten Wierod
General Counsel
Motion
Theodor Swedjemark
Sami Atiya
Chief Communications Officer
Robotics & Discrete Automation
Executive Committee responsibilities and organization
The Board has delegated the executive management
of ABB to the CEO. The CEO and,
under his direction, the
other members of the Executive Committee are responsible
for ABB’s overall business
and affairs and day-to-day
management. The CEO reports to the Board regularly,
and whenever extraordinary circumstances so require, on the
course of ABB’s business and
financial performance and on all organizationa
l
and personnel matters, transactions and
other issues material to the Group. Each member of the
Executive Committee is appointed and discharged by
the Board.
Members of the Executive Committee (at December
31, 2020):
Björn Rosengren
March 2020. Before joining ABB, he was the president and
chief executive officer of Sandvik AB (Sweden)
since 2015.
Prior to that, Mr. Rosengren
was the chief executive officer of Wärtsilä Corporation
(Finland) from 2011 to 2015. He
held a variety of management roles at Atlas Copco AB (Sweden)
from 1998 to 2011. Mr.
Rosengren was born in 1959
and is a Swedish citizen.
Timo Ihamuotila
April 2017. He is a member of the board of directors of
SoftwareONE Holding AG (Switzerland). From 2009 to 2016,
Mr. Ihamuotila was chief
financial officer and an executive vice president of the
Nokia Corporation (Finland). From
1999 to 2009, he held various senior roles with Nokia.
Mr. Ihamuotila was born in 1966
and is a Finnish citizen.
Sylvia Hill
June 2019.
From 2014 until June 2019 she was ABB’s
Head of Global HR Services and HR Transformation.
From 2011
to 2014 Ms. Hill was the Head of HR for ABB’s
Discrete Automation division. During 2005 to 2010 she
was the Head
of HR and Organization Health & Safety for ABB in
France and for part of that time she was also the Head of
HR for
the Mediterranean region. From 1993 through 2005
she held various HR roles with ABB. Ms. Hill was born in 1960
and
is a German citizen.
90
Maria Varsellona
November 2019.
She was a member of the board of directors of Nordea Bank Abp
(Finland) through May 2020. From
2014 to 2019 she was the Chief Legal Officer
of Nokia Corporation and from 2018 to 2019 she was also the
president of
Nokia Technologies.
From 2013 to 2014 she was the General Counsel of Nokia
Siemens Networks. During the period
from 2011 to 2013 Ms. Varsellona
was the Group General Counsel of Tetra
Pak and from 2009 to 2010 she was the
Group General Counsel of Sidel, both part of the Tetra
Laval Group. From 2001 to 2009 she held various senior legal
roles mainly with GE Oil & Gas. Ms. Varsellona
was born in 1970 and is an Italian citizen.
Theodor Swedjemark
effective August 2020. He is a member
of the board of directors of the Swedish Swiss Chamber
of Commerce.
Mr. Swedjemark assumed
the role of Chief of Staff in 2017, later adding group
responsibility for government relations
and public affairs. During 2016, he managed
the Strategic Portfolio Review of the Power Grids project.
From 2006 to
2015, he held various management positions at ABB in different
functions and businesses. Mr.
Swedjemark was born in
1980 and is a Swedish citizen.
Tarak Mehta
member of the Executive Committee since October 2010.
He had previously been President of the Electrification
Products division since January 2016.
From October 2010 through December 2015, he was President of
the Low
Voltage
Products division. From 2007 to 2010, he was Head of ABB’s
transformers business. Between 1998 and 2006,
he held several management positions with ABB. Mr.
Mehta was born in 1966 and is a U.S. citizen.
Peter Terwiesch
been a member of the Executive Committee since January
2015. He is a member of the board of directors of Metall Zug
AG (Switzerland). He was the President of the Process Automation
division from 2015 to 2016. From 2011
to 2014, Mr.
Terwiesch was Head
of ABB’s Central Europe
region. He was ABB’s Chief Technology
Officer from 2005 to 2011.
From 1994 to 2005, he held several positions with ABB. Mr.
Terwiesch was born
in 1966 and is a Swiss and German
citizen.
Morten Wierod
effective April 2019. From 2015 until April 2019
he was the Managing Director of the drives business unit in
the
Robotics and Motion division. During 2011
to 2015, Mr. Wierod
was the Managing Director of the control products
business unit in the Low Voltage
Products division. Between 1998 to 2011,
Mr. Wierod
held various management roles
with ABB. Mr. Wierod
was born in 1972 and is a Norwegian citizen.
Sami Atiya
has been a member of the Executive Committee since June
2016. He is a member of the board of directors of SGS SA
(Switzerland). He had previously been President of
the Robotics and Motion division since January 2017. From
June to
December 2016 he was President of the Discrete Automation
and Motion division. Prior to joining ABB, Mr.
Atiya held
senior roles at Siemens in Germany from 1997 to 2015, including
as chief executive officer of the mobility and logistics
division in the infrastructure and cities sector from 2011.
Mr. Atiya was born in 1964
and is a German citizen.
Effective as of January 1, 2021,
Carolina Granat
member of the Executive Committee of ABB. Ms. Granat was previously
ABB’s Global Head of People Development
and prior to that she was globally responsible for Human
Resources at Sandvik’s Machining
Solutions business area.
Further information about the members of the Executive
Committee can be found by clicking on the Executive
Committee link (available at
https://new.abb.com/about/corporate
-governance
).
Mandates of EC members outside the ABB Group
No member of the EC may hold more than five additional
mandates of which no more than one may be in a
listed company.
Certain types of mandates, such as those in our subsidiaries, those
in the same group of companies and
those in non‑profit and charitable institutions, are not
subject to those limits. Additional details can be found in Article
38 of ABB’s Articles of Incorporation
(available at
https://new.abb.com/about/corporate
-governance
).
91
Business relationships between ABB and its EC members
This section describes important business relationships between
ABB and its EC members, or companies and
organizations represented by them. This determination
has been made based on ABB Ltd's Related Party Transaction
Policy. This policy
is contained in the ABB Ltd Board Regulations & Corporate
Governance Guidelines (available at
https://new.abb.com/about/corporate
-governance
).
ABB has an unsecured syndicated $2 billion, revolving
credit facility. As of December
31, 2020, Nordea Bank
Abp (Nordea) had committed to approximately $105.7
million out of the $2 billion total. In addition, ABB has regular
banking business with Nordea.
Maria Varsellona
was a director of Nordea through May 2020.
After reviewing the banking commitments of Nordea,
the Board has determined that ABB’s
business
relationship with Nordea is not unusual in its nature or
conditions and does not constitute a material business
relationship. This determination was made in accordance
with ABB Ltd's Related Party Transaction Policy
which was
prepared based on the Swiss Code of Best Practice for Corporate
Governance and the independence criteria
set forth in
the corporate governance rules of the New York
Stock Exchange.
SHARES
Share capital of ABB
At December 31, 2020,
ABB’s ordinary share capital
(including treasury shares) as registered with the
Commercial Register amounted to CHF 260,177,791.68,
divided into 2,168,148,264 fully paid registered shares with
a
par value of CHF 0.12 per share.
ABB Ltd’s shares are listed
on the SIX Swiss Exchange, the NASDAQ OMX Stockholm
Exchange and the
New York
Stock Exchange (where its shares are traded in the form of American
depositary shares (ADS) – each ADS
representing one registered ABB share). At December 31,
2020,
ABB Ltd had a market capitalization based on
outstanding shares (total number of outstanding shares:
2,030,834,169) of approximately CHF 50 billion ($57 billion,
SEK 465 billion). The only consolidated subsidiary in the
ABB Group with listed shares is ABB India Limited,
Bangalore, India, which is listed on the BSE Ltd. (Bombay
Stock Exchange) and the National Stock Exchange of
India.
At December 31, 2020,
ABB Ltd, Switzerland, directly or indirectly owned 75 percent
of ABB India Limited,
Bangalore, India, which at that time had a market capital
ization of approximately INR 257 billion.
Stock exchange listings (at December 31, 2020)
Stock exchange
Security
Ticker symbol
ISIN code
SIX Swiss Exchange
ABB Ltd, Zurich, share
ABBN
CH0012221716
SIX Swiss Exchange
ABB Ltd, Zurich, share buyback
(second trading line)
ABBNE
CH0357679619
NASDAQ OMX Stockholm Exchange
ABB Ltd, Zurich, share
ABB
CH0012221716
New York Stock
Exchange
ABB Ltd, Zurich, ADS
ABB
US0003752047
BSE Ltd. (Bombay Stock Exchange)
ABB India Limited, Bangalore, share
ABB
(1)
INE117A01022
National Stock Exchange of India
ABB India Limited, Bangalore, share
ABB
INE117A01022
(1) also called
Scrip ID.
92
Share repurchases and cancellation
Under the share buyback program announced in July
2020, ABB repurchased a total of 108,829,359 shares as
per December 31, 2020,
and a total of 117,012,859 shares as per
February 15, 2021. ABB intends to ask the shareholders
at the Annual General Meeting 2021 to approve the cancellation
of 115,000,000 shares that were repurchased.
In
addition, ABB repurchased a total of 13,046,013 shares
as per December 31, 2020, primarily for use in connection with
employee share programs. Further information can be
found at https://www.abb.com/investorrelations
.
Changes to the ordinary share capital
In 2020,
ABB paid a dividend of 0.80 Swiss francs per share relating
to the year 2019. In 2019, ABB paid a
dividend of 0.80 Swiss francs per share relating to the
year 2018. In 2018, ABB paid a dividend of 0.78 Swiss francs
per
share relating to the year 2017.
There were no changes to ABB’s
ordinary share capital during 2020,
2019 and 2018.
Convertible bonds and options
ABB does not have any bonds outstanding that are
convertible into ABB shares. For information about options
on shares issued by ABB, please refer to “Note 19 - Stockholders' equity
”
to ABB’s Consolidated Financial
Statements.
Contingent share capital
At December 31, 2020,
ABB’s share capital may be
increased by an amount not to exceed CHF 24,000,000
through the issuance of up to 200,000,000 fully paid registered
shares with a par value of CHF 0.12 per share through
the exercise of conversion rights and/or warrants granted
in connection with the issuance on national or international
capital markets of newly or already issued bonds or
other financial market instruments. If this contingent share capital
were fully issued this would increase the existing share
capital by approximately 9.2 percent. The contingent share
capital has not changed during the last three years.
At December 31, 2020,
ABB’s share capital may be
increased by an amount not to exceed CHF 1,200,000
through the issuance of up to 10,000,000 fully paid registered
shares with a par value of CHF 0.12 per share through the
exercise of warrant rights granted to its shareholders.
If this contingent share capital were fully issued this would
increase the existing share capital by approximately
0.5 percent. This contingent share capital has not changed
during
the last three years. The Board may grant warrant rights
not taken up by shareholders for other purposes in the interest of
ABB.
The pre‑emptive rights of the shareholders are excluded in
connection with the issuance of convertible or
warrant-bearing bonds or other financial market instruments
or the grant of warrant rights. The then current owners
of
conversion rights and/or warrants will be entitled to subscribe
for new shares. The conditions of the conversion rights
and/or warrants will be determined by the Board.
The acquisition of shares through the exercise of
warrants and each subsequent transfer of the shares will be
subject to the restrictions of ABB’s
Articles of Incorporation (see “Limitations on
transferability of shares and nominee
registration” in the Shareholders section below) (available
at
https://new.abb.com/about/corporate
-governance
).
In connection with the issuance of convertible or warrant-bearing
bonds or other financial market instruments,
the Board is authorized to restrict or deny the advance subscription
rights of shareholders if such bonds or other financial
market instruments are for the purpose of financing or
refinancing the acquisition of an enterprise, parts of
an enterprise,
participations or new investments or an issuance on national
or international capital markets. If the Board denies
advance subscription rights, the convertible or warrant‑bearing
bonds or other financial market instruments will be
issued at the relevant market conditions and the new
shares will be issued pursuant to the relevant market conditions
taking into account the share price and/or other
comparable instruments having a market price. Conversion rights may
be
exercised during a maximum ten‑year period, and warrants
may be exercised during a maximum seven‑year period, in
each case from the date of the respective issuance. The
advance subscription rights of the shareholders may be granted
indirectly.
93
At December 31, 2020,
ABB’s share capital may be
increased by an amount not to exceed CHF 11,284,
656
through the issuance of up to 94,038,800 fully paid shares
with a par value of CHF 0.12 per share to employees.
If this
contingent
share capital were fully issued this would increase the existing
share capital by approximately 4.3 percent.
This contingent share capital has not changed during the
last three years. The pre‑emptive and advance subscription
rights of ABB’s shareholders
are excluded. The shares or rights to subscribe for shares
will be issued to employees
pursuant to one or more regulations to be issued by the
Board, taking into account performance, functions, level of
responsibility and profitability criteria. ABB may issue shares or
subscription rights to employees at a price lower than
that quoted on a stock exchange. The acquisition of shares within
the context of employee share ownership and each
subsequent transfer of the shares will be subject to the restrictions
of ABB’s Articles of Incorporation
(see “Limitations
on transferability of shares and nominee registration” in the
Shareholders section below).
Authorized share capital
At December 31, 2020,
ABB had an authorized share capital in the amount of up
to CHF 24,000,000 through
the issuance of up to 200,000,000 fully paid registered
shares with a par value of CHF 0.12 each, which is valid through
May 2, 2021. If the authorized share capital were fully issued,
this would increase the existing share capital by
approximately 9.2 percent. Aside from renewal at the
2019 AGM, the authorized share capital has not changed
during
the last three years. The Board is authorized to determine the date
of issue of new shares, the issue price, the type of
payment, the conditions for the exercise of pre‑emptive rights
and the beginning date for dividend entitlement. In this
regard, the Board may issue new shares by means of a firm
underwriting through a banking institution, a syndicate or
another third party with a subsequent offer
of these shares to the shareholders. The Board may permit
pre‑emptive rights
that have not been exercised by shareholders to expire
or it may place these rights and/or shares as to which pre
‑emptive
rights have been granted but not exercised at market conditions
or use them for other purposes in the interest of the
Company. Furthermore,
the Board is authorized to restrict or deny the pre‑emptive rights
of shareholders and allocate
such rights to third parties if the shares are used (1) for
the acquisition of an enterprise, parts of an enterprise, or
participations, or for new investments, or in case of
a share placement, for the financing or refinancing of such
transactions; or (2) for the purpose of broadening the shareholder
constituency in connection with a listing of shares on
domestic or foreign stock exchanges. The subscription
and the acquisition of the new shares, as well as each subsequent
transfer of the shares, will be subject to the restrictions
of ABB’s Articles of Incorporation
(available at
https://new.abb.com/about/corporate
-governance
).
94
SHAREHOLDERS
Shareholder structure
As of December 31, 2020, the total number of shareholders
directly registered with ABB Ltd was
approximately 102,000 and another 397,000 shareholders
held shares indirectly through nominees. In total as of that
date, ABB had approximately 499,000 shareholders.
Significant shareholders
Investor AB, Sweden, held 265,385,142 ABB shares as of
December 31, 2020 (refer to Investor’s year-end
2020 report available at
https://www.investorab.com/investors
-media/reports-presentations
). This holding represents
approximately 12.2 percent of ABB’s total
share capital and voting rights as registered in the Commercial
Register on
December 31, 2020.
The number of shares held by Investor AB does not include
shares held by Mr. Jacob Wallenberg,
the chairman of Investor AB and a director of ABB, in his individual
capacity.
Cevian Capital II GP Limited, Jersey,
disclosed that as of August 3, 2020,
it held 105,988,662 ABB shares.
This holding represents approximately 4.89 percent of ABB’s
total share capital and voting rights as registered in the
Commercial Register on December 31, 2020.
BlackRock Inc., U.S., disclosed that as of August 31, 2017
,
it, together with its direct and indirect subsidiaries,
held 72,900,737 ABB shares. This holding represents 3.36
percent of ABB’s total share capital
and voting rights as
registered in the Commercial Register on December 31,
2020.
The Capital Group Companies Inc., USA, disclosed
that as of November 4, 2020, it, together with its direct and
indirect affiliates, held 65,680,803 ABB shares. This
holding represents 3.03 percent of ABB’s
total share capital and
voting rights as registered in the Commercial Register on
December 31, 2020.
At December 31, 2020,
to the best of ABB’s knowledge,
no other shareholder held 3 percent or more of ABB’s
total share capital and voting rights as registered in the
Commercial Register on that date.
ABB Ltd has no cross shareholdings in excess of 5 percent
of capital, or voting rights with any other company.
Announcements related to disclosure notifications made
by shareholders during 2020 can be found via the
search facility on the platform of the Disclosure Office
of the SIX Swiss Exchange
: https://www.ser-
ag.com/en/resources/notifications
-market-participants/significant-shareholders.html#/
.
Under ABB’s Articles of Incorporation
(available at
https://new.abb.com/about/corporate
-governance
), each
registered share represents one vote. Significant shareholders do
not have different voting rights. To
our knowledge, we
are not directly or indirectly owned or controlled by any
government or by any other corporation or person.
Shareholders’ rights
Shareholders have the right to receive dividends, to
vote and to execute such other rights as granted under
Swiss law and the Articles of Incorporation (available
at
https://new.abb.com/about/corporate
-governance
).
Right to vote
ABB has one class of shares and each registered share
carries one vote at the general meeting. Voting
rights
may be exercised only after a shareholder has been
registered in the share register of ABB as a shareholder
with the right
to vote, or with Euroclear Sweden AB (Euroclear), which
maintains a subregister of the share register of ABB.
95
A shareholder may be represented at the Annual General
Meeting by its legal representative, by another
shareholder with the right to vote or by the independent
proxy elected by the shareholders (unabhängiger
Stimmrechtsvertreter). If the Company does not have
an independent proxy, the
Board of Directors shall appoint the
independent proxy for the next General Meeting of Shareholders.
All shares held by one shareholder may be represented
by one representative only.
For practical reasons shareholders must be registered in the
share register no later than 6 business days before
the general meeting in order to be entitled to vote. Except
for the cases described under “Limitations on transferability of
shares and nominee registration”
below, there are no
voting rights restrictions limiting ABB’s
shareholders’ rights.
Annual General Meeting/COVID-19
ABB’s top priority
is protecting the health of its shareholders and employees. Therefore,
due to the
extraordinary circumstances and in accordance with applicable
Swiss COVID-19 legislation, shareholders were not able
to attend ABB’s Annual General
Meeting 2020 in person, but could exercise their shareholder
rights via the independent
proxy only. The
Board of Directors has resolved that for ABB’s
Annual General Meeting 2021, in accordance
with
applicable Swiss COVID-19 legislation, the same procedures
shall apply.
Shareholders’ dividend rights
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. Swiss law requires that ABB Ltd
retain
at least 5 percent
of its annual net profits as legal reserves until these reserves amount
to at least 20 percent of ABB
Ltd’s share capital. Any
net profits remaining in excess of those reserves are at
the disposal of the shareholders’
meeting.
Under Swiss law, ABB Ltd
may only pay out a dividend if it has been proposed by
a shareholder or the Board
of Directors and approved at a general meeting of shareholders,
and the auditors confirm that the dividend conforms to
statutory law and ABB’s Articles of
Incorporation. In practice, the shareholders’ meeting usually approves
dividends as
proposed by the Board of Directors.
Dividends are usually due and payable no earlier than
2 trading days after the shareholders’ resolution and the
ex‑date for dividends is normally 2 trading days after the
shareholders’ resolution approving the dividend. Dividends are
paid out to the holders that are registered on the record
date. Euroclear administers the payment of those shares
registered with it. Under Swiss law,
dividends not collected within 5 years after the due date accrue
to ABB Ltd and are
allocated to its other reserves. As ABB Ltd pays cash dividends,
if any, in Swiss francs (subject
to the exception for
certain shareholders in Sweden described below), exchange
rate fluctuations will affect the U.S. dollar
amounts received
by holders of ADSs upon conversion of those cash dividends by
Citibank, N.A., the depositary,
in accordance with the
Amended and Restated Deposit Agreement dated
May 7, 2001.
For shareholders who are residents of Sweden, ABB has
established a dividend access facility (for up to
600,004,716 shares). With respect
to any annual dividend payment for which this facility is made
available, shareholders
who register with Euroclear may elect to receive
the dividend from ABB Norden Holding AB in Swedish krona (in
an
amount equivalent to the dividend paid in Swiss francs) without
deduction of Swiss withholding tax. For further
information on the dividend access facility,
see ABB’s Articles of Incorporation.
96
Limitations on transferability of shares and
nominee registration
ABB may decline a registration with voting rights
if a shareholder does not
declare that it has acquired the
shares in its own name and for its own account. If the
shareholder refuses to make such declaration, it will be registered
as a shareholder without voting rights. A person failing to
expressly declare in its registration/application that it holds
the shares for its own account (a nominee), will be entered
in the share register with voting rights, provided that such
nominee has entered into an agreement with ABB concerning
its status, and further provided that the nominee is subject
to recognized bank or financial market supervision.
In special cases the Board may grant exemptions. There were
no
exemptions granted in 2020.
The limitation on the transferability of shares may be removed by
an amendment of ABB’s
Articles of Incorporation by a shareholders’ resolution
requiring two-thirds of the votes represented at the meeting.
No restriction on trading of shares
No restrictions are imposed on the transferability of ABB shares.
The registration of shareholders in the ABB
Share register, Euroclear and the ADS
register kept by Citibank does not affect
transferability of ABB shares or ADSs.
Registered ABB shareholders or ADR holders may therefore purchase
or sell their ABB shares or ADRs at any time,
including before a General Meeting regardless of the
record date. The record date serves
only to determine the right to
vote at a General Meeting.
Duty to make a public tender offer
ABB’s Articles of Incorporation
do not contain any provisions raising the threshold (opting up) or
waiving the
duty (opting out) to make a public tender offer
pursuant to Article 135 of the Swiss Act on Financial Market
Infrastructures and Market Conduct in Securities and Derivatives
Trading.
OTHER GOVERNANCE INFORMATION
ABB Group organizational structure
ABB Ltd, Switzerland is the ultimate parent company
of the ABB Group. It is the sole shareholder of ABB
Asea Brown Boveri Ltd which directly or indirectly
owns the other companies in the ABB Group. The table
in the
appendix to this Corporate governance report sets forth,
as of December 31, 2020, the name, place of incorporation,
ownership interest and share capital of the significant direct
and indirect subsidiaries of ABB Ltd. In addition, ABB Ltd
also owns 19.9 percent of Hitachi ABB Power Grids Ltd. ABB’s
operational group structure is described in the
“Financial review of ABB Group” section of this Annual
Report under “Operating and financial review and prospects –
Organizational structure”.
Management contracts
There are no management contracts between ABB and companies
or natural persons not belonging to the ABB
Group.
Change of control clauses
Board members, Executive Committee members, and other
members of senior management do not receive any
special benefits in the event of a change of control. However,
the conditional grants under the Long Term
Incentive Plan
(LTIP)
and the Management Incentive Plan (MIP) may be subject to
accelerated vesting in the event of a change of
control. From 2021, the rules for the LTIP
will be amended to no longer provide for accelerated vesting
upon a change
in control. This amendment will apply to future grants made
under the LTIP.
No further grants are made under the MIP.
97
Employee participation programs
In order to align its employees’ interests with the business goals
and financial results of the Company,
ABB
operates a number of incentive plans, linked to ABB’s
shares, such as the Employee Share Acquisition Plan, the
Management Incentive Plan and the Long Term
Incentive Plan. For a more detailed description of these incentive
plans,
please refer to “Note 18 - Share-based payment arrangements”
to ABB’s Consolidated Financial
Statements.
Governance differences from NYSE Standards
According to the New York
Stock Exchange’s corporate
governance standards (the Standards), ABB is
required to disclose significant ways in which its corporate
governance practices differ from the Standards.
ABB has
reviewed the Standards and concluded that its corporate
governance practices are generally consistent with the
Standards, with the following
significant exceptions:
•
Swiss law requires that the external auditors be elected
by the shareholders at the Annual General Meeting
rather than by the audit committee or the board of directors.
•
The Standards require that all equity compensation
plans and material revisions thereto be approved by the
shareholders. Consistent with Swiss law such matters are
decided by our Board. However, the
shareholders
decide about the creation of new share capital that can
be used in connection with equity compensation
plans.
•
Swiss law requires
that the members of the compensation committee are elected
by the shareholders rather
than appointed by our Board.
•
Swiss law requires shareholders to approve the maximum
aggregate Board compensation and the
maximum aggregate Executive Committee compensation.
98
COMPENSATION
Compensation governance
Shareholder engagement
ABB’s Articles of Incorporation,
approved by its shareholders, contain provisions on compensation
which
govern and outline the principles of compensation relating
to our Board of Directors (Board) and Executive Committee
(EC). They can be found on ABB’s Corporate
governance Web site new.abb.com/about/corporate
-governance and are
summarized below:
•
Compensation Committee
(Articles 28 to 31): The Compensation Committee (CC) is composed
of a
minimum of three members of the Board of Directors who
are elected individually by the shareholders at
the Annual General Meeting (AGM) for a period
of one year. The CC supports
the Board in establishing
and reviewing the compensation strategy,
principles and programs, in preparing the proposals to the AGM
on compensation matters and in determining the compensation
of the Board and of the EC. The
responsibilities of the CC are defined in more detail in
the Board Regulations and Corporate Governance
guidelines, which are available on ABB’s
Corporate governance Web
site.
•
Compensation principles
(Article 33): Compensation of the members of the
Board consists of fixed
compensation only,
which is delivered in cash and shares (with an option to elect for
shares only).
Compensation of the members of the EC consists of fixed
and variable compensation. Variable
compensation may comprise short-term and long-term
elements. Compensation may be paid in cash, shares
or other benefits.
•
“Say-on-pay” vote
of the Board for the following Board term and of the EC
for the following financial year.
•
Supplementary amount for new EC members
compensation amount is not sufficient to
also cover the compensation of newly promoted/hired EC
members, up to 30 percent of the last maximum approved
aggregate amount shall be available as a
supplementary amount to cover the compensation of such
new EC members.
•
Loans
Shareholders also have a consultative vote on the prior
year’s Compensation Report at the AGM. The
Compensation Policy sections of this Report describe
the compensation policies and programs as well as the governance
framework related to the compensation of the Board
and EC. The Compensation Implementation sections of this Report
provide details of the compensation paid to the members
of the Board and of the EC in the prior calendar year.
The Compensation Report is prepared in accordance with
the Ordinance against Excessive Remuneration in
Listed Stock Corporations (Ordinance), the Directive
on Information
relating to Corporate Governance of the SIX
Exchange Regulation, the rules of the stock markets of
Sweden and the United States where ABB’s shares
are also
listed, and the principles of the Swiss Code of Best Practice for
Corporate Governance of economiesuisse.
Authority levels in compensation matters
The CC acts in an advisory capacity while the Board
retains the decision authority on compensation matters,
except for the maximum aggregate compensation amounts
of the Board and of the EC, which are subject to the approval
of shareholders at the AGM. The authority levels of
the different bodies on compensation matters are detailed
in
Compensation Exhibit 1.
99
Compensation Exhibit 1: Authority levels in compensation
matters
CEO
CC
Board
AGM
Compensation policy including incentive plans
●
●
●
Maximum aggregate compensation amount EC members
●
●
●
CEO compensation
●
●
Individual compensation EC members
●
●
●
Performance target setting and assessment CEO
●
●
Performance target setting and assessment EC members
●
●
●
Shareholding requirements CEO and EC members
●
●
Maximum aggregate compensation amount Board
members
●
●
●
Individual compensation Board members
●
●
Compensation Report
●
●
Consultative vote
●
●
Recommendation
●
Approval
Activities of the CC in 2020
The CC meets as often as business requires but at least four
times a year. In 2020, the CC held
seven meetings
and performed the activities described in Compensation Exhibit
2. Details on meeting attendance of the individual
CC
members are provided in the section titled “Board of Directors
– Meetings and attendance” of the Corporate Governance
Report.
Compensation Exhibit 2: CC activities during 2020
Board Compensation
Review of approach to benchmarking
Review of benchmark data
EC Compensation
Review of approach to benchmarking
Review of benchmark data and recommendations on
individual compensation for EC members
Review of the share ownership of EC members
Review and approval of compensation for new and departing EC
members
Performance – relating to past performance
cycle
Assessment of short-term incentive awards for 2019
Assessment of achievement of performance targets
for Long-Term
Incentive Plan (LTIP)
awards
vesting in 2020
Performance – relating to forthcoming performance
cycle
Setting of preliminary Annual Incentive Plan (AIP)
targets for 2021
Setting of performance targets for LTIP
awards granted in 2020
Review impact of Power Grids (PG) joint venture
on LTIP
targets
Updates on achievement against performance targets
for 2020 AIP and unvested LTIP
awards
Compliance
Review of the Swiss gender pay regulatory and disclosure
requirements
Review of the LTIP
rules
Review of feedback from Investor Engagement meetings
Regulatory and market updates
Review of the Compensation Report for publication
Preparation of maximum aggregate compensation for Board
to be submitted for AGM vote
Preparation of maximum aggregate compensation for EC to
be submitted for AGM vote
100
The Chairman of the CC reports to the full Board
after each CC meeting. The minutes of the meetings are
available to the members of the Board.
The CC retains independent, external advisors for compensation
matters. PricewaterhouseCoopers (PwC) are
currently mandated to provide services related to executive
compensation matters. Apart from its CC advisory role, PwC
also provides human resources, tax and advisory services
to ABB.
The CEO, the Chief Human Resources Officer
(CHRO) and the Head of Performance and Reward also attend
all or part of the CC meetings in an advisory capacity.
The Chairman of the CC may decide to invite other executives
upon consultation with the CEO, as appropriate. Executives
do not attend the meetings or the parts of the meetings
in
which their own compensation and/or performance are
being discussed.
Board compensation policy
Overview
The compensation system for the members of the Board is designed
to attract and retain experienced people on
the Board. Compensation of Board members takes into
account the responsibilities, time and effort required to fulfill
their roles on the Board and its committees. A fixed fee
is payable for the Chairman, Vice
-Chairman and members of the
Board, and additional fees are payable for chairing or membership
of a Board Committee,
except for the Chairman and
Vice-Chairman.
Board members do not receive variable compensation
or pension benefits, underscoring their focus on
corporate strategy,
supervision and governance. In accordance with Swiss law,
Board members may not receive ‘golden
parachutes’ or other special benefits in the event of a
change of control. Board members are paid for their service
over a
12-month period that starts with their election at the AGM.
Payment of fees is made in semi-annual installments
in
arrears.
In order to further align the interests of the Board members
with those of ABB’s shareholders,
half of their fee
must be paid in ABB shares, although Board members
may choose to receive all of their fee in shares. The number
of
shares delivered is calculated prior to each semi-annual
payment by dividing the monetary amount to which the Board
members are entitled by the average closing price of the
ABB share over a predefined 30-day period. The shares are
subject to a three-year restriction period during which they
cannot be sold, transferred or pledged. Any restricted shares
are unblocked when the Board member leaves the Board.
Implementation of Board compensation policy
From time to time, the levels and mix of compensation
of Board members are compared against the
compensation of non-executive board members from
a cross section of publicly traded companies in Switzerland
that are
part of the Swiss Market Index (i.e. Adecco, Alcon, Geberit, Givaudan,
LafargeHolcim, Lonza, Richemont, SGS, Sika,
Swisscom, Swiss Life, Zurich Insurance). Such a
review was undertaken in 2020, and there was no adjustment
made to
Board fees for the term of office from the 2020
AGM to the 2021 AGM, as set out in Compensation Exhibit 3 below.
101
Compensation Exhibit 3: Current Board
fees
Board term fee (CHF)
(1)
Chairman of the Board
(2)
1,200,000
Vice-Chairman of
the Board
(2)
450,000
Member of the Board
290,000
Additional committee fees:
Chairman of FACC
(3)
110,000
Chairman of CC or GNC
(3)
60,000
Member of FACC
(3)
40,000
Member of CC or GNC
(3)
30,000
(1)
The Chairman and the Vice-Chairman
do not receive any additional committee fees for their roles on the GNC.
(2)
CC: Compensation Committee,
(3)
These fees do not reflect the 10 percent COVID-19 related voluntary
donation in fees for the first half of the
2020-2021 Board term.
The compensation paid to the Board members for
the calendar year 2020 and for the term of office from
the
2020 AGM to the 2021 AGM are disclosed in Compensation
Exhibits 24 and 25, respectively,
in the section
“Compensation and share ownership tables”.
At the 2020 AGM, the shareholders approved a maximum
aggregate compensation amount of
CHF 4.70 million for the 2020-2021 Board term, the
same as was approved for the previous Board term. The
compensation actually paid was five percent lower than
the prior term due to the voluntary donation of 10 percent of
fees for a six-month period during 2020 to fight the impacts
of the COVID-19 crisis.
The Board compensation is
therefore within the amount approved by the shareholders.
See Compensation Exhibit 4 below and Compensation
Exhibit 25 in the section “Compensation and share
ownership tables”.
Compensation Exhibit 4: Board compensation
(in CHF)
Board term
Board of Directors
2020–2021
2019–2020
Number of members
11
11
Total compensation
4,436,500
4,670,000
Maximum aggregate compensation amount approved at
AGM
4,700,000
4,700,000
Shareholdings
of Board members
The members of the Board collectively owned less than
one percent of ABB’s total shares outstanding
at
December 31, 2020.
Compensation Exhibit 26 in the section “Compensation
and share ownership tables” shows the number of ABB
shares held by each Board member at December 31, 2020
and 2019. Except as described in this Compensation Exhibit,
no member of the Board and no person closely linked
to a member of the Board held any shares of ABB or options in
ABB shares.
In 2020, ABB did not pay any fees or compensation
to the members of the Board for services rendered to ABB
other than those disclosed in this report.
102
Compensation of former Board members
In 2020, no payment was made to any former Board
member.
Executive Committee compensation policy
Overview
ABB’s compensation
system reflects its commitment to attract, motivate and retain
people with the talent
necessary to strengthen ABB’s
position as a leading global technology company,
connecting software to its
electrification, robotics, automation and motion portfolio
to drive performance to new levels.
The compensation system is designed to provide competitive
compensation and to encourage
executives to
deliver outstanding results and create sustainable shareholder
value without taking excessive risks. The compensation
system balances:
•
fixed and variable compensation;
•
short-term and long-term incentives;
•
the recognition of Group,
business and individual performance.
Compensation structure ‒ overview
The structure for EC members consists of an annual base
salary, a short-term
incentive plan (AIP) based on
annual performance targets, a long-term incentive
plan (LTIP)
based on three-year performance targets, and
benefits.
This structure is linked to our strategy and, as illustrated
in Compensation Exhibits 5 and 6, a significant
portion of total compensation depends on variable pay
components which require the achievement of challenging
performance targets.
103
Compensation Exhibit 5: Structure of
EC compensation for 2021
Compensation structure
Fixed compensation -
annual base salary
and benefits
Short-term incentive
(AIP)
Long-term incentive
(LTIP)
Wealth at Risk/
Share Ownership
Purpose and link to strategy
Compensates
Rewards annual
company and individual
performance. Drives
annual strategy
implementation
Encourages creation of
long-term, sustainable
value for shareholders,
and delivery of
long-term strategic goals
Aligns individual’s
personal wealth at risk
directly to the ABB
Operation
Cash salary, benefits
contribution
Annual awards, payable
in cash after
a 1-year
performance period
Annual awards in shares
which may vest after 3
years subject to
performance conditions
Individuals required
Opportunity level (as % of
annual base salary)
Based on scope of
responsibilities,
individual experience
and skillset
Target: 100%
Maximum: 150%
CEO
Target at grant: 150%
Vesting: 0-300%
EC
Target at grant: 100%
CEO wealth at risk:
500% (net)
EC wealth at risk:
Time period
Delivered in year
1 year
3 years
Total EC tenure
Performance measures
Changes to annual base
salary takes into account
the Executive’s
performance in the
preceding year and
potential for the future
All: ABB Op EBITA
margin (%)
(20-25%);
Business measures,
which may include, for
example:
ROCE, Business Area
Op EBITA margin (%),
productivity,
OFCF (55-60%);
All: individual
objectives (20%);
All: ESG boundary
condition for awards
Relative TSR
(1)
Average EPS
(2)
Direct link to
(1)
Total Shareholder
Return.
(2)
Earnings Per
Share.
104
Compensation Exhibit 6: Compensation components under
various scenarios
Competitive positioning of compensation
The Board considers competitive market data when setting
the compensation policy for the EC. It is also one of
several factors in positioning the target compensation
for individual EC members which include:
•
market value of the role (external benchmarking);
•
individual profile of the incumbent in terms of experience
and skills;
•
individual performance and potential;
•
affordability for the Company.
The CC conducted a comprehensive review of its approach
to competitive benchmarking, in the light of the
new operating model, the ‘ABB Way
’, the consequential change in responsibilities on
the EC and the divestment of the
Power Grids (PG) business.
105
As a result of this review,
the number of competitive benchmarking peer groups has been
reduced from four to
three – a Global Industry peer group,
a Pan-European Market peer group and a Swiss Market peer group.
In all cases,
these peer groups have been designed to match the size,
scope and complexity of ABB. Companies from the
financial
services sector have been removed. The U.S. peer group
was considered to be less relevant and was therefore removed.
The Global Industry peer group has been redesigned to
a specifically tailored group of 16 peers/competitors
matching the size, scope and complexity of ABB, selected from
ABB’s competitive landscape.
It now includes
companies in Asia, has a reduced number of companies in
North America and excludes companies from the
financial
services
sector.
The Pan-European Market peer group has been streamlined
from its original 400 companies to a robust panel of
50 cross-industry organizations matching the
size, scope and complexity of ABB, excluding companies from
the
financial services sector.
The Swiss Market peer group, included to reflect ABB’s
headquarters
and listing location in Switzerland,
consists of a panel of 16 cross-industry companies matching
the size, scope
and complexity of ABB, and excludes
companies from the financial services
sector.
The use of these peer groups will depend on the nature
of the role and the source of relevance. For example, a
stronger emphasis will be placed on the Global Industry
peer group for operational roles and in compensation design,
and on the Pan-European Market peer group for functional
roles. In all cases, the other two peer groups will be used to
stress test the findings of the primary peer group (see the
summary in Compensation Exhibit 7 below).
It is the intention to position target compensation
for individual EC members between median and upper
quartile of the relevant peer group(s) considering the other
factors referenced above (e.g. skills, experience,
performance, potential).
Compensation Exhibit 7: Compensation benchmarking
peer groups
REFERENCE
COMPOSITION
RATIONALE
Global Industry
A tailored group of 16 global
industry peer companies
(1)
,
matching the scale and complexity
of ABB
Focus for operational roles and
benchmarking compensation
design
Pan-European Market
A panel of 50 cross-industry
European companies
(2)
, matching
the scale and complexity of ABB
Focus for functional roles;
continuity and stability of data
points
Swiss Market
A panel of 16 SMI and SMIM
companies
(3)
, matching the scale
and complexity of ABB
Swiss listing and location of
headquarters
(1)
AB SKF, Alstom, Airbus, Atlas
Copco, Denso, Eaton, Emerson Electric, Honeywell, Mitsubishi Electric,
Mitsubishi Heavy Industries, Schneider
Electric, Schindler, Siemens, Thermo Fisher Scientific,
Toshiba and Traton
.
(2) AB InBev, Adidas, Air Liquide, Associated
British Foods, AstraZeneca, BAE Systems, Bayer,
Bouygues, British American Tobacco,
Compass Group,
Continental, CRH, Danone, Endesa, EssilorLuxottica, Fresenius,
Fresenius Medical Care, GlaxoSmithKline, HeidelbergCement,
Heineken, Henkel,
Hennes & Mauritz, Iberdrola, Imperial Brands, Industria de Diseno
Textil, Jeronimo Martins SGPS, Kuehne
& Nagel, LafargeHolcim, Linde, L’Oreal,
Michelin, National Grid, Naturgy Energy Group, Nokia,
Novartis, Novo Nordisk, OMV,
Philips, Rio Tinto, Safran, Saint Gobain, Sanofi, SAP,
Schneider Electric, Telefonaktiebolaget
LM Ericsson, Thales, Umicore, Veolia
Environment, Vinci, Vodafone
.
(3)
SMI: Swiss Market Index; SMIM: Swiss Market Index MID; Companies
include: Adecco,
Geberit, Givaudan, Glencore, Kuehne & Nagel, Lafarge
Holcim, Nestle, Novartis, Richemont, Roche, Schindler,
SGS, Sika, STMicroelectronics, Swatch, and Swisscom.
ABB is typically at the median of key comparator indicators
(market capitalization, revenues, number of
employees) against the Global Industry and Pan-European
Market peer groups, and at the upper quartile of the Swiss
Market peer group. See Compensation Exhibit 8 below.
106
Compensation Exhibit 8: Comparison of ABB to compensation
benchmarking peer groups
(1)
Market
capitalization
(2)(3)(4)
Revenues
(2)(4)(5)
Number of
employees
(5)(6)
ABB
45.6
27.0
110,000
Global Industry
Upper Quartile
54.6
37.8
137,828
Median
31.1
29.2
94,500
Lower Quartile
12.4
72,827
Pan-European Market
Upper Quartile
68.9
38.4
126,994
Median
37.4
26.9
95,331
Lower Quartile
18.2
22.2
61,450
Swiss Market
Upper Quartile
31.6
31.7
93,930
Median
25.9
13.4
55,930
Lower Quartile
18.0
8.2
31,785
(1) Data
sources for
market capitalization,
revenues and
number of employees
are Thomson
Reuters or
Annual Reports.
(2) Market
capitalization
and revenues
are in CHF
millions.
(3) Market
capitalization
is averaged
over a period
of three months
(May 3, 2020
until August
3, 2020).
(4) Amounts
have been
translated
to CHF using
the one-year
average rate
from July 1,
2019 until
June 30, 2020.
(5) Revenues
and number
of employees
as per last
financial year
prior to October
2020.
(6)
Number of
employees
in full-time
equivalent
(FTE) unless
FTE information
was not available,
then in total
number of employees.
Compensation elements
Fixed compensation – annual base salary and benefits
Purpose and link to strategy
•
Compensates the EC members for the role.
Operation
•
Fixed annual base salary and benefits.
•
Benefits consist mainly of retirement, insurance and
healthcare plans that are designed to provide a
reasonable level of support for the employees and their dependents
in case of retirement, disability or
death. Benefit plans are in line with the local competitive and
legal environment and are, at a minimum, in
accordance with the legal requirements of the respective
country.
Opportunity level
•
Annual base salary based on the scope of responsibilities,
individual experience and skill set.
•
The monetary value of benefits is disclosed in Compensation
Exhibit 27: EC compensation in 2020.
107
Performance measures
•
When considering changes in annual base salary,
the executive’s performance
during the preceding year
against individual objectives as well as potential for the
future are taken into account.
Annual Incentive Plan (AIP)
Purpose and link to strategy
•
The AIP is designed to reward EC members for the Group’s
results, the results of their business or function
and their individual performance over a time horizon
of one year.
Operation
•
Annual cash award based on performance assessment over
the given year.
Opportunity levels
•
100 percent of annual base salary at target,
with a maximum opportunity of 150 percent.
Performance measures
•
The AIP structure was revised for 2020 in the light of
feedback from shareholders and other stakeholders,
the new ABB operating model, and to further increase
the focus on operational delivery and underpin our
performance culture.
•
It is designed to create focus on key priorities, with
a maximum of five measures.
•
In 2021, all EC members will have a common measure
with a minimum 20 percent weighting.
•
Up to three measures will be linked to specific Business Area
needs, which have a total 60 percent
weighting.
•
All EC members will also have personal measures for
the remaining total 20 percent weighting. This
individual component is informed by up to three objectives
which may include a combination of
quantitative and qualitative goals.
o
One of these objectives will include a common safety measure
– the percentage improvement
in the Lost Time Incident Frequency
Rate (LTIFR),
underpinned by at least two sustainability
observation tours.
o
The CC has a discretionary authority to adjust the AIP
results based on safety performance,
including fatalities.
o
The final outcome against this measure will be a discretionary
judgment based on the
combined performance against all objectives.
•
For each performance measure, a target will
be set corresponding to the expected level of performance
that
will generate a target (100 percent) award.
Further, a minimum level of performance,
below which there is
no award (threshold) and a maximum level of performance,
above which the award is capped at
150 percent of the target (cap), will also be
defined. For qualitative Group and business measures, the
award percentage achievements between threshold,
target and the cap will be determined by linear
interpolations from target to threshold and target
to cap.
108
•
Outcomes may be subject to appropriate discretionary upward
or downward adjustments for non-
operational items and other adjustment principles agreed
with the Board.
o
For example, in
2020, this included caps on outcomes for Corporate Officers
to ensure there
were not
unintended windfalls due to the impact of the COVID-19 crisis on
cost or other
qualitative measures.
•
From 2021, progress against defined ESG target(s)
will be a ‘boundary condition’ for making AIP awards.
Under this approach, the Board will, each year,
agree specific ESG target(s) and review whethe
r
the
Company had made sufficient progress at the
end of the year to justify making the indicated AIP award.
If,
in the opinion of the Board, insufficient progress
has been made, the AIP award may be reduced on a
discretionary basis. For 2021, the ‘boundary condition’ will be
the setting of plans in each ABB Division to
mitigate for ABB scope 1 and 2 emissions.
•
An illustration of the measures to be applied to the CEO for
2021 is set out in Compensation Exhibit 9.
Compensation Exhibit 9: 2021 Annual Incentive Plan
for CEO – Measures and Weightings
Measure
Weighting
(total 100%)
Description
Link to Strategy
Group
Operational
EBITA %
(Common
measure)
25.00%
Operational EBITA margin is Operational EBITA (as defined in
“Note 23 – Operating segment and geographic data” to the
Consolidated Financial Statements) as a percentage of Operational
revenues, which is total revenues adjusted for foreign
exchange/commodity timing differences in total revenues
Increased weighting on
Group Operational EBITA
to focus on strategic
execution and improving
margin, resulting in a
strong bottom line
Group ROCE %
25.00%
ROCE is calculated as Operational EBITA after tax divided by the
average of the period’s opening and closing Capital employed,
adjusted to reflect impacts from significant
acquisitions/divestments occurring during the same period. Capital
employed is calculated as the sum of Adjusted total fixed assets
and Net working capital
ROCE reflects the strong
focus on delivering high
return on capital employed
in both business operations
and corporate portfolio
management
Group
Productivity
10.00%
Calculation is based on the 12-month rolling revenues over the
average number of total workforce in the last three months.
Productivity growth is the change of productivity over the same
period a year earlier, represented in percentage change
An increase in productivity
will lead to an
improvement in margin and
drive overall performance
Group FCF
(Free cash flow)
20.00%
Free cash flow is calculated as net cash provided by operating
activities adjusted for: (i) purchases of property, plant and
equipment and intangible assets, and (ii) proceeds from sales of
property, plant and equipment
Operating cash flow has
been replaced by free cash
flow to better focus on cash
available to return to
shareholders
Individual
Measure
20.00%
Linked to a maximum of three KPIs, which will include safety
targets related to the Lost Time Incident Frequency Rate (LTIFR).
LTIFR is seen as a clear indicator of the effectiveness of incident
prevention programs in ABB
Reflecting importance of
safety agenda in keeping it
with the sustainability
strategy and commitment to
achieve excellence in
health, safety and the
environment at ABB
ESG Boundary
Condition for
awards
Setting of plans in each ABB Division to mitigate for ABB scope 1
and 2 emissions
Aligned to ABBs
sustainability strategy and
associated targets
Long-term incentive Plan (LTIP)
Purpose and link to strategy
•
Aimed at driving long-term shareholder value creation
in a sustainable manner. It rewards
the achievement
of predefined performance goals over a three-year
period.
109
Operation
•
Annual Conditional Grant.
•
Target
LTIP
grant values are defined as a percentage of annual base salary (see
Compensation Exhibit 10
below).
Compensation Exhibit 10: Target
LTIP grant value (% of annual base salary)
EPS measure
TSR measure
Total
CEO
75%
75%
150%
EC
(1)
40-50%
40-50%
80-100%
•
The total value of the grant size for EC members as a pool
may be increased or decreased by the Board by
up to 12.5 percent. This does not apply to the CEO.
•
The number of shares to be granted is determined by
dividing the grant value by the average share price
over the period 20 trading days prior,
and 20 trading days after, the date
of publication of ABB’s full year
financial results. Settlement of the LTIP
is three years after grant, subject to achievement of performanc
e
conditions, defined prior to grant.
•
The actual settlement value of awards will vary between
zero and 200 percent of the grant value according
to achievement against two equally weighted performance
measures, one tied to ABB’s EPS and
one to
ABB’s TSR (see performance
measures section below).
•
Default settlement of the final LTIP
award is 100 percent in shares, with an automatic sell-to-cover
in
place for employees who are subject to withholding taxes.
•
LTIP
shares are subject to malus and clawback rules, which
include illegal activities and any financial
misstatement that has a material impact on any Group
company.
This means that the Board of Directors
may decide not to pay any unpaid or unvested incentive
compensation (malus), or may seek to recover
incentive compensation that has been paid in the past (claw
back).
•
The CC also has the ability to suspend the payment
of awards if it is likely that the Board determines that
the malus or clawback provisions may potentially apply
(e.g. if the employee is subject to an external
investigation), in line with leading market practice.
•
For awards from 2021, the LTIP
rules will be amended to remove the automatic accelerated
vesting of
awards in the event of a change of control.
Performance measures
TSR
•
Achievement against this measure is determined by ABB’s
relative TSR performance against a defined
peer group.
•
The constituents of the peer group and the appropriate
threshold (zero), target (100 percent) and maximum
(200 percent) award points are reviewed by the CC on
an annual basis.
•
The TSR calculations are made for the reference period
beginning in the year of the conditional grant of
the shares and ending three years later.
The evaluation is performed by an independent third party.
110
EPS
•
Achievement against this measure is determined by ABB’s
average EPS over a three-year period.
•
The average EPS result is calculated from the sum of EPS
for each of the three relevant years, divided by
three.
•
EPS is defined as ‘Diluted earnings per share attributable
to ABB shareholders, calculated using Income
from continuing operations, net of tax, unless the Board
elects to calculate using Net income for a
particular year’.
•
Appropriate threshold (zero), target (100 percent)
and maximum (200 percent) award points are reviewed
by the CC on an annual basis.
•
Performance target points are set using an ‘outside-in’
view, taking into account
the growth expectations,
risk profile, investment levels and profitability levels that
are typical for the industry.
•
This ‘outside-in’ approach is provided by external advisors
and assumes that investors expect a risk-
adjusted return on their investment, which is based on
market value (and not on book value) and translates
such expected returns over a three-year period into
EPS targets.
•
Adjustments to the outcome of the EPS may be considered
for items which are not part or the result of the
normal course of business operation and/or which were
not considered, either by way of inclusion or
exclusion, for the target setting of a specific
LTIP
launch. Only the net impact of such adjustments over the
vesting period of the respective LTIP
grant will be considered.
Total
wealth at risk
Purpose and link to strategy
•
To align EC members’
interests with those of shareholders in order to maintain focus on
the long-term
success of the Company.
•
Wealth at risk
is broadly defined as two components – namely personal
share ownership and unvested
shares arising from the Company’s
share grants (e.g. LTIP
grants).
Share ownership program
•
EC members are required to retain all shares vested from
the Company’s LTIP
and any other share-based
compensation until his or her share ownership requirement
is met. In circumstances where there is a
withholding tax obligation, the number of shares received
will be considered to be the number of shares
vested minus the shares sold under the default sell-to-cover
facility.
•
The share ownership requirement is equivalent to
a multiple of the EC member’s annual base salary,
net of
tax (see Compensation Exhibit 11).
•
These shareholding requirements are significantly above
market practice and result in a wealth at risk for
each EC member which is aligned with shareholder
interests.
Compensation Exhibit 11:
Share ownership requirement
CEO
5 × annual base salary,
net of tax
Other EC members
4 × annual base salary,
net of tax
111
•
Only vested shares owned by an EC member and
the member’s spouse are included in the share ownership
calculation. Vested
but unexercised and unvested stock options under the MIP
are not considered for this
purpose.
•
The CC reviews the status of EC share ownership on an
annual basis. It also reviews the required
shareholding amounts annually,
based on salary and expected share price developments.
Notice period, severance provisions and
non-competition clauses
Operation
•
Employment contracts for EC members include a notice
period of 12 months, during which they are
entitled to their annual base salary,
benefits and short-term incentive. In accordance with Swiss law and
ABB’s Articles of Incorporation,
the contracts for the EC members do not allow for any severance
payment.
•
Non-compete agreements have been entered into
with the CEO and all EC members for a period of 12
months after their employment. Compensation for such
agreements, if any, may
not exceed the EC
member’s last total annual compensation (annual
base salary, short
-term incentive and benefits).
Implementation of executive compensation policy
Overview
EC members received total compensation of CHF 35.4
million in 2020 compared with CHF 51.4 million in
2019, as summarized in Compensation Exhibit 12 below and
presented in detail in Compensation Exhibits 27 and
28.
This 31 percent decrease in total compensation was
influenced by the reduction in the number of active EC members,
lower payments to former EC members, EC members voluntarily
donating 10 percent of their salary to fight the impacts
of the COVID-19 pandemic for a six-month period during
2020, and much lower short-term incentive awards due
to the
impact of COVID-19.
Compensation Exhibit 12: Total
compensation of EC members (in CHF millions)
(1)
2020
2019
Base salaries
8.4
12.1
Pension benefits
4.5
5.5
Other benefits
5.9
6.9
Total
fixed compensation
18.8
24.5
Short-term incentives
6.8
12.7
Long-term incentives (fair value at grant)
6.5
12.6
Replacement share grants
3.3
1.6
Total
variable compensation
16.6
26.9
Total
compensation
35.4
51.4
(1) Has been
adjusted for roundin
g
where appropriate
.
For an overview
of compensation
by individual
and component,
please refer
to Compensation
Exhibit 27
and
Compensation Exhibit
28 in “Compensation
and share ownership
tables” below.
An overview of
2020
realized compensation
by individual
is in Compensation
Exhibit 33.
At the 2019 AGM, the shareholders approved a maximum
aggregate compensation amount of
CHF 55.5 million for the EC for the year 2020. The EC
compensation for 2020 amounted to CHF 35.4 million and
is
within the approved
amount. See Compensation Exhibit 13 below.
112
Compensation Exhibit 13: EC compensation (in CHF)
Calendar year
Executive Committee
2020
2019
Number of members
9
11
Total compensation
35,448,118
(1)
51,355,121
Maximum aggregate compensation amount approved at
AGM
55,500,000
52,000,000
(1)
Total compensation
for 2020 compared
to 2019 was lower
mainly due to
the reduction
in the number
of active EC
members,
lower payments
to former EC members,
and lower short
-term incentive
awards due to
the impact of
COVID-19.
Overall ratio of compensation components
The ratio of fixed to variable components in any given year
depends on the performance of the Company and
individual EC members against predefined performance
objectives.
In 2020,
the variable compensation of the new CEO was 51 percent of his
total annual compensation (previous
year:
52 percent applicable to the previous interim CEO). The total
annual compensation for the new CEO excludes the
value of the one-time replacement share grant to compensate
for foregone benefits with the previous employer.
For the
other EC members, the variable compensation represent
ed an average of 41 percent (previous year: 45 percent).
Terms of appointment
for new Executive Committee members
The new Chief Human Resources Officer (CHRO), Carolina
Granat, was appointed to the EC effective from
January 1, 2021 with an annual base salary of CHF 700,000,
a target short-term and long-term incentive
of 100 percent
of annual base salary.
This represents a reduction in total target direct compensation
(TTDC) compared to the prior
incumbent. She is eligible for standard EC benefits and,
where appropriate legacy relocation benefits.
The Chief Communications Officer (CCO), Theodor
Swedjemark, was appointed to a new EC position on
August 1, 2020, with an annual base salary of CHF 500,000,
a target short-term incentive of 100 percent of
annual base
salary and a target long-term incentive of 80
percent of annual base salary,
leading to a TTDC of CHF 1,400,000. He is
eligible for standard EC benefits.
Compensation elements – 2020 highlights
Annual base salary
Three of the nine EC members in place in March
2020 received a salary adjustment, which ranged from 4.3
to
7.1 percent, the latter being for an exceptional performance
and market adjustment. This corresponded to a 1.6 percent
increase on annual base salaries for the EC members in post in
March, 2020.
Short-term incentive - design
As disclosed in the 2019 Compensation Report, ABB’s
short-term incentive, the Annual Incentive Plan (AIP)
,
was redesigned in 2020 to create focus on key priorities,
with a maximum of five performance measures.
Under the AIP,
all members of the EC have a common measure, with a 20 to
25 percent weighting. In 2020,
this was Group ROCE - designed to create a greater focus
on profitability and the efficiency with which
capital is used.
In line with the new ABB operating model, up to three measures
were linked to specific Business Area or
Function needs, rather than having largely
common measures for all EC members. Together,
these Business Area or
Functional measures had a total of a 55 to 60 percent weighting.
•
For the CEO and CCO, the measures were Group Operational
EBITA margin
(%), Group Revenue and
Group Free Cash Flow.
113
•
For Business Area Presidents, measures were tailored
to business
imperatives and included their respective
Business Area Operational EBITA
(absolute), Operational EBITA
margin (%), Net Working
Capital,
Operational Free Cash Flow (OFCF), Orders received,
and absolute Gross Profit on orders.
•
For other Corporate Officers, measures included
Group financial measures, corporate function cost and
progress against functional imperatives such as functional
effectiveness and the completion of the
divestment of the PG business. As a reminder,
in 2021 all Corporate Officers will move to the same
Group
quantitative measures as the CEO.
Definitions of the quantitative measures for EC members
used above are set out in the Compensation
Exhibit 14, below.
Compensation Exhibit 14: Business Area
and Function specific quantitative objectives in 2020
Objective
Description
ROCE %
ROCE is calculated as Operational EBITA after tax divided by the average of the
period’s opening and closing Capital employed, adjusted to reflect impacts from
significant acquisitions/divestments occurring during the same period. Capital
employed is calculated as the sum of Adjusted total fixed assets and Net Working
Capital
Operational EBITA
(absolute)
(1)
Operational EBITA (as defined in “Note 23 – Operating segment and geographic
data” to the Consolidated Financial Statements) is a profit measure before interest, tax
and amortization expenses. It excludes non-operational items such as restructuring,
foreign exchange/commodity timing differences, M&A transaction and integration
costs and certain other non-operational items
Operational EBITA
margin (%)
Operational EBITA margin
is Operational EBITA as a percentage of Operational
revenues, which is total revenues adjusted for foreign exchange/commodity timing
differences in total revenues
Free Cash Flow
(FCF)
Free Cash Flow is calculated as net cash provided by operating activities adjusted for:
(i) purchases of property, plant and equipment and intangible assets, and (ii) proceeds
from sales of property, plant and equipment
Operational Free
Cash Flow (OFCF)
Cash generated by business operations after paying expenditures but before paying
interests and taxes (OCF
(2)
Function Cost
Total operating costs of the function that include the personnel costs and other
operating expenses such as rent, travel, consultancy, communication, office
administration and other related expenses to run the function
Net Working
Capital
(1)
Net Working Capital is the sum of (i) receivables, net, (ii) contract assets, (iii)
inventories, net, and (iv) prepaid expenses; less (v) accounts payable, trade, (vi)
contract liabilities, and (vii) other current liabilities (excluding primarily: (a) income
taxes payable, (b) current derivative liabilities, (c) pension and other employee
benefits, (d) payables under the share buyback program and (e) liabilities related to
the divestment of the Power Grids business); and including the amounts related to
these accounts which have been presented as either assets or liabilities held for sale
but excluding any amounts included in discontinued operations
Orders received
Represents the values of goods and services contracted and ordered by customers
within a given accounting period net of cancellations
Gross Profit on
orders (absolute)
(1)
Gross profit on orders is calculated by deducting the total costs to complete the order
from the total revenue value of the order
Revenues
Revenues realized from executing and fulfilling customer orders, before any costs or
expenses are deducted
(1) Applied to
Industrial Automation
Business Area
only.
(2) Cash flow
from operating
activities excluding
payments for
interest and
income taxes
.
All EC members also had an individual measure with
a 20 percent weighting. This individual component was
informed by up to three objectives, which included a combination
of quantitative and qualitative objectives. The final
outcome against this measure was based on a discretionary
judgment of the combined performance against all
objectives.
114
•
In 2020, all the EC had a common safety objective –
namely relevant improvement targets for the
Total
Recordable Incident Frequency Rate (TRIFR) – for the
CEO and Corporate Officers, these related to
Group targets, and for Business Area Presidents their
respective Business Areas targets.
•
For the CEO, the other two objectives were linked to
the delivery of the long-term Group strategy and of
the Group sustainability strategy and targets.
•
For other EC members, objectives included qualitative
and/or quantitative objectives such as establishing
robust internal controls, delivery of digital goals and business transformation.
The relative weighting and composition of Group, Business Area,
Functional and Individual measures for EC
members for 2020 are summarized in Compensation
Exhibit 15 below.
Compensation Exhibit 15: Weighting
and composition of objectives for EC members for 2020
CEO
(1)
Business Area
Presidents
Corporate
Officers
(2)
Group measures
80%
20%
20%
Business Area /
Functional measures
n.a.
60%
60%
Individual measures
20%
20%
20%
Overall composition
of AIP measures:
- Quantitative
- Qualitative
80%
20%
80%+
Up to 20%
40-80%
20-60%
(1) Chief Communications Officer (CCO) replicated CEO
measures in 2020 (targets in individual measure varied).
(2) Chief Financial Officer (CFO), Chief Human Resources
Officer (CHRO) and General Counsel (GC).
For each measure, a target was set corresponding
to the expected level of performance that would generate a
target (100 percent) award. Further,
a minimum level of performance, below which there is no
award (threshold) and a
maximum level of performance, above which the award
is capped at 150 percent of the target (cap), were also
defined.
For qualitative Group,
Business Area and Functional measures, the award percentage
achievements between threshold
and target,
as well as between target and cap were determined by
linear interpolations between these points.
Outcomes were subject to appropriate discretionary upward
or downward adjustments for some non-operational
items and other adjustment principles agreed with the Board.
2020 Annual Incentive Plan (AIP) – outcomes
In summary, the
average award for the EC under the AIP for 2020 was 72.
4
percent (out of a maximum
150 percent), compared to 94.7 percent in 2019. This significant
drop in outcomes from the prior year was heavily
influenced by the impact on the business from COVID-19.
The 2020 AIP outcomes were net of the application
of adjustments for some non-operational items and other
adjustment principles agreed with the Board, specifically
including balance sheet risk mitigation actions, where the
benefits will be factored into the settling of future AIP
targets. It also included caps on outcomes for Corporate
Officers
to ensure there were not unintended windfalls due to
the impact of the COVID-19 crisis on cost or other qualitative
measures. The average outcome for the EC without the
application of these adjustments would have been nine percent
lower.
Common measure
Achievement against the 2020 Group ROCE measure, which
applied to all EC members, with a weighting of
20-25%, was zero percent (2019: n.a.). The Group’s
ROCE was 10.3 percent compared to 11.1
percent in 2019,
reflecting the recognition of the investment in the Power Grids
business joint venture as well as lower business activity.
115
Group measures
The outcome related to the other Group measures,
which were applied to the CEO and CCO, with weightings
of 10 to 25 percent, ranged from zero to for 109 percent
and the weighted achievement related to all Group measures,
including the common measure is 35 percent.
Business Area and Functional measures
Up to three quantitative business measures were applied
to Business Area Presidents,
with weightings from 15
to 40 percent, and the outcomes ranged from zero
to 150 percent of target.
Up to three qualitative or quantitative business measures were
applied to the CFO, CHRO and GC (‘Corporate
Officers’), with weightings from 15 to 25
percent, and the outcomes ranged from 53 to 125 percent
of target.
Individual Measures
Thanks to the Company’s
strong
focus on safety, in 2020
the target set for the Total
Recordable Incident
Frequency Rate (TRIFR) – has been overachieved at the
Group level, resulting from the majority of Business Areas and
Functions having overachieved their targets.
In summary, for EC
members the assessed achievement of objectives representing
the personal component,
inclusive of the safety outcomes described, which has a weighting
of 20 percent, ranged from 100 to 150 percent of
target for 2020.
This compared to a range of 59 to 111
percent in 2019.
Overall outcomes
The overall average award under the AIP for the entire EC
was 72.4
percent of target (2019: 94.7 percent) with
a range from 51.0 percent (lowest achievement) to 95.6
percent of target (highest achievement). This compared
to a
range of 72.0 to 106.2 percent in 2019.
These outcomes are summarized in Compensation Exhibit
16 below.
116
Compensation Exhibit 16: ‘At a Glance’ STI 2020 outcomes
(rounded, with 2019 comparisons)
2020
(% of target)
Group
(1)
2020
(% of target)
Business Area
Presidents
2020
(% of target)
Corporate
Officers
2019
(% of target)
Common Measure
Group ROCE
0%
0%
0%
n.a.
Group Measures
Cost Savings
n.a.
149%
Free Cash Flow
109%
n.a.
Operational Net Income
n.a.
79%
Operational EBITA
margin (%)
53%
83%
Operational Cash Flow
n.a.
93%
Revenues
0%
89%
Weighted Group results
(Common + Group measures)
35%
97%
Business Area Measures
(2)
Gross Profit on orders
(absolute)
0%
Operational EBITA
margin (%)
0 - 95%
Orders received
0 - 83%
Operational Free Cash Flow
106 - 150%
Operational EBITA
(absolute)
0%
Net Working
Capital
105%
Range of results
0 - 150%
Weighted Business Area
results
(Common + Business Area measures)
21 - 66%
n.a.
Functional Measures
Range of results
(2)(3)
53 - 125%
n.a.
Weighted Functional
results
(Common + Functional measures)
47 - 61%
n.a.
Individual Measures
Range of results
(4)
100 - 150%
59 - 111%
Combined AIP results from Common, Group,
Business Area/Functional and Individual Measures
Range of outcomes
(4)
51 - 96%
72 - 106%
Overall Average
(4)
72%
95%
(1) Applied to
CEO and CCO in
2020. Therefore
CCO is excluded
from Corporate
Officers data.
(2) Up to three
business measures
were applied to
each Business
Area President
and Corporate
Officer.
(3) May include
Group measures
and after the
application of
relevant caps.
(4) Applies to
all Executive
Committee members
.
The table below provides information related to the
actual 2020 AIP achievement,
in comparison to the target
for all active EC members.
117
Compensation Exhibit 17: Overview of targeted
and realized AIP 2020 values
Target
AIP
award
(in % of base
salary)
Target
AIP award
(in CHF)
(1)
Actual AIP award
(in % of target)
Actual AIP award
(in CHF)
(2)
Björn Rosengren
(3)
100%
1,504,131
65.0%
977,685
Timo Ihamuotila
100%
902,500
77.4%
698,535
Sylvia Hill
100%
730,000
75.0%
547,500
Maria Varsellona
100%
760,000
86.3%
655,880
Theodor Swedjemark
(4)
100%
200,000
65.0%
130,000
Sami Atiya
100%
760,000
55.0%
418,000
Tarak Mehta
100%
855,000
81.3%
695,115
Peter Terwiesch
100%
760,000
51.0%
387,600
Morten Wierod
100%
712,500
95.6%
681,150
Total
7,184,131
5,191,465
(1)
Inclusive of adjustments for the COVID-19 salary donation program
and pro-rating for time served on the EC.
(2)
Represents accrued AIP award for the year 2020, which will be
paid in 2021, after the publication of ABB's financial results.
(3)
Björn Rosengren joined the EC on January 27, 2020.
(4)
Theodor Swedjemark joined the EC on August 1, 2020.
2020 Long-term incentive plan outcomes
The estimated value at grant of the share-based grants to
EC members under the 2020 LT
IP award was
CHF 6.5 million, compared with CHF 12.6 million in
2019. This deviation is primarily driven from the reduction
in the
numbers of EC members between 2019 (11
EC members) and 2020 (9 EC members).
The companies approved by the Board to determine
ABB’s relative TSR performance
for the 2020 LTIP
were:
3M, Danaher, Eaton, Emerson Electric,
General Electric, Honeywell Intl., LafargeHolcim,
Legrand, Mitsubishi Electric,
Raytheon Technologies,
Rockwell, Rolls Royce, Schneider Electric, Siemens and
Yokogawa.
Note that LafargeHolcim
replaced ThyssenKrupp, which had been previously included
in the peer group. These were selected to provide an
appropriate and very challenging set of peers, and
influenced the payment point setting accordingly (see Compensation
Exhibit 18 below).
The EPS targets for the 2020 LTIP,
which were set before the COVID-19 crisis occurred, were not
changed for
the impact of COVID-19. This may have a materially
negative impact on the final amount which may be delivered
under
the award.
The reference price for the 2020 LTIP
grant which is used to determine the number of shares granted
to
participants was set in March, during a time of high market
volatility due to the COVID-19 crisis. Given the high
variability between the formulaic outcome of the reference
price under the LTIP
rules, of CHF 23.00,
and the share price
near the date of grant, in the region of CHF 16.00, it was decided
to use the prior year’s reference price of CHF 19.36.
Also note that, from 2020, for the top 100 senior leaders outside
the EC, future grants under the Management
Incentive Plan (MIP) – a stock option plan, without performance
conditions – were discontinued and replaced by the
LTIP.
Other employees previously eligible to receive grants under
the MIP received grants under a restricted share plan.
The 2020 LTIP
award curves are also illustrated in Compensation Exhibit
18 below.
118
Compensation Exhibit 18: 2020 LTIP Targets
The change in the EPS award curve for the 2020 LTIP
(range cut from plus/minus 25 percent of target
to
plus/minus 17 percent of target) is a reflection
of the perceived EPS volatility during the performance period,
and also
serves to make the achievement of a threshold award under
the plan more demanding.
2017 LTIP outcome
The final number of shares vesting under the 2017 LTIP
grant in 2020 was determined based on the
achievement level against the defined Net income and EPS targets.
The Net income measure was achieved at
105 percent (2016 grant 100 percent) out of a potential
of 150 percent.
The CC exercised its discretion to apply Net income to determine
EPS rather than income from continuing
operations, net of tax, given the move of the Power
Grids business into discontinued operations. The average EPS
measure vested at 41 percent (previous year: 85 percent)
out of a potential 200 percent, net of adjustments for items
considered outside the normal course of business operation
and/or which were not considered in the target setting
of the
2017 LTIP
.
On this occasion, adjustments were made for the impact of
divestments, integration and restructuring costs.
Without the impact of the approved
adjustments the vesting level would have been 21 percent.
119
The average achievement level of the two performance
measures under the 2017 LTIP
was 73.0 percent (out of
a maximum 175 percent), with the actual level varying
by individual EC member, from 69.4 to
75.4 percent, as specified
in Compensation Exhibit 20.
Since the performance period for determining the value
of the award was from 2017 to 2019, the outcome
was
not affected by the impact of COVID‑19.
As announced in our 2019 Compensation Report,
the EPS performance targets for vested LTIP
awards will be
retrospectively disclosed in our Compensation Reports.
The three target points (threshold, target and
maximum) and the
actual achievement for the 2017 EPS performance
measure are shown in Compensation Exhibit 19 below.
Compensation Exhibit 19: 2017 LTIP EPS
performance measure
Notes
1. Net
income used to
determine EPS
rather than income
from continuing
operations,
net of tax, given
the
move of the Power
Grids business
into discontinued
operations.
2. Actual
value shown
net of adjustments
for items considered
outside the
normal course
of business
operation and/or
which were not
considered in
the target
setting of the
LTIP.
Please note that
as a result
of the adjustments
applied, the
EPS number shown
above will no
t
reconcile with
EPS calculated
based
on Net income
only.
Overview of disclosed and realized LTIP
2017 value
A new table below,
requested by stakeholders, provides information related
to the LTIP 2017
grant, showing
the previously disclosed ‘fair value’ of the grant to
each EC member and the actual value of the grant at the time
of
delivery in 2020. Values
are gross, e.g. before payment of any applicable taxes. This indicates
the gross realized value
was 65.4 percent of the disclosed grant fair value.
120
Compensation Exhibit 20: Realized value of 2017 LTIP
grant
2017 LTIP
grant date
Shares
granted
related to
the Net
income
measure
(1)
Shares
granted
related to
the EPS
measure
(2)
Total
number
of shares
granted
Disclosed
grant fair
value
(3)
2017 LTIP
vesting date
Vesting
percentage
Number
of vested
shares
Realized
value
(4)
Björn Rosengren
n.a.
Timo Ihamuotila
June 13, 2017
20,500
20,500
41,000
998,965
June 13, 2020
73.0%
29,930
593,811
Sylvia Hill
n.a.
Maria Varsellona
n.a.
Theodor Swedjemark
n.a.
Sami Atiya
June 13, 2017
18,691
16,044
34,735
845,147
June 13, 2020
75.4%
26,205
519,907
Tarak Mehta
June 13, 2017
15,331
19,163
34,494
842,145
June 13, 2020
69.4%
23,955
475,267
Peter Terwiesch
June 13, 2017
19,989
17,158
37,147
903,833
June 13, 2020
75.4%
28,024
555,996
Morten Wierod
June 13, 2017
7,029
7,029
14,058
n.a.
June 13, 2020
73.0%
10,263
203,618
Total
3,590,090
2,348,599
(1)
Actual achievement level of the Net income measure was 105 percent.
(2)
Actual achievement level of the EPS measure was 41 percent.
(3)
At the time of disclosure Morten Wierod was not member of the EC.
(4)
Valued at CHF 19.84, the closing price of the ABB share on the day of vesting.
Historical vesting outcomes
The historical vesting percentages for the prior five years
are shown in Compensation Exhibit 21 below.
Over
the last five years vesting has averaged at 79.6 percent
of target and 53.1 percent of the maximum award.
Compensation Exhibit 21: LTIP historical actual
vesting percentages
(1)
Plan Year
of Award
2013
2014
2015
2016
2017
Vesting
in % of target award
77.2%
74.8%
80.5%
92.5%
73.0%
Vesting
in % of maximum potential award
55.1%
53.4%
53.7%
61.7%
41.7%
Shareholdings of EC members
Three out of nine EC members have achieved or exceeded their
share ownership requirement. A further five
members have been newly appointed to the EC in the
last two years. The EC members collectively owned less than
1 percent of ABB’s total shares
outstanding at December 31, 2020.
At December 31, 2020, members of the EC held ABB shares
and conditional rights to receive shares, as shown
in Compensation Exhibit 31 in the section “Compensation
and share ownership tables” below.
Their holdings at
December 31, 2019, are shown in Compensation Exhibit
32 in the section “Compensation and share ownership
tables”
below.
As previously stated, no further grants will be made under
the Management Incentive Plan (MIP), a stock
option plan without performance conditions. Any MIP
instruments held by EC members were awarded prior to their
appointment as EC members. For a more detailed description
of MIP,
please refer to “Note 18 – Share-based payment
arrangements” in our Consolidated Financial Statements.
Except as described in Compensation Exhibits 29 and
30, no member of the EC and no person closely linked
to
a member of the EC held any shares of ABB or options on
ABB shares at December 31, 2020 and 2019.
121
Other compensation
Members of the EC are eligible to participate in the Employee Share
Acquisition Plan (ESAP), a savings plan
based on stock options, which is open to employees around
the world. Five members of the EC participated in the
17th
annual launch of the plan in 2020. EC members who
participated will, upon vesting, each be entitled to acquire
up to
440 ABB shares at CHF 22.87 per share, the market share
price at the start of the 2020 launch.
For a more detailed description of the ESAP,
please refer to “Note 18 – Share‑based payment arrangements”
in
our Consolidated Financial Statements.
In 2020, ABB did not pay any fees or compensation
to the members of the EC for services rendered to ABB
other than those disclosed in this Compensation Report.
Except as disclosed in the section titled “Executive Committee
─ Business relationships
between ABB and its EC members” in the Corporate
Governance Report, ABB did not pay any
additional fees or compensation in 2020 to persons
closely linked to a member of the EC for services rendered to ABB.
Terms of
departure for former EC members
The former CHRO, Sylvia Hill, will continue to
receive her annual base salary and benefits during her
notice
period, until her termination date, on December 31, 2021.
She will receive a short-term incentive payment for 2021,
based on the average short-term incentive award percentages
achieved in 2019 and 2020, at the termination date.
Outstanding LTIP
grants made for the years 2019 and 2020 will be settled according
to the plan-related vesting
schedule, subject to achievement against the relevant performance
conditions.
Legacy MIP awards may be exercised up
to one year following the termination date. She withdrew
from the voluntary 10 percent salary donation program.
Compensation of former EC members
In 2020, certain former EC members received contractual
compensation for the period after leaving the EC, as
shown in Compensation Exhibit 27, footnotes (6) and
(7).
Votes
on compensation at the 2021 AGM
As illustrated in Compensation Exhibit 22, the Board’s
proposals to shareholders at the 2021 AGM will relate
to Board compensation for the 2021–2022 term of
office and EC compensation for the calendar
year 2022. There will
also be a non-binding vote on the 2020 Compensation Report.
122
Compensation Exhibit 22: Shareholders
will have three separate votes on
compensation at the 2021 AGM
In determining the proposed maximum aggregate
EC compensation, the Board takes into consideration the
criteria illustrated in Compensation Exhibit 23. Given the
variable nature of a major portion of the compensation
components, the proposed maximum aggregate EC compensation
will almost always be higher than the actual
compensation paid or awarded, as it must cover the
potential maximum value of each component of compensation.
123
Compensation Exhibit 23: Overview of key factors affecting the
determination of
maximum aggregate EC compensation
124
Compensation and share ownership tables
Compensation Exhibit 24: Board compensation
in 2020 and 2019
Paid in 2020
Paid in 2019
Board term 2020-2021
May
Board term 2019-2020
Board term 2019-2020
May
Board term 2018-2019
Name
Settled in
cash
(1)
Settled in
shares -
number
of shares
received
(2)
Settled in
cash
(1)
Settled in
shares -
number
of shares
received
(2)
Total
compensation
paid in 2020
(3)
Settled in
cash
(1)
Settled in
shares -
number
of shares
received
(2)
Settled in
cash
(1)
Settled in
shares -
number
of shares
received
(2)
Total
compensation
paid in 2019
(3)
CHF
CHF
CHF
CHF
CHF
CHF
Peter Voser,
Chairman
(4)
—
21,831
—
32,642
1,140,000
—
29,156
—
29,943
1,200,000
Jacob Wallenberg
(5)
101,250
3,297
112,500
4,928
427,500
112,500
4,397
112,500
4,515
450,000
Matti Alahuhta
(6)
—
4,787
—
7,155
304,000
—
6,384
80,000
3,210
320,000
Gunnar Brock
(7)
—
4,937
—
7,379
313,500
—
6,584
82,500
3,311
330,000
David Constable
(8)
78,750
2,564
87,500
3,833
332,500
87,500
3,420
87,500
3,511
350,000
Frederico Curado
(9)
—
4,438
—
6,646
304,000
—
5,934
80,000
2,973
320,000
Lars Förberg
(10)
—
5,805
—
8,688
304,000
—
7,755
—
7,970
320,000
Jennifer Xin-Zhe Li
(11)
72,000
2,163
80,000
3,239
304,000
80,000
2,892
80,000
2,973
320,000
Geraldine Matchett
(12)
74,250
3,159
82,500
4,722
313,500
82,500
4,213
82,500
4,326
330,000
David Meline
(13)
90,000
2,931
100,000
4,380
380,000
100,000
3,908
100,000
4,013
400,000
Satish Pai
(14)
74,520
2,231
82,500
3,340
313,500
82,500
2,983
82,500
3,066
330,000
Total
490,770
58,143
545,000
86,952
4,436,500
545,000
77,626
787,500
69,811
4,670,000
_____________________
(1)
Represents gross amounts paid, prior to deductions for social security, withholding tax etc.
(2)
Number of shares per Board member is calculated based on net amount due after deductions for social security, withholding tax etc.
(3)
In addition to the Board remuneration stated in the above table, in 2020 and 2019 the Company paid CHF 272,312 and CHF 270,933, respectively, in related mandatory social security
payments.
(4)
Chairman of the ABB Ltd Board for the 2018-2019, 2019-2020 and 2020-2021 board terms and Chairman of the Governance and Nomination Committee for the 2018-2019 board term; is
receiving 100 percent of his compensation in the form of ABB shares.
(5)
Vice-Chairman of the ABB Ltd Board for the 2018-2019, 2019-2020 and 2020-2021 board terms; Chairman of the Governance and Nomination Committee for the 2019-2020 and 2020-
2021 board terms and member of that committee for the 2018-2019 board term; is receiving 50 percent of his compensation in the form of ABB shares.
(6)
Member of the Governance and Nomination Committee for the 2018-2019, 2019-2020 and 2020-2021 board terms; received 50 percent of his compensation in the form of ABB shares for
the 2018-2019 board term and is receiving 100 percent of his compensation in shares for the 2019-2020 and 2020-2021 board terms.
(7)
Member of the Finance, Audit and Compliance Committee for the 2018-2019, 2019-2020 and 2020-2021 board terms; received 50 percent of his compensation in shares for the 2018-2019
board term and is receiving 100 percent of his compensation in the form of ABB shares for the 2019-2020 and 2020-2021 board terms.
(8)
Chairman of the Compensation Committee for the 2018-2019, 2019-2020 and 2020-2021 board terms; is receiving 50 percent of his compensation in the form of ABB shares.
(9)
Member of the Compensation Committee for the 2018-2019, 2019-2020 and 2020-2021 board terms; received 50 percent of his compensation in the form of ABB shares for the 2018-2019
board term and is receiving 100 percent of his compensation in shares for the 2019-2020 and 2020-2021 board terms.
(10)
Member of the Governance and Nomination Committee for the 2018-2019, 2019-2020 and 2020-2021 board terms; is receiving 100 percent of his compensation in the form of ABB shares.
(11)
Member of the Compensation Committee for the 2018-2019, 2019-2020 and 2020-2021 board terms; is receiving 50 percent of her compensation in the form of ABB shares.
(12)
Member of the Finance, Audit and Compliance Committee for the 2018-2019, 2019-2020 and 2020-2021 board terms; is receiving 50 percent of her compensation in the form of ABB
shares.
(13)
Chairman of the Finance, Audit and Compliance Committee for 2018-2019, 2019-2020 and 2020-2021 board terms; is receiving 50 percent of his compensation in the form of ABB shares.
(14)
Member of the Finance, Audit and Compliance Committee for the 2018-2019, 2019-2020 and 2020-2021 board terms; is receiving 50 percent of his compensation in the form of ABB
shares.
125
Compensation Exhibit 25: Board compensation
for the Board terms 2020-2021 and
2019-2020
Name
Specific Board Roles
Board term
2020-2021
(1)
Board term
2019-2020
CHF
CHF
Peter Voser
Chairman of the Board
1,140,000
1,200,000
Jacob Wallenberg
Vice-Chairman of the Board and Chairman GNC
427,500
450,000
Matti Alahuhta
Member GNC
304,000
320,000
Gunnar Brock
Member FACC
313,500
330,000
David Constable
Chairman CC
332,500
350,000
Frederico Curado
Member CC
304,000
320,000
Lars Förberg
Member GNC
304,000
320,000
Jennifer Xin-Zhe Li
Member CC
304,000
320,000
Geraldine Matchett
Member FACC
313,500
330,000
David Meline
Chairman of FACC
380,000
400,000
Satish Pai
Member FACC
313,500
330,000
Total
4,436,500
4,670,000
__________________________
(1)
This reflects a 10 percent COVID-19 related voluntary donation in Board fees
for the first half of the 2020-2021 Board term.
Key:
CC: Compensation Committee
FACC: Finance, Audit and Compliance
Committee
GNC: Governance and Nomination Committee
Compensation Exhibit 26: Board ownership
of ABB shares
Total number of shares
held
Name
December 31, 2020
December 31, 2019
Peter Voser
314,648
260,175
Jacob Wallenberg
234,246
226,021
Matti Alahuhta
93,408
51,466
Gunnar Brock
26,951
14,635
David Constable
33,978
27,581
Frederico Curado
32,382
21,298
Lars Förberg
49,992
35,499
Jennifer Xin-Zhe Li
33,721
8,319
Geraldine Matchett
19,800
11,919
David Meline
33,774
25,463
Satish Pai
24,618
19,047
Total
897,518
701,423
______________
(1) Includes 2,000 shares held by spouse.
(2) Includes 3,150 shares held by spouse.
126
Compensation Exhibit 27: EC compensation in 2020
Cash Compensation
Estimated value
of share-based
grants under the
LTIP in 2020
(5)
Estimated value
of replacement
share-based
grant in 2020
(incl.
conditional
share-based
grants)
(6)
Name
Base salary
(1)
Short-term
incentive
(1)(2)
Pension
benefits
Other
benefits
(3)
2019 Total cash-
based
compensation
(4)
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
Björn Rosengren (EC member
as of January 27, 2020, CEO
as of March 1, 2020)
1,504,141
977,685
666,175
688,685
3,836,686
1,970,457
3,308,781
9,115,924
Timo Ihamuotila
902,508
698,535
494,360
646,278
2,741,681
734,103
—
3,475,784
Sylvia Hill
725,004
547,500
471,925
290,108
2,034,537
564,097
—
2,598,634
Maria Varsellona
760,008
655,880
471,538
818,288
2,705,714
618,193
—
3,323,907
Theodor Swedjemark (EC
member as of August 1, 2020)
200,002
130,000
118,951
75,259
524,212
92,887
—
617,099
Sami Atiya
760,008
418,000
465,509
423,787
2,067,304
618,193
—
2,685,497
Tarak Mehta
848,339
695,115
479,932
390,681
2,414,067
695,462
—
3,109,529
Peter Terwiesch
760,008
387,600
456,374
334,575
1,938,557
618,193
—
2,556,750
Morten Wierod
704,171
681,150
413,120
346,080
2,144,521
579,552
—
2,724,073
Total current Executive
Committee members at
December 31, 2020
7,164,189
5,191,465
4,037,884
4,013,741
20,407,279
6,491,137
3,308,781
30,207,197
Peter Voser (EC
member until
February 29, 2020)
280,835
421,250
37,443
48,160
787,688
—
—
787,688
Ulrich Spiesshofer (EC
member until April 16,
2019)
(7)
561,670
749,825
214,588
820,421
2,346,504
—
—
2,346,504
Jean-Christophe Deslarzes
(EC member until May 31,
2019)
156,668
158,939
86,309
169,099
571,015
—
—
571,015
Diane de Saint Victor (EC
member until October 31,
2019)
250,001
260,750
74,561
950,402
1,535,714
—
—
1,535,714
Total departing Executive
Committee members
1,249,174
1,590,764
412,901
1,988,082
5,240,921
—
—
5,240,921
Total
8,413,363
6,782,229
4,450,785
6,001,823
25,648,200
6,491,137
3,308,781
35,448,118
____________________________
__
(1)
Base salary as well as the target short-term incentive were adjusted where appropriate for EC members who voluntarily donated 10 percent of their salary to fight the impacts of the COVID-19
crisis for a six-month period during 2020.
(2)
Represents accrued short-term variable compensation for the year 2020, which will be paid in 2021, after the publication of ABB's financial results. Short-term variable compensation is linked
to the objectives defined in each EC member's annual incentive plan. Upon full achievement of these objectives, the short-term variable compensation of the EC members represents 100
percent of their respective base salary. The short-term variable compensation of the former CEO, Ulrich Spiesshofer, corresponds to the contractually agreed average of the year 2017 and 2018
short-term variable compensation award. Peter Voser received his short-term variable compensation payment monthly at target
achievement level. Diane de Saint Victor and Jean-Christophe
Deslarzes received a pro-rata short-term variable compensation payment for their period of service as an EC member, in accordance with the contractual obligations of ABB.
(3)
Other benefits comprise payments related to social security, health insurance, children's education, transportation, tax advice and certain other items like compensation for unused vacation
balances at the time of departure from ABB.
(4)
Prepared on an accrual basis.
(5)
The estimated value of the share-based LTIP grants are based on the price of ABB shares on the grant date, adjusted for expected foregone dividends during the vesting period. On the day of
vesting (April 27, 2023), the value of the share-based awards granted under the LTIP may vary from the above amounts due to changes in ABB's share price and the outcome of the
performance factors.
(6)
Payments totaling CHF 161,274 were made in 2020 on behalf of certain other former EC members, representing social security premium payments.
(7)
ABB paid Ulrich Spiesshofer in addition to the compensation related to the termination period,
non-compete payments for the period May 1, 2020, to December 31, 2020, and related social
security payments totaling CHF 2,806,111.
127
Compensation Exhibit 28: EC compensation in 2019
Cash Compensation
Estimated value
of share-based
grants under the
LTIP in 2019
(4)
Estimated value
of replacement
share-based
grant in 2019
(incl.
conditional
share-based
grants)
(5)
Name
Base salary
Short-term
incentive
(1)
Pension
benefits
Other
benefits
(2)
2019 Total cash-
based
compensation
(3)
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
Peter Voser (CEO
as of April
17, 2019)
1,187,167
1,780,739
149,772
320,688
3,438,366
—
—
3,438,366
Timo Ihamuotila
945,005
960,450
500,830
581,983
2,988,268
836,661
—
3,824,929
Sylvia Hill (EC member as of
June 1, 2019)
408,334
433,650
268,643
198,236
1,308,863
616,494
—
1,925,357
Maria Varsellona (EC
member as of November 1,
2019)
(6)
133,335
133,333
40,619
472,088
779,375
822,328
1,624,386
3,226,089
Frank Duggan
(7)
667,708
707,103
363,173
552,220
2,290,204
704,559
—
2,994,763
Chunyuan Gu
(8)
685,847
685,963
263,125
708,252
2,343,187
616,494
—
2,959,681
Sami Atiya
786,676
602,400
467,214
528,033
2,384,323
845,459
—
3,229,782
Tarak Mehta
860,004
747,340
478,990
570,644
2,656,978
757,396
—
3,414,374
Claudio Facchin
810,006
583,200
469,271
404,865
2,267,342
713,355
—
2,980,697
Peter Terwiesch
795,009
668,800
460,453
389,694
2,313,956
704,559
—
3,018,515
Morten Wierod (EC member
as of April 1, 2019)
525,000
516,600
304,632
200,336
1,546,568
616,494
—
2,163,062
Total Executive Committee
members at December 31,
2019
7,804,091
7,819,578
3,766,722
4,927,039
24,317,430
7,233,799
1,624,386
33,175,615
Ulrich Spiesshofer (EC
member until April 16, 2019)
1,685,010
2,249,475
639,222
979,554
5,553,261
2,967,911
—
8,521,172
Jean-Christophe Deslarzes
(EC member until May 31,
2019)
940,007
998,280
513,258
522,119
2,973,664
827,846
—
3,801,510
Diane de Saint Victor (EC
member until October 31,
2019)
1,000,001
1,062,000
298,242
246,441
2,606,684
880,685
—
3,487,369
Greg Scheu (EC member until
October 31, 2019)
(9)
661,604
557,123
228,298
199,474
1,646,499
722,956
—
2,369,455
Total departing Executive
Committee members
4,286,622
4,866,878
1,679,020
1,947,588
12,780,108
5,399,398
—
18,179,506
Total
12,090,713
12,686,456
5,445,742
6,874,627
37,097,538
12,633,197
1,624,386
51,355,121
____________________________
__
(1)
Represents accrued STI for the year 2019, which was paid in 2020, after the publication of ABB's financial results. STI is linked to the objectives defined in each EC member's scorecard.
Upon full achievement of these objectives, the STI of the EC members represents 100 percent of their respective annual base salary. The STI of the former CEO, Ulrich Spiesshofer,
corresponds to the contractually agreed average of the year 2017 and 2018 STI award. Peter Voser received his STI payment monthly at target
achievement level. Greg Scheu received a pro-
rata STI payment for his period of service as an EC member, in accordance with the contractual obligations of ABB.
(2)
Other benefits comprise payments related to social security, health insurance, children's education, transportation, tax advice and certain other items. Other benefits for Peter Voser
include
mandatory social security payments only.
(3)
Prepared on an accrual basis.
(4)
On the day of vesting (May 16, 2022), the value of the share-based awards granted under the LTIP may vary from the above amounts due to changes in ABB's share price and the outcome of
the performance factors. The estimated value of the share-based grants is based on the price of ABB shares on the grant date, adjusted for expected foregone dividends during the vesting
period.
(5)
Payments totaling CHF 216,069 were made in 2019 on behalf of certain other former EC members, mainly representing mandatory social security payments.
(6)
In addition to the replacement share grant, Maria Varsellona received compensation in the amount of CHF 445,939 for 10 months of foregone STI payments from her previous employer,
which is shown under other benefits.
(7)
Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR. The Company purchased EUR with AED to meet this obligation. All AED amounts were converted into
Swiss francs using a rate of CHF 0.2635992 per AED.
(8)
Chunyuan Gu received for the period January to February 2019, 100 percent of his compensation in CNY and for the period March to December 2019, 100 percent of his base salary in HKD.
All CNY amounts were converted into Swiss francs using a rate of CHF 0.1391052 per CNY and all HKD amounts were converted into Swiss francs using a rate of CHF 0.12434741 per
HKD.
(9)
Greg Scheu received 100 percent of his base salary in USD. All USD amounts were converted into Swiss francs using a rate of CHF 0.9682 per USD.
128
Compensation Exhibit 29: LTIP grants in 2020
Name
Reference number
of shares under the
EPS performance
factor of the 2020
launch
of the LTIP
(1)
Total estimated
value of share-
based grants under
the EPS
performance factor
of the 2020 launch
of the LTIP
(2),(3)
Reference number
of shares under the
TSR performance
factor of the 2020
launch
of the LTIP
(1)
Total estimated
value of share-
based grants under
the TSR
performance factor
of the 2020 launch
of the LTIP
(2),(3)
Total number of
shares granted
under the 2020
launch
of the LTIP
(1),(2)
Total estimated
value of share-
based grants under
the LTIP in
2020
(2),(3)
CHF
CHF
CHF
Björn Rosengren (EC member as of
January 27, 2020, CEO as of March 1,
2020)
65,857
985,221
65,858
985,236
131,715
1,970,457
Timo Ihamuotila
(4)
24,535
367,044
24,536
367,059
49,071
734,103
Sylvia Hill
18,853
282,041
18,854
282,056
37,707
564,097
Maria Varsellona
20,661
309,089
20,662
309,104
41,323
618,193
Theodor Swedjemark (EC member as of
August 1, 2020)
(4)
3,104
46,436
3,105
46,451
6,209
92,887
Sami Atiya
20,661
309,089
20,662
309,104
41,323
618,193
Tarak Mehta
(4)
23,244
347,731
23,244
347,731
46,488
695,462
Peter Terwiesch
(4)
20,661
309,089
20,662
309,104
41,323
618,193
Morten Wierod
(4)
19,370
289,776
19,370
289,776
38,740
579,552
Total current Executive
Committee
members at December 31, 2020
216,946
3,245,516
216,953
3,245,621
433,899
6,491,137
__________________
(1)
Vesting date April 27, 2023.
(2)
The reference number of shares of the EPS and TSR performance factors are valued using the fair value of the ABB shares on the grant date adjusted for expected foregone dividends
during the vesting period.
(3)
Default settlement of the final LTIP award is 100 percent in shares, with an automatic sell-to-cover in place for employees who are subject to withholding taxes. The plan foresees a
maximum payout of 200 percent of the number of reference shares granted based on the achievement against the pre-defined average EPS and relative TSR targets.
(4)
In addition to the above awards, five members of the EC participated in the 17th launch of the ESAP in 2020, which will allow them to save over a 12-month period and, in November
2021, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP will be entitled to acquire up to 440 ABB shares at an exercise price of CHF
22.87 per share.
129
Compensation Exhibit 30: LTIP grants in 2019
Name
Reference number
of shares under the
EPS performance
factor of the 2019
launch
of the LTIP
(1)
Total estimated
value of share-
based grants under
the EPS
performance factor
of the 2019 launch
of the LTIP
(2),(3)
Reference number
of shares under the
TSR performance
factor of the 2019
launch
of the LTIP
(1)
Total estimated
value of share-
based grants under
the TSR
performance factor
of the 2019 launch
of the LTIP
(2),(3)
Total number of
shares granted
under the 2019
launch
of the LTIP
(1),(2)
Total estimated
value of share-
based grants under
the LTIP in
2019
(2),(3)
CHF
CHF
CHF
Timo Ihamuotila
(4)
24,535
418,322
24,536
418,339
49,071
836,661
Sylvia Hill (EC member as of June 1,
2019)
18,079
308,247
18,079
308,247
36,158
616,494
Maria Varsellona (EC member
as of
November 1, 2019)
20,661
411,154
20,662
411,174
41,323
822,328
Frank Duggan
(4)
20,661
352,271
20,662
352,288
41,323
704,559
Chunyuan Gu
18,079
308,247
18,079
308,247
36,158
616,494
Sami Atiya
24,793
422,721
24,794
422,738
49,587
845,459
Tarak Mehta
22,211
378,698
22,211
378,698
44,422
757,396
Claudio Facchin
20,919
356,669
20,920
356,686
41,839
713,355
Peter Terwiesch
(4)
20,661
352,271
20,662
352,288
41,323
704,559
Morten Wierod (EC member as of
April 1, 2019)
(4)
18,079
308,247
18,079
308,247
36,158
616,494
Total Executive Committee
members
at December 31, 2019
208,678
3,616,847
208,684
3,616,952
417,362
7,233,799
Ulrich Spiesshofer (EC member until
April 16, 2019)
87,035
1,483,947
87,036
1,483,964
174,071
2,967,911
Jean-Christophe Deslarzes (EC member
until May 31, 2019)
24,277
413,923
24,277
413,923
48,554
827,846
Diane de Saint Victor (EC member until
October 31, 2019)
25,826
440,334
25,827
440,351
51,653
880,685
Greg Scheu (EC member until
October 31, 2019)
21,201
361,478
21,201
361,478
42,402
722,956
Total departing Executive Committee
members
158,339
2,699,682
158,341
2,699,716
316,680
5,399,398
Total
367,017
6,316,529
367,025
6,316,668
734,042
12,633,197
__________________
(1)
Vesting date May 16, 2022.
(2)
The valuation method of the share grant has been adjusted to reflect best practice, according to which, it is not recommended to use a Monte Carlo simulation at the time of grant to
determine the fair value of a share grant. In response to that, the reference number of shares of the EPS and TSR performance factors are valued using the fair value of the ABB shares on
the grant date adjusted for expected foregone dividends during the vesting period.
(3)
The LTIP foresees delivering 65 percent of the value of vested performance shares (both performance factors EPS and TSR), if any, in
shares and the remainder in cash. However, upon
vesting participants have the possibility to elect to receive 100 percent of the vested award in shares. The plan foresees a maximum payout of 200 percent of the number of reference shares
granted based on the achievement against the pre-defined average EPS and relative TSR targets.
(4)
In addition to the above awards, four members of the EC participated in the 16th launch of the ESAP in 2019, which allowed them to save over a 12-month period and, in November 2020,
use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP was entitled to acquire up to 480 ABB shares at an exercise price of CHF 20.78 per
share.
130
Compensation Exhibit 31: EC shareholding
overview at December 31, 2020
Total number
of shares
held at
December 31,
2020
Vested at
December 31,
2020
Unvested at December 31, 2020
Number of
vested
options held
under the
MIP
Number of
unvested
options
held under
the MIP
Reference
number of
shares
deliverable
under the
2018
performance
components
(EPS and
TSR) of the
LTIP
(1)
Reference
number of
shares
deliverable
under the
2019
performance
factors (EPS
and TSR) of
the LTIP
(1)
Reference
number of
shares
deliverable
under the
2020
performance
factors (EPS
and TSR) of
the LTIP
(1)
Replacement
share grant
for foregone
benefits from
former
employer
(2)
Replacement
share grant
for foregone
benefits from
former
employer
(2)
Replacement
share grant
for foregone
benefits from
former
employer
(2)
Name
(vesting
2021/2022)
(vesting
2021)
(vesting
2022)
(vesting
2023)
(vesting
2021)
(vesting
2022)
(vesting
2023)
Björn Rosengren (EC
member as of January 27,
2020, CEO as of March 1,
2020)
5,000
—
—
—
—
131,715
—
130,150
18,904
Timo Ihamuotila
171,610
—
—
37,217
49,071
49,071
—
—
—
Sylvia Hill
2,265
796,875
318,750
—
36,158
37,707
—
—
—
Maria Varsellona
—
—
—
—
41,323
41,323
40,010
40,009
—
Theodor Swedjemark (EC
member as of August 1,
2020)
(3)
480
102,000
250,750
—
—
6,209
—
—
—
Sami Atiya
42,778
—
—
23,301
49,587
41,323
—
—
—
Tarak Mehta
179,636
—
—
34,790
44,422
46,488
—
—
—
Peter Terwiesch
142,338
—
—
37,379
41,323
41,323
—
—
—
Morten Wierod
1,544
—
—
15,292
36,158
38,740
—
—
—
Total Executive
Committee members at
December 31, 2020
545,651
898,875
569,500
147,979
298,042
433,899
40,010
170,159
18,904
______________
(1)
The final LTIP 2018 award and LTIP
2019 award will be settled 65 percent in shares and 35 percent in cash. This applies to both performance factors (EPS and TSR). However, the participants have the
possibility to elect to receive 100 percent of the vested award in shares. The final LTIP 2020 award will be settled 100 percent in shares, with an automatic sell-to-cover in place for employees who are
subject to withholding taxes.
(2)
It is expected that the replacement share grants will be settled 65 percent in shares and 35 percent in cash. However, the participants have the possibility to elect to receive 100 percent of the vested
award in shares.
(3)
In addition, his spouse holds unvested shares and options granted in connection with her role in the company.
131
Compensation Exhibit 32: EC shareholding
overview at December 31, 2019
Total number
of shares
held at
December 31,
2019
Vested at
December 31,
2019
Unvested at December 31, 2019
Number of
vested options
held under
the MIP
Number of
unvested
options held
under the
MIP
Reference
number of
shares
deliverable
under the
2017
performance
components
(P1 and P2) of
the LTIP
(1)
Reference
number of
shares
deliverable
under the
2018
performance
factors (EPS
and TSR) of
the LTIP
(2)
Reference
number of
shares
deliverable
under the
2019
performance
factors (EPS
and TSR) of
the LTIP
(2)
Replacement
share grant
for foregone
benefits from
former
employer
(3)
Replacement
share grant
for foregone
benefits from
former
employer
(4)
Name
(vesting
2020/2021)
(vesting 2020)
(vesting 2021)
(vesting 2022)
(vesting 2020)
(vesting 2021/
2022)
Timo Ihamuotila
64,572
—
—
41,000
37,217
49,071
76,628
—
Sylvia Hill (EC member as
of June 1, 2019)
2,265
743,750
584,375
—
—
36,158
—
—
Maria Varsellona (EC
member as of November 1,
2019)
—
—
—
—
—
41,323
—
80,019
Frank Duggan
269,846
—
—
34,984
31,756
41,323
—
—
Chunyuan Gu
45,577
—
—
31,196
33,981
36,158
—
—
Sami Atiya
24,435
—
—
34,735
23,301
49,587
—
—
Tarak Mehta
212,869
—
—
34,494
34,790
44,422
—
—
Claudio Facchin
163,219
—
—
39,076
26,214
41,839
—
—
Peter Terwiesch
122,242
—
—
37,147
37,379
41,323
—
—
Morten Wierod (EC
member as of April 1,
2019)
1,064
398,440
—
—
15,292
36,158
—
—
Total Executive
Committee members at
December 31, 2019
906,089
1,142,190
584,375
252,632
239,930
417,362
76,628
80,019
_______________
(1)
The LTIP 2017 foresees that 70 percent are settled in shares and 30 percent in cash for the performance components (P1 and P2). However, participants have the possibility to elect to receive
100 percent of the vested award in shares.
(2)
It is expected that the LTIP 2018 and 2019 will be settled 65 percent in shares and 35 percent in cash for the performance factors (EPS and TSR). However,
the participants have the
possibility to elect to receive 100 percent of the vested award in shares.
(3)
The replacement share grant was settled 100 percent in shares.
(4)
It is expected that the replacement share grants will be settled 65 percent in shares and 35 percent in cash. However, the participant has the possibility to elect to receive 100 percent of the
vested award in shares.
(5)
Departing Executive Committee members are not included in this table.
132
Compensation Exhibit 33: Targeted
and realized EC Total
Compensation in 2020
Target Compensation (in
CHF)
Base salary
Pension
benefits
Other
benefits
(1)
Target
short-term
incentive
(2)
LTIP Grant
Fair Value
2017
(3)
Target total
variable
compensation
Target Total
Compensation
Björn Rosengren (EC member as of
January 27, 2020, CEO as of March
1, 2020)
1,504,141
666,175
688,685
1,504,131
n.a.
1,504,131
4,363,132
Timo Ihamuotila
902,508
494,360
646,278
902,500
998,965
1,901,465
3,944,611
Sylvia Hill
725,004
471,925
290,108
730,000
n.a.
730,000
2,217,037
Maria Varsellona
760,008
471,538
818,288
760,000
n.a.
760,000
2,809,834
Theodor Swedjemark (EC member as
of August 1, 2020)
200,002
118,951
75,259
200,000
n.a.
200,000
594,212
Sami Atiya
760,008
465,509
423,787
760,000
845,147
1,605,147
3,254,451
Tarak Mehta
848,339
479,932
390,681
855,000
842,145
1,697,145
3,416,097
Peter Terwiesch
760,008
456,374
334,575
760,000
903,833
1,663,833
3,214,790
Morten Wierod
704,171
413,120
346,080
712,500
377,781
1,090,281
2,553,652
Total
7,164,189
4,037,884
4,013,741
7,184,131
3,967,871
11,152,002
26,367,816
Realized Compensation (in CHF)
Base salary
Pension
benefits
Other
benefits
(1)
Short-term
incentive
(4)
Realized
Value LTIP
2017
(5)
Total variable
compensation
Total
Compensation
Björn Rosengren (EC member as of
January 27, 2020, CEO as of March
1, 2020)
1,504,141
666,175
688,685
977,685
n.a.
977,685
3,836,686
Timo Ihamuotila
902,508
494,360
646,278
698,535
593,811
1,292,346
3,335,492
Sylvia Hill
725,004
471,925
290,108
547,500
n.a.
547,500
2,034,537
Maria Varsellona
760,008
471,538
818,288
655,880
n.a.
655,880
2,705,714
Theodor Swedjemark (EC member as
of August 1, 2020)
200,002
118,951
75,259
130,000
n.a.
130,000
524,212
Sami Atiya
760,008
465,509
423,787
418,000
519,907
937,907
2,587,211
Tarak Mehta
848,339
479,932
390,681
695,115
475,267
1,170,382
2,889,334
Peter Terwiesch
760,008
456,374
334,575
387,600
555,996
943,596
2,494,553
Morten Wierod
704,171
413,120
346,080
681,150
203,618
884,768
2,348,139
Total
7,164,189
4,037,884
4,013,741
5,191,465
2,348,599
7,540,064
22,755,878
Realized achievement level
Base salary
Pension
benefits
Other
benefits
(1)
Short-term
incentive
(4)
Realized
Value LTIP
2017
in %
(5)
Total
variable
compensation
Total
Compensation
Björn Rosengren (EC member as of
January 27, 2020, CEO as of March
1, 2020)
100%
100%
100%
65%
n.a.
65%
88%
Timo Ihamuotila
100%
100%
100%
77%
59%
68%
85%
Sylvia Hill
100%
100%
100%
75%
n.a.
75%
92%
Maria Varsellona
100%
100%
100%
86%
n.a.
86%
96%
Theodor Swedjemark (EC member as
of August 1, 2020)
100%
100%
100%
65%
n.a.
65%
88%
Sami Atiya
100%
100%
100%
55%
62%
58%
79%
Tarak Mehta
100%
100%
100%
81%
56%
69%
85%
Peter Terwiesch
100%
100%
100%
51%
62%
57%
78%
Morten Wierod
100%
100%
100%
96%
54%
81%
92%
Total
100%
100%
100%
72%
59%
68%
86%
______________________
(1)
Other benefits comprise payments related to social security, health insurance, children's education, transportation, tax advice and certain other items.
(2)
Target short-term incentive corresponds to 100 percent of the latest applicable annual base salary adjusted for the voluntary COVID-19 donation and pro-rated for the EC members who
joined the EC during the year 2020.
(3)
Represents the LTIP 2017 grant date fair value as per June 13, 2017, as disclosed in our annual report 2017.
(4)
Represents accrued STI for the year 2020, which will be paid in 2021, after the publication of ABB's financial results. STI is linked to the objectives defined in each EC member's
annual incentive plan.
(5)
Valued at CHF 19.84, the closing price of the ABB share on the day of vesting.
133
EMPLOYEES
A breakdown of our employees by geographic region is as follows:
December 31,
2020
2019
2018
Europe
49,200
68,400
68,300
The Americas
27,600
35,200
35,600
Asia, Middle East and Africa
28,800
40,800
42,700
Total
105,600
144,400
146,600
The proportion of our employees that are represented
by labor unions or are subject to collective bargain
ing
agreements varies based on the labor practices of each
country in which we operate.
Item 7.
Major Shareholders and Related Party Transactions
MAJOR SHAREHOLDERS
At December 31, 2020, we had approximately 499,000 shareholders.
Approximately 282,000 were U.S.
holders, of which approximately 430 were record holders.
Based on the share register, U.S. holders
(including holders of
ADSs) held approximately 12 percent of the total share
capital and voting rights as registered in the Commercial
Register on that date.
For information on major shareholders see “Item 6. Directors,
Senior Management and Employees—
Shareholders—Significant shareholders”.
RELATED PARTY
TRANSACTIONS
Affiliates and associates
In the normal course of our business, we purchase products
from, sell products to and engage in other
transactions with entities in which we hold an equity interest. The
amounts involved in these transactions are not
material to ABB Ltd. Also, in the normal course of our
business, we engage in transactions with businesses that we have
divested. We
believe that the terms of the transactions we conduct with
these companies are negotiated on an arm’s
length basis.
Key management personnel
For information on important business relationships between
ABB and its Board and EC members, or
companies and organizations represented by them,
see “Item 6. Directors, Senior Management and Employees
”
sections
entitled “Board of Directors—Business Relationships between
ABB and its Board members” and “Executive
Committee—Business Relationships between ABB and
its EC members”.
Item 8.
Financial Information
CONSOLIDATED STATEMENTS
AND OTHER FINANCIAL INFORMATION
See “Item 18. Financial Statements”.
134
LEGAL PROCEEDINGS
Regulatory
As a result of an internal investigation, ABB self-reported
to the Securities and Exchange Commission (SEC)
and the Department of Justice (DoJ) in the United States
as well as to the Serious Fraud Office (SFO) in the
United
Kingdom concerning certain of our past dealings with
Unaoil and its subsidiaries, including alleged improper payments
made by these entities to third parties. In May 2020, the
SFO closed its investigation, which it originally announced in
February 2017, as the case did not meet the relevant
test for prosecution. We
continue to cooperate with the U.S.
authorities as requested. At this time, it is not possible for
us to make an informed judgment about the outcome of this
matter.
Based on findings during an internal investigation, ABB self
-reported to the SEC and the DoJ, in the United
States, to the Special Investigating Unit (SIU) and the
National Prosecuting Authority (NPA)
in South Africa as well as
to various authorities in other countries potential suspect payments
and other compliance concerns in connection with
some of our dealings with Eskom and related persons.
Many of those parties have expressed an interest in, or
commenced an investigation into, these matters and we
are cooperating fully with them. ABB paid $104 million to
Eskom in December 2020 as part of a full and final settlement
with Eskom and the Special Investigating Unit relating to
improper payments and other compliance issues associated with
the Controls and Instrumentation Contract, and its
Variation
Orders for Units 1 and 2 at Kusile. ABB continues to cooperate
fully with the National Prosecuting Authority
in South Africa as well as other authorities in their review
of the Kusile project. Although we believe that there could
be
an unfavorable outcome in one or more of these ongoing reviews,
at this time it is not possible for us to make an
informed judgment about the possible financial impact.
General
In addition, we are aware of proceedings, or the threat of proceedings,
against us and others in respect of
private claims by customers and other third parties with
regard to certain actual or alleged anticompetitive practices.
Also, we are subject to other claims and legal proceedings,
as well as investigations carried out by various law
enforcement authorities. With respect
to the above-mentioned claims, regulatory matters, and
any related proceedings,
we will bear the related costs including costs necessary
to resolve them.
Liabilities recognized
At December 31, 2020 and 2019, we had aggregate liabilities of
$100 million and $157 million, respectively,
included in “Other provisions” and “Other non-current liabilities”, for
the above regulatory,
compliance and legal
contingencies, and none of the individual liabilities recognized
was significant. As it is not possible to make an informed
judgment on, or reasonably predict, the outcome of certain
matters and as it is not possible, based on information
currently available to management, to estimate the maximum
potential liability on other matters, there could be adverse
outcomes beyond the amounts accrued.
DIVIDENDS AND DIVIDEND POLICY
See “Item 3. Key Information—Dividends and Dividend
Policy” and “Item 6. Directors, Senior Management
and Employees—Shareholders—Shareholders’ rights—Shareholders’
dividend rights”.
SIGNIFICANT CHANGES
Except as otherwise described in this Annual Report,
there has been no significant change in our financial
position since December 31, 2020.
135
Item 9.
The Offer and Listing
MARKETS
The shares of ABB Ltd. are principally traded on the SIX Swiss Exchange
(under the symbol “ABBN”) and on
the NASDAQ OMX Stockholm Exchange (under the symbol “ABB”).
ADSs of ABB Ltd. have been traded on the New
York
Stock Exchange under the symbol “ABB” since April 6, 2001.
ABB Ltd.’s ADSs are issued under
the Amended
and Restated Deposit Agreement, dated May 7, 2001, with
Citibank, N.A. as depositary.
Each ADS represents one
share.
There were no suspensions in the trading of our shares
in 2020, 2019 and 2018.
Item 10.
Additional Information
DESCRIPTION OF SHARE CAPITAL
AND ARTICLES OF INCORPORATION
This section summarizes the material provisions of ABB Ltd’s
Articles of Incorporation and the Swiss Code of
Obligations relating to the shares of ABB Ltd. The description
is only a summary and is qualified in its entirety by
ABB Ltd’s Articles of Incorporation,
a copy of which has been filed as Exhibit 1.1 to this Annual Report,
ABB Ltd’s
filings with the commercial register of the Canton of Zurich
(Switzerland) and Swiss statutory law.
Other than as
disclosed below, the
information called for by this Item is set forth in Exhibit 2.3
to this Annual Report and is
incorporated by reference into this Annual Report.
Registration and Business Purpose
ABB Ltd was registered as a corporation (
Aktiengesellschaft
) in the commercial register of the Canton of
Zurich (Switzerland) on March 5, 1999, under the name
of “New ABB Ltd” and its name was subsequently changed
to
“ABB Ltd”. Its commercial register number is CHE-101.049.653.
ABB Ltd’s purpose, as set forth
in Article 2 of its Articles of Incorporation, is to hold interests in
business
enterprises, particularly in enterprises active in the areas
of industry, trade and
services. It may acquire, encumber,
exploit or sell real estate and intellectual property rights
in Switzerland and abroad and may also finance other
companies. It may engage in all types of transactions
and may take all measures that appear appropriate to promote,
or
that are related to, its purpose. Finally,
in pursuing its purpose, ABB Ltd shall strive for long-term
sustainable value
creation.
Capital Structure
For a description of ABB Ltd’s
capital structure (including issued shares, contingent
share capital and
authorized share capital) and its dividend policy,
see “Item 6. Directors, Senior Management and Employees—Shares”
and “Item 3. Key Information—Dividends and Dividend
Policy”.
Shareholders’
Meetings
Under Swiss law, the annual
general meeting of shareholders must be held within 6 months after
the end of
ABB Ltd’s fiscal year.
Annual general meetings of shareholders are convened
by the board of directors, liquidators or
representatives of bondholders or,
if necessary, by the statutory
auditors. The board of directors is further required to
convene an extraordinary general meeting of shareholders
if so resolved by the shareholders in a general meeting of
shareholders or if so requested by one or more shareholders
holding in aggregate at least 10 percent of ABB Ltd’s
share
capital. A general meeting of shareholders is convened
by publishing a notice in the Swiss Official Gazette of
Commerce (
Schweizerisches Handelsamtsblatt
) at least 20 days prior to the meeting date. In addition,
ABB publishes
notices for its general meetings in certain newspapers
as well as on its website. Such notices contain information
as to
procedures to be followed by shareholders in order to
participate and exercise voting rights at the shareholders’
meetings.
136
One or more shareholders whose combined holdings represent
an aggregate par value of at least CHF 48,000
may require, in the form of a written request,
40 calendar days prior to a general meeting of shareholders
that specific
items and proposals be included on the agenda and voted
on at the next general meeting of shareholders.
The following powers are vested exclusively in
the general meeting of the shareholders:
•
adoption and amendment of the Articles of Incorporation,
•
election of members of the Board of Directors, the Chairman
of the Board, the members of the
Compensation Committee, the auditors and the independent
proxy,
•
approval of the annual management report and the consolidated
financial statements,
•
approval of the annual financial statements and decision
on the allocation of profits shown on the balance
sheet, in particular with regard to dividends,
•
approval of the compensation of the Board of Directors and
of the Executive Committee pursuant to
ABB Ltd’s Articles of Incorporation,
•
granting discharge to the members of the
Board of Directors and the persons entrusted with management,
and
•
passing resolutions as to all matters reserved to the authority
of the shareholders’ meeting by law or under
ABB Ltd’s Articles of Incorporation
or that are submitted to the shareholders’ meeting by the Board
of
Directors to the extent permitted by law.
There is no provision in ABB Ltd’s
Articles of Incorporation requiring a quorum for the holding
of
shareholders’
meetings.
Resolutions and elections usually require the approval
of an “absolute majority”
of the shares represented at a
shareholders’
meeting (i.e. a majority of the shares represented at the shareholders
’
meeting with abstentions having the
effect of votes against the resolution). If the
first ballot fails to result in an election and more than one candidat
e
is
standing for election, the presiding officer will order
a second ballot in which a relative majority (i.e. a majority
of the
votes) shall be decisive.
A resolution passed with a qualified majority (at least two-thirds)
of the shares represented at a shareholders’
meeting is required for:
•
a modification of the purpose of ABB Ltd,
•
the creation of shares with increased voting powers,
•
restrictions on the transfer of registered shares and the
removal of those restrictions,
•
restrictions on the exercise of the right to vote and the
removal of those restrictions,
•
an authorized or conditional increase in share capital,
•
an increase in share capital through the conversion of
capital surplus, through an in-kind contribution or in
exchange for an acquisition of property,
and the grant of special benefits,
•
the restriction or denial of pre-emptive rights,
•
a transfer of ABB Ltd’s place
of incorporation, and
137
•
ABB Ltd’s dissolution.
In addition, the introduction of any provision in ABB Ltd’s
Articles of Incorporation providing for a qualified
majority must be resolved in accordance with such qualified
majority voting requirements.
Pursuant to the Swiss Federal Merger Act, special
quorum rules apply by law to a merger (
Fusion
) (including a
possible squeeze-out merger), de-merger
(
Spaltung
), or conversion (
Umwandlung
) of ABB Ltd.
At shareholders’
meetings, shareholders can be represented by proxy,
but only by their legal representative,
another shareholder with the right to vote, or the independent
proxy elected by the shareholders (
unabhängiger
Stimmrechtsvertreter
). All shares held by one shareholder may be represented
by only one representative. Votes
are
taken on a show of hands unless a secret ballot is required
by the general meeting of shareholders or the presiding
officer. The
presiding officer may arrange for resolutions and elections
to be carried out by electronic means. As a result,
resolutions and elections carried out by electronic means
will be deemed to have the same effect as secret ballots.
The
presiding officer may at any time order that
a resolution or election decided by a show of hands be repeated through
a
secret ballot if, in his view,
the results of the vote are in doubt. In this case, the preceding
decision by a show of hands
shall be deemed to have not occurred.
Only shareholders registered in ABB Ltd’s
share register with the right to vote are entitled to participate
at
shareholders’
meetings. For practical reasons, shareholders must be registered
in the share register with the right to vote
no later than 6 business days prior to a shareholders’ meeting
in order to be entitled to participate and vote at such
shareholders’
meeting.
Holders of Euroclear Sweden AB-registered shares are provided
with financial and other information on
ABB Ltd in the Swedish language in accordance with regulatory
requirements and market practice. For shares that are
registered in the system of Euroclear Sweden AB in the
name of a nominee, such information is to be provided by the
nominee.
Borrowing Power
Neither Swiss law nor ABB Ltd’s
Articles of Incorporation restrict in any way ABB Ltd’s
power to borrow and
raise funds. The decision to borrow funds is taken by or
under the direction of the Board of Directors or the Executive
Committee, and no shareholders’ resolution is required.
Directors and Officers
For further information regarding the material provisions
of ABB Ltd’s Articles of Incorporation
and the Swiss
Code of Obligations regarding directors and officers,
see “Item 6. Directors, Senior Management and Employees
—
Board Of Directors—Board governance”.
Auditors
The auditors are elected by the shareholders at the Annual
General Meeting. Pursuant to ABB Ltd’s
Articles of
Incorporation, their term of office is one year.
KPMG AG, Zürich, Switzerland, assumed the sole auditing
mandate of the consolidated financial statements of
the ABB Group beginning in the year ended December
31, 2018. The auditor in charge and responsible for
the mandate,
Hans-Dieter Krauss, began serving in this capacity in respect
of the financial year ended December 31, 2018.
See “Item 16C. Principal Accountant Fees and Services” for
information regarding the fees paid to KPMG AG.
138
MATERIAL CONTRACTS
The following descriptions of the material provisions of
the referenced agreements do not purport to be
complete and are subject to, and qualified in their entirety
by reference to, the agreements which have been filed as
exhibits to this Annual Report.
Sale and Purchase agreement relating
to the divestment of the Power Grids business
On December 17, 2018, ABB Ltd (the Seller) entered into a
Sale and Purchase Agreement with Hitachi Ltd (the
Purchaser) for the sale and purchase of 80.1% of
the shares of ABB Management Holding AG (or such other
entity as
agreed between the Seller and the Purchaser). See Exhibit
4.6 to this Annual Report.
Revolving Credit Facilities
On December 16, 2019, ABB entered into a syndicated
$2 billion five-year revolving credit facility with the
right to extend for up to two additional years in accordance
with its terms. For a description of the facility,
see “Item 5.
Operating and Financial Review and Prospects—Liquidity
and Capital Resources—Credit Facility” and “Note 12
-
Debt” to our Consolidated Financial Statements. See Exhibit
4.1 to this Annual Report.
In March 2020, ABB entered into a bank-funded short
-term EUR 2 billion Revolving Credit Agreement (the
Agreement). This Agreement was in addition to our
existing $2 billion multicurrency revolving credit facility (see
below). Under this Agreement, outstanding amounts were
subject to interest at the rate of EURIBOR plus a margin
of
0.25 percent. We
requested the full amount to be borrowed and the proceeds
were received on March 31, 2020,
amounting to $2,183 million, net of issuance costs. The
Agreement required that all outstanding amounts be repaid
within 15 days after the completion of the sale of the
Power Grids business. The Agreement was terminated after the
final repayment on July 8, 2020.
2012 Notes Indenture
On May 8, 2012, ABB’s subsidiary,
ABB Finance (USA) Inc., issued $500,000,000 aggregate principal
amount
of 1.625% notes due 2017, $1,250,000,000 aggregate principal amount
of 2.875% notes due 2022 and $750,000,000
aggregate principal amount of 4.375% notes due 2042
under an Indenture and a First Supplemental Indenture
,
dated as
of May 8, 2012, among ABB Finance (USA) Inc., ABB and Deutsche
Bank Trust Company Americas (the
“2012
Indenture”). The notes due in 2017 were repaid at maturity.
In 2020, the notes due 2042 were subject to a cash
tender
offer by the issuer and redeemed in part. Pursuant
to the terms of the 2012 Indenture, ABB has fully and unconditionally
guaranteed payment of principal, premium, if any,
and interest in respect of the outstanding notes. See Exhibit
s
4.2 and
4.3 to this Annual Report.
2018 Notes Indenture
On April 3, 2018, ABB’s subsidiary,
ABB Finance (USA) Inc., issued (i) $300,000,000 aggregate
principal
amount of 2.8% notes due 2020 (ii) $450,000,000 aggregate
principal amount of 3.375% notes, due 2023, and
(iii)
$750,000,000 aggregate principal amount of 3.8% notes due
2028 under an Indenture and a First Supplemental
Indenture dated, dated as of April 3, 2018, among ABB Finance
(USA) Inc., ABB and Deutsche Bank Trust
Company
Americas (the “2018 Indenture”). The notes due in 2020
were repaid
at maturity. The notes due
2023 were redeemed in
full in 2020 following the exercise of ABB’s
early redemption option.
The notes due 2028 were subject to a cash tender
offer in 2020 by the issuer and redeemed in part.
Pursuant to the terms of the 2018 Indenture, ABB has fully and
unconditionally guaranteed payment of principal, premium,
if any, and interest in respect
of the outstanding notes. See
Exhibits
4.4 and 4.5 to this Annual Report.
139
EXCHANGE CONTROLS
Other than in connection with Swiss government sanctions
imposed on Belarus, the Republic of Burundi, the
Central African Republic, the Democratic Republic of
the Congo, Guinea, the Islamic Republic of Iran, the Republic
of
Iraq, Lebanon, Libya, the Republic of Mali, Myanmar
(Burma), Nicaragua, the Democratic People's Republic of
Korea
(North Korea), the Republic of Guinea-Bissau, Somalia, the
Republic of South Sudan, Sudan, Syria, Venezuela,
Yemen,
Zimbabwe, persons and organizations with connection
to the late Osama bin Laden, the “al Qaeda” group or the Taliban
,
certain persons connected with the assassination of Rafik
Hariri and certain measures in connection with the prevention
of circumvention of international sanctions in connection
with the situation in the Ukraine, there are currently no laws,
decrees or regulations in Switzerland that restrict the
export or import of capital, including, but not limited to, Swiss
foreign exchange controls on payment of dividends, interest or
liquidation proceeds, if any,
to non-Swiss resident
holders of shares. In addition, there are no limitations imposed
by Swiss law or ABB Ltd’s
Articles of Incorporation on
the rights of non-Swiss residents or non-Swiss citizens as shareholders
to hold shares or to vote.
TAXATION
Swiss Taxation
Withholding Tax
on Dividends and Other Distributions
Dividends paid and similar cash or in-kind distributions that we
make to a holder of shares or ADSs (including
dividends on liquidation proceeds and stock dividends and
taxable income resulting from partial liquidation) are subject
to a Swiss federal withholding tax at a rate of 35 percent.
A repurchase of shares by us for the purpose of a capital
reduction is defined as a partial liquidation of the
Company. In this case, the
difference between the nominal value of the
shares and their repurchase price is qualified as taxable
income. The same would be true upon a repurchase of shares
if
we were not to dispose of the repurchased shares within
six years after the repurchase, or if 10 percent of outstanding
shares were exceeded. We
must withhold the tax from the gross distribution and pay
it to the Swiss Federal Tax
Administration.
Obtaining a Refund of Swiss Withholding
Tax for
U.S. Residents
The Convention between the Swiss Confederation and the
United States of America for the Avoidance
of
Double Taxation
with Respect to Taxes
on Income, which was signed on October 2, 1996 (including
any amendments
thereto) and which we will refer to in the following discussion
as the Treaty,
allows U.S. resident individuals or U.S.
corporations to seek a refund of the Swiss withholding
tax paid in respect of our shares or ADSs if they qualify for
benefits under the Treaty.
U.S. resident individuals and U.S. corporations holding less than 10
percent of the voting
rights in respect of our shares or ADSs are entitled to seek
a refund of withholding tax to the extent the tax withheld
exceeds 15 percent of the gross dividend or other distribution.
U.S. corporations holding 10 percent or more of the
voting rights of our shares or ADSs are entitled to seek a refund
of withholding tax to the extent the tax withheld
exceeds 5 percent of the gross dividend or other distribution.
Qualifying U.S. pension or other retirement arrangements
and – as from January 1, 2020 – also individual retirement
saving plans that do not control the Company are entitled
to
seek a full refund of withholding tax.
Claims for refunds must be filed with the Swiss Federal Tax
Administration, Eigerstrasse 65, 3003 Bern,
Switzerland, no later than December 31 of the third year
following the calendar year in which the dividend or similar
distribution became payable. The form used for obtaining a
refund is Swiss Tax Form
82 (82C for companies; 82E for
other entities; 82I for individuals; 82R for regulated
investment companies (RICs)). This form may be obtained
from any
Swiss Consulate General in the United States, from
the Swiss Federal Tax
Administration at the address above or under
www.estv.admin.ch
. The form must be filled out in triplicate with each copy duly
completed and signed before a notary
public in the United States. The form must be accompan
ied by evidence of the deduction of withholding tax
withheld at
the source (including tax voucher issued by the custodian
bank).
140
Stamp Duties upon Transfer
of Securities
The sale of shares or ADSs, whether by Swiss resident or non-resident
holders, may be subject to a Swiss
securities transfer stamp duty of up to 0.15 percent calculated
on the sale proceeds
if it occurs through or with a Swiss
bank or other Swiss securities dealer as defined in the
Swiss Federal Stamp Tax
Act. In addition to the stamp duty,
the
sale of shares or ADSs by or through a member of
the SIX Swiss Exchange may be subject to a stock exchange
levy.
United States Taxes
The following is a summary of the material U.S. federal
income tax consequences of the ownership by U.S.
holders (defined below) of shares or ADSs. This summary
does not purport to address all of the tax considerations that
may be relevant to a decision to purchase, own or dispose
of shares or ADSs. This summary assumes that U.S. holders
hold shares or ADSs as capital assets for U.S. federal
income tax purposes. This summary does not address tax
considerations applicable to holders that may be subject
to special tax rules, such as U.S. expatriates, dealers or traders
in securities or currencies, partnerships owning shares or
ADSs, tax-exempt entities, banks and other financial
institutions, regulated investment companies, traders in
securities that elect to apply a mark-to-market method of
accounting, insurance companies, holders that own (or
are deemed to own) at least 10 percent or more (by voting power
or value) of the stock of ABB, investors whose functional
currency is not the U.S. dollar, persons
subject to the
alternative minimum tax, persons subject to special tax
accounting rules as a result of any item of gross income with
respect to the shares or ADSs being taken into account
in an applicable financial statement, persons that will hold
shares
or ADSs as part of a position in a straddle or as part
of a hedging or conversion transaction for U.S. tax purposes and
persons who are not U.S. holders. This discussion does not
address aspects of U.S. taxation other than U.S. federal
income taxation, nor does it address state, local or foreign
tax consequences of an investment in shares or ADSs.
This summary is based (i) on the Internal Revenue
Code of 1986, as amended, U.S. Treasury
Regulations and
judicial and administrative interpretations thereof,
in each case as in effect and available on the date
of this registration
statement and (ii) in part, on representations of the depositary
and the assumption that each obligation in the deposit
agreement and any related agreement will be performed in
accordance with its terms. The U.S. tax laws and regulations
and the interpretation thereof are subject to change, which
change could apply retroactively and could affect the
tax
consequences described below.
For purposes of this summary,
a U.S. holder is a beneficial owner of shares or ADSs that,
for U.S. federal
income tax purposes, is:
•
a citizen or individual resident of the United States,
•
a corporation (or other entity treated as a corporation for
U.S. federal income tax purposes) created or
organized in or under the laws of the United States or
any state, including the District of Columbia,
•
an estate if its income is subject to U.S. federal income
taxation regardless of its source, or
•
a trust if such trust validly has elected to be treated as
a U.S. person for U.S. federal income tax purposes
or if (i) a U.S. court can exercise primary supervision over
its administration and (ii) one or more U.S.
persons have the authority to control all of its substantial decisions.
If a partnership (including any entity or arrangement
treated as a partnership for U.S. federal income tax
purposes) is a beneficial owner of shares or ADSs, the treatment
of a partner in the partnership will generally depend on
the status of the partner and the activities of the partn
ership. If you are a partner in a partnership that holds shares or
ADSs you should consult your tax advisor.
Each prospective purchaser should consult the purchaser
’s tax advisor with respect to the
U.S. federal, state,
local and foreign tax consequences of acquiring, owning or
disposing of shares or ADSs.
141
Ownership of ADSs in General,
and Exchange of ADSs for Shares
For U.S. federal income tax purposes, a holder of ADSs generally
will be treated as the owner of the shares
represented by the ADSs, and the following discussion assumes
that such treatment will be respected. If so, no gain
or
loss will be recognized upon an exchange of shares for ADSs or
an exchange of ADSs for shares. The U.S. Treasury
has
expressed concerns that intermediaries in the chain of
ownership between the holder of an ADS and the issuer
of the
security underlying the ADS may be taking actions
that are inconsistent with the beneficial ownership of the underlying
shares. Accordingly,
the creditability of foreign taxes and the availability of
the reduced tax rate for dividends received
by certain non-corporate U.S. holders, if any,
as described below, could
be affected by actions taken by intermediaries in
the chain of ownership between the holder of an ADS and
ABB.
Distributions
In general, for U.S. federal income tax purposes, the gross
amount of any distribution (other than certain
distributions, if any,
of shares distributed to all shareholders of ABB, including
holders of ADSs) made to you with
respect to shares or ADSs, including the amount of any
Swiss taxes withheld from the distribution, will constitute
dividends and be includible in gross income in the year
received to the extent of ABB’s current
and accumulated
earnings and profits (as determined under U.S. federal
income tax principles).
Non-corporate U.S. holders generally will be taxed
on such distributions at the lower rates applicable to
long-term capital gains (i.e., gains from the sale of capital
assets held for more than one year) with respect to
distributions during 2020, provided that the U.S. holder meets certain
holding period and other requirements and
provided that such distributions constitute “qualified dividends”
for U.S. federal income tax purposes. Distributions
treated as dividends will not be treated as “qualified dividends”
if we were to be treated as a “passive foreign investment
company” (PFIC) for U.S. federal income tax purposes in
the year that the dividend is paid or in the year prior to the
year that the dividend is paid. Based on certain estimates of
its gross income and gross assets and the nature of its
business, ABB believes that it will not be classified as a PFIC for
the taxable year ended December 31, 2020 and does
not expect to be classified as a PFIC for the taxable
year ending December 31, 2021. ABB’s
status in the current year
and in future years will depend on its assets and activities in
those years. ABB has no reason to believe that its assets or
activities will change in a manner that would cause it to
be classified as a PFIC. However, as PFIC status is a
factual
matter that depends on, among other things, the composition
of the income and assets, and the market value of the assets
as reflected in market capitalization, of ABB and its subsidiaries
that must be determined annually at the close of each
taxable year, there can be no certainty
regarding ABB’s PFIC status in any
particular year until the end of that year.
U.S.
holders are urged to consult their own tax advisors
regarding the availability to them of the reduced dividend
rate in light
of their own particular circumstances and the consequences
to them if ABB were to be treated as a PFIC with respect to
any taxable year.
Dividends paid to U.S. corporate holders will not be eligible for
the dividends received deduction generally
allowed to corporate U.S. holders.
If you are a U.S. holder and distributions with respect to shares or
ADSs exceed ABB’s current and
accumulated earnings and profits as determined under U.S.
federal income tax principles, then the excess generally
would be treated first as a tax-free return of capital to
the extent of your adjusted tax basis in the shares or ADSs. Any
amount in excess of the amount of the dividend and the
return of capital generally would be treated as capital gain. ABB
does not maintain calculations of its earnings and profits under
U.S. federal income tax principles, so a U.S. holder
should expect all cash distributions to be reported as dividends
for U.S. federal income tax purposes.
142
If you are a U.S. holder, then
dividends paid in Swiss francs, including the amount
of any Swiss taxes withheld
from the dividends, will be included in your gross income
in an amount equal to the U.S. dollar value of the Swiss francs
calculated by reference to the spot exchange rate in
effect on the day the dividends are includible in income.
In the case
of ADSs, dividends generally are includible in income on
the date they are received by the depositary,
regardless of
whether the payment is in fact converted into U.S.
dollars at that time. If dividends paid in Swiss francs are converted
into U.S. dollars on the day they are includible in income,
then you generally should not be required to recognize foreign
currency gain or loss with respect to the conversion. However,
any gains or losses resulting from the conversion of
Swiss francs between the time of the receipt of dividends
paid in Swiss francs and the time the Swiss francs are
converted into U.S. dollars will be treated as ordinary income
or loss to you, as the case may be. The amount of any
distribution of property other than cash will be the
fair market value of the property on the date of distribution.
If you are a U.S. holder, then
dividends received by you with respect to shares or ADSs will
be treated as
foreign source income, which may be relevant in calculating your
foreign tax credit limitation. Subject to certain
conditions and limitations, Swiss tax withheld on dividends
may be deducted from your taxable income or credited
against your U.S. federal income tax liability.
However, to the extent that you would
be entitled to a refund of Swiss
withholding taxes pursuant to the U.S.-Switzerland tax treaty,
you may not be eligible for a U.S. foreign tax credit with
respect to the amount of such withholding taxes which
may be refunded, even if you fail to claim the refund. See “—
Swiss Taxation—Obtaining a Refund of Swiss Withholding
Tax for U.S. Residents”.
The limitation on foreign taxes
eligible for credit is calculated separately with respect
to specific classes of income. For this purpose, dividends
distributed by ABB generally will constitute passive income.
The rules relating to the determination of the U.S. foreign
tax credit are complex, and you should consult your
tax advisor to determine whether and to what extent you
would be
entitled to this credit.
Sale, Exchange or other Taxable
Disposition of Shares or ADSs
If you are a U.S. holder that holds shares or ADSs as capital assets, then
you generally will recognize capital
gain or loss for U.S. federal income tax purposes upon
a sale, exchange or other taxable disposition of your shares or
ADSs in an amount equal to the difference between
your adjusted tax basis in the shares or ADSs and the amount
realized on their disposition. If you are a non-corporate
U.S. holder, the maximum marginal
U.S. federal income tax rate
applicable to the gain is generally lower than the maximum
marginal U.S. federal income tax rate applicable
to ordinary
income (other than certain dividends) if your holding period
for the shares or ADSs exceeds one year (i.e., long term
capital gains). If you are a U.S. holder,
then the gain or loss, if any,
recognized by you generally will be treated as U.S.
source income or loss, as the case may be, for U.S. foreign
tax credit purposes.
If you are a U.S. holder and you receive any foreign currency
on the disposition of shares or ADSs, the amount
realized will be the U.S. dollar value of the payment
received, translated at the spot rate of exchange on the date
of
taxable disposition. If the shares are treated as traded
on an established securities market, a cash basis U.S. holder
and an
accrual basis U.S. holder who has made a special election
(which must be applied consistently from year to year and
cannot be changed without the consent of the U.S. Internal
Revenue Service) will determine the U.S. dollar value of the
amount realized in foreign currency by translating the amount
received at the spot rate of exchange on the settlement
date of the disposition. An accrual basis U.S. holder
that does not make the special election will recognize U.S.
source
ordinary income or loss as a result of currency fluctuations
between the trade date and the settlement date of the
disposition of the shares or ADSs, as the case may be.
Medicare Tax
For taxable years beginning after December 31, 2012,
certain U.S. holders who are individuals, estates or trusts
must pay a 3.8 percent tax on the lesser of (i) the U.S. holder’s
“net investment income” for the relevant taxable year
and
(ii) the excess of the U.S. holder’s modified adjusted
gross income for the taxable year over a certain threshold
(which in
the case of individuals will be between $125,000 and $250,000,
depending on the individual’s circumstances).
A U.S.
holder’s net investment income will generally include
its dividend income and its net gains from the disposition of
shares or ADSs, unless such income or net gains are derived
in the ordinary course of the conduct of a trade or business
(other than a trade or business that consists of certain passive
or trading activities). If you are a U.S. holder that is an
individual, estate or trust, you are urged to
consult your tax advisor regarding the applicability of the
Medicare tax to
your income and gains in respect of your investment in
shares or ADSs.
143
Information with Respect to Foreign
Financial Assets
Certain U.S. holders who are individuals (and certain
entities) that hold an interest in “specified foreign
financial assets” (which may include the shares) are required
to report information relating to such assets, subject to
certain exceptions (including an exception for shares held
in accounts maintained by certain financial institutions).
Penalties can apply if U.S. holders fail to satisfy such reporting
requirements. U.S. holders should consult their tax
advisors regarding the effect, if any,
of this requirement on their ownership and disposition of
the shares.
Backup Withholding
and Information Reporting
U.S. backup withholding tax and information reporting
requirements generally apply to certain payments to
certain non-corporate holders of stock. Information reporting
generally will apply to payments of dividends on, and to
proceeds from the sale or redemption of, shares or ADSs made
within the United States to a holder of shares or ADSs
(other than an exempt recipient, including a corporation,
a payee that is not a U.S. holder that provides an appropriate
certification, and certain other persons).
A payor will be required to withhold backup withholding
tax from any payments of dividends on, or the
proceeds from the sale or redemption of, shares or ADSs within
the United States to you, unless you are an exempt
recipient, if you fail to furnish your correct taxpayer identification
number or otherwise fail to establish an exception
from backup withholding tax requirements. U.S. holders who
are required to establish their exempt status may be
required to provide such certification on U.S. Internal
Revenue Service Form W-9. Backup
withholding is not an
additional tax. The amount of any backup withholding from
a payment to you may be allowed as a credit against your
U.S. federal income tax liability and may entitle you to
a refund, provided that the required information is furnished
timely to the U.S. Internal Revenue Service.
THE ABOVE SUMMARIES ARE NOT INTENDED TO
CONSTITUTE A COMPLETE ANALYSIS
OF ALL
TAX CONSEQUENCES
RELATING TO
THE OWNERSHIP OF SHARES OR ADSS. PROSPECTIVE
PURCHASERS OF SHARES OR ADSS SHOULD CONSULT
THEIR TAX ADVISORS
CONCERNING THE
TAX CONSEQUENCES
OF THEIR PARTICULAR
SITUATIONS.
DOCUMENTS ON DISPLAY
We are subject
to the informational requirements of the Exchange Act.
In accordance with these requirements,
we file reports and other information with the SEC. The
SEC maintains a Web site at
www.sec.gov
including this Annual Report and the exhibits thereto,
and other information regarding registrants that file electronically
with the SEC. Our Annual Reports on Form 20-F,
reports on Form 6-K and some of the other information we
submit to
the SEC may be accessed through this Web
site. In addition, material that we file can be inspected at the offices
of the
New York
Stock Exchange at 11 Wall
Street, New York,
New York
10005.
Item 11.
Quantitative and Qualitative Disclosures about Market
Risk
Market Risk Disclosure
The continuously evolving financial markets and
the dynamic business environment expose us to changes in
foreign exchange, interest rate and other market price
risks. We have
developed and implemented comprehensive
policies, procedures, and controls to identify,
mitigate, and monitor financial risk on a company
-wide basis. To
efficiently aggregate and manage financial
risks that could impact our financial performance, we operate
a Corporate
Treasury Operations function. Our Corporate
Treasury Operations provides an efficient
source of liquidity, financing,
risk management and other global financial services
to the ABB Group companies. Our policies do not allow our
Corporate Treasury Operations or ABB Group
companies to perform speculative trading. Market risk
management
activities are focused on mitigating material financial
risks resulting from our global operating and financing
activities.
144
Corporate Treasury Operations maintains risk
management control systems to monitor foreign exchange
and
interest rate risks and exposures arising from our underlying
business, as well as the associated hedge positions. Our
written policies govern how such exposures are managed.
Financial risks are monitored using a number of analytical
techniques including market value and sensitivity analysis.
The following quantitative analyses are based on sensitivity
analysis tests, which assume parallel shifts of interest rate
yield curves, and foreign exchange rates and equity prices.
Currency Fluctuations and Foreign
Exchange Risk
It is our policy to identify and manage all transactional
foreign exchange exposures to minimize risk. With
the
exception of certain financing subsidiaries and to the extent
certain operating subsidiaries are domiciled in high inflation
environments, the functional currency of each of our companies
is considered to be its local currency.
Our policies
require our subsidiaries to hedge all contracted foreign
exchange exposures, as well as a portion of their forecast
exposures, against their local currency.
These transactions are undertaken mainly with our Corporate
Treasury
Operations.
We have foreign
exchange transaction exposures related to our global operating
and financing activities in
currencies other than the functional currency in which
our entities operate. Specifically,
we are exposed to foreign
exchange risk related to future earnings, assets or liabilities
denominated in foreign currencies. The most significant
currency exposures relate to operations in the Eurozone
area, Sweden and Switzerland. In addition, we are exposed
to
currency risk associated with translating our functional
currency financial statements into our reporting currency,
which
is the U.S. dollar.
Our operating companies are responsible for identifying
their foreign currency exposures and entering into
intercompany derivative contracts with Corporate Treasury
Operations, where legally possible, to hedge their exposures.
Where local laws restrict our operating companies from
entering into intercompany derivatives with Corporate Treasury
Operations, derivative contracts are entered into
locally with third-party financial institutions. The intercompany
transactions have the effect of transferring the operating
companies’ currency risk to Corporate Treasury
Operations, but
create no additional market risks on a consolidated
basis. Corporate Treasury Operations then
manages this risk by
entering into offsetting transactions with third
-party financial institutions. According to our policy,
material net currency
exposures are required to be hedged and are primarily
hedged with forward foreign exchange contracts. The
majority of
the foreign exchange hedge instruments have, on average,
a maturity of less than twelve months. Corporate Treasury
Operations also hedges currency risks arising from monetary
intercompany balances, primarily loans receivable
from
other ABB companies.
At December 31, 2020 and 2019, the net fair value of financial
instruments with exposure to foreign currency
rate movements was an asset of $1,973 million and
$2,382 million, respectively.
The potential loss in fair value of such
financial instruments from a hypothetical 10 percent move
in foreign exchange rates against our position would be
approximately $647 million and $428 million for December
31 2020 and 2019, respectively.
The analysis reflects the
aggregate adverse foreign exchange impact associated with
transaction exposures, as well as translation exposures
where
appropriate. Our sensitivity analysis assumes a simultaneous
shift in exchange rates against our positions exposed
to
foreign exchange risk and as such assumes an unlikely
adverse case scenario. Exchange rates rarely move in the same
direction. Therefore, the assumption of a simultaneous shift
may overstate the impact of changing rates on assets and
liabilities denominated in foreign currencies. The underlying
trade-related transaction exposures of the industrial
companies are not included in the quantitative analysis. If
these underlying transaction exposures were included, they
would tend to have an offsetting effect
on the potential loss in fair value detailed above.
Interest Rate Risk
We are exposed
to interest rate risk due to our financing, investing, and
liquidity management activities. Our
operating companies primarily invest excess cash with, and
receive funding from, our Corporate Treasury
Operations on
an arm’s length basis. It is
our policy that the primary third-party funding and investing
activities, as well as the
monitoring and management of the resulting interest rate
risk, are the responsibility of Corporate Treasury
Operations.
Corporate Treasury Operations adjusts the duration
of the overall funding portfolio through derivative instruments
in
order to better match underlying assets and liabilities, as well
as minimize the cost of capital.
145
At December 31, 2020 and 2019, the net fair value of instruments
subject to Interest Rate Risk was an Asset of
$2,095 million and $5,765 million liability,
respectively. The potential
loss in fair value for such instruments from a
hypothetical 100 basis points parallel shift in interest rates
against our position (or a multiple of 100 basis points where
100 basis points is less than 10 percent of the interest rate)
would be approximately $395 million and $286 million,
for
December 31, 2020 and 2019, respectively.
Equity Risk
Certain of our entities have equity investments that expose
us to equity price risk. At December 31, 2020 and
2019, the net fair value of equity risk sensitive instruments was
an asset of $21 million and $26 million, respectively.
The potential loss in fair value of such financial instruments
from a hypothetical 10 percent move in the underlying
equity prices against our position would be approximately
$8 million and $10 million, for December 31, 2020 and 2019,
respectively.
Commodity Risk
We enter into
commodity derivatives to hedge certain of our raw material exposures.
At both December 31,
2020 and 2019, the net fair value of commodity derivatives
was an asset of $15 million. The potential loss in fair
value
for such commodity hedging derivatives from a hypothetical
adverse 10 percent move against our position in the
underlying commodity prices would be approximately
$11 million and $39 million for December
31, 2020 and 2019,
respectively. A portion
of our commodity derivatives are denominated in euro. The foreign
exchange risk arising on
such contracts has been excluded from the calculation
of the potential loss in fair value from a hypothetical 10 percent
move in the underlying commodity prices as discussed
above.
Item 12.
Description of Securities Other Than Equity Securities
American Depositary Shares
Depositary fees payable upon the issuance and cance
llation of ADSs are typically paid to the depositary bank
by the brokers (on behalf of their clients) receiving
the newly-issued ADSs from the depositary bank and by the brokers
(on behalf of their clients) delivering the ADSs to the depositary
bank for cancellation. The brokers in turn may charge
these transaction fees to their clients.
Depositary fees payable in connection with distributions
of cash or securities to ADS holders and the depositary
services fee are charged by the depositary
bank to the holders of record of ADSs as of the applicable ADS
record date.
The depositary fees payable for cash distributions are
generally deducted from the cash being distributed. In
the case of
distributions other than cash (i.e., stock dividends, rights
offerings), the depositary bank charges
the applicable fee to the
ADS record date holders concurrent with the distribution. In
the case of ADSs registered in the name of the investor
(whether certificated or un-certificated in direct registration),
the depositary bank sends invoices to the applicable
record
date ADS holders. In the case of ADSs held in brokerage
and custodian accounts via the central clearing and settlement
system, The Depository Trust Company
(DTC), the depositary bank, generally collects its fees through
the systems
provided by DTC (whose nominee is the registered holder
of the ADSs held in DTC) from the brokers and custodians
holding ADSs in their DTC accounts. The brokers and
custodians who hold their clients’ ADSs in DTC accounts in turn
charge their clients’ accounts the amount of
the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the
depositary bank may,
under the terms of the deposit
agreement, refuse the requested service until payment
is received or may set-off the amount of the depositary
fees from
any distribution to be made to the ADS holder.
146
Depositary fees are as follows:
Depositary Service
Fee
Issuance of ADSs upon deposit of shares
Up to $5.00 per 100 ADSs (or fraction thereof) issued.
Delivery of deposited security against surrender of
ADSs
Up to $5.00 per 100 ADSs (or fraction thereof) surrendered.
Distribution of dividend
Up to $2.00 per 100 ADSs (or fraction thereof) held.
Distribution of cash proceeds
Up to $2.00 per 100 ADSs (or fraction thereof) held.
Distribution of ADSs pursuant to exercise of rights
Up to $5.00 per 100 ADSs (or fraction thereof) issued.
Depositary Payments
In 2020,
we received reimbursements from Citibank N.A., the Depositary
Bank of our ADS program, of
approximately $4 million to help cover costs related to our
ADS program. Those costs, in addition to costs associated
with compliance with U.S. securities laws, include expenses
such as listing fees, proxy expenses, printing and
distribution of reports, and other investor relations-related
activities.
PART
II
Item 13.
Defaults, Dividend Arrearages and Delinquencies
None
Item 14.
Material Modifications to the Rights of Security Holders and Use
of Proceeds
None
Item 15.
Controls and Procedures
Disclosure controls and procedures
In designing and evaluating our disclosure controls and
procedures, management recognizes that any controls
and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
of
achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the
fact that there are resource constraints and that management is required
to apply judgment in evaluating the benefits of
possible controls and procedures relative to their costs.
Our Chief Executive Officer,
Björn Rosengren, and Chief Financial Officer,
Timo Ihamuotila, with the
participation of key corporate senior management and
management of key corporate functions, performed an evaluation
of our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Exchange Act) as of December 31, 2020,
including the effects of the COVID-19 pandemic.
Based on that evaluation, management, including the Chief
Executive
Officer and Chief Financial Officer,
has concluded that, as of December 31, 2020, our disclosure controls
and
procedures were effective.
Management’s annual report
on internal control over financial reporting
The Board of Directors and management of the ABB Group
are responsible for establishing and maintaining
adequate internal control over financial reporting as defined
in Rule 13a-15(f) of the Exchange Act.
147
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls
may become inadequate because of changes in conditions,
or that the degree of compliance with the policies and
procedures may deteriorate.
Management conducted an assessment of the effectiveness
of internal control over financial reporting as of
December 31, 2020. In making this assessment, management used
the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway
Commission (2013
framework). Based on this assessment, management
has concluded that internal control over financial reporting
was
effective as of December 31, 2020.
Report of the independent registered
public accounting firm
KPMG’s opinion on
the effectiveness of the ABB Group’s
internal control over financial reporting as of
December 31, 2020,
is included in “Item 18. Financial Statements”.
Changes in internal control over financial reporting
During the year ended December 31, 2020, changes
were made to the ABB Group’s
organizational structure
under the launch of the ABB Way
decentralized operating model. Aligning our internal
control framework with these
changes, the ownership and accountability for certain entity
-level controls have been reallocated between the Business
Areas, GBS and certain corporate functions relating to
the provision of assurance over key activities. Management
believes that these changes materially affected
the Company’s internal control
over financial reporting. These entity-
level controls, and the changes thereto, were included
within management’s assessment of
the effectiveness of internal
control over financial reporting as of December 31, 2020
described above.
There have been no other changes in our internal control over
financial reporting that occurred during the
period covered by this annual report that have materially
affected, or are reasonably likely to materially
affect, our
internal control over financial reporting. Since the
first quarter of 2020, in response to the COVID-19 pandemic,
the
majority of our accounting, finance and legal employees
have been working remotely.
The COVID-19 pandemic has not
had a material effect on, and is not reasonably
likely to materially affect, the ABB Group’s
internal control over
financial reporting.
Item 16A.
Audit Committee Financial Expert
Our Board of Directors has determined that David Meline,
Gunnar Brock, Geraldine Matchett and Satish Pai,
who serve on our Finance, Audit and Compliance Committee
(FACC),
are independent for purposes of serving on
the
audit committee under Rule 10A-3 of the Exchange Act
and the listing standards promulgated by the New York
Stock
Exchange, and are audit committee financial experts.
Item 16B.
Code of Ethics
Our Board of Directors as well as our Chief Executive
Officer, Chief Financial Officer,
principal accounting
officer and persons performing similar functions
are bound to adhere to our Code of Conduct, which applies to
all
employees of all companies in the ABB Group. Our
Code of Conduct is available on our Web
site in the section
“Corporate governance”
at
www.abb.com/investorrelations
. ABB intends to satisfy any applicable disclosure
requirement regarding amendment to, or waiver from, a
provision of our Code of Conduct by posting such information
on our Web
site at the address and location specified above.
148
Item 16C.
Principal Accountant Fees and Services
The aggregate fees for services rendered by KPMG along
with their respective affiliates for professional
services were as follows:
KPMG
($ in millions)
2020
2019
Audit Fees
40.6
37.5
Audit-Related Fees
2.7
0.7
Tax Fees
0.8
0.5
Other Fees
0.0
0.0
Total
44.1
38.7
Audit Fees
Audit fees include the standard audit work performed
each fiscal year necessary to allow the auditor to issue an
opinion on our Consolidated Financial Statements (including
the integrated audit of internal controls over financial
reporting) and to issue an opinion on the local statutory financial
statements of ABB Ltd and its subsidiaries. Audit fees
also include services that can be provided only by the
ABB Group auditor such as pre-issuance reviews of quarterly
financial results (no such reviews have been performed)
and comfort letters delivered to underwriters in connection
with
debt and equity offerings. Included in the 2020
audit fees were approximately $4.5 million related to audits
from 2019
and earlier,
which were not agreed until after the Company had filed its annual
report on Form 20-F with the SEC on
February 26, 2020.
Audit-Related Fees
These services consisting primarily of agreed-upon procedure
reports, accounting consultations, audits of
pension and benefit plans, accounting advisory services and
other attest services related to financial reporting that are
not required by statute or regulation.
Tax Fees
Fees for tax services represent primarily income tax
and indirect tax compliance services as well as tax
advisory services.
All Other Fees
Fees for other services not included in the above three
categories.
Pre-Approval
Procedures and Policies
In accordance with the requirements of the U.S. Sarbanes-Oxley
Act of 2002 and rules issued by the SEC, we
utilize a procedure for the review and pre-approval of
any services performed by KPMG. The procedure requires that
all
proposed engagements of KPMG for audit and permitted
non-audit services are submitted to the FACC
for approval
prior to the beginning of any such services. In accordance
with this policy, all services
performed by and fees paid to
KPMG in 2020
and 2019 were approved by the FACC
.
Item 16D.
Exemptions from the Listing Standards for Audit Committees
None
149
Item 16E.
Purchase of Equity Securities by Issuer and Affiliated
Purchasers
The following table sets out certain information about
purchases of our own shares made by us or on our behalf
or by affiliated purchasers:
Total number
Maximum
of shares
number of
purchased
shares that
Average
as part of
may yet be
Total number
price paid
publicly
purchased
of shares
per share
announced
under the
Period
purchased
(1)
(in CHF)
program
(2)
program
January 2020
—
—
—
—
February 2020
—
—
—
—
March 2020
—
—
—
—
April 2020
—
—
—
—
May 2020
—
—
—
—
June 2020
—
—
—
—
July 2020
8,569,859
23.71
8,569,859
171,430,141
August 2020
24,665,000
23.70
24,665,000
146,765,141
September 2020
26,074,500
23.46
26,074,500
120,690,641
October 2020
26,197,500
23.50
24,047,500
96,643,141
November 2020
17,699,000
23.85
11,494,000
85,149,141
December 2020
18,669,513
24.02
13,978,500
71,170,641
Total
121,875,372
108,829,359
(1)
In 2020, 13,046,013
shares were bought
outside of the
publicly announced
program. These
share purchases
were made through
open-
market transactions.
(2)
In July 2020,
ABB announced
it initially
intends to buy
10 percent of
its issued share
capital (which
at the time represented
a maximum
of 180 million
shares, in addition
to those already
held in treasury)
through the share
buyback program
that started in
July 2020. The
share buyback
program is executed
on a second trading
line on the SIX
Swiss Exchange
and is planned
to run until
ABB’s Annual
General Meeting
(AGM) in March
2021. At the
AGM, ABB intends
to request shareholder
approval to cancel
the shares purchased
through this
program.
Item 16F.
Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G.
Corporate Governance
See “Item 6. Directors, Senior Management and Employees—Other
governance information—Governance
differences from NYSE Standards”
for significant ways in which ABB’s corporate
governance practices differ from the
New York
Stock Exchange’s standards.
Item 16H.
Mine Safety Disclosure
Not applicable.
150
PART
III
Item 17.
Financial Statements
We have elected
to provide financial statements and the related information
pursuant to Item 18.
Item 18.
Financial Statements
See pages F-1 to F-86, which are incorporated herein
by reference. All schedules are omitted as the required
information is inapplicable or the information is presented
in the Consolidated Financial Statements or notes thereto.
151
Item 19.
Exhibits
1.1
2.1
issued thereunder (including as an exhibit the form
of American Depositary Receipt). Incorporated by
2.2
2.3
(1)
4.1
between ABB Ltd, certain subsidiaries of ABB Ltd as borrowers,
19 banks as mandated lead arrangers,
Citibank Europe PLC, UK Branch, as facility agent and
euro swingline agent and Citibank N.A. as dollar
swingline agent. Incorporated by reference to Exhibit
4.1 to the Annual Report on Form 20-F filed by
ABB Ltd on February 26, 2020.
4.2
4.3
4.4
4.5
4.6
to the Form 20-F filed by ABB Ltd on March
28,
2019.
8.1
(1)
12.1
(1)
12.2
(1)
13.1
13.2
15.1
(1)
17.1
(1)
101.INS
XBRL Instance Document - the instance document does
not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
152
101.SCH
Inline XBRL Taxonomy
Extension Schema Document
101.CAL
Inline XBRL Taxonomy
Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy
Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy
Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy
Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline
XBRL and contained in Exhibit 101)
(1)
* This
document is being furnished in accordance with SEC Release Nos.
33-8212 and 34-74551.
(1) Filed at the SEC Herewith
153
SIGNATURES
The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly
caused and authorized the undersigned to sign this Annual
Report on its behalf.
ABB LTD
By:
/s/ T
IMO
I
HAMUOTILA
Date: February 25, 2021
Name:
Timo Ihamuotila
Title:
Executive Vice
President and
Chief Financial Officer
By:
/s/ R
ICHARD
A.
B
ROWN
Date: February 25, 2021
Name:
Richard A. Brown
Title:
Group Senior Vice
President and
Chief Counsel Corporate & Finance
F-1
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
AND SCHEDULES
Consolidated Financial Statements:
Report of management on internal control over financial
reporting
F-2
Reports of Independent Registered Public Accounting
Firm
F-3
Consolidated Income Statements for the years ended December
31, 2020, 2019 and 2018
F-8
Consolidated Statements of Comprehensive Income for
the years ended December 31, 2020,
2019 and
2018
F-9
Consolidated Balance Sheets as of December 31, 2020 and
2019
F-10
Consolidated Statements of Cash Flows for the years
ended December 31, 2020,
2019 and 2018
F-11
Consolidated Statements of Changes in Stockholders
’
Equity for the years ended December 31, 2020,
2019
and 2018
F-12
Notes to the Consolidated Financial Statements
F-13
F-2
Report of management on internal control
over financial reporting
The Board of Directors and Management of ABB Ltd and
its consolidated subsidiaries (“ABB”) are responsible
for establishing and maintaining adequate internal
control over financial reporting. ABB’s
internal control over financial
reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparati
on
and fair presentation of the published Consolidated Financial Statements
in accordance with U.S. generally accepted
accounting principles.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls
may become inadequate because of changes in conditions,
or that the degree of compliance with ABB’s
policies and
procedures may deteriorate.
Management conducted an assessment of the effectiveness
of internal control over financial reporting based on
the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway
Commission (2013 framework). Based on this assessment, manage
ment has concluded
that ABB’s internal control
over financial reporting was effective as of December
31, 2020.
KPMG AG, the independent registered public accounting
firm who audited the Company’s
consolidated
financial statements
included in this Form 20-F,
has issued an opinion on the effectiveness of ABB’s
internal control
over financial reporting as of December 31, 2020,
which is included on page F-7 of this Annual Report.
/s/ B
JÖRN
R
OSENGREN
Chief Executive Officer
/s/ T
IMO
I
HAMUOTILA
Chief Financial Officer
Zurich, February 25,
2021
F-3
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders of ABB Ltd
Opinion on the Consolidated Financial Statements
We have audited
the accompanying consolidated balance sheets of ABB Ltd and
its subsidiaries (the Company)
as of December 31, 2020 and 2019, the related consolidated
income statements, statements of comprehensive income,
cash flows and changes in stockholders’ equity for each of
the years in the three-year period ended December 31,
2020,
and the related notes (collectively,
the consolidated financial statements). In our opinion,
the consolidated financial
statements present fairly,
in all material respects, the financial position of the Company
as of December 31, 2020 and
2019, and the results of its operations and its cash flows
for each of the years in the three-year period ended
December 31, 2020, in conformity with U.S. generally
accepted accounting principles.
We also have
audited, in accordance with the standards of the Public Company
Accounting Oversight Board
(United States) (PCAOB), the Company’s
internal control over financial reporting as of December 31,
2020, based on
criteria established in
Internal Control – Integrated Framework (2013)
Organizations of the Treadway
Commission (COSO), and our report dated February 25, 2021,
expressed an unqualified
opinion on the effectiveness of the Company’s
internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements,
the Company has changed its method of
accounting for leases as of January 1, 2019, due to the
adoption of Accounting Standard Codification (ASC), 842
Leases
.
Basis for Opinion
These consolidated financial statements are the responsibility
of the Company’s Board
of Directors and
management. Our responsibility is to express an opinion
on these consolidated financial statements
based on our audits.
We are a public
accounting firm registered with the PCAOB and are required
to be independent with respect to the
Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted
our audits in accordance with the standards of the PCAOB. Those standards
require that we plan
and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free
of
material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated
financial statements. We
believe that our audits provide a reasonable basis for
our opinion.
Critical Audit Matters
The critical audit matters communicated below are
matters arising from the current period audit of the
consolidated financial statements that were communicated
or required to be communicated to the audit committee and
that: (1) relate to accounts or disclosures that are material
to the consolidated financial statements and (2) involved
our
especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not alter
in
any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating
the
critical audit matters below,
providing separate opinions on the critical audit matters
or on the accounts or disclosures to
which they relate.
F-4
Revenue recognition for long-term fixed price
contracts using the percentage-of-completion
method
As discussed in Note 2 to the consolidated financial statements,
revenues from the sale of customized products,
including long-term fixed price contracts for integrated
automation and electrification systems and solutions are
generally recognized on an over time basis using the percentage
of completion method of accounting. For the year ended
December 31, 2020, the Company reported $21,214 million
of revenue from sales of products, a portion of which
related
to long-term fixed price contracts.
We identified
the evaluation of estimated costs to complete related to revenue
recognition of long-term fixed
price contracts using the percentage of-completion method
of accounting as a critical audit matter.
In particular, a high
degree of subjective auditor judgment was required
to evaluate the Company’s estimates regardi
ng the amount of future
direct materials, labor and subcontract costs, and indirect
costs to complete the contracts.
The following are the primary procedures we performed
to address this critical audit matter.
We evaluated
the
design and tested the operating effectiveness
of certain internal controls related to the Company’s
revenue process
including controls over the development of estimates regarding
the amount of future direct materials, labor and
subcontract costs, and indirect costs. We
assessed the Company’s
historical ability to accurately estimate costs to
complete by comparing historical estimates to actual results for
a selection of contracts. We
evaluated the estimate of
remaining costs to be incurred for a selection of contracts
by assessing progress to date and the nature and complexity
of
work to be performed through interviewing project managers and
inspecting correspondence, if any,
between the
Company and the customer and/or subcontractors.
Valuation
of unrecognized tax benefits related
to transfer pricing
As discussed in Note 2 to the consolidated financial statements,
the Company operates across multiple tax
jurisdictions, is exposed to numerous tax laws and is regularly
subject to tax audits by local tax authorities. As discussed
in Note 16, the Company reported total unrecognized tax
benefits of $1,298 million, a portion of which related
to
unrecognized tax benefits related to transfer pricing.
We identified
the valuation of unrecognized tax benefits related to transfer
pricing as a critical audit matter.
A
high degree of subjective auditor judgment and specialized
skills and knowledge was required in assessing the
Company’s interpretation
of international tax practice and developments in relation to
intragroup charges and intragroup
sales of goods and services and the Company’s
ability to estimate the ultimate resolution of the tax positions.
The following are the primary procedures we performed
to address this critical audit matter.
We evaluated
the
design and tested the operating effectiveness
of certain internal controls related to the Company’s
tax process including
controls related to the Company’s
interpretation of international tax practice and developments in relation
to intragroup
charges and intragroup sale of goods and services
and the estimate of the related unrecognized tax benefits. We
tested
the identified costs that have a higher likelihood of being
challenged by tax authorities associated with intragroup
arrangements and potential price adjustments for intragroup
sales of goods and services. We
involved tax professionals
with specialized skills and knowledge, who assisted in evaluating
(1) the Company’s historical ability
to accurately
estimate the unrecognized tax benefits related to transfer
pricing by comparing historical tax positions to subsequent
settlements (2) the Company’s
transfer pricing documentation and methodology for compliance
with applicable laws
and regulations by assessing the documentation and
relevant agreements, (3) the impact of new information or changes
in international tax practice and developments on historical
tax positions, and (4) developing an independent expectation
of the unrecognized tax benefits estimate relating to the
Company’s intragroup
sales of goods and services and
comparing the results to the Company’s
assessment.
F-5
Valuation
of goodwill for the Machine Automation reporting
unit
As discussed in Note 2 to the consolidated financial statements,
goodwill is evaluated for impairment annually
as of October 1, or more frequently if events or circumstances indicate
that the carrying value may not be recoverable.
As discussed in Note 11, effective
July 1, 2020, the Company implemented a new operating model
resulting in the
identification of new goodwill reporting units and a revised allocation
of goodwill within operating segments. As a
result, interim quantitative impairment tests were performed
over the newly established goodwill reporting units, with
the fair value of each reporting unit estimated using
a discounted cash flow model. The Company’s
quantitative
impairment test indicated that the Machine Automation
reporting unit within the Robotics & Discrete Automation
operating segment had a carrying value that was not recoverable,
resulting in an impairment charge of $290 million,
which was recorded to reduce the carrying value of
this reporting unit to its implied fair value. The goodwill balance
was $2,228 million for the Robotics & Discrete Automation
operating segment as of December 31, 2020.
We identified
the valuation of goodwill for the Machine Automation
reporting unit as a critical audit matter.
A
high degree of subjective auditor judgment and specialized
skills and knowledge was required to evaluate the projected
revenue growth rates, projected earnings before interest,
taxes, depreciation, and amortization (“EBITDA”) margins,
and
the discount rate used in the Company’s
impairment test.
The following are the primary procedures we performed
to address this critical audit matter.
We evaluated
the
design and tested the operating effectiveness
of certain internal controls related to the Company’s
goodwill process. This
included controls related to management’s
determination of the projected revenue growth rates, projected
EBITDA
margins, and the discount rate. We
assessed the Company’s
ability to accurately prepare projections for the Machine
Automation reporting unit by comparing the projected
revenues from past periods to actual results for the same period.
Additionally, we
evaluated the reasonableness of the reporting unit projected revenue
growth rates and projected
EBITDA margins used in management’s
discounted cash flow analysis by comparing projected amounts
to past
performance of the reporting unit. We
involved valuation professionals with specialized skills and
knowledge who
assisted in assessing: (1) the reasonableness of the projected revenue
growth rates and projected EBITDA margins by
comparing the assumptions to relevant industry trends and
current market indices of comparable entities (2) the
reasonableness of the discount rate through testing the source
information underlying the determination of the discount
rate, and developing a range of independent estimates and
comparing those to the discount rate applied by management.
Valuation
of the retained noncontrolling
interest in the Power Grids business
As discussed in Notes 3 and 4 to the consolidated financial
statements, the Company completed the sale of 80.1
percent of its Power Grids (“PG”) business and retained
a 19.9 percent ownership interest in the PG business with
a fair
value estimated at $1,661 million as of July 1, 2020, which
was valued using a discounted cash flow model, and
recognized within Investments in equity-accounted companies.
The valuation of the retained noncontrolling interest had
a direct impact on the gain on sale of the PG business, for
which the Company recognized a gain of $5,141 million in
Income from discontinued operations, net of tax.
We identified
the valuation of the retained noncontrolling interest in the
PG business as a critical audit matter.
A high degree of subjective auditor judgment and specialized
skills and knowledge was required to evaluate the
projected revenue growth rates, projected earnings before
interest, taxes, depreciation, and amortization (“EBITDA”)
margins, and the risk-adjusted weighted-average
cost of capital (“discount rate”) assumptions applied by management
in
the discounted cash flow model used to estimate the fair
value of the retained noncontrolling interest.
F-6
The following are the primary procedures we performed
to address this critical audit matter.
We evaluated
the
design and tested the operating effectiveness
of certain internal controls related to the Company’s
valuation of
noncontrolling interest process including internal controls related
to management’s determination
of the projected
revenue growth rates, projected EBITDA margins,
and the discount rate assumptions used in the discounted
cash flow
model. We
evaluated the projected revenue growth rates and projected EBITDA
margins by comparing projected
amounts to historical performance of the PG business. We
involved valuation professionals with specialized skills and
knowledge who assisted in assessing: (1) the reasonableness of
the projected revenue growth rates and projected
EBITDA margins by comparing the assumptions
to relevant industry trends and current market indices of
comparable
entities (2) the reasonableness of the discount rate through
testing the source information underlying the determination
of the discount rate, and developing a range of independent
estimates and comparing those to the discount rate applied
by management.
/s/ KPMG AG
We have served
as the Company’s auditor since
2018.
Zurich, Switzerland
February 25, 2021
F-7
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders of ABB Ltd
Opinion on Internal Control Over Financial
Reporting
We have audited
ABB Ltd and its subsidiaries’ (the Company) internal control over
financial reporting as of
December 31, 2020, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of
the Treadway Commission (COSO). In our
opinion the Company
maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2020,
based on
criteria established in Internal Control – Integrated
Framework (2013) issued by COSO.
We also have
audited, in accordance with the standards of the Public Company
Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets
of the Company as of December 31, 2020 and 2019, the
related consolidated income statements, statements of comprehensive
income, cash flows and changes in stockholders’
equity for each of the years in the three-year period ended
December 31, 2020, and the related notes (collectively,
the
consolidated financial statements), and our report dated
February 25, 2021, expressed an unqualified opinion on those
consolidated financial statements.
Basis for Opinion
The Company’s Board
of Directors and management is responsible for maintaining
effective internal control
over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included
in the accompanying Report of management on internal
control over financial reporting. Our responsibility is to express
an opinion on the Company’s
internal control over financial reporting based on our
audit. We are a public
accounting
firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission
and the
PCAOB.
We conducted
our audit in accordance with the standards of the PCAOB. Those
standards require that we plan
and perform the audit to obtain reasonable assurance about
whether effective internal control over financial
reporting
was maintained in all material respects. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered
necessary in the circumstances. We
believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control
Over Financial Reporting
A company’s internal
control over financial reporting is a process designed to provide
reasonable assurance
regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in
accordance with generally accepted accounting principles.
A company’s internal control
over financial reporting
includes
those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance
with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s
assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls
may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ KPMG AG
Zurich, Switzerland
February 25, 2021
F-8
ABB Ltd
Consolidated Income Statements
Year
ended December 31 ($ in millions, except per share
data in $)
2020
2019
2018
Sales of products
Sales of services and other
Total
revenues
Cost of sales of products
(
15,229
)
(
15,811
)
(
15,961
)
Cost of services and other
(
3,027
)
(
3,261
)
(
3,157
)
Total
cost of sales
(
18,256
)
(
19,072
)
(
19,118
)
Gross profit
Selling, general and administrative expenses
(
4,895
)
(
5,447
)
(
5,295
)
Non-order related research and development expenses
(
1,127
)
(
1,198
)
(
1,147
)
Impairment of goodwill
(
311
)
Other income (expense), net
(
323
)
Income from operations
Interest and dividend income
Interest and other finance expense
(
240
)
(
215
)
(
262
)
Losses from extinguishment of debt
(
162
)
Non-operational pension (cost) credit
(
401
)
Income from continuing operations before
taxes
Income tax expense
(
496
)
(
772
)
(
544
)
Income from continuing operations, net of
tax
Income from discontinued operations, net of tax
Net income
Net income attributable to noncontrolling interests
(
59
)
(
89
)
(
125
)
Net income attributable to ABB
Amounts attributable to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Basic earnings per share attributable to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Diluted earnings per share attributable to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Weighted-average
number of shares outstanding (in millions) used to compute:
Basic earnings per share attributable to ABB shareholders
Diluted earnings per share attributable to ABB shareholders
Due to rounding, numbers presented may not add to the totals provided.
See accompanying Notes to the Consolidated Financial Statements
F-9
ABB Ltd
Consolidated Statements of Comprehensive Income
Year
ended December 31 ($ in millions)
2020
2019
2018
Net income
Other comprehensive income (loss), net of tax:
Foreign currency
translation adjustments:
Foreign currency translation adjustments
(
130
)
(
627
)
Gain on liquidation of foreign subsidiary
(
31
)
Changes attributable to divestments
(
2
)
Foreign currency translation adjustments
(
132
)
(
646
)
Available-for-sale
securities:
Net unrealized gains (losses) arising during the year
(
4
)
Reclassification adjustments for net (gains) losses included
in net income
(
14
)
Changes attributable to divestments
(
3
)
Unrealized gains (losses) on available-for-sale
securities
(
3
)
Pension and other postretirement
plans:
Prior service (costs) credits arising during the year
(
7
)
Net actuarial losses arising during the year
(
200
)
(
220
)
(
352
)
Amortization of prior service credit included in net income
(
11
)
(
28
)
(
24
)
Amortization of net actuarial loss included in net income
Net (gains) losses from pension settlements included in
net income
Changes attributable to divestments
Pension and other postretirement
plan adjustments
(
142
)
(
295
)
Cash flow hedge derivatives:
Net unrealized gains (losses) arising during the year
(
49
)
Reclassification adjustments for net (gains) losses included
in net income
(
9
)
Unrealized gains (losses) of cash flow hedge derivatives
(
28
)
Total
other comprehensive income (loss), net of tax
(
249
)
(
972
)
Total
comprehensive income, net of tax
Total comprehensive
income attributable to noncontrolling interests, net of tax
(
86
)
(
83
)
(
110
)
Total
comprehensive income attributable to ABB, net of
tax
Due to rounding, numbers presented may not add to the totals provided.
See accompanying Notes to the Consolidated Financial Statements
F-10
ABB Ltd
Consolidated Balance Sheets
December 31 ($ in millions, except share data)
2020
2019
Cash and equivalents
Restricted cash
Marketable securities and short-term investments
Receivables, net
Contract assets
Inventories, net
Prepaid expenses
Other current assets
Current assets held for sale and in discontinued operations
Total current
assets
Restricted cash, non-current
Property, plant and equipment, net
Operating lease right-of-use assets
Investments in equity-accounted companies
Prepaid pension and other employee benefits
Intangible assets, net
Goodwill
Deferred taxes
Other non-current assets
Total assets
Accounts payable, trade
Contract liabilities
Short-term debt and current maturities of long-term debt
Current operating leases
Provisions for warranties
Other provisions
Other current liabilities
Current liabilities held for sale and in discontinued operations
Total current
liabilities
Long-term debt
Non-current operating leases
Pension and other employee benefits
Deferred taxes
Other non-current liabilities
Non-current liabilities held for sale and in discontinued operations
Total liabilities
Commitments and contingencies
nil
nil
Stockholders’ equity:
Common stock, CHF
(
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
(
4,002
)
(
5,590
)
Treasury stock, at cost
(
(
3,530
)
(
785
)
Total ABB stockholders’ equity
Noncontrolling interests
Total stockholders’ equity
Total liabilities and stockholders’ equity
Due to rounding, numbers presented may not add to the totals provided.
See accompanying Notes to the Consolidated Financial Statements
F-11
ABB Ltd
Consolidated Statements of Cash Flows
Year
ended December 31 ($ in millions)
2020
2019
2018
Operating activities:
Net income
Less: Income from discontinued operations, net of tax
(
4,860
)
(
438
)
(
723
)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Impairment of goodwill
Pension and other employee benefits
(
102
)
(
100
)
Deferred taxes
(
280
)
(
83
)
(
142
)
Losses from extinguishment of debt
Net loss (gain) from derivatives and foreign exchange
(
2
)
Net gain from sale of property, plant and
equipment
(
37
)
(
51
)
(
57
)
Net loss (gain) from sale of businesses
(
55
)
(
57
)
Fair value adjustment on assets and liabilities held for sale
Share-based payment arrangements
Other
(
20
)
Changes in operating assets and liabilities:
Trade receivables, net
(
100
)
(
202
)
(
144
)
Contract assets and liabilities
(
18
)
Inventories, net
(
182
)
(
336
)
Accounts payable, trade
(
13
)
Accrued liabilities
(
92
)
(
76
)
Provisions, net
(
36
)
Income taxes payable and receivable
(
76
)
(
3
)
(
102
)
Other assets and liabilities, net
(
131
)
(
143
)
Net cash provided by operating activities — continuing
operations
Net cash provided by (used in) operating activities
— discontinued operations
(
182
)
Net cash provided by operating activities
Investing activities:
Purchases of investments
(
5,933
)
(
748
)
(
322
)
Purchases of property, plant and equipment
and intangible assets
(
694
)
(
762
)
(
772
)
Acquisition of businesses (net of cash acquired) and increases
in cost- and equity-accounted companies
(
121
)
(
22
)
(
2,664
)
Proceeds from sales of investments
Proceeds from maturity of investments
Proceeds from sales of property, plant and
equipment
Proceeds from sales of businesses (net of transaction costs and
cash disposed) and cost- and equity-accounted companies
(
136
)
Net cash from settlement of foreign currency derivatives
(
76
)
(
30
)
Other investing activities
(
23
)
(
32
)
Net cash used in investing activities — continuing operations
(
2,272
)
(
651
)
(
2,908
)
Net cash provided by (used in) investing activities —
discontinued operations
(
164
)
(
177
)
Net cash provided by (used in) investing activities
(
815
)
(
3,085
)
Financing activities:
Net changes in debt with maturities of 90 days or less
(
587
)
Increase in debt
Repayment of debt
(
3,459
)
(
2,156
)
(
830
)
Delivery of shares
Purchase of treasury stock
(
3,048
)
(
250
)
Dividends paid
(
1,736
)
(
1,675
)
(
1,717
)
Dividends paid to noncontrolling shareholders
(
82
)
(
90
)
(
86
)
Other financing activities
(
49
)
(
35
)
Net cash used in financing activities — continuing operations
(
8,206
)
(
1,328
)
(
741
)
Net cash provided by (used in) financing activities
— discontinued operations
(
55
)
(
48
)
Net cash used in financing activities
(
8,175
)
(
1,383
)
(
789
)
Effects of exchange rate changes on cash and equivalents and
restricted cash
(
28
)
(
131
)
Net change in cash and equivalents and restricted cash
(
1,081
)
Cash and equivalents and restricted cash, beginning of period
Cash and equivalents and restricted cash, end of period
Supplementary disclosure of cash flow information:
Interest paid
Income taxes paid
Due to rounding, numbers presented may not add to the totals provided.
See accompanying Notes to the Consolidated Financial Statements
F-12
ABB Ltd
Consolidated Statements of Changes in Stockholders’ Equity
Years
ended December 31, 2020, 2019 and 2018 ($ in millions)
Accumulated
Additional
other
Total ABB
Non-
Total
Common
paid-in
Retained
comprehensive
Treasury
stockholders’
controlling
stockholders’
stock
capital
earnings
loss
stock
equity
interests
equity
Balance at January 1, 2018
(
4,345
)
(
647
)
Cumulative effect of changes
in accounting principles
(
192
)
(
9
)
(
201
)
(
201
)
Comprehensive income:
Net income
Foreign currency translation
adjustments, net of tax
(
631
)
(
631
)
(
15
)
(
646
)
Effect of change in fair value of
available-for-sale securities, net of tax
(
3
)
(
3
)
(
3
)
Unrecognized income (expense)
related to pensions and other
postretirement plans, net of tax
(
295
)
(
295
)
(
295
)
Change in derivatives qualifying as
cash flow hedges, net of tax
(
28
)
(
28
)
(
28
)
Total comprehensive income
Changes in noncontrolling interests
(
4
)
(
4
)
(
19
)
(
23
)
Noncontrolling interests recognized in
connection with business combination
Dividends to noncontrolling shareholders
(
146
)
(
146
)
Dividends paid to shareholders
(
1,736
)
(
1,736
)
(
1,736
)
Share-based payment arrangements
Purchase of treasury stock
(
249
)
(
249
)
(
249
)
Delivery of shares
(
35
)
Call options
Balance at December 31, 2018
(
5,311
)
(
820
)
Adoption of accounting standard update
(
36
)
Comprehensive income:
Net income
Foreign currency translation
adjustments, net of tax
(
126
)
(
126
)
(
6
)
(
132
)
Effect of change in fair value of
available-for-sale securities, net of tax
Unrecognized income (expense)
related to pensions and other
postretirement plans, net of tax
(
142
)
(
142
)
(
142
)
Change in derivatives qualifying as
cash flow hedges, net of tax
Total comprehensive income
Changes in noncontrolling interests
(
17
)
(
17
)
(
5
)
Fair value adjustment to noncontrolling interests
recognized in business combination
(
44
)
(
44
)
Changes in noncontrolling interests
in connection with divestments
(
55
)
(
55
)
Dividends to noncontrolling shareholders
(
122
)
(
122
)
Dividends paid to shareholders
(
1,675
)
(
1,675
)
(
1,675
)
Share-based payment arrangements
Delivery of shares
(
24
)
Call options
Balance at December 31, 2019
(
5,590
)
(
785
)
Adoption of accounting standard update
(
82
)
(
82
)
(
9
)
(
91
)
Comprehensive income:
Net income
Foreign currency translation
adjustments, net of tax
Effect of change in fair value of
available-for-sale securities, net of tax
Unrecognized income (expense)
related to pensions and other
postretirement plans, net of tax
Change in derivatives qualifying as
cash flow hedges, net of tax
Total comprehensive income
Changes in noncontrolling interests
(
16
)
(
16
)
Changes in noncontrolling interests
in connection with divestments
(
138
)
(
138
)
Dividends to noncontrolling shareholders
(
98
)
(
98
)
Dividends paid to shareholders
(
1,758
)
(
1,758
)
(
1,758
)
Share-based payment arrangements
Purchase of treasury stock
(
3,181
)
(
3,181
)
(
3,181
)
Delivery of shares
(
24
)
Other
(
3
)
(
3
)
(
3
)
Balance at December 31, 2020
(
4,002
)
(
3,530
)
Due to rounding, numbers presented may not add to the totals provided.
See accompanying Notes to the Consolidated Financial Statements
F-13
Note 1—The Company
ABB Ltd and its subsidiaries (collectively,
the Company) together form a leading global technology
company,
connecting software to its electrification, robotics, automation
and motion portfolio to drive performance to new levels.
Note 2—Significant accounting policies
The following is a summary of significant accounting
policies followed in the preparation of these
Consolidated Financial Statements.
Basis of presentation
The Consolidated Financial Statements are prepared
in accordance with United States of America (United
States or U.S.) generally accepted accounting principles
(U.S. GAAP) and are presented in United States dollars ($
or
USD) unless otherwise stated. Due to rounding, numbers
presented may not add to the totals provided. The par value
of
capital stock is denominated in Swiss francs.
Reclassifications
Certain amounts reported for prior years in the Consolidated
Financial Statements and the accompanying Notes
have been reclassified to conform to the current year’s
presentation. These changes primarily relate to the separate
presentation of Restricted cash in the Consolidated Balance
Sheets.
Scope of consolidation
The Consolidated Financial Statements include the
accounts of ABB Ltd and companies which are directly or
indirectly controlled by ABB Ltd. Additionally,
the Company consolidates variable interest entities if it has determined
that it is the primary beneficiary.
Intercompany accounts and transactions are eliminated. Investments
in joint ventures
and affiliated companies in which the Company
has the ability to exercise significant influence over operating and
financial policies (generally through direct or indirect ownership
of
recorded in the Consolidated Financial Statements using the
equity method of accounting.
Translation of foreign
currencies and foreign exchange transactions
The functional currency for most of the Company’s
subsidiaries is the applicable local currency.
The translation
from the applicable functional currencies into the Company’s
reporting currency is performed for balance sheet
accounts
using exchange rates in effect at the balance
sheet date and for income statement accounts using average
exchange rates
prevailing during the year.
The resulting translation adjustments are excluded from the determination
of earnings and are
recognized in “Accumulated other comprehensive loss”
until the subsidiary is sold, substantially liquidated or evaluated
for impairment in anticipation of disposal.
Foreign currency exchange gains and losses, such as those
resulting from foreign currency denominated
receivables or payables, are included in the determination
of earnings, except as they relate to intercompany loans that
are equity‑like in nature with no reasonable expectation
of repayment, which are recognized in “Accumulated other
comprehensive loss”. Exchange gains and losses recognized
in earnings are included in “Total
revenues”, “Total
cost of
sales”, “Selling, general and administrative expenses”
or “Interest and other finance expense” consistent with the nature
of the underlying item.
F-14
Discontinued operations
The Company reports a disposal, or planned disposal, of
a component or a group of components as a
discontinued operation if the disposal represents a strategic shift
that has or will have a major effect on the Company’s
operations and financial results. A strategic shift could
include a disposal of a major geographical area, a major line
of
business or other major parts of the Company.
A component may be a reportable segment or an operating segment,
a
reporting unit, a subsidiary,
or an asset group.
The assets and liabilities of a component reported
as a discontinued operation are presented separately as held
for sale in the Company’s
Consolidated Balance Sheets.
Interest expense that is not directly attributable to or related
to the Company’s continuing
business or
discontinued business is allocated to discontinued operations based
on the ratio of net assets to be sold less debt that is
required to be paid as a result of the planned disposal transaction
to the sum of total net assets of the Company plus
consolidated debt. General corporate overhead is not allocated
to discontinued operations (see Note 3).
Operating cycle
A portion of the Company’s
activities (primarily long‑term system integration activities)
has an operating cycle
that exceeds
. For classification of current assets and liabilities related to such
activities, the Company elected to
use the duration of the individual contracts as its operating
cycle. Accordingly, there
are accounts receivable, inventories
and provisions related to these contracts which will not
be realized within one year that have been classified as current.
Use of estimates
The preparation of financial statements in conformity
with U.S. GAAP requires management to make
assumptions and estimates that directly affect
the amounts reported in the Consolidated Financial Statements and
the
accompanying Notes. These accounting assumptions and
estimates include:
•
growth rates, discount rates and other assumptions used
to determine impairment of long‑lived assets and
in testing goodwill for impairment,
•
estimates to determine valuation allowances for deferred
tax assets and amounts recorded for unrecognized
tax benefits,
•
assumptions used in determining inventory obsolescence
and net realizable value,
•
estimates and assumptions used in determining the initial fair
value of retained noncontrolling interest and
certain obligations in connection with divestments,
•
estimates and assumptions used in determining the fair
values of assets and liabilities assumed in business
combinations,
•
assumptions used in the determination of corporate costs directly
attributable to discontinued operations,
•
estimates of loss contingencies associated with litigation or
threatened litigation and other claims and
inquiries, environmental damages, product warranties,
self‑insurance reserves, regulatory and other
proceedings,
•
estimates used to record expected costs for employee severance
in connection with restructuring programs,
•
estimates related to credit losses expected to occur over
the remaining life of financial assets such as trade
and other receivables, loans and other instruments,
F-15
•
assumptions used in the calculation of pension and
postretirement benefits and the fair value of pension
plan assets, and
•
assumptions and projections, principally related to future
material, labor and project‑related overhead
costs, used in determining the percentage‑of‑completion
on projects, as well as the amount of variable
consideration the Company expects to be entitled to.
The actual results and outcomes may differ from
the Company’s estimates and
assumptions.
Cash and equivalents
Cash and equivalents include highly liquid investments
with maturities of three months or less at the date of
acquisition.
Currency and other local regulatory limitations related
to the transfer of funds exist in a number of countries
where the Company operates. Funds, other than regular
dividends, fees or loan repayments, cannot be readily transferred
abroad from these countries and are therefore deposited
and used for working capital needs locally.
These funds are
included in cash and equivalents as they are not considered
restricted.
Cash and equivalents that are subject to contractual restrictions
or other legal obligations and not readily
available are classified as “Restricted cash”.
Marketable securities and short‑term investments
Management determines the appropriate classification of
held‑to‑maturity and available‑for‑sale debt securities
at the time of purchase. Debt securities are classified as held
‑to‑maturity when the Company has the positive intent and
ability to hold the securities to maturity.
Held‑to‑maturity debt securities are carried at amortized cost, adjusted
for
accretion of discounts or amortization of premiums to
maturity computed under the effective interest method.
Such
accretion or amortization is included in “Interest and
dividend income”. Marketable debt securities not classified as
held‑to‑maturity are classified as available‑for‑sale and reported
at fair value.
Unrealized gains and losses on available‑for‑sale debt
securities are excluded from the determination of
earnings and are instead recognized in the “Accumulated
other comprehensive loss” component of stockholders’
equity,
net of tax, until realized. Realized gains and losses on available‑for‑sale
debt securities are computed based upon the
historical cost of these securities, using the specific identification
method.
Marketable debt securities are classified as either “Cash and
equivalents” or “Marketable securities and
short‑term investments” according to their maturity at the
time of acquisition.
Marketable equity securities are generally classified as “Marketable
securities and short‑term investments”,
however,
any marketable securities held as a long‑term investment rather
than as an investment of excess liquidity are
classified as “Other non‑current assets”. Equity securities are measured
at fair value with fair value changes reported in
net income. Fair value changes for equity securities are generally
reported in “Interest and other finance expense”,
however,
fair value changes for certain equity securities classified as long
-term investments are reported in “Other
income (expense),
net”.
For debt securities classified as available-for-sale where
fair value has declined below amortized cost due to
credit losses, the Company records an allowance for expected
credit losses and adjusts the allowance in subsequent
periods in “Interest and other finance expense”.
All fair value changes other than those related to credit
risk are reported
in “Accumulated other comprehensive loss” until the security
is sold.
In addition, equity securities without readily determinable
fair values
are written down to fair value if a
qualitative assessment indicates
that the investment is impaired and the fair value of the
investment is less than its
carrying amount. The impairment charge
is recorded in “Interest and other finance expense”.
F-16
Accounts receivable and allowance for expected
credit losses
Accounts receivable are recorded at the invoiced
amount. The Company has a group‑wide policy on the
management of credit risk. The policy includes a credit
assessment methodology to assess the creditworthiness of
customers and assign to those customers a risk category.
Third‑party agencies’ ratings are considered, if available.
For
customers where agency ratings are not available, the
customer’s most recent financial statements, payment
history and
other relevant information are considered in the assignment
to a risk category. Customers
are assessed at least annually
or more frequently when information on significant changes
in the customer’s financial
position becomes known. In
addition to the assignment to a risk category,
a credit limit per customer is set.
The Company recognizes an allowance for credit losses to
present the net amount of receivables expected to be
collected as of the balance sheet date. The allowance is based
on the credit losses expected to arise over the asset’s
contractual term taking into account historical loss experience,
customer-specific data as well as forward looking
estimates. Receivables are grouped in pools based
on similar risk characteristics to estimate expected credit losses.
Expected credit losses are estimated individually when
the related assets do not share similar risk characteristics.
Accounts receivable are written off when
deemed uncollectible and are recognized as a deduction from
the
allowance for credit losses. Expected recoveries, which
are not to exceed the amount previously written off, are
considered in determining the allowance balance at
the balance sheet date.
The Company, in
its normal course of business, transfers receivables to third parties, generally
without
recourse. The transfer is accounted for as a sale when the
Company has surrendered control over the receivables. Control
is deemed to have been surrendered when (i) the transferred
receivables have been put presumptively beyond the
reach
of the Company and its creditors, even in bankruptcy or other
receivership, (ii) the third‑party transferees have the
right
to pledge or exchange the transferred receivables, and
(iii) the Company has relinquished effective control over the
transferred receivables and does not retain the ability or
obligation to repurchase or redeem the transferred receivables.
At the time of sale, the sold receivables are removed from
the Consolidated Balance Sheets and the related cash inflows
are classified as operating activities in the Consolidated Statements
of Cash Flows. Costs associated with the sale of
receivables, including the related gains and losses from
the sales, are included in “Interest and other finance expense”.
Transfers of receivables that do not
meet the requirements for treatment as sales are accounted for
as secured borrowings
and the related cash flows are classified as financing activities
in the Consolidated Statements of Cash Flows.
Concentrations of credit risk
The Company sells a broad range of products, systems, services
and software to a wide range of industrial,
commercial and utility customers as well as various government
agencies and quasi‑governmental agencies throughout
the world. Concentrations of credit risk with respect to
accounts receivable are limited, as the Company’s
customer base
is comprised of a large number of individual
customers. Ongoing credit evaluations of customers’ financial positions
are
performed to determine whether the use of credit support
instruments such as guarantees, letters of credit or credit
insurance are necessary; collateral is not generally required.
The Company maintains an allowance for credit losses as
discussed above in “Accounts receivable and allowance
for expected credit losses”. Such losses, in the aggregate,
are in
line with the Company’s expectations.
It is the Company’s
policy to invest cash in deposits with banks throughout the
world with certain minimum
credit ratings and in high quality,
low risk, liquid investments. The Company actively manages
its credit risk by
routinely reviewing the creditworthiness of the banks and
the investments held. The Company has not incurred
significant credit losses related to such investments.
The Company’s exposure
to credit risk on derivative financial instruments is the risk that
the counterparty will
fail to meet its obligations. To
reduce this risk, the Company has credit policies that require the
establishment and
periodic review of credit limits for individual counterparties.
In addition, the Company has entered
into close‑out netting
agreements with most derivative counterparties. Close‑out
netting agreements provide for the termination, valuation and
net settlement of some or all outstanding transactions
between two counterparties on the occurrence of one or more
pre‑defined trigger events. Derivative instruments are
presented on a gross basis in the Consolidated Financial
Statements.
F-17
Revenue recognition
A customer contract exists if collectability under the contract
is considered probable, the contract has
commercial substance, contains payment terms, as well as the
rights and commitments of both parties, and has been
approved.
The Company offers arrangements with multiple
performance obligations to meet its customers’ needs.
These
arrangements may involve the delivery of multiple products
and/or performance of services (such as installation and
training) and the delivery and/or performance may occur
at different points in time or over different
periods of time.
Goods and services under such arrangements are evaluated
to determine whether they form distinct performance
obligations and should be accounted for as separate
revenue transactions. The Company allocates the sales price to
each
distinct performance obligation based on the price of each
item sold in separate transactions at the inception of the
arrangement.
The Company generally recognizes revenues for the sale
of non‑customized products including circuit breakers,
modular substation packages, control products, motors,
generators, drives, robots, turbochargers, measurement
and
analytical instrumentation, and other goods which are
manufactured on a standardized basis at a point in time.
Revenues
are recognized at the point in time that the customer
obtains control of the goods, which is when it has taken
title to the
products and assumed the risks and rewards of ownership
of the products specified in the purchase order or sales
agreement. Generally,
the transfer of title and risks and rewards of ownership are
governed by the contractually defined
shipping terms. The Company uses various International
Commercial Terms (as promulgated
by the International
Chamber of Commerce) in its sales of products to third
party customers, such as Ex Works
(EXW), Free Carrier (FCA)
and Delivered Duty Paid (DDP).
Billing terms for these point in time contracts vary but
generally coincide with delivery to the customer.
Payment is generally due upon receipt of the invoice,
payable within 90 days or less.
The Company generally recognizes revenues for the sale
of customized products,
including integrated
automation and electrification systems and solutions, on
an over time basis using the percentage‑of‑completion method
of accounting. These systems are generally accounted for
as a single performance obligation as the Company is required
to integrate equipment and services into one deliverable
for the customer. Revenues
are recognized as the systems are
customized during the manufacturing or integration process and
as control is transferred to the customer as evidenced by
the Company’s right to
payment for work performed or by the customer’s
ownership of the work in process. The
Company principally uses the cost‑to‑cost method to measure
progress towards completion on contracts. Under
this
method, progress of contracts is measured by actual
costs incurred in relation to the Company’s
best estimate of total
costs based on the Company’s
history of manufacturing or constructing similar assets for customers.
Estimated costs are
reviewed and updated routinely for contracts in progress to reflect
changes in quantity or pricing of the inputs. The
cumulative effect of any change in estimate is recorded
in the period when the change in estimate is determined.
Contract costs include all direct materials, labor and subcontract
costs and indirect costs related to contract performance,
such as indirect labor, supplies, tools
and depreciation costs.
The nature of the Company’s
contracts for the sale of customized products gives rise
to several types of
variable consideration, including claims, unpriced change
orders, liquidated damages and penalties. These amounts
are
estimated based upon the most likely amount of consideration
to which the customer or the Company will be entitled.
The estimated amounts are included in the sales price to
the extent it is probable that a significant reversal of cumulative
revenues recognized will not occur when the uncertainty
associated with the variable consideration is resolved. All
estimates of variable consideration are reassessed periodically.
Back charges to suppliers or subcontractors are
recognized as a reduction of cost when it is determined
that recovery of such cost is probable and the amounts can be
reliably estimated.
Billing terms for these over‑time contracts vary but
are generally based on achieving specified milestones. The
differences between the timing of revenues recognized
and customer billings result in changes to contract assets and
contract liabilities. Payment is generally due upon receipt
of the invoice, payable within 90 days or less. Contractual
retention amounts billed to customers are generally due
upon expiration of the contractual warranty period.
F-18
Service revenues reflect revenues earned from the Company’s
activities in providing services to customers
primarily subsequent to the sale and delivery of a product
or complete system. Such revenues consist of maintenance
type contracts, repair services, equipment upgrades, field
service activities that include personnel and accompanying
spare parts, training, and installation and commissioning
of products as a stand-alone service or as part of a service
contract. The Company generally recognizes revenues from
service transactions as services are performed or at the
point
in time that the customer obtains control of the spare parts.
For long-term service contracts including monitoring and
maintenance services, revenues are recognized on a straight
line basis over the term of the contract consistent with the
nature, timing and extent of the services or,
if the performance pattern is other than straight line, as the
services are
provided based on costs incurred relative to total expected
costs.
In limited circumstances the Company sells extended warranties that
extend the warranty coverage beyond the
standard coverage offered on specific products.
Revenues for these warranties are recorded over the length
of the
warranty period based on their stand‑alone selling price.
Billing terms for service contracts vary but are generally
based on the occurrence of a service event. Payment is
generally due upon receipt of the invoice, payable within
90 days or less.
Revenues are reported net of customer rebates, early settlement
discounts, and similar incentives. Rebates are
estimated based on sales terms, historical experience and
trend analysis. The most common incentives relate to amounts
paid or credited to customers for achieving defined volume
levels.
Taxes assessed by
a governmental authority that are directly imposed on revenue
-producing transactions
between the Company and its customers, such as sales, use,
value added and some excise taxes, are excluded from
revenues.
The Company does not adjust the contract price for the
effects of a financing component if the Company
expects, at contract inception, that the time between
control transfer and cash receipt is less than 12 months.
Sales commissions are expensed immediately when the
amortization period for the costs to obtain the contract
is less than a year.
Contract loss provisions
Losses on contracts are recognized in the period when
they are identified and are based upon the anticipated
excess of contract costs over the related contract revenues.
Shipping and handling costs
Shipping and handling costs are recorded as a component
of cost of sales.
Inventories
Inventories are stated at the lower of cost or net realizable
value. Cost is determined using the first‑in, first‑out
method, the weighted‑average cost method, or the specific
identification method. Inventoried costs are stated at
acquisition cost or actual production cost, including direct
material and labor and applicable manufacturing overheads.
Adjustments to reduce the cost of inventory to its net realizable value
are made, if required, for decreases in sales prices,
obsolescence or similar reductions in value.
F-19
Impairment of long‑lived assets
Long‑lived assets that are held and used are evaluated for
impairment for each of the Company’s
asset groups
when events or circumstances indicate that the carrying
amount of the long-lived asset or asset group may not be
recoverable. If the asset group’s
net carrying value exceeds the asset group’s
net undiscounted cash flows expected to be
generated over its remaining useful life including net
proceeds expected from disposition of the asset group,
if any, the
carrying amount of the asset group is reduced to its estimated
fair value. The estimated fair value is determined using a
market, income and/or cost approach.
Property, plant
and equipment
Property, plant and
equipment is stated at cost, less accumulated depreciation
and is depreciated using the
straight‑line method. The estimated useful lives of the assets are
generally as follows:
•
factories and office buildings:
•
other facilities:
•
machinery and equipment:
•
furniture and office equipment:
•
leasehold improvements are depreciated over their estimated useful
life or, for operating leases, over the
lease term, if shorter.
Goodwill and intangible assets
Goodwill is reviewed for impairment annually as of
October 1, or more frequently if events or circumstances
indicate that the carrying value may not be recoverable.
Goodwill is evaluated for impairment at the reporting unit
level. A reporting unit is an operating segment or
one level below an operating segment. For the annual
impairment review performed in 2020, the reporting units
were
determined to be one level below the operating
segments.
When evaluating goodwill for impairment, the Company
uses either a qualitative or quantitative assessment
method for each reporting unit. The qualitative assessment in
volves determining, based on an evaluation of qualitative
factors, if it is more likely than not that the fair value of a
reporting unit is less than its carrying value. If, based on
this
qualitative assessment, it is determined to be more likely
than not that the reporting unit’s
fair value is less than its
carrying value, a quantitative impairment test is performed,
otherwise no further analysis is required. If the Company
elects not to perform the qualitative assessment for a reporting
unit, then a quantitative impairment test is performed.
When performing a quantitative impairment test, the
Company calculates the fair value of a reporting unit using
an income approach based on the present value of
future cash flows, applying a discount rate that represents
the
reporting unit’s weighted-average
cost of capital, and compares it to the reporting unit’s
carrying value. If the carrying
value of the net assets of a reporting unit exceeds the
fair value of the reporting unit then the Company records
an
impairment charge equal to the difference,
provided that the loss recognized does not exceed the total amount
of
goodwill allocated to that reporting unit.
The cost of acquired intangible assets with a finite life is amortized
using a method of amortization that reflects
the pattern of intangible assets’ expected contributions
to future cash flows. If that pattern cannot be reliably determined,
the straight‑line method is used. The amortization
periods range from
for customer‑, technology‑
and marketing‑related intangibles. Intangible assets with a finite life
are tested for
impairment upon the occurrence of certain triggering
events.
F-20
Derivative financial instruments and hedging activities
The Company uses derivative financial instruments
to manage currency,
commodity, interest rate and
equity
exposures, arising from its global operating, financing
and investing activities (see Note 6).
The Company recognizes all derivatives, other than certain
derivatives indexed to the Company’s
own stock, at
fair value in the Consolidated Balance Sheets. Derivatives that
are not designated as hedging instruments are reported
at
fair value with derivative gains and losses reported through
earnings and classified consistent with the nature of the
underlying transaction.
If the derivatives are designated as a hedge, depending
on the nature of the hedge, changes in the fair value of
the derivatives will either be offset against the change
in fair value of the hedged item attributable to the risk being
hedged through earnings (in the case of a fair value hedge)
or recognized in “Accumulated other comprehensive loss”
until the hedged item is recognized in earnings (in the case
of a cash flow hedge). Where derivative financial instruments
have been designated as cash flow hedges of forecasted
transactions and such forecasted transactions are no longer
probable of occurring, hedge accounting is discontinued
and any derivative gain or loss previously included in
“Accumulated other comprehensive loss” is reclassified into
earnings consistent with the nature of the original
forecasted transaction. Gains or losses from derivatives
designated as hedging instruments in a fair value hedge are
reported through earnings and classified consistent with the nature
of the underlying hedged transaction.
Certain commercial contracts may grant rights to the Company
or the counterparties, or contain other
provisions that are considered to be derivatives. Such embedded
derivatives are assessed at inception of the contract and
depending on their characteristics, accounted for as separate
derivative instruments and shown at their fair value
in the
Consolidated Balance Sheets
with changes in their fair value reported in earnings consistent
with the nature of the
commercial contract to which they relate.
Derivatives are classified in the Consolidated Statements
of Cash Flows in the same section as the underlying
item. Cash flows from the settlement of undesignated
derivatives used to manage the risks of different
underlying items
on a net basis are classified within “Net cash provided
by operating activities”, as the underlying items are primarily
operational in nature. Other cash flows on the settlement
of derivatives are recorded within “Net cash provided by (used
in) investing activities”.
Leases
The Company leases primarily real estate, vehicles and
machinery.
In January 2019, the Company adopted a new lease
accounting standard.
Prior to the adoption of the new
accounting standard, lease transactions where substantially
all risks and rewards incident to ownership were transferred
from the lessor to the lessee were accounted for as capital
leases. All other leases were accounted for as operating leases.
The periodic rent expense for operating leases was recorded
on a straight‑line basis over the life of the lease term.
Amounts due under capital leases were recorded as a liability.
The value of the assets under capital leases were recorded
as property, plant
and equipment. Depreciation and amortization of assets recorded
under capital leases was included in
depreciation and amortization expense.
Under the new lease accounting standard, the Company
evaluates if a contract contains a lease at inception of
the contract. A contract is or contains a lease if it conveys
the right to control the use of identified property,
plant, or
equipment (an identified asset) for a period of time in
exchange for consideration. To
determine this, the Company
assesses whether, throughout
the period of use, it has both the right to obtain substantially all of
the economic benefits
from use of the identified asset and the right to direct the
use of the identified asset. Leases are classified as either
finance or operating, with the classification determining
the pattern of expense recognition in the Consolidated Income
Statements. Lease expense for operating leases continues
to be recorded on a straight-line basis over the lease term.
Lease expense for finance leases is separated between amortization
of right-of-use assets and lease interest expense.
F-21
In many cases, the Company’s
leases include one or more options to renew,
with renewal terms that can extend
up to 5 years. The exercise of lease renewal options is at the
Company’s discretion. Renewal
periods are included in the
expected lease term if they are reasonably certain of being
exercised by the Company.
Certain leases also include
options to purchase the leased property.
None of the Company’s lease agreements
contain
material residual value
guarantees or material restrictions or covenants.
Long-term leases (leases with terms greater than 12
months) are recorded in the Consolidated Balance Sheets at
the commencement date of the lease based on the
present value of the minimum lease payments. The present
value of
the lease payments is determined by using the interest rate
implicit in the lease if available. As most of the Company’s
leases do not provide an implicit rate, the Company’s
incremental borrowing rate is used for most leases and is
determined for portfolios of leases based on the remaining
lease term, currency of the lease, and the internal credit rating
of the subsidiary which entered into the lease.
Short-term leases (leases with an initial lease term of 12
months or less and where it is reasonably certain that
the property will not be leased for a term greater than
12 months) are not recorded in the Consolidated Balance
Sheets
and are expensed on a straight-line basis over the
lease term. The majority of short-term leases relate to real estate and
machinery.
Assets under operating lease are included in “Operating
lease right-of-use assets”. Operating lease liabilities are
reported both as current and non-current operating lease liabilities. Right
-of-use assets represent the Company’s
right to
use an underlying asset for the lease term and lease liabilities
represent its obligation to make lease payments arising
from the lease.
Assets under finance lease are included in “Property,
plant and equipment,
net” while finance lease liabilities
are included in “Long-term debt” (including “Current maturities
of long-term debt”
as applicable).
Lease and non-lease components for leases other than real
estate are not accounted for separately.
Income taxes
The Company uses the asset and liability method to
account for deferred taxes. Under this method, deferred tax
assets and liabilities are determined based on temporary
differences between the financial reporting and the
tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates and laws that are expected
to be in effect when the differences are
expected to reverse. The Company records a deferred tax asset when
it
determines that it is more likely than not that the deduction
will be sustained based upon the deduction’s
technical merit.
Deferred tax assets and liabilities that can be offset
against each other are reported on a net basis. A valuation
allowance
is recorded to reduce deferred tax assets to the amount
that is more likely than not to be realized.
Deferred taxes are provided on unredeemed retained earnings
of the Company’s subsidiaries.
However,
deferred taxes are not provided on such unredeemed retained
earnings to the extent it is expected that the earnings are
permanently reinvested. Such earnings may become taxable
upon the sale or liquidation of these subsidiaries or upon
the
remittance of dividends.
The Company operates in numerous tax jurisdictions and,
as a result, is regularly subject to audit by tax
authorities. The Company provides for tax contingencies
whenever it is deemed more likely than not that a tax asset has
been impaired or a tax liability has been incurred.
Contingency provisions are recorded based on the technical merits
of
the Company’s filing position,
considering the applicable tax laws and Organisation
for Economic Co‑operation and
Development (OECD) guidelines and are based on its evaluations of
the facts and circumstances as of the end of each
reporting period.
The Company applies a two‑step approach to recognize and
measure uncertainty in income taxes. The first step
is to evaluate the tax position for recognition by determining
if the weight of available evidence indicates that it is more
likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation
processes,
if any. The second step
is to measure the tax benefit as the largest amount
which is more than 50 percent likely of being
realized upon ultimate settlement. Uncertain tax
positions that could be settled against existing loss carryforwards
or
income tax credits are reported net.
F-22
Expenses
related to tax penalties are classified in the Consolidated Income
Statements as “Income tax expense”
while interest thereon is classified as “Interest and other
finance expense”.
Current income tax relating to certain items is
recognized directly in “Accumulated other comprehensive
loss” and not in earnings. In general, the Company
applies the
individual items approach when releasing income tax effects
from “Accumulated other comprehensive loss”.
Research and development
Research and development costs not related to specific customer
orders are generally expensed as incurred.
Earnings per share
Basic earnings per share is calculated by dividing income
by the weighted‑average number of shares
outstanding during the year.
Diluted earnings per share is calculated by dividing income by the
weighted‑average
number of shares outstanding during the year,
assuming that all potentially dilutive securities were exercised,
if dilutive.
Potentially dilutive securities comprise outstanding written
call options, outstanding options and shares granted subject
to certain conditions under the Company’s
share‑based payment arrangements. See further discussion related
to earnings
per share in Note 20 and of potentially dilutive securities in
Note 18.
Share‑based payment arrangements
The Company has various share‑based payment arrangements
for its employees, which are described more
fully in Note 18. Such arrangements are accounted for
under the fair value method. For awards that are equity‑settled,
total compensation is measured at grant date, based
on the fair value of the award at that date, and recorded in
earnings
over the period the employees are required to render service. For
awards that are cash‑settled, compensation is initially
measured at grant date and subsequently remeasured at
each reporting period, based on the fair value and vesting
percentage of the award at each of those dates, with changes
in the liability recorded in earnings.
Fair value measures
The Company uses fair value measurement principles to record
certain financial assets and liabilities on a
recurring basis and, when necessary,
to record certain non‑financial assets at fair value on a non
‑recurring basis, as well
as to determine fair value disclosures for certain financial
instruments carried at amortized cost in the financial
statements. Financial assets and liabilities recorded at
fair value on a recurring basis include foreign currency,
commodity and interest rate derivatives, as well as cash‑settled
call options and available‑for‑sale securities.
Non‑financial assets recorded at fair value on a non‑recurring
basis include long‑lived assets that are reduced to their
estimated fair value due to impairments.
Fair value is the price that would be received when
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date. In determining fair value, the Company uses various
valuation techniques including the market approach (using
observable market data for identical or similar assets and
liabilities), the income approach (discounted cash flow
models) and the cost approach (using costs a market participant
would incur to develop a comparable asset). Inputs used
to determine the fair value of assets and liabilities are defined
by a three‑level hierarchy,
depending on the nature of those inputs. The Company
has categorized its financial assets and
liabilities and non‑financial assets measured at fair value
within this hierarchy based on whether the inputs to the
valuation technique are observable or unobservable.
An observable input is based on market data obtained from
independent sources, while an unobservable input refl
ects the Company’s assumptions
about market data.
F-23
The levels of the fair value hierarchy are as follows:
Level 1: Valuation
inputs consist of quoted prices in an active market for identical assets or
liabilities
(observable quoted prices). Assets and liabilities valued using
Level 1 inputs include
exchange‑traded equity securities, listed derivatives which
are actively traded such as commodity
futures, interest rate futures and certain actively traded
debt securities.
Level 2: Valuation
inputs consist of observable inputs (other than Level 1 inputs)
such as actively quoted
prices for similar assets, quoted prices in inactive markets
and inputs other than quoted prices such
as interest rate yield curves, credit spreads, or inputs
derived from other observable data by
interpolation, correlation, regression or other means. The adjustments
applied to quoted prices or
the inputs used in valuation models may be both observable
and unobservable. In these cases, the
fair value measurement is classified as Level 2 unless the
unobservable portion of the adjustment or
the unobservable input to the valuation model is significant,
in which case the fair value
measurement would be classified as Level 3. Assets and
liabilities valued or disclosed using Level
2 inputs include investments
in certain funds, certain debt securities that are not actively traded,
interest rate swaps, commodity swaps, cash‑settled call options,
forward foreign exchange
contracts, foreign exchange swaps and forward rate
agreements, time deposits, as well as financing
receivables and debt.
Level 3: Valuation
inputs are based on the Company’s
assumptions of relevant market data (unobservable
input).
Investments in private equity,
real estate and collective funds held within the Company’s
pension plans are
generally valued using the net asset value (NAV)
per share as a practical expedient for fair value provided
certain
criteria are met. The NAVs
are determined based on the fair values of the underlying
investments in the funds. These
assets are not classified in the fair value hierarchy but
are separately disclosed.
Whenever quoted prices involve bid‑ask spreads, the
Company ordinarily determines fair values based on
mid‑market quotes. However,
for the purpose of determining the fair value of cash‑settled call
options serving as hedges
of the Company’s management
incentive plan (MIP), bid prices are used.
When determining fair values based on quoted prices
in an active market, the Company considers if the level of
transaction activity for the financial instrument has significantly
decreased, or would not be considered orderly.
In such
cases, the resulting changes in valuation techniques would
be disclosed. If the market is considered disorderly or if
quoted prices are not available, the Company is required
to use another valuation technique, such as an income
approach.
Disclosures about the Company’s
fair value measurements of assets and liabilities are included
in Note 7.
Contingencies
The Company is subject to proceedings, litigation
or threatened litigation and other claims and inquiries,
related
to environmental, labor, product, regulatory,
tax (other than income tax) and other matters, and is required
to assess the
likelihood of any adverse judgments or outcomes to these
matters, as well as potential ranges of probable losses. A
determination of the provision required, if any,
for these contingencies is made after analysis of each individual
issue,
often with assistance from both internal and external legal
counsel and technical experts. The required amount of a
provision for a contingency of any type may change in
the future due to new developments in the particular matter,
including changes in the approach to its resolution.
The Company records a provision for its contingent obligations
when it is probable that a loss will be incurred
and the amount can be reasonably estimated. Any such provision
is generally recognized on an undiscounted basis using
the Company’s best estimate of
the amount of loss incurred or at the lower end of an estimated
range when a single best
estimate is not determinable. In some cases, the Company
may be able to recover a portion of the costs relating to these
obligations from insurers or other third parties; however,
the Company records such amounts only when it is probable
that they will be collected.
F-24
The Company provides for anticipated costs for warranties when
it recognizes revenues on the related products
or contracts. Warranty
costs include calculated costs arising from imperfections
in design, material and workmanship in
the Company’s products.
The Company makes individual assessments on contracts with
risks resulting from
order‑specific conditions or guarantees and assessments on
an overall, statistical basis for similar products sold
in larger
quantities.
The Company may have legal obligations to perform
environmental clean‑up activities related to land and
buildings as a result of the normal operations of its business.
In some cases, the timing or the method of settlement,
or
both, are conditional upon a future event that may or may
not be within the control of the Company,
but the underlying
obligation itself is unconditional and certain. The Company
recognizes a provision for these obligations when it is
probable that a liability for the clean‑up activity has been
incurred and a reasonable estimate of its fair value can
be
made. In some cases, a portion of the costs expected
to be incurred to settle these matters may be recoverable. An
asset
is recorded when it is probable that such amounts are recoverable.
Provisions for environmental obligations are not
discounted to their present value when the timing of payments cannot
be reasonably estimated.
Pensions and other postretirement
benefits
The Company has a number of defined benefit pension
plans, defined contribution pension plans and
termination indemnity plans. The Company recognizes an
asset for such a plan’s overfunded
status or a liability for such
a plan’s underfunded status
in its Consolidated Balance Sheets. Additionally,
the Company measures such a plan’s
assets and obligations that determine its funded status as of
the end of the year and recognizes the changes in the funded
status in the year in which the changes occur.
Those changes are reported in “Accumulated other comprehensive
loss”.
The Company uses actuarial valuations to determine its pension
and postretirement benefit costs and credits.
The amounts calculated depend on a variety of key assumpt
ions, including discount rates and expected return on plan
assets. Current market conditions are considered in selecting
these assumptions.
The Company’s various pension
plan assets are assigned to their respective levels in the
fair value hierarchy in
accordance with the valuation principles described in the
“Fair value measures” section above.
See Note 17 for further discussion of the Company’s
employee benefit plans.
Business combinations
The Company accounts for assets acquired and liabilities assumed
in business combinations using the
acquisition method and records these at their respective fair
values. Contingent consideration is recorded at fair value
as
an element of purchase price with subsequent adjustments
recognized in income.
Identifiable intangibles consist of intellectual property such
as trademarks and trade names, customer
relationships, patented and unpatented technology,
in‑process research and development, order backlog and capitalized
software; these are amortized over their estimated useful
lives. Such intangibles are subsequently subject to evaluation
for potential impairment if events or circumstances indicate
the carrying amount may not be recoverable. See “Goodwill
and intangible assets” above. Acquisition‑related costs are
recognized separately from the acquisition and expensed
as
incurred. Upon gaining control of an entity in which
an equity method or cost basis investment was held by the
Company, the carrying
value of that investment is adjusted to fair value with the related
gain or loss recorded in income.
Deferred tax assets and liabilities based on temporary
differences between the financial reporting
and the tax
base of assets and liabilities as well as uncertain tax positions
and valuation allowances on acquired deferred tax
assets
assumed in connection with a business combination
are initially estimated as of the acquisition date based on facts
and
circumstances that existed at the acquisition date.
These estimates are subject to change within the measurement
period
(a period of up to 12 months after the acquisition date
during which the acquirer may adjust the provisional acquisition
amounts) with any adjustments to the preliminary estimates being
recorded to goodwill. Changes in deferred taxes,
uncertain tax positions and valuation allowances on acquired deferred
tax assets that occur after the measurement period
are recognized in income.
F-25
New accounting pronouncements
Applicable for current period
Measurement of credit
losses on financial instruments
In January 2020, the Company adopted a new account
ing standard update, along with additional related updates
containing targeted improvements and clarifications,
that replaces the previous incurred loss impairment methodology
for most financial assets with a new “current expected
credit loss” model. The new model requires immediate
recognition of the estimated credit losses expected to occur
over the remaining life of financial assets such as trade and
other receivables, held-to-maturity debt securities, loans and other
instruments. Measurement of expected credit losses is
now based on historical experience, current conditions,
and reasonable and supportable forecasts. The update also
requires additional disclosures related to estimates and
judgments used to measure credit losses. Credit losses relating to
available-for-sale debt securities are now measured
in a manner similar to the loss impairment methodology,
except that
the losses are recorded through an allowance for credit
losses rather than as a direct write-down of the security.
The Company has adopted these updates on a modified
retrospective basis and has therefore recorded a
cumulative-effect adjustment of $
an increase in the allowance for credit losses on financial
assets carried at amortized cost. This adjustment consisted
primarily of an impact on the opening balance of trade receivables
of $
deferred tax), of which $
which is included in discontinued operations.
Disclosure Framework — Changes
to the disclosure requirements
for fair value measurement
In January 2020, the Company adopted a new accounting
standard update which modified the disclosure
requirements for fair value measurements. The update
eliminates the requirements to disclose the amount of and reasons
for transfers between Level 1 and 2 of the fair value hierarchy,
the timing of transfers between levels and the Level 3
valuation process, while expanding the Level 3 disclosures
to include the range and weighted-average used to develop
significant unobservable inputs and the changes in unrealized
gains and losses on recurring fair value measurements.
This update was applied prospectively for the changes and
modifications to the Level 3 disclosures, while all other
amendments were applied retrospectively.
The update does not have a significant impact on the Company’s
Consolidated Financial Statements.
Applicable for future periods
Simplifying the accounting for income taxes
In December 2019, an accounting standard update was issued
which enhances and simplifies
various aspects of
the income tax accounting guidance related to intraperiod
tax allocations, ownership changes in investments, and
certain
aspects of interim period tax accounting. This update is
effective for the Company for annual and interim
periods
beginning January 1, 2021. Depending on the amendment,
adoption may be applied on a retrospective, modified
retrospective or prospective basis. The Company does not
expect this update to have a significant impact on its
Consolidated Financial Statements.
Facilitation of the effects of reference
rate reform on financial reporting
In March 2020, an accounting standard update was issued
which provides temporary optional expedients and
exceptions to the current guidance on contract modifications
and hedge accounting to ease the financial reporting
burdens related to the expected market transition from
the London Interbank Offered Rate (LIBOR) and
other interbank
offered rates to alternative reference rates. The
update can be adopted and applied no later than December
31, 2022, with
early adoption permitted. The Company is currently evaluating
the impact of adopting this optional guidance on its
Consolidated Financial Statements.
F-26
Note 3—Discontinued operations
Divestment of the Power Grids business
On July 1, 2020, the Company completed the sale of
(Hitachi). The transaction was executed through the
sale of
(“Hitachi ABB PG” or “HAPG”). Cash consideration received
at the closing date was $
disposed. Further, for accounting
purposes, the
have been both divested and reacquired at its fair value
on July 1, 2020. The Company also obtained a put option,
exercisable commencing in April 2023, allowing the
Company to require Hitachi to purchase the remaining interest for
fair value, subject to a minimum floor price equivalent
to a
$
of the entire Power Grids business (see Note 4). The Company
also recorded a liability in discontinued operations for
estimated future costs and other cash payments of $
business including required future cost reimbursements payable
to HAPG, costs incurred by the Company for the direct
benefit of HAPG and an amount due to Hitachi Ltd in
connection with the expected purchase price finalization of the
closing debt and working capital balances. From the date of
the disposal through December 31, 2020, $
these liabilities have been paid and are reported as reductions
in the cash consideration received.
As a result of the Power Grids sale, the Company has recognized
a net gain of $
costs, for the sale of the entire Power Grids business which
is included in Income from discontinued operations, net of
tax, in 2020. Included in the calculation of the net gain was a
cumulative translation loss relating to the Power Grids
business of $
amounts included in the net gain are estimated or
otherwise subject to change in value and, as a result, the Company
may record additional adjustments to the gain in future
periods which are not expected to have a material impact
on the
Consolidated Financial Statements. In 2020, the Company
has also recorded $
discontinued operations in connection with the reorganization
of the legal entity structure of the Power Grids business
required to facilitate the sale.
Certain entities of the Power Grids business for which
the legal process or other regulatory delays resulted in
the Company not yet having transferred legal titles to Hitachi have
been accounted for as being sold since control of the
business as well as all risks and rewards of the business have
been fully transferred to Hitachi ABB PG. The proceeds
for these entities are included in the cash proceeds described
above and certain funds have been placed in escrow
and are
reflected as current restricted cash of $
HAPG by the first half of 2021.
The Company has recognized liabilities in discontinued
operations in connection with the divestment for
certain indemnities (see Note 15 for additional information). The
Company has also recorded an initial liability of
$
Upon closing of the sale, the Company entered into various transition
services agreements (TSAs). Pursuant to
these TSAs, the Company and Hitachi ABB PG provide
to each other, on an interim, transitional
basis, various services.
The services provided by the Company primarily include
finance, information technology,
human resources and certain
other administrative services. Under the current terms,
the TSAs will continue for up to
extended on an exceptional basis for business-critical services for
an additional period which is reasonably necessary to
avoid a material adverse impact on the business. In 2020,
the Company has recognized within its continuing operations,
general and administrative expenses incurred to perform the TSAs, offset
by $
services that is reported in Other income and expense,
net.
F-27
Discontinued operations
As a result of the sale of the Power Grids business, substantially
all Power Grids-related assets and liabilities
have been sold. As this divestment represented a strategic
shift that would have a major effect on the Company’s
operations and financial results, the results of operations
for this business have been presented as discontinued
operations and the assets and liabilities are presented as held for
sale and in discontinued operations for all periods
presented. Certain of the business contracts in the Power
Grids business continue to be executed by subsidiaries of
the
Company for the benefit/risk of Hitachi ABB PG. Assets and
liabilities relating to, as well as the net financial results of,
these contracts will continue to be included in discontinued
operations until they have been completed or otherwise
transferred to Hitachi ABB PG.
Prior to the divestment, interest expense that was not directly
attributable to or related to the Company’s
continuing business or discontinued business was allocated
to discontinued operations based on the ratio of net assets to
be sold less debt that was required to be paid as a result
of the planned disposal transaction to the sum of total net assets
of the Company plus consolidated debt. General corporate
overhead was not allocated to discontinued operations.
Operating results of the discontinued operations are
summarized as follows:
($ in millions)
2020
2019
2018
Total revenues
Total cost of sales
(
3,058
)
(
6,983
)
(
7,378
)
Gross profit
Expenses
(
808
)
(
1,394
)
(
1,326
)
Net gain recognized on sale of the Power Grids business
—
—
Income from operations
Net interest and other finance expense
(
5
)
(
61
)
(
55
)
Non-operational pension (cost) credit
(
94
)
Income from discontinued operations before
taxes
Income tax expense
(
322
)
(
167
)
(
228
)
Income from discontinued operations, net of
tax
Of the total Income from discontinued operations before
taxes in the table above, $
and $
attributable to noncontrolling interests.
Until the date of the divestment, Income from discontinued
operations before taxes excluded stranded costs
which were previously able to be allocated to the Power
Grids operating segment. As a result, $
and $
previously included in the measure of segment profit for
the Power Grids operating segment are now reported as part
of
Corporate and Other.
In the table above, Net interest and other finance expense
in 2020, 2019 and 2018 includes
$
in accordance with the Company’s
accounting policy election until the divestment date. In addition,
as required by U.S.
GAAP,
subsequent to December 17, 2018,
(the date of the original agreement to sell the Power Grids business) the
Company has not recorded depreciation or amortization
on the property, plant
and equipment and intangible assets
reported as discontinued operations. In 2018, a total
of $
recorded for such assets.
Included in the reported Total
revenues of the Company for 2020, 2019 and 2018
are revenues for sales from
the Company’s operating
segments to the Power Grids business of $
respectively, which
represent intercompany transactions that, prior to Power Grids
being classified as a discontinued
operation, were eliminated in the Company’s
Consolidated Financial Statements (see Note 23). Subsequent
to the
divestment, sales to Hitachi ABB PG are reported as third
-party revenues.
F-28
In addition, the Company also has retained obligations
(primarily for environmental and taxes) related to other
businesses disposed or otherwise exited that qualified
as discontinued operations. Changes to these retained obligations
are also included in Income from discontinued operations,
net of tax, above.
The major components of assets and liabilities held for
sale and in discontinued operations in the Company’s
Consolidated Balance Sheets are summarized as follows:
December 31,
($ in millions)
2020
(1)
2019
Receivables, net
Contract assets
Inventories, net
Property, plant and
equipment, net
Goodwill
Other current assets
Current assets held for sale and in discontinued operations
Accounts payable, trade
Contract liabilities
Pension and other employee benefits
Other current liabilities
Current liabilities held for sale and in discontinued operations
Other non-current liabilities
Non-current liabilities held for sale and in discontinued
operations
(1) At December 31, 2020, the balances reported as held for sale and in discontinued operations pertain to
Power Grids activities and other
obligations which will remain with the Company until such time as the
obligation is settled or the activities are fully wound down.
Note 4—Acquisitions, divestments and equity-accounted companies
Acquisition of controlling interests
Acquisitions of controlling interests were as follows:
($ in millions, except number of acquired businesses)
2020
2019
2018
Purchase price for acquisitions (net of cash acquired)
Aggregate excess of purchase price over fair value of net
assets
(1)
Number of acquired businesses
(1)
Recorded as goodwill
(see Note 11).
Includes adjustments
of $
acquisitions,
primarily reflecting
changes in the
valuation of net
working capital,
deferred tax
liabilities and
intangible assets
acquired.
Acquisitions of controlling interests have been accounted
for under the acquisition method and have been
included in the Company’s
Consolidated Financial Statements since the date of acquisition. In
2020 and 2019,
acquisitions of controlling interests were not material.
F-29
On June 30, 2018, the Company acquired through numerous
share and asset purchases substantially all the
assets, liabilities and business activities of GEIS, General
Electric’s global electrification
solutions business. GEIS,
headquartered in Atlanta, United States, provides technologies
that distribute and control electricity and support
the
commercial, data center, health care,
mining, renewable energy,
oil and gas, water and telecommunications sectors. The
resulting cash outflows for the Company amounted to
$
acquisition strengthens the Company’s
global position in electrification and expands its access to the North
American
market through strong customer relationships, a large
installed base and extensive distribution networks. Consequently,
the goodwill acquired represents expected operating
synergies and cost savings as well as intangible assets that are
not
separable such as employee know-how and expertise.
While the Company uses its best estimates and assumptions
as part of the purchase price allocation process to
value assets acquired and liabilities assumed at the acquisition
date, the purchase price allocation for acquisitions is
preliminary for up to 12 months after the acquisition date
and is subject to refinement as more detailed analyses are
completed and additional information about the fair values
of the acquired assets and liabilities becomes available. The
purchase price allocation relating to the GEIS acquisition
was finalized during the second quarter of 2019 and resulted in
$
net working capital, deferred tax liabilities and intangible
assets acquired.
In addition, in November 2019, the Company recognized
a gain of $
from General Electric for a favorable resolution of an
uncertainty with respect to the price paid to acquire GEIS.
This
occurred after the end of the measurement period
and as a result, the Company recorded a gain in “Other income
(expense), net”.
The final allocation of purchase consideration for
GEIS was as follows:
GEIS
($ in millions)
Weighted-average
Allocated amounts
useful life
Technology
Customer relationships
Trade names
Supply agreement
Intangible assets
Property, plant and
equipment
Deferred tax liabilities
(
45
)
Inventories
Other assets and liabilities, net
(1)
(
19
)
Goodwill
(2)
Noncontrolling interest
(
63
)
Total
consideration (net of cash acquired)
(3)
(1)
Gross receivables
from the GEIS acquisition
totaled $
contractual
cash flows not
expected to be
collected.
(2)
The amount of
goodwill which
is tax deductible
is $
(3)
Cash acquired
in the GEIS acquisition
totaled $
The Company’s Consolidated
Income Statement for 2018, includes total revenues of
$
income of $
F-30
The unaudited pro forma financial information in the
table below summarizes the combined pro forma results
of the Company and GEIS for 2018 as if GEIS had been
acquired on January 1, 2017.
($ in millions)
2018
Total revenues
Income from continuing operations, net of tax
The pro forma results are for information purposes only and
do not include any anticipated cost synergies or
other effects of the planned integration
of GEIS. Accordingly, such
pro forma amounts are not necessarily indicative of
the results that would have occurred had the acquisition
been completed on the date indicated, nor are they indicative
of
the future operating results of the combined company.
The unaudited pro forma results above include certain
adjustments related to the GEIS acquisition. The table
below summarizes the adjustments necessary to present
the pro forma financial information of the combined entity as if
GEIS had been acquired on January 1, 2017.
($ in millions)
2018
Impact on cost of sales from additional amortization of intangible
assets
(
10
)
Impact on cost of sales from fair valuing acquired inventory
Impact on cost of sales from additional depreciation of property,
plant and equipment
(
4
)
Impact on selling, general and administrative expenses from
additional amortization of intangible assets
(
5
)
Impact on selling, general and administrative expenses from
acquisition-related costs
Impact on interest expense from financing costs
(
15
)
Taxation adjustments
(
5
)
Total
pro forma adjustments
Acquisition of noncontrolling interests
In connection with the divestment of its Power Grids business to
Hitachi (see Note 3), the Company retained a
divested and reacquired, with a fair value at the transaction
date of $
discounted cash flow model considering the expected
results of the future business operations of Hitachi ABB PG and
using relevant market inputs including
a risk-adjusted weighted-average cost of capital. The Company
also obtained a
right to require Hitachi to purchase this investment (see
Note 3) with a floor price equivalent to a
compared to the price paid for the initial
pricing model with inputs considering the nature of the
investment and the expected period until option exercise. As this
option is not separable from the investment the value has
been combined with the value of the underlying investment
and is accounted for together.
The Company has concluded that based on its continuing
involvement with the Power Grids business, including
membership in its governing board of directors, it has significant
influence over Hitachi ABB PG.
As a result, the
investment (including the value of the option) is accounted
for using the equity method.
F-31
The difference between the initial carrying
value of the Company's investment in Hitachi ABB PG at fair
value
and its proportionate share of the underlying net assets created
basis differences of $
the Company’s
Weighted-average
($ in millions)
Allocated amounts
useful life
Inventories
Order backlog
Property, plant and
equipment
(1)
Intangible assets
(2)
Other contractual rights
Other assets
Deferred tax liabilities
(
942
)
Goodwill
Less: Amount attributed to noncontrolling interest
(
451
)
Basis difference
(1)
Property,
plant and equipment
includes assets
subject to amortization
having an initial
fair value difference
of $
weighted-average
useful life
of
.
(2)
Intangible assets
include brand
license agreement,
technology and
customer relationships.
For assets subject to depreciation or amortization, the
Company amortizes these basis differences over
the
estimated remaining useful lives of the assets that gave rise to
this difference, recording the amortization, net of
related
deferred tax benefit, as a reduction of income from equity-accounted
companies. Certain other assets are recorded as an
expense as the benefits from the assets are realized. At December
31, 2020, the Company determined that no impairment
of its equity-accounted investments existed.
The carrying value of the Company’s
investments in equity-accounted companies and respective percentage
of
ownership is as follows:
Ownership as of
Carrying value at December 31,
($ in millions, except ownership share in %)
December 31, 2020
2020
2019
Hitachi ABB Power Grids Ltd
—
Others
Total
In 2020, 2019 and 2018, the Company recorded a loss of
$
respectively, in Other
income (expense), net, representing the Company's share of
the earnings of investees
accounted
for under the equity method of accounting, the components
of which are as follows:
($ in millions)
2020
2019
2018
Income from equity-accounted companies, net of taxes
Basis difference amortization (net of deferred
income tax benefit)
(
95
)
—
—
Income (loss) from equity-accounted companies
(
66
)
Business divestments
In 2020, the Company completed the sale of its Power Grids
business (see Note 3 for details) and its solar
inverters business. In 2019, the Company recorded net
gains (including transactions costs) of $
to the divestment of two businesses in China, and in 2018,
there were no significant amounts recognized from
divestments of consolidated businesses.
F-32
Divestment of the solar inverters business
In February 2020, the Company completed the sale of
its solar inverters business for
the agreement, which was reached in July 2019, the
Company was required to transfer $
on the closing date. In addition, payments totaling EUR
buyer from 2020 through 2025. In 2019, the Company
recorded a loss of $
net”, representing the excess of the carrying value, which
includes a loss of $
translation adjustment, over the estimated fair value
of this business. In 2020, a further loss of $
in “Other income (expense), net” for changes in fair value
of this business. The loss in 2020 includes the $
reclassification from other comprehensive income of
the currency translation adjustment related to the business.
The fair value was based on the estimated current market
values using Level 3 inputs, considering the
agreed-upon sale terms with the buyer.
The solar inverters business, which includes the solar inverter
business acquired
as part of the Power-One acquisition in 2013,
was part of the Company’s
Electrification operating segment.
As this divestment does not qualify as a discontinued
operation, the results of operations for this business prior
to its disposal are included in the Company’s
continuing operations for all periods presented. The assets and
liabilities of
this business were shown as assets and liabilities held for
sale in the Company’s Consolidated Balance
Sheet at
December 31, 2019,
and as at that date, the carrying amounts of the major classes of assets and
liabilities held for sale
were as follows:
($ in millions)
December 31, 2019
Assets
Receivables, net
Inventories, net
Property, plant and
equipment, net
Intangible assets, net
Other assets
Valuation
allowance on assets held for sale
(
319
)
Current assets held for sale
Liabilities
Accounts payable, trade
Contract liabilities
Provisions for warranties
Other liabilities
Fair value adjustment on disposal group
Current liabilities held for sale
Including the above loss of $
continuing operations before taxes includes net losses of
$
In 2018, net losses of $
F-33
Note 5—Cash and equivalents, marketable securities and
short-term investments
Current assets
Cash and equivalents and marketable securities and short‑term
investments consisted of the following:
December 31, 2020
Marketable
securities
Gross
Gross
and
unrealized
unrealized
Cash and
short-term
($ in millions)
Cost basis
gains
losses
Fair value
equivalents
investments
Changes in fair value recorded in
net income
Cash
Time deposits
Equity securities
—
Changes in fair value recorded in
other comprehensive income
Debt securities available-for-sale:
—U.S. government obligations
—European government obligations
—Corporate
—
—
Total
—
Of which:
—Restricted cash, current
—Restricted cash, non-current
December 31, 2019
Marketable
securities
Gross
Gross
and
unrealized
unrealized
Cash and
short-term
($ in millions)
Cost basis
gains
losses
Fair value
equivalents
investments
Changes in fair value recorded in
net income
Cash
Time deposits
Equity securities
—
Changes in fair value recorded in
other comprehensive income
Debt securities available-for-sale:
—U.S. government obligations
(
1
)
—Corporate
(
1
)
—
Total
(
1
)
Of which:
—Restricted cash, current
F-34
Contractual maturities
Contractual maturities of debt securities consisted of the following:
December 31, 2020
Available-for-sale
($ in millions)
Cost basis
Fair value
Less than one year
One to five years
Six to ten years
Due after ten years
Total
At December 31, 2020 and 2019, the Company pledged $
available‑for‑sale marketable securities as collateral for issued
letters of credit and other security arrangements.
Note 6—Derivative financial instruments
The Company is exposed to certain currency,
commodity, interest rate and
equity risks arising from its global
operating, financing and investing activities. The Company
uses derivative instruments to reduce and manage the
economic impact of these exposures.
Currency risk
Due to the global nature of the Company’s
operations, many of its subsidiaries are exposed to currency
risk in
their operating activities from entering into transactions
in currencies other than their functional currency.
To manage
such currency risks, the Company’s
policies require its subsidiaries to hedge their foreign currency
exposures from
binding sales and purchase contracts denominated in foreign
currencies. For forecasted foreign currency denominated
sales of standard products and the related foreign currency
denominated purchases, the Company’s
policy is to hedge up
to a maximum of
forecasted exposures. Forecasted exposures greater
than
are the main instrument used to protect the Company against
the volatility of future cash flows (caused by changes in
exchange rates) of contracted and forecasted sales and
purchases denominated in foreign currencies. In addition, within
its treasury operations, the Company primarily uses foreign
exchange swaps and forward foreign exchange contracts
to
manage the currency and timing mismatches arising in
its liquidity management activities.
Commodity risk
Various
commodity products are used in the Company’s
manufacturing activities. Consequently it is exposed
to
volatility in future cash flows arising from changes in commodity
prices. To manage
the price risk of commodities, the
Company’s policies require
that its subsidiaries hedge the commodity price risk exposures
from binding contracts, as
well as at least
risks of commodities.
Interest rate risk
The Company has issued bonds at fixed rates. Interest
rate swaps are used to manage the interest rate risk
associated with certain debt and generally such swaps are
designated as fair value hedges. In addition, from time
to time,
the Company uses instruments such as interest rate swaps,
interest rate futures, bond futures or forward rate
agreements
to manage interest rate risk arising from the Company’s
balance sheet structure but does not designate such instruments
as hedges.
F-35
Equity risk
The Company is exposed to fluctuations in the fair value of
its warrant appreciation rights (WARs)
issued
under its MIP (Management Incentive Plan) (see Note
18).
A WAR
gives its holder the right to receive cash equal
to the
market price of an equivalent listed warrant on the date of
exercise. To eliminate
such risk, the Company has purchased
cash‑settled call options,
indexed
to the shares
of the
Company,
equivalent to its obligations under the outstanding WARs.
Volume
of derivative activity
In general, while the Company’s
primary objective in its use of derivatives is to minimize exposures
arising
from its business, certain derivatives are designated
and qualify for hedge accounting treatment while others either
are
not designated or do not qualify for hedge accounting.
Foreign exchange and interest
rate derivatives
The gross notional amounts of outstanding foreign exchange
and interest rate derivatives (whether designated
as hedges or not) were as follows:
Type of derivative
Total notional amounts at December 31,
($ in millions)
2020
2019
2018
Foreign exchange contracts
Embedded foreign exchange derivatives
Interest rate contracts
Derivative commodity contracts
The Company uses derivatives to hedge its direct or indirect
exposure to the movement in the prices of
commodities which are primarily copper,
silver and aluminum. The following table shows the notional
amounts of
outstanding derivatives (whether designated as hedges
or not), on a net basis, to reflect the Company’s
requirements for
these commodities:
Total notional amounts at December 31,
Type of derivative
Unit
2020
2019
2018
Copper swaps
metric tonnes
Silver swaps
ounces
Aluminum swaps
metric tonnes
Equity derivatives
At December 31, 2020, 2019 and 2018, the Company held
call options indexed to ABB Ltd shares (conversion ratio
:1) with a total fair value of $
$
Cash flow hedges
As noted above, the Company mainly uses forward foreign
exchange contracts
to manage the foreign exchange
risk of its operations, commodity swaps to manage its commodity
risks and cash‑settled call options to hedge its WAR
liabilities. Where such instruments are designated and
qualify as cash flow hedges, the effective portion of
the changes
in their fair value is recorded in “Accumulated other
comprehensive loss” and subsequently reclassified into earnings
in
the same line item and in the same period as the underlying
hedged transaction affects earnings. Any
ineffectiveness in
the hedge relationship, or hedge component excluded from
the assessment of effectiveness, is recognized in earnings
during the current period.
F-36
At December 31, 2020,
2019 and 2018, “Accumulated other comprehensive loss” included
net unrealized
losses of $
designated as cash flow hedges. Of the amount at December
31, 2020, net losses of $
reclassified to earnings in 2021. At December 31, 20
20, the longest maturity of a derivative classified as a cash flow
hedge was
In 2020,
2019 and 2018, the amounts of gains or losses, net of tax,
reclassified into earnings due to the
discontinuance of cash flow hedge accounting and the amount
of ineffectiveness in cash flow hedge relationships
directly recognized in earnings were not significant.
The pre‑tax effects of derivative instruments,
designated and qualifying as cash flow hedges, on “Accumulated
other comprehensive loss” and the Consolidated Income
Statements in 2020, 2019 and 2018, were not significant.
Fair value hedges
To reduce its interest
rate exposure arising primarily from its debt issuance activities,
the Company uses
interest rate swaps. Where such instruments are designated
as fair value hedges, the changes in the fair value of these
instruments, as well as the changes in fair value of the
risk component of the underlying debt being hedged, are
recorded
as offsetting gains and losses in “Interest
and other finance expense”.
The effect of Interest rate contracts, designated
and qualifying as fair value hedges, on the Consolidated Income
Statements was as follows:
($ in millions)
2020
2019
2018
Gains (losses) recognized in Interest and other finance
expense:
(
4
)
(
11
)
(
38
)
Derivatives not designated in hedge relationships
Derivative instruments that are not designated as hedges
or do not qualify as either cash flow or fair value
hedges are economic hedges used for risk management
purposes. Gains and losses from changes in the fair values of
such derivatives are recognized in the same line
in the income statement as the economically hedged transaction.
Furthermore, under certain circumstances, the Company is required
to split and account separately for foreign
currency derivatives that are embedded within certain
binding sales or purchase contracts denominated in a currency
other than the functional currency of the subsidiary
and the counterparty.
F-37
The gains (losses) recognized in the Consolidated Income
Statements on derivatives not designated in hedging
relationships were as follows:
($ in millions)
Gains (losses) recognized in income
Type of derivative not designated as a hedge
Location
2020
2019
2018
Foreign exchange contracts
Total revenues
(
7
)
(
121
)
Total cost of sales
(
64
)
SG&A expenses
(1)
(
11
)
Non-order related research and
development
(
2
)
(
1
)
Interest and other finance
expense
(
122
)
Embedded foreign exchange contracts
Total revenues
(
34
)
Total cost of sales
(
1
)
(
6
)
(
4
)
SG&A expenses
(1)
Commodity contracts
Total cost of sales
(
33
)
Other
Interest and other finance
expense
Total
(
167
)
(1)
SG&A expenses
represent “Selling,
general and
administrative
expenses”.
The fair values of derivatives included in the Consolidated
Balance Sheets were as follows:
December 31, 2020
Derivative assets
Derivative liabilities
Non-current
Non-current
Current in
in “Other
Current in
in “Other
“Other current
non-current
“Other current
non-current
($ in millions)
assets”
assets”
liabilities”
liabilities”
Derivatives designated as hedging instruments:
Foreign exchange contracts
Interest rate contracts
Cash-settled call options
Total
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Commodity contracts
Interest rate contracts
Embedded foreign exchange derivatives
Total
Total
fair value
F-38
December 31, 2019
Derivative assets
Derivative liabilities
Non-current
Non-current
Current in
in “Other
Current in
in “Other
“Other current
non-current
“Other current
non-current
($ in millions)
assets”
assets”
liabilities”
liabilities”
Derivatives designated as hedging instruments:
Foreign exchange contracts
Interest rate contracts
Cash-settled call options
Total
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Commodity contracts
Cash-settled call options
Embedded foreign exchange derivatives
Total
Total
fair value
Close‑out netting agreements provide for the termination,
valuation and net settlement of some or all
outstanding transactions between two counterparties on
the occurrence of one or more pre‑defined trigger events.
Although the Company is party to close‑out netting agreements
with most derivative counterparties, the fair
values in the tables above and in the Consolidated Balance
Sheets at December 31, 2020 and 2019, have been presented
on a gross basis.
The Company’s netting
agreements and other similar arrangements allow net settlements under
certain
conditions. At December 31, 2020 and 2019, information
related to these offsetting arrangements was as follows:
($ in millions)
December 31, 2020
Gross amount of
Derivative liabilities
Type of agreement or
recognized
eligible for set-off in
Cash collateral
Non-cash collateral
Net asset
similar arrangement
assets
case of default
received
received
exposure
Derivatives
(
106
)
Total
(
106
)
—
—
($ in millions)
December 31, 2020
Gross amount of
Derivative liabilities
Type of agreement or
recognized
eligible for set-off in
Cash collateral
Non-cash collateral
Net liability
similar arrangement
liabilities
case of default
pledged
pledged
exposure
Derivatives
(
106
)
Total
(
106
)
—
—
F-39
($ in millions)
December 31, 2019
Gross amount of
Derivative liabilities
Type of agreement or
recognized
eligible for set-off in
Cash collateral
Non-cash collateral
Net asset
similar arrangement
assets
case of default
received
received
exposure
Derivatives
(
102
)
Total
(
102
)
—
($ in millions)
December 31, 2019
Gross amount of
Derivative liabilities
Type of agreement or
recognized
eligible for set-off in
Cash collateral
Non-cash collateral
Net liability
similar arrangement
liabilities
case of default
pledged
pledged
exposure
Derivatives
(
102
)
Total
(
102
)
—
—
Note 7—Fair values
Recurring fair value measures
The fair values of financial assets and liabilities measured at
fair value on a recurring basis were as follows:
December 31, 2020
Total
($ in millions)
Level 1
Level 2
Level 3
fair value
Assets
Securities in “Marketable securities and short-term
investments”:
Equity securities
Debt securities—U.S. government obligations
Debt securities—European government obligations
Debt securities—Corporate
Derivative assets—current in “Other current assets”
Derivative assets—non-current in “Other non-current
assets”
Total
—
Liabilities
Derivative liabilities—current in “Other current liabilities”
Derivative liabilities—non-current in “Other non-current liabilities”
Total
—
—
F-40
December 31, 2019
Total
($ in millions)
Level 1
Level 2
Level 3
fair value
Assets
Securities in “Marketable securities and short-term
investments”:
Equity securities
Debt securities—U.S. government obligations
Debt securities—Corporate
Derivative assets—current in “Other current assets”
Derivative assets—non-current in “Other non-current
assets”
Total
—
Liabilities
Derivative liabilities—current in “Other current liabilities”
Derivative liabilities—non-current in “Other non-current liabilities”
Total
—
—
During 2020, 2019 and 2018 there have been
Level 1 and Level 2.
The Company uses the following methods and assumptions
in estimating fair values of financial assets and
liabilities measured at fair value on a recurring basis:
•
Securities in “Marketable securities and short‑term investments”:
markets for identical assets are available, these are considered
Level 1 inputs; however, when markets
are
not active, these inputs are considered Level 2. If such
quoted market prices are not available, fair value is
determined using market prices for similar assets or present
value techniques, applying an appropriate
risk‑free interest rate adjusted for non‑performance
risk. The inputs used in present value techniques are
observable and fall into the Level 2 category.
•
Derivatives:
The fair values of derivative instruments are determined
using quoted prices of identical
instruments from an active market, if available
(Level 1 inputs). If quoted prices are not available, price
quotes for similar instruments, appropriately adjusted, or
present value techniques, based on available
market data, or option pricing models are used.
Cash‑settled call options hedging the Company’s
WAR
liability are valued based on bid prices of the equivalent
listed warrant. The fair values obtained using price
quotes for similar instruments or valuation techniques represent
a Level 2 input unless significant
unobservable inputs are used.
Non‑recurring fair value measures
The Company elects to record private equity investments
without readily determinable fair values at cost, less
impairment, adjusted for observable price changes. The
Company reassesses at each reporting period whether these
investments continue to qualify for this treatment. In 2020,
the Company recognized net increases in fair value of
$
or similar investment of the same issuer.
The fair values of these investments totaled $
using Level 2 inputs.
Based on valuations at July 1, 2020, the Company recorded
goodwill impairment charges of $
third quarter of 2020. The fair value measurements used
in the analyses were calculated using the income approach
(discounted cash flow method). The discounted cash
flow models were calculated using unobservable inputs, which
classified the fair value measurement as Level 3 (see Note
11 for additional information including
further detailed
information related to these charges and significant
unobservable inputs).
F-41
In June 2019, upon meeting the criteria as held for sale,
the Company adjusted the carrying value of the solar
inverters business which was sold in February 2020 (see
Note 4). Apart from the transactions above, there were
additional significant non‑recurring
fair value measurements during 2020 and 2019.
Disclosure about financial instruments carried on a
cost basis
The fair values of financial instruments carried
on a cost basis were as follows:
December 31, 2020
Carrying
Total
($ in millions)
value
Level 1
Level 2
Level 3
fair value
Assets
Cash and equivalents (excluding securities
with original maturities up to 3 months):
Cash
Time deposits
Restricted cash
Restricted cash, non-current
300
Liabilities
Short-term debt and current maturities of long-term debt
(excluding finance lease obligations)
Long-term debt (excluding finance lease obligations)
December 31, 2019
Carrying
Total
($ in millions)
value
Level 1
Level 2
Level 3
fair value
Assets
Cash and equivalents (excluding securities
with original maturities up to 3 months):
Cash
Time deposits
Restricted cash
Liabilities
Short-term debt and current maturities of long-term debt
(excluding finance lease obligations)
Long-term debt (excluding finance lease obligations)
The Company uses the following methods and assumptions
in estimating fair values of financial instruments
carried on a cost basis:
•
Cash and equivalents (excluding securities with original maturities
up to 3 months), Restricted cash,
current and non-current,
and Marketable securities and short‑term investments (excluding
securities):
carrying amounts approximate the fair values as the items are
short‑term in nature or, for cash held
in
banks, are equal to the deposit amount.
•
Short‑term debt and current maturities of long
‑term debt (excluding finance lease obligations):
Short‑term
debt includes commercial paper, bank
borrowings and overdrafts. The carrying amounts of short‑term
debt
and current maturities of long‑term debt, excluding finance
lease obligations, approximate their fair values.
•
Long‑term debt (excluding finance lease obligations):
Fair values of bonds are determined using quoted
market prices (Level 1 inputs), if available. For bonds without
available quoted market prices and other
long‑term debt, the fair values are determined using
a discounted cash flow methodology based upon
borrowing rates of similar debt instruments and reflecting
appropriate adjustments for non‑performance
risk (Level 2 inputs).
F-42
Note 8—Receivables, net and Contract assets and liabilities
“Receivables, net” consisted of the following:
December 31,
($ in millions)
2020
2019
Trade receivables
Other receivables
Allowance
(
357
)
(
228
)
Total
“Trade receivables”
in the table above includes contractual retention amounts billed
to customers of
$
majority of related contracts will be completed and the
substantial majority of the billed amounts retained by the
customer will be collected. Of the retention amounts outstanding
at December 31, 2020,
expected to be collected in 2021 and 2022,
respectively.
“Other receivables”
in the table above consists of value added tax, claims, rental deposits and
other non‑trade
receivables.
The reconciliation of changes in the allowance for doubtful
accounts is as follows:
($ in millions)
2020
2019
2018
Balance at January 1,
Transition adjustment
—
—
Current-period provision for expected credit losses
Write-offs charged
against the allowance
(
42
)
(
19
)
(
17
)
Exchange rate differences
(
3
)
(
16
)
Balance at December 31,
The following table provides information about Contract
assets and Contract liabilities:
($ in millions)
2020
2019
2018
Contract assets
Contract liabilities
Contract assets primarily relate to the Company’s
right to receive consideration for work completed but for
which no invoice has been issued at the reporting date.
Contract assets are transferred to receivables when rights to
receive payment become unconditional. Management
expects that the majority of the amounts will be collected within
one year of the respective balance sheet date.
Contract liabilities primarily relate to up-front advances
received on orders from customers as well as amounts
invoiced to customers in excess of revenues recognized
predominantly on long-term projects. Contract liabilities are
reduced as work is performed and as revenues are recognized.
F-43
The significant changes in the Contract assets and Contract
liabilities balances were as follows:
2020
2019
Contract
Contract
Contract
Contract
($ in millions)
assets
liabilities
assets
liabilities
Revenue recognized, which was included in the Contract liabilities
balance at January 1, 2020/2019
(
1,011
)
(
1,158
)
Additions to Contract liabilities - excluding amounts recognized
as
revenue during the period
Receivables recognized that were included in the Contract
assets
balance at January 1, 2020/2019
(
680
)
(
786
)
The Company considers its order backlog to represent
its unsatisfied performance obligations. At December 31,
2020, the Company had unsatisfied performance obligations
totaling $
expects to fulfill approximately
2022 and the balance thereafter.
Note 9—Inventories, net
“Inventories, net” consisted of the following:
December 31,
($ in millions)
2020
2019
Raw materials
Work in
process
Finished goods
Advances to suppliers
Total
Note 10—Property,
plant and equipment, net
“Property, plant and
equipment, net” consisted of the following:
December 31,
($ in millions)
2020
2019
Land and buildings
Machinery and equipment
Construction in progress
Accumulated depreciation
(
6,364
)
(
5,716
)
Total
Assets under finance leases included in “Property,
plant and equipment, net” were as follows:
December 31,
($ in millions)
2020
2019
Land and buildings
Machinery and equipment
Accumulated depreciation
(
111
)
(
99
)
Total
F-44
In 2020, 2019 and 2018 depreciation, including depreciation
of assets under finance leases, was $
$
plant or equipment.
Note 11—Goodwill and intangible
assets
The changes in “Goodwill” were as follows:
Robotics &
Industrial
Discrete
Corporate
($ in millions)
Electrification
Automation
Motion
and Other
Total
Balance at January 1, 2019
Goodwill acquired during the year
(1)
—
—
—
—
Goodwill allocated to disposals
(
18
)
—
—
—
—
(
18
)
Exchange rate differences and other
(
1
)
(
5
)
(
29
)
—
(
13
)
Balance at December 31, 2019
Goodwill acquired during the year
—
—
—
Impairment of Goodwill
—
—
—
(
290
)
(
21
)
(
311
)
Exchange rate differences and other
—
Balance at December 31, 2020
(2)
(1)
Amount consists
of adjustments
arising during
the twelve-month
measurement period
subsequent to
the respective
acquisition date
(see
Note 4).
(2)
As of December
31, 2020, the
gross goodwill
amounted to $
$
The Company adopted a new operating model on July
1, 2020, which resulted in a change to the identification
of the goodwill reporting units. Previously,
the reporting units were the same as the operating segments for
Electrification, Motion and Robotics & Discrete Automation,
while for the Industrial Automation operating segment the
reporting units were determined to be at the Division level,
which is one level below the operating segment. The
new
operating model provides the Divisions with full ownership
and accountability for their respective strategies,
performance and resources and based on these changes, the
Company concluded that the reporting units would change
and be the respective Divisions within each operating
segment. This change resulted only in an allocation of goodwill
within the operating segments and thus there is no change
to segment level goodwill in the table above.
As a result of the new allocation of goodwill, an interim quantitative
impairment test was conducted both
before and after the changes
which were effective July 1, 2020. In the “before”
test, it was concluded that the fair value
of the Company’s reporting
units exceeded the carrying value under the historical reporting
unit structure.
The impairment test was performed for the new reporting
units and the fair value of each was determined using
a discounted cash flow fair value estimate based on
objective information available at the measurement date.
The
significant assumptions used to develop the estimates of
fair value for each reporting unit included management’s
best
estimates of the expected future results and discount
rates specific to the reporting unit. The fair value estimates were
based on assumptions that the Company believed to be reasonable,
but which are inherently uncertain and thus, actual
results may differ from those estimates. The fair values
for each of the individual reporting units and their associated
goodwill were determined using Level 3 measurements.
F-45
The interim quantitative impairment test indicated that
the estimated fair values of the reporting units were
substantially in excess of their carrying value for all repor
ting units except for the Machine Automation reporting unit
within the Robotics & Discrete Automation operating segment.
The contraction of the global economy in 2020,
particularly in end-customer industries related to this reporting
unit and considerable uncertainty around the continued
pace of macroeconomic recovery generally led to a reduction
in the fair values of the reporting units, thus affecting
this
reporting unit. Also, at the division level, this reporting
unit does not
benefit from shared cash flows generated within an
entire operating segment.
In addition, the book value of the Machine Automation Division includes
a significant amount
of intangible assets recognized in past acquisitions,
resulting in a proportionately higher book value than the other
reporting unit within the Robotics & Discrete Automation
Business Area. With the fair value
of the reporting unit lower
due to the economic conditions, the existing book value
of the intangible assets combined with the newly allocated
reporting unit goodwill led to the carrying value of the Machine
Automation reporting unit exceeding its fair value.
During 2020, a goodwill impairment charge
of $
unit to its implied fair value. The remaining goodwill
for the Machine Automation reporting unit was $
December 31, 2020.
The Company performed its annual impairment test as of
October 1, 2020, using a qualitative assessment
method for each reporting unit and determined it was not
more likely than not
that any reporting unit’s fair value
is less
than its carrying value.
Intangible assets consisted of the following:
December 31,
2020
2019
Gross
Net
Gross
Net
carrying
Accumulated
carrying
carrying
Accumulated
carrying
($ in millions)
amount
amortization
amount
amount
amortization
amount
Capitalized software for internal use
(
694
)
(
628
)
Capitalized software for sale
(
32
)
(
29
)
—
Intangibles other than software:
Customer-related
(
1,104
)
(
1,005
)
Technology-related
(
898
)
(
722
)
Marketing-related
(
304
)
(
286
)
Other
(
33
)
(
26
)
Total
(
3,065
)
(
2,696
)
In 2020 and 2019, additions to intangible assets were $
.
There were no significant intangible assets acquired
in business combinations during 2020 and 2019.
Amortization expense of intangible assets consisted of the following:
($ in millions)
2020
2019
2018
Capitalized software for internal use
Intangibles other than software
Total
In 2020,
2019 and 2018, impairment charges on intangible
assets were not significant.
F-46
At December 31, 2020, future amortization expense
of intangible assets is estimated to be:
($ in millions)
2021
2022
2023
2024
2025
Thereafter
Total
Note 12—Debt
The Company’s total debt
at December 31, 2020 and 2019, amounted to $
respectively.
Short‑term debt and current maturities of
lon
g̩
‑term debt
The Company’s “Short‑term
debt and current maturities of long‑term debt” consisted of
the following:
December 31,
($ in millions)
2020
2019
Short-term debt (weighted-average interest rate of
% and
%, respectively)
Current maturities of long-term debt (weighted-average
nominal interest rate of
%
and
%, respectively)
Total
Short‑term debt primarily represents short‑term loans from
various banks and issued commercial paper.
At December 31, 2020, the Company had in place
Euro‑commercial paper program for the issuance of commercial
paper in a variety of currencies, and a $
commercial paper program for the private placement of U.S.
dollar denominated commercial paper in the United
States.
At December 31, 2020 and 2019,
December 31, 2020 and 2019, $
in the United States.
In March 2020, the Company entered into a bank-funded
short-term EUR
Agreement (the “Agreement”). This Agreement was in
addition to the Company’s existing $
revolving credit facility (see below). Under this Agreement,
outstanding amounts were subject to interest at the rate
of
EURIBOR plus a margin of
were received on March 31, 2020, amounting to $
outstanding amounts be repaid within
Agreement was terminated after the final repayment on
July 8, 2020.
F-47
In addition, during 2019, the Company replaced its previous $
maturing in 2021, with a new $
-year multicurrency credit facility maturing in 2024. The new
credit facility
provides an option in 2020 and 2021 to extend the maturity
to 2025 and 2026, respectively.
The Company exercised the
option in 2020 to extend the maturity of the facility to
2025. The facility is for general corporate purposes. Interest
costs
on drawings under the facility are LIBOR or EURIBOR (depending
on the currency of the drawings) plus a margin
of
margin, which represents commitment fees of
to
one‑third but less than or equal to two‑thirds of the facility,
or
the facility. The
facility contains cross‑default clauses whereby an event of default
would occur if the Company were to
default on indebtedness as defined in the facility,
at or above a specified threshold.
December 31, 2020 and 2019, under this facility.
Long‑term debt
The Company raises long-term debt in various currencies,
maturities and on various interest rate terms. For
certain of its debt obligations,
the Company utilizes derivative instruments to modify
its interest rate exposure. In
particular, the Company uses interest
rate swaps to effectively convert certain
fixed‑rate long‑term debt into floating rate
obligations. The carrying value of debt, designated as being
hedged by fair value hedges, is adjusted for changes
in the
fair value of the risk component of the debt being hedged.
The following table summarizes the Company’s
long‑term debt considering the effect of interest rate swaps.
Consequently, a
fixed‑rate debt subject
to a fixed‑to‑floating interest rate swap is included as a floating
rate debt in the
table below:
December 31,
2020
2019
Nominal
Effective
Nominal
Effective
($ in millions, except % data)
Balance
rate
rate
Balance
rate
rate
Floating rate
%
%
%
%
Fixed rate
%
%
%
%
Current portion of long-term debt
(
1,140
)
%
%
(
1,449
)
%
%
Total
At December 31, 2020,
the principal amounts of long‑term debt repayable (excluding
finance lease obligations)
at maturity were as follows:
($ in millions)
2021
2022
2023
2024
2025
Thereafter
Total
F-48
Details of the Company’s
outstanding bonds were as follows:
December 31,
2020
2019
Nominal
Carrying
Nominal
Carrying
outstanding
value
(1)
outstanding
value
(1)
(in millions)
(in millions)
Bonds:
% USD Notes, due 2020
—
USD
$
Floating EUR Notes, due 2020
—
EUR
$
% USD Notes, due 2021
USD
$
USD
$
% CHF Bonds, due 2021
CHF
$
CHF
$
% USD Notes, due 2021
—
USD
$
% USD Notes, due 2022
USD
$
USD
$
% USD Notes, due 2023
—
USD
$
% EUR Instruments, due 2023
EUR
$
EUR
$
% EUR Instruments, due 2024
EUR
$
EUR
$
% CHF Notes, due 2024
CHF
$
CHF
$
% USD Notes, due 2028
USD
$
USD
$
% CHF Notes, due 2029
CHF
$
CHF
$
% USD Notes, due 2042
USD
$
USD
$
Total
$
$
(1)
USD carrying
values include
unamortized debt
issuance costs,
bond discounts
or premiums,
as well as adjustments
for fair value
hedge
accounting, where
appropriate.
During 2020, the Company repaid at maturity
its
% USD Notes and its floating EUR Notes. The
% USD Notes paid interest semi‑annually in arrears, while the
floating EUR Notes paid interest quarterly in arrears at
a variable interest rate of
.
In November 2020, the Company completed a cash
tender offer on its
% USD Notes due 2028 and
%
USD Notes due 2042. As a result of this tender offer
the Company redeemed principal amounts of $
% USD Notes due 2028 and $
% USD Notes due 2042 for a total cash payment of
$
representing the premium associated with the early
redemption, as well as the recognition of remaining unamortized
issuance discounts and costs.
In December 2020, the Company exercised its early
redemption option on its
% USD Notes due 2021 and
its
% USD Notes due 2023. Both USD Notes paid interest semi-annually
in arrears. In connection with the
redemption, the Company recognized losses from extinguishment
of debt of $
associated with the early redemption,
as well as the recognition of the relevant remaining unamortized premium
or
discount and issuance costs.
The
% USD Notes, due 2021, pay interest semi‑annually in arrears, at
a fixed annual rate of
Company may redeem these notes prior to maturity,
in whole or in part, at the greater of (i)
amount of the notes to be redeemed and (ii) the sum
of the present values of remaining scheduled payments of
principal
and interest (excluding interest accrued to the redemption
date) discounted to the redemption date at a rate defined in
the
note terms, plus interest accrued at the redemption date.
F-49
The
% CHF Bonds, due 2021, pay interest annually in arrears, at a
fixed annual rate of
Company has the option to redeem the bonds prior
to maturity, in whole,
at par plus accrued interest, if
aggregate principal amount of the bonds has been redeemed
or purchased and cancelled. The Company entered into
interest rate swaps to hedge its interest obligations on
these bonds. After considering the impact of such swaps, these
bonds effectively became floating rate Swiss franc
obligations and consequently have been shown as floating rate
debt
in the table of long‑term debt above.
The
% USD Notes, due 2022, pay interest semi‑annually in arrears
at a fixed annual rate of
The
% USD Notes, due 2042, pay interest semi‑annually in arrears
at a fixed annual rate of
Company may redeem both of these notes (which were
issued together in May 2012) prior to maturity,
in whole or in
part, at the greater of (i)
values of remaining scheduled payments of principal and
interest (excluding interest accrued to the redemption date)
discounted to the redemption date at a rate defined
in the note terms, plus interest accrued at the redemption
date. These
notes, registered with the U.S. Securities and Exchange
Commission, were issued by ABB Finance (USA) Inc., a
significant restrictions on the ability of the parent
company to obtain funds from its subsidiaries by dividend or loan.
In
reliance on Rule 3‑10 of Regulation S‑X, the separate
financial statements of ABB Finance (USA) Inc. are not provided.
The Company has entered into interest rate swaps for an
aggregate nominal amount of $
its interest obligations on the
% USD Notes, due 2022. After considering the impact of such swaps,
$
of the outstanding principal is shown as floating rate debt
in the table of long‑term debt above.
The
% EUR Instruments, due 2023, were issued in May 2016, with
total net issuance proceeds of
EUR
annually in arrears at a fixed rate of
to maturity (Par call date), in whole or in part, at
the greater of (i)
redeemed and (ii) the sum of the present values of remaining
scheduled payments of principal and interest (excluding
interest accrued to the redemption date) discounted to the
redemption date at a rate defined in the note terms, plus
interest accrued at the redemption date. The Company
may redeem these instruments in whole or in part, after the
Par
call date at
swaps to hedge its interest on these bonds. After considering
the impact of such swaps, these notes effectively
became
floating rate euro obligations and consequently have
been shown as floating rate debt, in the table of long‑term debt
above.
The
% EUR Instruments, due 2024, were issued in May 2017, with
total net issuance proceeds of
EUR
annually in arrears at a fixed rate of
% EUR Instruments above. The Company entered into interest rate swaps to
hedge its interest on these bonds.
After considering the impact of such swaps, these bonds effectively
became floating rate euro obligations and
consequently have been shown as floating rate debt
in the table of long‑term debt above.
In April 2018, the Company issued the following notes
(i) $
% USD Notes, due 2020,
(ii) $
% USD Notes, due 2023, and (iii) $
% USD Notes, due 2028. Each of the
respective notes pays interest semi‑annually in arrears.
The aggregate net proceeds of these bond issues, after
underwriting discount and other fees, amounted to $
2020 and the 2023 Notes were redeemed in full in December
2020.
The Company may redeem the remaining principal
outstanding on the 2028 Notes up to
(i)
scheduled payments of principal and interest (excluding
interest accrued to the redemption date) discounted to the
redemption date at a rate defined in the Notes terms,
plus interest accrued at the redemption date. On or after January
3,
2028 (
any time at a redemption price equal to
accrued interest to, but excluding, the redemption date.
These notes, registered with the U.S. Securities and Exchange
Commission, were issued by ABB Finance (USA) Inc.,
a
unconditionally guaranteed by ABB Ltd. There are no
significant restrictions on the ability of the parent company
to
obtain funds from its subsidiaries by dividend or loan.
In reliance on Rule 3‑10 of Regulation S‑X, the separate
financial
statements of ABB Finance (USA) Inc. are not provided.
F-50
In February 2019, the Company issued the following
notes: (i) CHF
% CHF Notes, due 2024
and (ii) CHF
% CHF Notes, due 2029. Each of the respective notes pays interests
annually in arrears.
The Company recorded aggregate net proceeds, after
underwriting discount and other fees, of CHF
(equivalent to approximately $
The Company’s various debt
instruments contain cross‑default clauses which would allow the bondholders
to
demand repayment if the Company were to default on
any borrowing at or above a specified threshold. Furthermore, all
such bonds constitute unsecured obligations of the
Company and rank pari passu with other debt obligations.
In addition to the bonds described above, included in long‑term
debt at December 31, 2020 and 2019, are
finance lease obligations, bank borrowings of subsidiaries
and other long‑term debt, none of which is individually
significant.
Subsequent events
In January 2021, the Company issued
due in 2030. The Company recorded net proceeds (after underwriting
fees) of EUR
$
Note 13—Other provisions, other current
liabilities and other non-current liabilities
“Other provisions” consisted of the following:
December 31,
($ in millions)
2020
2019
Contract-related provisions
Restructuring and restructuring-related provisions
Provisions for contractual penalties and compliance and litigation
matters
Provision for insurance-related reserves
Other
Total
“Other current liabilities” consisted of the following:
December 31,
($ in millions)
2020
2019
Employee-related liabilities
Accrued expenses
Non-trade payables
Income taxes payable
Accrued customer rebates
Other tax liabilities
Derivative liabilities (see Note 6)
Deferred income
Pension and other employee benefits
Accrued interest
Other
Total
F-51
“Other non‑current liabilities” consisted of the following:
December 31,
($ in millions)
2020
2019
Income tax related liabilities
Deferred income
Provisions for contractual penalties and compliance and litigation
matters
Employee-related liabilities
Environmental provisions
Derivative liabilities (see Note 6)
Other
Total
Note 14—Leases
The Company’s lease obligations
primarily relate to real estate,
machinery and equipment. Prior to the adoption
of the new lease standard in 2019, rent expense was $
leased assets was $
Under the accounting standard, adopted in January
2019, the components of lease expense were as follows:
2020
2019
Land
Machinery
Land
Machinery
and
and
and
and
($ in millions)
buildings
equipment
Total
buildings
equipment
Total
Operating lease cost
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Variable
lease cost
(1)
Short-term lease cost
Sub-lease income
(
20
)
(
1
)
(
21
)
(
2
)
(
2
)
Total
lease expense
(1) Primarily
relates to variable
payments that
are tied to the
consumer price
index and are
therefore included
in the measurement
of the
right-of-use
asset or lease
liability.
F-52
The following table presents supplemental cash flow information
related to leases:
2020
2019
Land
Machinery
Land
Machinery
and
and
and
and
($ in millions)
buildings
equipment
Total
buildings
equipment
Total
Cash paid for amounts included in
the measurement of lease liabilities:
Operating cash flows from
Financing cash flows from
Right-of-use assets obtained
in exchange for new liabilities:
Under operating leases
Under finance leases
At December 31, 2020,
the future net minimum lease payments for operating and finance
leases and the related
present value of the net minimum lease payments consisted
of the following:
Operating Leases
Finance Leases
Land and
Machinery
Land and
Machinery
($ in millions)
buildings
and equipment
buildings
and equipment
2021
2022
2023
2024
2025
Thereafter
Total
minimum lease payments
Difference between undiscounted cash flows
(
80
)
(
2
)
(
43
)
Present value of minimum lease payments
The following table presents certain information related
to lease terms and discount rates:
Operating Leases
Finance Leases
Land and
Machinery
Land and
Machinery
buildings
and equipment
buildings
and equipment
($ in millions)
2020
2019
2020
2019
2020
2019
2020
2019
Weighted-average
remaining term (months)
Weighted-average
discount rate
The present value of minimum finance lease payments
included in “Short‑term debt and current maturities of
long‑term debt”
and “Long‑term debt”
in the Consolidated Balance Sheets at December 31, 2020, amounts
to
$
respectively.
F-53
Note 15—Commitments and contingencies
Contingencies—Regulatory,
Compliance and Legal
Regulatory
As a result of an internal investigation, the Company self-reported
to the Securities and Exchange Commission
(SEC) and the Department of Justice (DoJ) in the United States as well
as to the Serious Fraud Office (SFO)
in the
United Kingdom concerning certain of its past dealings with
Unaoil and its subsidiaries, including alleged improper
payments made by these entities to third parties. In May
2020, the SFO closed its investigation, which it originally
announced in February 2017, as the case did not meet
the relevant test for prosecution. The Company continues
to
cooperate with the U.S. authorities as requested. At this time,
it is not possible for the Company to make an informed
judgment about the outcome of this matter.
Based on findings during an internal investigation, the
Company self-reported to the SEC and the DoJ, in the
United States, to the Special Investigating Unit (SIU)
and the National Prosecuting Authority (NPA)
in South Africa as
well as to various authorities in other countries potential suspect
payments and other compliance concerns in connection
with some of the Company’s
dealings with Eskom and related persons. Many of those
parties have expressed an interest
in, or commenced an investigation into, these matters
and the Company is cooperating fully with them. The Company
paid $
Investigating Unit relating to improper payments and
other
compliance issues associated with the Controls and
Instrumentation Contract, and its Variation
Orders for Units 1 and 2 at Kusile. The Company continues
to cooperate
fully with the National Prosecuting Authority in South
Africa as well as other authorities in their review of the
Kusile
project. Although the Company believes that there
could be an unfavorable outcome in one or more of these ongoing
reviews,
at this time it is not possible for the Company to
make an informed judgment about the possible financial
impact.
General
The Company is aware of proceedings, or the threat
of proceedings, against it and others in respect of private
claims by customers and other third parties with regard
to certain actual or alleged anticompetitive practices. Also, the
Company is subject to other claims and legal proceedings,
as well as investigations carried out by various law
enforcement authorities. With respect
to the above-mentioned claims, regulatory matters, and
any related proceedings,
the Company will bear the related costs, including
costs necessary to resolve them.
Liabilities recognized
At December 31, 2020 and 2019, the Company had aggregate
liabilities of $
respectively, included
in “Other provisions”
and “Other non‑current liabilities”, for the above regulatory,
compliance
and legal contingencies, and none of the individual
liabilities recognized was significant. As it is not possible to make
an
informed judgment on, or reasonably predict, the outcome
of certain matters and as it is not possible, based on
information currently available to management, to
estimate the maximum potential liability on other matters, there could
be adverse outcomes beyond the amounts accrued.
F-54
Guarantees
General
The following table provides quantitative data regarding
the Company’s third‑party guarantees.
The maximum
potential payments represent a “worst‑case scenario”, and
do not reflect management’s
expected outcomes.
December 31,
2020
2019
Maximum potential
($ in millions)
payments
(1)
Performance guarantees
Financial guarantees
Indemnification guarantees
(2)
Total
(1)
Maximum potential payments include amounts in both continuing
and discontinued operations.
(2)
Certain indemnifications provided to Hitachi in connection with
the divestment of Power Grids are without limit.
The carrying amount of liabilities recorded in the Consolidated
Balance Sheets reflects the Company’s
best
estimate of future payments, which it may incur as part
of fulfilling its guarantee obligations. In respect of the above
guarantees, the carrying amounts of liabilities at December
31, 2020, amounted to $
discontinued operations, while at December 31, 2019,
balances were not significant.
The Company is party to various guarantees providing
financial or performance assurances to certain third
parties. These guarantees, which have various maturities up
to 2035, mainly consist of performance guarantees whereby
(i) the Company guarantees the performance of a third
party’s product or service according
to the terms of a contract and
(ii) as member of a consortium/joint venture that includes third
parties, the Company guarantees not only its own
performance but also the work of third parties. Such guarantees
may include guarantees that a project will be completed
within a specified time. If the third party does not fulfill
the obligation, the Company will compensate the guaranteed
party in cash or in kind. The original maturity dates for
the majority of these performance guarantees range from
one
.
In conjunction with the divestment of the high‑voltage cable and
cables accessories businesses, the Company
has entered into various performance guarantees with other
parties with respect to certain liabilities of the divested
business. At December 31, 2020 and 2019, the maximum
potential payable under these guarantees amounts to
$
one
ten years
.
The Company retained obligations for financial, performance
and indemnification guarantees related to the
Power Grids business sold on July 1, 2020 (see Note 3
for details). The performance and financial guarantees
have been
indemnified by Hitachi at the same proportion of its ownership
in Hitachi ABB Power Grids (
guarantees, which have various maturities up to 2035,
primarily consist of bank guarantees, standby letters of credit,
business performance guarantees and other trade-related
guarantees, the majority of which have original maturity dates
ranging from
one
. The maximum amount payable under the guarantees is approximately
$
carrying amounts of liabilities (recorded in discontinued
operations) at December 31, 2020, amounted to $
F-55
Commercial commitments
In addition, in the normal course of bidding for and executing certain
projects, the Company has entered into
standby letters of credit, bid/performance bonds and surety
bonds (collectively “performance bonds”) with various
financial institutions. Customers can draw on such
performance bonds in the event that the Company does not
fulfill its
contractual obligations. The Company would then have
an obligation to reimburse the financial institution for amounts
paid under the performance bonds. At December 31,
2020 and 2019, the total outstanding performance bonds
aggregated to $
discontinued operations.
There have been no significant amounts reimbursed to
financial institutions under these types
of arrangements in 2020, 2019 and 2018.
Product and order‑related contingencies
The Company calculates its provision for product
warranties based on historical claims experience and specific
review of certain contracts.
The reconciliation of the “Provisions for warranties”, including
guarantees of product performance, was as
follows:
($ in millions)
2020
2019
2018
Balance at January 1,
Net change in warranties due to acquisitions, divestments
and
liabilities held for sale
(1)
(
88
)
Claims paid in cash or in kind
(
209
)
(
310
)
(
307
)
Net increase in provision for changes in
estimates, warranties issued and warranties expired
Exchange rate differences
(
10
)
(
36
)
Balance at December 31,
(1)
Includes adjustments
to the initial
purchase price
allocation recorded
during the measurement
period.
a
During 2018, the Company determined that the provision
for a product warranty related to a divested business
was no longer sufficient to cover expected warranty
costs in the remaining warranty period. Due to an unexpected
level
of product failure, the previously estimated product warranty
provision was increased by a total of $
2018 and further increased by $
of sales of products”. As these costs relate to a divested
business, in accordance with the definition of the Company’s
primary measure of segment performance, Operational
EBITA (see Note 23)
,
the costs have been excluded from this
measure.
The warranty liability has been recorded based on
the information currently available and is subject to change
in the future.
Related party transactions
The Company conducts business with certain companies
where members of the Company’s
Board of Directors
or Executive Committee act, or in recent years have acted,
as directors or senior executives. The Company’s
Board of
Directors has determined that the Company’s
business relationships with those companies do not
constitute material
business relationships. This determination was made
in accordance with the Company’s
related party transaction policy
which was prepared based on the Swiss Code of Best Practice
and the independence criteria set forth in the corporate
governance rules of the New York
Stock Exchange.
F-56
Note 16—Income taxes
“Income tax expense” consisted of the following:
($ in millions)
2020
2019
2018
Current taxes
Deferred taxes
(
280
)
(
83
)
(
142
)
Income tax expense allocated to continuing operations
Income tax expense allocated to discontinued operations
Income tax expense from continuing operations is reconciled
below from the Company’s weighted
‑average
global tax rate (rather than from the Swiss domestic statutory
tax rate) as the parent company of the ABB Group,
ABB Ltd, is domiciled in Switzerland and income generated
in jurisdictions outside of Switzerland (hereafter “foreign
jurisdictions”) which has already been subject to corporate
income tax in those foreign jurisdictions is, to a large
extent,
tax exempt in Switzerland. There is no requirement
in Switzerland for any parent company of a group to file a
tax return
of the consolidated group determining domestic and
foreign pre‑tax income. As the Company’s
consolidated income
from continuing operations is predominantly earned
outside of Switzerland, the weighted‑average global tax
rate of the
Company results from enacted corporate income tax
rates in foreign jurisdictions.
The reconciliation of “Income tax expense from
continuing operations” at the weighted‑average tax rate
to the
effective tax rate is as follows:
($ in millions, except % data)
2020
2019
2018
Income from continuing operations before
income taxes
Weighted-average global
tax rate
Income taxes at weighted-average tax rate
Items taxed at rates other than the weighted-average
tax rate
(
7
)
(
43
)
Unrecognized tax benefits
(
38
)
(
22
)
Changes in valuation allowance, net
Effects of changes in tax laws and (enacted) tax
rates
Non-deductible expenses (including impairment of goodwill)
Other, net
Income tax expense from continuing operations
Effective tax rate for the year
The allocation of consolidated income from continued operations,
which is predominantly earned outside of
Switzerland, impacts the “weighted-average global tax
rate”. In 2019, based on the enacted tax rates in the applicable
jurisdictions, the loss recorded for the planned sale of the solar
inverters business reduced the weighted-average global
tax rate by approximately
In 2018, the benefit reported in “Items taxed at rates other
than the weighted-average tax rate” included positive
impacts of $
amount was not significant.
In 2020,
“Changes in valuation allowance, net” predominantly reflects increases
in the valuation allowance
resulting from changes in expectations of future economic
conditions due to impacts on the Company’s
business from
the COVID-19 pandemic.
In 2019, “Changes in valuation allowance, net”
included adjustments to the valuation allowance in certain
jurisdictions where the Company updated its assessment that
it was more likely than not that such deferred tax
assets
would be realized. In 2019, the Company recorded an
increase of $
operations in North America,
including an amount to provide
for certain deferred tax assets arising in 2019.
F-57
In 2018, the “Changes in valuation allowance, net”
included adjustments in valuation allowance recorded in
certain jurisdictions where the Company updated its assessment
that it was more likely than not that such deferred
tax
assets would be realized. The amount included an increase
of $
Europe.
In 2020,
“Effects of changes in tax laws and (enacted) tax rates” primarily
reflects the impact of changes to tax
rates in certain countries in Asia by $
primarily reflects a change in tax law applicable to a country
in Europe.
The benefit in 2019 was mostly offset by a
related change in the valuation allowance, resulting
in a net benefit of $
In 2020, the impact on the income tax expense from
“Non-deductible expenses” was $
an impact of $
$
were principally not deductible. Non-deductible expenses
also includes other items that were deducted for financial
accounting purposes but are typically not tax deductible, such as
interest expense, local taxes on productive activities,
disallowed meals and entertainment expenses and other
similar items. The amounts in 2019 and 2018 related primarily
to these typically non-deductible items.
In 2020 and 2018, “Unrecognized tax benefits” in the
table above included a net benefit of $
$
authorities while in 2019, “Unrecognized tax benefits” included
a net charge of $
In 2020, “Other, net” represents income
tax expense of $
Europe.
F-58
Deferred tax assets and liabilities (excluding amounts held
for sale and in discontinued operations) consisted of
the following:
December 31,
($ in millions)
2020
2019
Deferred tax assets:
Unused tax losses and credits
Provisions and other accrued liabilities
Other current assets including receivables
Pension
Inventories
Intangible assets
Other
Total
gross deferred tax asset
Valuation
allowance
(
1,518
)
(
1,632
)
Total
gross deferred tax asset, net of valuation
allowance
Deferred tax liabilities:
Property, plant and
equipment
(
275
)
(
244
)
Intangible assets
(
419
)
(
483
)
Other assets
(
65
)
(
161
)
Pension
(
223
)
(
214
)
Other liabilities
(
310
)
(
359
)
Inventories
(
29
)
(
39
)
Unremitted earnings of subsidiaries
(
333
)
(
353
)
Total
gross deferred tax liability
(
1,654
)
(
1,853
)
Net deferred tax asset (liability
)
(
1
)
Included in:
“Deferred taxes”—non-current assets
“Deferred taxes”—non-current liabilities
(
661
)
(
911
)
Net deferred tax asset (liability)
(
1
)
Certain entities have deferred tax assets related to net operating
loss carry‑forwards and other items. As
recognition of these assets in certain entities did not
meet the more likely than not criterion, valuation allowances have
been recorded. “Unused tax losses and credits” at December
31, 2020 and 2019, in the table above, included
$
limitations imposed by the relevant tax law,
the Company determined that, more likely than not, such deferred
tax assets
would not be realized.
The valuation allowance at December 31, 2020, 2019
and 2018, was $
$
At December 31, 2020 and 2019, deferred tax liabilities totaling
$
have been provided for withholding taxes, dividend
distribution taxes or additional corporate income taxes
(hereafter
“withholding taxes”) on unremitted earnings which will be
payable in foreign jurisdictions in the event of repatriation
of
the foreign earnings to Switzerland. Income which has
been generated outside of Switzerland and has already been
subject to corporate income tax in such foreign jurisdictions
is, to a large extent, tax exempt in Switzerland and
therefore, generally no or only limited Swiss income tax has
to be provided for on the repatriated earnings of foreign
subsidiaries.
F-59
Certain countries levy withholding taxes on dividend distributions
and these taxes cannot always be fully
reclaimed by the Company’s
relevant subsidiary receiving the dividend although the taxes
have to be withheld and paid
by the relevant subsidiary distributing such dividend
.
In 2020 and 2019, certain taxes arose in certain foreign
jurisdictions for which the technical merits do not allow
utilization of benefits. At December 31, 2020 and 2019, foreign
subsidiary retained earnings subject to withholding taxes
upon distribution of approximately $
$
operations as well as business growth through working
capital and capital expenditure in those countries and,
consequently, no
deferred tax liability was recorded.
At December 31, 2020, net operating loss carry‑forwards
of $
available to reduce future income taxes of certain subsidiaries.
Of these amounts, $
forwards and $
for carryforward indefinitely.
The largest amount of these carry‑forwards
related to the Company’s Europe
operations.
Unrecognized tax benefits consisted of the following:
Penalties and
interest
related to
Unrecognized
unrecognized
($ in millions)
tax benefits
tax benefits
Total
Classification as unrecognized tax items on January
1, 2018
Net change due to acquisitions and divestments
Increase relating to prior year tax positions
Decrease relating to prior year tax positions
(
99
)
(
85
)
Increase relating to current year tax positions
Decrease due to settlements with tax authorities
(
44
)
(
17
)
(
61
)
Decrease as a result of the applicable statute of limitations
(
66
)
(
31
)
(
97
)
Exchange rate differences
(
24
)
(
11
)
(
35
)
Balance at December 31, 2018, which would, if recognized,
affect
the effective tax rate
Net change due to acquisitions and divestments
Increase relating to prior year tax positions
Decrease relating to prior year tax positions
(
82
)
(
63
)
(
145
)
Increase relating to current year tax positions
Decrease due to settlements with tax authorities
(
57
)
(
8
)
(
65
)
Decrease as a result of the applicable statute of limitations
(
83
)
(
28
)
(
111
)
Exchange rate differences
(
9
)
(
5
)
(
14
)
Balance at December 31, 2019, which would, if recognized,
affect
the effective tax rate
Net change due to acquisitions and divestments
Increase relating to prior year tax positions
Decrease relating to prior year tax positions
(
161
)
(
57
)
(
218
)
Increase relating to current year tax positions
Decrease due to settlements with tax authorities
(
340
)
(
75
)
(
415
)
Decrease as a result of the applicable statute of limitations
(
59
)
(
16
)
(
75
)
Exchange rate differences
Balance at December 31, 2020, which would, if recognized,
affect
the effective tax rate
In 2020, the “Increase relating to current year tax positions”
included a total of $
the interpretation of tax law and double tax treaty agreements by
competent tax authorities, of which $
reported as Income tax expense in discontinued operations.
F-60
In 2019 and 2018, the “Increase relating to current year tax
positions” included a total of $
$
competent tax authorities.
In 2020, the “Increase relating to prior year tax positions”
is predominantly related to the interpretation of tax
law and double tax treaty agreements by competent
tax authorities in Europe, of which $
tax expense in discontinued operations.
In 2020, the “Decrease relating to prior year tax positions” included
a total of $
interpretation of tax law in Asia and changed tax risk assessments
in Europe of $
In 2020, the “Decrease due to settlements with tax authorities”
is predominantly related to closed tax audits in
Europe.
At December 31, 2020,
the Company expected the resolution, within the next twelve
months, of unrecognized
tax benefits related to pending court cases amounting
to $
the Company had not identified any other significant changes which
were considered reasonably possible to occur
within the next twelve months.
At December 31, 2020,
the earliest significant open tax years that remained subject to
examination were the
following:
Region
Year
Europe
United States
Rest of Americas
China
Rest of Asia, Middle East and Africa
Note 17—Employee benefits
The Company operates defined benefit pension plans, defined
contribution pension plans, and termination
indemnity plans, in accordance with local regulations and
practices. At December 31, 2020, the Company’s
most
significant defined benefit pension plans are in Switzerland
as well as in Germany, the
United Kingdom, and the United
States. These plans cover a large portion of the
Company’s employees and provide
benefits to employees in the event of
death, disability,
retirement, or termination of employment. Certain of these plans
are multi‑employer plans. The
Company also operates other postretirement benefit plans
including postretirement health care benefits and other
employee‑related benefits for active employees including
long‑service award plans. The measurement date used for the
Company’s employee
benefit plans is December 31. The funding policies of the Company
’s plans are consistent with the
local government and tax requirements.
During 2020, the Company took steps to transfer
the defined benefit pension risks in
countries to external financial institutions.
third plan involved the settlement of specific obligations
for certain former employees. In connection with these
transactions, the Company made net payments of $
$
The Company also made cash payments of $
in 2020 for the settlement of pension obligations in discontinued
operations.
The Company recognizes in its Consolidated Balance Sheets
the funded status of its defined benefit pension
plans, postretirement plans, and other employee‑related
benefits measured as the difference between the
fair value of the
plan assets and the benefit obligation.
F-61
Unless otherwise indicated, the following tables include amounts
relating to both continuing and discontinued
operations.
Obligations and funded status of the plans
The change in benefit obligation, change in fair value
of plan assets, and funded status recognized in the
Consolidated Balance Sheets were as follows:
Other
Defined pension
postretirement
benefits
benefits
Switzerland
International
International
($ in millions)
2020
2019
2020
2019
2020
2019
Benefit obligations at January 1,
Service cost
Interest cost
Contributions by plan participants
—
—
Benefit payments
(
160
)
(
133
)
(
295
)
(
302
)
(
12
)
(
10
)
Settlements
(
101
)
(
111
)
(
2,542
)
(
102
)
—
—
Benefit obligations of businesses acquired (divested)
(
765
)
—
(
165
)
(
21
)
(
5
)
—
Actuarial (gain) loss
(
1
)
Plan amendments and other
—
—
(
64
)
(
3
)
(
5
)
Exchange rate differences
(
58
)
Benefit obligation at December 31,
Fair value of plan assets at January 1,
—
—
Actual return on plan assets
—
—
Contributions by employer
Contributions by plan participants
—
—
Benefit payments
(
160
)
(
133
)
(
295
)
(
302
)
(
12
)
(
10
)
Settlements
(
101
)
(
111
)
(
2,542
)
(
102
)
—
—
Plan assets of businesses acquired (divested)
(
664
)
—
(
82
)
(
12
)
—
—
Plan amendments and other
—
—
—
—
—
Exchange rate differences
(
27
)
—
—
Fair value of plan assets at December 31,
—
—
Funded status — overfunded (underfunded)
(
119
)
(
919
)
(
1,632
)
(
98
)
(
110
)
The amounts recognized in "Accumulated other comprehensive
loss" and "Noncontrolling interests" were:
December 31,
2020
2019
2018
2020
2019
2018
Defined pension
Other postretirement
($ in millions)
benefits
benefits
Net actuarial (loss) gain
(
2,038
)
(
2,782
)
(
2,628
)
Prior service credit
Amount recognized in OCI
(1)
(2)
(
1,963
)
(
2,723
)
(
2,554
)
Taxes associated with
amount recognized
in OCI and NCI
—
—
—
Amount recognized in OCI and NCI, net of tax
(3)
(
1,589
)
(
2,187
)
(
2,019
)
(1)
OCI represent
s
“Accumulated other
comprehensive
loss”.
(2)
NCI represents
“Noncontrolling
interests”.
(3)
NCI, net of tax,
amounted to $
(
1
)
(
1
)
(
1
)
F-62
In addition, the following amounts were recognized in
the Company's Consolidated Balance Sheets:
December 31,
2020
2019
2020
2019
2020
2019
Defined pension
Other postretirement
benefits
benefits
($ in millions)
Switzerland
International
International
Overfunded plans
—
—
Underfunded plans — current
(
78
)
(
22
)
(
295
)
(
9
)
(
14
)
Underfunded plans — non-current
(
4
)
(
103
)
(
989
)
(
1,408
)
(
89
)
(
96
)
Funded status - underfunded
(
119
)
(
919
)
(
1,632
)
(
98
)
(
110
)
Amounts reported as assets and
liabilities held for sale
(
78
)
(
277
)
(
5
)
December 31,
($ in millions)
2020
2019
Non-current assets
Overfunded pension plans
Other employee-related benefits
Pension and other employee benefits
December 31,
($ in millions)
2020
2019
Current liabilities
Underfunded pension plans
(
22
)
(
374
)
Underfunded other postretirement benefit plans
(
9
)
(
14
)
Other employee-related benefits
(
11
)
(
72
)
Pension and other employee benefits
(
42
)
(
460
)
Amounts reported as Current
liabilities held for sale
(
424
)
December 31,
($ in millions)
2020
2019
Non-current liabilities
Underfunded pension plans
(
993
)
(
1,510
)
Underfunded other postretirement benefit plans
(
89
)
(
96
)
Other employee-related benefits
(
149
)
(
186
)
Pension and other employee benefits
(
1,231
)
(
1,792
)
F-63
The accumulated benefit obligation (ABO) for all defined
benefit pension plans was $
$
value of plan assets, for pension plans with a PBO in excess
of fair value of plan assets or ABO in excess of fair value
of
plan assets, was:
PBO exceeds fair value of plan assets
ABO exceeds fair value of plan assets
($ in millions)
Switzerland
International
Switzerland
International
December 31,
2020
2019
2020
2019
2020
2019
2020
2019
PBO
ABO
Fair value of plan assets
All of the Company's other postretirement benefit plans
are unfunded.
Components of net periodic benefit cost
Net periodic benefit cost consisted of the following:
Defined pension
Other postretirement
benefits
benefits
Switzerland
International
International
($ in millions)
2020
2019
2018
2020
2019
2018
2020
2019
2018
Operational pension cost:
Service cost
Operational pension cost
Non-operational pension cost (credit):
Interest cost
Expected return on plan assets
(
123
)
(
112
)
(
117
)
(
253
)
(
276
)
(
305
)
—
—
—
Amortization of prior service cost (credit)
(
11
)
(
14
)
(
15
)
(
2
)
(
5
)
(
5
)
Amortization of net actuarial loss
—
—
(
3
)
(
3
)
(
1
)
Curtailments, settlements and special
termination benefits
—
(
10
)
—
Non-operational pension cost (credit)
(
115
)
(
100
)
(
102
)
(
2
)
(
14
)
(
2
)
Net periodic benefit cost
(
41
)
(
24
)
(
10
)
(
1
)
(
13
)
(
1
)
The components of net periodic benefit cost other than
the service cost component are included in the line Non-
operational pension (cost) credit in the income statement.
Net periodic benefit cost includes $
and $
F-64
Assumptions
The following weighted-average assumptions were used
to determine benefit obligations:
December 31,
2020
2019
2020
2019
2020
2019
Defined pension
Other postretirement
benefits
benefits
(in %)
Switzerland
International
International
Discount rate
Rate of compensation increase
—
—
Rate of pension increase
—
—
—
—
Cash balance interest credit rate
—
—
For the Company’s significant
benefit plans, the discount rate used at each measurement
date is set based on a
high-quality corporate bond yield curve (derived based
on bond universe information sourced from reputable third-party
index and data providers and rating agencies)
reflecting the timing, amount and currency of the future expected
benefit
payments for the respective plan. Consistent discount rates
are used across all plans in each currency zone, based on
the
duration of the applicable plan(s) in that zone. For plans in
the other countries, the discount rate is based on high quality
corporate or government bond yields applicable in the respective
currency, as appropriate
at each measurement date with
a duration broadly consistent with the respective plan’s
obligations.
At the end of 2018, the Company changed the approach
used to calculate the service and interest components
of net periodic benefit cost for its significant benefit plans
to provide a more precise measurement of service and interest
costs. This change compared to the previous approach
resulted in a net decrease in the service and interest components
for benefit cost in 2019. Previously,
the Company calculated the service and interest cost components
utilizing a single
weighted-average discount rate derived from the yield
curve used to measure the benefit obligation at the beginning
of
the period. The Company has elected to utilize an approach
that discounts the individual expected cash flows using the
applicable spot rates derived from the yield curve over
the projected cash flow period. This change does not affect
the
measurement of our total benefit obligations.
The following weighted‑average assumptions were used
to determine the “Net periodic benefit cost”:
Defined pension
Other postretirement
benefits
benefits
Switzerland
International
International
(in %)
2020
2019
2018
2020
2019
2018
2020
2019
2018
Discount rate
Expected long-term rate of return on plan assets
—
—
—
Rate of compensation increase
—
—
—
—
Cash balance interest credit rate
—
—
—
The “Expected long‑term rate of return on plan assets” is derived
for each benefit plan by considering the
expected future long‑term return assumption for each
individual asset class. A single long‑term return assumption
is then
derived for each plan based upon the plan’s
target asset allocation.
F-65
The Company maintains other postretirement benefit plans,
which are generally contributory with participants’
contributions adjusted annually.
The assumptions used were:
December 31,
2020
2019
Health care cost trend rate assumed for next year
Rate to which the trend rate is assumed to decline (the ultimate
trend rate)
Year
that the rate reaches the ultimate trend rate
Plan assets
The Company has pension plans in various countries with
the majority of the Company’s
pension liabilities
deriving from a limited number of these countries.
The pension plans are typically funded by regular
contributions from employees and the Company.
These plans
are typically administered by boards of trustees (which include
Company representatives) whose primary responsibilities
include ensuring that the plans meet their liabilities through
contributions and investment returns. The boards of trustees
have the responsibility for making key investment strategy
decisions within a risk‑controlled framework.
The pension plan assets are invested in diversified por
tfolios that are managed by third‑party asset managers, in
accordance with local statutory regulations, pension plan
rules and the respective plans’ investment guidelines, as
approved by the boards of trustees.
Plan assets are generally segregated from those of the
Company and invested with the aim of meeting the
respective plans’ projected future pension liabilities. Plan assets
are measured at fair value at the balance sheet
date.
The boards of trustees manage the assets of the pension
plans in a risk‑controlled manner and assess the risks
embedded in the pension plans through asset/liability management
studies. Asset/liability management studies typically
take place every three years. However,
the risks of the plans are monitored on an ongoing basis.
The board of trustees’ investment goal is to maximize the
long‑term returns of plan assets within specified risk
parameters, while considering the future liabilities and liquidity
needs of the individual plans. Risk measures taken into
account include the funding ratio of the plan, the
likelihood of extraordinary cash contributions being required, the
risk
embedded in each individual asset class, and the plan
asset portfolio as a whole.
The Company’s global
pension asset allocation is the result of the asset allocations of
the individual plans,
which are set by the respective boards of trustees. The
target asset allocation of the Company’s
plans on a
weighted‑average basis is as follows:
Target
(in %)
Switzerland
International
Asset class
Equity
Fixed income
Real estate
Other
Total
The actual asset allocations of the plans are in line with the
target asset allocations.
F-66
Equity securities primarily includes investments in large‑cap
and mid‑cap publicly traded companies. Fixed
income assets primarily include corporate bonds
of companies from diverse industries and government bonds.
Both
fixed income and equity assets are invested either
via funds or directly in segregated investment mandates,
and include
an allocation to emerging markets. Real estate consists
primarily of investments in real estate in Switzerland
held in the
Swiss plans. The “Other” asset class includes investments in
private equity, hedge
funds, commodities, and cash, and
reflects a variety of investment strategies.
Based on the above global asset allocation and the fair
values of the plan assets, the expected long‑term return
on assets at December 31, 2020, is
investment performance of the asset classes and individual
asset managers. Due to the diversified nature of the
investments, the Company is of the opinion that no significant
concentration of risks exists in its pension fund assets.
At December 31, 2020 and 2019, plan assets include ABB Ltd’s
shares (as well as an insignificant amount of
the Company’s debt instruments)
with a total value of $
The fair values of the Company’s
pension plan assets by asset class are presented below.
For further
information on the fair value hierarchy and an overview
of the Company’s valuation
techniques applied, see the “Fair
value measures” section of Note 2.
December 31, 2020
Not subject
Total
($ in millions)
Level 1
Level 2
to leveling
(1)
fair value
Asset class
Equity
Equity securities
Mutual funds/commingled funds
Emerging market mutual funds/commingled
funds
Fixed income
Government and corporate securities
Government and corporate—mutual funds/commingled
funds
Emerging market bonds—mutual funds/commingled
funds
Real estate
Insurance contracts
Cash and short-term investments
Private equity
Hedge funds
Total
F-67
December 31, 2019
Not subject
Total
($ in millions)
Level 1
Level 2
to leveling
(1)
fair value
Asset class
Equity
Equity securities
Mutual funds/commingled funds
Emerging market mutual funds/commingled
funds
Fixed income
Government and corporate securities
Government and corporate—mutual funds/commingled
funds
Emerging market bonds—mutual funds/commingled
funds
Real estate
Insurance contracts
Cash and short-term investments
Private equity
Hedge funds
Commodities
Total
(1)
Amounts relate
to assets measured
using the NAV
practical expedient
which are not
subject to leveling.
The Company applies accounting guidance related to the
presentation of certain investments using the net asset
value (NAV)
practical expedient. This accounting guidance exempts investments
using this practical expedient from
categorization within the fair value hierarchy.
Investments measured at NAV
are primarily non exchange-traded
commingled or collective funds in private equity and
real estate where the fair value of the underlying assets is
determined by the investment manager.
Investments in private equity can never be redeemed, but
instead the funds will
make distributions through liquidation of the underlying
assets. Total unfunded
commitments for the private equity
funds were approximately $
period of up to three years after subscribing. After this
period, the real estate funds typically offer a redemption
notice of
three to twelve months.
Contributions
Employer contributions were as follows:
Defined pension
Other postretirement
benefits
benefits
Switzerland
International
International
($ in millions)
2020
2019
2020
2019
2020
2019
Total contributions
to defined benefit pension
and other postretirement benefit plans
Of which, discretionary contributions to
defined benefit pension plans
In 2020, total contributions included non‑cash contributions totaling
$
securities to certain of the Company’s
pension plans in Switzerland and the United Kingdom. The
contributions in 2019
and 2018 were not significant.
F-68
The Company expects to contribute approximately
$
contributions, to its defined benefit pension plans in 2021.
Of these discretionary contributions, $
to be non‑cash contributions. The Company expects to
contribute approximately $
benefit plans in 2021.
The Company also contributes to a number of defined
contribution plans. The aggregate expense for these
plans in continuing operations was $
Contributions to multi‑employer plans were not significant
in 2020, 2019 and 2018.
Estimated future benefit payments
The expected future cash flows to be paid by the
Company’s plans in respect of pension
and other
postretirement benefit plans at December 31, 2020, are
as follows:
Defined pension
Other postretirement
benefits
benefits
($ in millions)
Switzerland
International
International
2021
2022
2023
2024
2025
Years
2026 - 2030
Note 18—Sharebased payment arrangements
The Company has granted share-based instruments to its employees
under
plans, as more fully described in the respective sections below.
Compensation cost for equity‑settled awards is recorded
in Total cost of
sales and in Selling, general and administrative expenses and
totaled $
$
general and administrative expenses, was not significant,
as mentioned in the WARs,
LTIP
and Other share‑based
payments sections of this note. The total tax benefit
recognized in 2020,
2019 and 2018 was not significant.
At December 31, 2020, the Company had the ability
to issue up to
capital in connection with share‑based payment arrangements.
In addition,
the Company as treasury stock at December 31, 2020
,
could be used to settle share‑based payment arrangements.
As the primary trading market for the shares of ABB Ltd is the
SIX Swiss Exchange (on which the shares are
traded in Swiss francs) and substantially all the share‑based
payment arrangements with employees are based on
the
Swiss franc share or have strike prices set in Swiss francs, certain
data disclosed below related to the instruments granted
under share‑based payment arrangements are presented
in Swiss francs.
Management Incentive Plan
Up to 2019, the Company offered, under the MIP,
options and cash‑settled WARs
to key employees for
consideration. Starting in 2020, the employee group previously
eligible to receive grants under the MIP were granted
shares under the LTIP
(see LTIP section
below) and consequently no grants were made in 2020
under the MIP.
The options granted under the MIP allow participants to
purchase shares of ABB Ltd at predetermined prices.
Participants may sell the options rather than exercise the
right to purchase shares. Equivalent warrants are listed by a
third‑party bank on the SIX Swiss Exchange, which facilitates pricing
and transferability of options granted under this
plan. The options entitle the holder to request that the
third‑party bank purchase such options at the market price of
equivalent listed warrants related to that MIP launch. If
the participant elects to sell the options, the options will
thereafter be held by a third party and, consequently,
the Company’s obligation
to deliver shares will be toward this third
party.
F-69
Each WAR
gives the participant the right to receive, in cash, the
market price of an equivalent listed warrant on
the date of exercise of the WAR.
Participants may exercise or sell options and exercise WARs
after the vesting period,
which is
Options
The fair value of each option was estimated on the date
of grant using a lattice model that used the assumptions
noted in the table below.
Expected volatilities were based on implied volatilities from
equivalent listed warrants on
ABB Ltd shares. The expected term of the options granted
is the contractual
six‑year
fact that after the vesting period, a participant can elect to
sell the option rather than exercise the right to purchase
shares, thereby also realizing the time value of the options.
The risk‑free rate was based on a
six‑year
interest rate, reflecting the
six‑year
previous comparable MIP launches.
2019
2018
Expected volatility
Dividend yield
Expected term
Risk-free interest rate
-
0.9
%
-
0.1
%
Presented below is a summary of the activity related
to options under the MIP:
Weighted-
Weighted-
Aggregate
average
average
intrinsic
exercise
remaining
value
Number of
Number of
price
contractual
(in millions
options
shares
(in Swiss
term
of Swiss
(in millions)
(in millions)
(1)
francs)
(2)
(in years)
francs)
(3)
Outstanding at January 1, 2020
Exercised
(4)
(
72.5
)
(
14.5
)
Forfeited
(
8.9
)
(
1.8
)
Expired
(
0.1
)
Outstanding at December 31, 2020
Vested and expected
to vest at December 31, 2020
Exercisable at December 31, 2020
(1)
Information presented
reflects the number
of ABB Ltd shares
that can be received
upon exercise,
as options have
a conversion ratio
of
:1.
(2)
Information presented
reflects the exercise
price per ABB
Ltd share.
(3)
Computed using
the closing
price, in Swiss
francs, of ABB
Ltd shares on
the SIX Swiss
Exchange and the
exercise price
of each option
in Swiss francs.
(4)
The cash received
upon exercise
amounted to approximately
$
At December 31, 2020, there was $
options granted under the MIP.
That cost is expected to be recognized over a weighted‑average
period of
weighted‑average grant‑date fair value (per option)
of options granted during 2019 and 2018 was
aggregate intrinsic value (on the date of exercise) of options
exercised was $
while the amount in 2019 was not significant.
F-70
Presented below is a summary,
by launch, related to options outstanding at December 31,
2020:
Weighted-
average
Number of
Number of
remaining
options
shares
contractual
Exercise price (in Swiss francs)
(1)
(in millions)
(in millions)
(2)
term (in years)
Total
number of options and shares
(1)
Information presented
reflects the exercise
price per share
of ABB Ltd.
(2)
Information presented
reflects the number
of shares of
ABB Ltd that can
be received upon
exercise.
WARs
As each WAR
gives the holder the right to receive cash equal to
the market price of the equivalent listed
warrant on date of exercise, the Company records a
liability based upon the fair value of outstanding WARs
at each
period end, accreted on a straight‑line basis over the
three‑year
expenses, the Company records the changes in both
the fair value and vested portion of the outstanding WARs.
To
hedge its exposure to fluctuations in the fair value of outstanding
WARs,
the Company purchased cash‑settled call
options, which entitle the Company to receive amounts
equivalent to its obligations under the outstanding WARs.
The
cash‑settled call options are recorded as derivatives measured
at fair value (see Note 6), with subsequent changes in
fair
value recorded in Selling, general and administrative expenses to
the extent that they offset the change in fair value
of
the liability for the WARs.
The total impact in Selling, general and administrative
expenses in 2020, 2019 and 2018 was
not significant.
The aggregate fair value of outstanding WARs
was $
2019, respectively.
The fair value of WARs
was determined based upon the trading price of equivalent
warrants listed
on the SIX Swiss Exchange.
Presented below is a summary of the activity related
to WARs:
Number of WARs
(in millions)
Outstanding at January 1, 2020
Exercised
(
17.1
)
Forfeited
(
0.7
)
Outstanding at December 31, 2020
Exercisable at December 31, 2020
The aggregate fair value at date of grant of WARs
granted in 2019 and 2018 was not significant.
As mentioned
previously,
exercise of WARs
by participants. The amounts in 2019 and 2018 were
not significant.
F-71
Employee Share Acquisition Plan
The employee share acquisition plan (ESAP) is an employee
stock‑option plan with a savings feature.
Employees save over a
twelve‑month
employees choose whether to exercise their stock options using
their savings plus interest, if any,
to buy ABB Ltd shares
(American Depositary Shares (ADS) in the case of
employees in the United States and Canada—each ADS representing
interest. The savings are accumulated in bank accounts held
by a third‑party trustee on behalf of the participants and
earn interest, where applicable. Employees can withdraw
from the ESAP at any time during the savings period and will
be entitled to a refund of their accumulated savings.
The fair value of each option is estimated on the date
of grant using the same option valuation model as
described under the MIP,
using the assumptions noted in the table below.
The expected term of the option granted has
been determined to be the contractual
one‑year
participants are required to decide whether to exercise their
options or have their savings returned with interest. The
risk‑free rate is based on
one‑year
one‑year
estimating forfeitures, the Company has used the data
from previous ESAP launches.
2020
2019
2018
Expected volatility
Dividend yield
Expected term
Risk-free interest rate
-
0.7
%
-
0.7
%
-
0.6
%
Presented below is a summary of activity under the ESAP:
Weighted-
Weighted-
Aggregate
average
average
intrinsic
exercise
remaining
value
Number of
price
contractual
(in millions
shares
(in Swiss
term
of Swiss
(in millions)
(1)
francs)
(2)
(in years)
francs)
(2)(3)
Outstanding at January 1, 2020
Granted
Forfeited
(
0.1
)
Exercised
(4)
(
1.4
)
Not exercised (savings returned plus interest)
(
0.8
)
Outstanding at December 31, 2020
Vested and expected
to vest at December 31, 2020
Exercisable at December 31, 2020
—
—
—
—
(1)
Includes shares
represented by
ADS.
(2)
Information presented
for ADS is based
on equivalent
Swiss franc denominated
awards.
(3)
Computed using
the closing
price, in Swiss
francs, of ABB
Ltd shares on
the SIX Swiss
Exchange and the
exercise price
of each option
in Swiss francs.
(4)
The cash received
in 2020 upon
exercise was approximately
$
The exercise prices per ABB Ltd share and per ADS of
, respectively, for
the
2020 grant,
, respectively, for the
2019 grant, and
,
respectively, for the
2018 grant were determined using the closing price of the
ABB Ltd share on the SIX Swiss
Exchange and ADS on the New York
Stock Exchange on the respective grant dates.
F-72
At December 31, 2020, the total unrecognized compensation
cost related to non‑vested options granted under
the ESAP was not significant. The weighted‑average
grant‑date fair value (per option) of options granted during
2020,
2019 and 2018 was
(on the date of exercise) of options exercised in 2020,
2019 and 2018 was not significant.
Long-Term
Incentive Plan
The long‑term incentive plan (LTIP)
involves annual grants of the Company’s
stock subject to certain
conditions (Performance Shares) to members of the Company’s
Executive Committee and selected other senior
executives, as defined in the terms of the LTIP.
In 2020, certain of the employee group previously eligible
to receive
grants under the MIP are now included in the LTIP.
The ultimate amount delivered under the LTIP’s
Performance
Shares grant is based on achieving certain results against targets,
as set out below,
over a
three-year
and the final amount is delivered to the participants at the
end of this period. In addition, for certain awards to vest, the
participant has to fulfill a
three-year
The Performance Shares under the 2020, 2019 and 2018
LTIP launch
es include a performance component,
based on the Company’s earnings
per share performance, and a market component, based
on the Company’s relative
total shareholder return.
For the relative total shareholder return component
of the Performance Shares,
the actual number of shares that
will be delivered at a future date is based on the Company’s
total shareholder return performance relative to a peer group
of companies over a
three-year
delivered will vary depending on the relative total shareholder
return outcome achieved between a lower threshold (no
shares delivered) and an upper threshold (the number
of shares delivered is capped at
grant).
For the earnings per share performance component
of the Performance Shares,
the actual number of shares that
will be delivered at a future date is based on the Company’s
average earnings per share over
three
beginning with the year of launch. The actual number
of shares that will ultimately be delivered will vary depending
on
the earnings per share outcome as computed under each
LTIP launch,
interpolated between a lower threshold (no shares
delivered) and an upper threshold (the number of shares
delivered is capped at
Under the 2019 and 2018 LTIP
launches, participants receive
form of shares and
receive the
have the ability to receive any of the award in cash,
subject to legal restrictions in certain jurisdictions.
Presented below is a summary of activity under the Performance
Shares of the LTIP:
Weighted-average
Number of
grant-date
Performance Shares
fair value per share
(in millions)
(Swiss francs)
Nonvested at January 1, 2020
Granted
Vested
(
0.7
)
Forfeited
(
0.4
)
Nonvested at December 31, 2020
The aggregate fair value, at the dates of grant, of Performance
Shares granted in 2019 and 2018 was
$
that vested during 2019 and 2018 was $
significant.
The weighted-average grant-date fair value (per share) of
shares granted during 2020, 2019 and 2018 was
F-73
Starting in 2020, key employees which were previously
eligible to participate in the MIP and which were not
included in the employee group granted the Performance
Shares described above, were granted Restricted Shares of the
Company under the LTIP.
The Restricted Shares do not have performance conditions and vest over
a
three-year
from the grant date.
Presented below is a summary of activity under the Restricted
Shares of the LTIP:
Weighted-average
Number of
grant-date
Restricted Shares
fair value per share
(in millions)
(Swiss francs)
Nonvested at January 1, 2020
Granted
Forfeited
(
0.1
)
Nonvested at December 31, 2020
The aggregate fair value, at the dates of grant, of Restricted
Shares granted in 2020 was $
weighted‑average grant‑date fair value (per share) of
shares granted during 2020 was
Equity‑settled awards are recorded in the Additional
paid‑in capital component of Stockholders’ equity,
with
compensation cost recorded in Selling, general and administrative
expenses over the vesting period (which is from grant
date to the end of the vesting period) based on the grant‑date
fair value of the shares. Cash‑settled awards are recorded
as
a liability, remeasured
at fair value at each reporting date for the percentage vested,
with changes in the liability
recorded in Selling, general and administrative expenses.
At December 31,
2020, total unrecognized compensation cost related to equity‑settled
awards under the LTIP
was $
recorded in 2020, 2019 and 2018 for cash‑settled awards was
not significant.
For the relative total shareholder return component
of the LTIP
launches, the fair value of granted shares at
grant date, for equity‑settled awards, and at each reporting
date, for cash‑settled awards, is determined using a Monte
Carlo simulation model. The main inputs to this model
are the Company’s share price
and dividend yield, the volatility
of the Company’s and the
peer group’s share price as well
as the correlation between the peer companies. For
the
earnings per share component of the LTIP
launches, the fair value of granted shares is based on
the market price of the
ABB Ltd share at grant date for equity‑settled awards and
at each reporting date for cash‑settled awards, as well as the
probable outcome of the earnings per share achievement,
as computed using a Monte Carlo simulation model. The
main
inputs to this model are the Company’s
and external financial analysts’ revenue growth rates and Operational
EBITA
margin expectations.
Other share‑based payments
The Company has other minor share‑based payment arrangements
with certain employees. The compensation
cost related to these arrangements in 2020, 2019 and
2018 was not significant.
Note 19—Stockholders' equity
At both December 31, 2020 and 2019, the Company had
F-74
At the Annual General Meeting of Shareholders (AGM)
in March 2020,
the shareholders approved the proposal
of the Board of Directors to distribute a total of
amounted to $
proposal of the Board of Directors to distribute a total
of
amounted to $
proposal of the Board of Directors to distribute a total
of
amounted to $
In July 2020, the Company announced it initially intends
to buy
time represented a maximum of
buyback program that started in July 2020. The share
buyback program is executed on a second trading line on the SIX
Swiss Exchange and is planned to run until the Company’s
AGM in March 2021. At the AGM the Company intends to
request shareholder approval to cancel the shares purchased
through this program. In 2020, under this program,
the
Company purchased
In addition to the ongoing share buyback program,
in the fourth quarter of 2020,
the Company purchased
transactions resulted in an increase in Treasury
stock of $
purchased on the open market an aggregate of
employee share programs. These transactions resulted in an
increase in Treasury stock of $
Upon and in connection with each launch of the Company’s
MIP,
the Company sold call options to a bank at
fair value, giving the bank the right to acquire shares
equivalent to the number of shares represented by the MIP WAR
awards to participants. Under the terms of the agreement
with the bank, the call options can only be exercised by
the
bank to the extent that MIP participants have exercised
their WARs.
At December 31, 2020, such call options
representing
price of
August 2025. However, only
francs (weighted‑average strike price of
of the agreement with the bank.
In addition to the above, at December 31, 2020,
the Company had further outstanding obligations to deliver:
•
up to
price of
•
up to
price of
•
up to
price of
•
up to
price of
•
up to
price of
•
up to
•
up to
vesting and expiring in April 2023, May 2022 and
April 2021, respectively,
and
•
approximately
employees.
F-75
See Note 18 for a description of the above share‑based
payment arrangements.
In 2020 and 2018, the Company delivered
stock, for options exercised in relation to the MIP,
while in 2019 the amount was not significant. In addition,
in 2020
and 2019 the Company delivered
delivered in 2018 under the ESAP.
Amounts available to be distributed as dividends to
the stockholders of ABB Ltd are based on the requirements
of Swiss law and ABB Ltd’s Articles
of Incorporation, and are determined based on amounts presented
in the
unconsolidated financial statements of ABB Ltd, prepared
in accordance
with Swiss law. At December
31, 2020,
the
total unconsolidated stockholders’ equity of ABB Ltd was
representing reserves and
(treasury stock). Of the reserves,
Swiss francs ($
In February 2021, the Company announced that a
proposal will be put to the 2021 AGM for approval by the
shareholders to distribute
Subsequent events
Subsequent to December 31, 2020, and up to February
24, 2021, the Company purchased, under the share
buyback program, an additional
additional
Note 20—Earnings per share
Basic earnings per share is calculated by dividing income
by the weighted‑average number of shares
outstanding during the year.
Diluted earnings per share is calculated by dividing income by the
weighted‑average
number of shares outstanding during the year,
assuming that all potentially dilutive
securities were exercised, if dilutive.
Potentially dilutive securities comprise outstanding written
call options and outstanding options and shares granted
subject to certain conditions under the Company’s
share‑based payment arrangements. In 2020, 2019 and 2018,
outstanding securities representing a maximum of
excluded from the calculation of diluted earnings per
share as their inclusion would have been antidilutive.
Basic earnings per share:
($ in millions, except per share data in $)
2020
2019
2018
Amounts attributable to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Weighted-average number
of shares outstanding (in millions)
Basic earnings per share attributable
to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
F-76
Diluted earnings per share:
($ in millions, except per share data in $)
2020
2019
2018
Amounts attributable to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Weighted-average
number of shares outstanding (in millions)
Effect of dilutive securities:
Call options and shares
Adjusted weighted-average number of shares outstanding
(in millions)
Diluted earnings per share attributable
to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
F-77
Note 21—Other comprehensive income
The following table includes amounts recorded
within “Total other comprehensive
income (loss)” including the
related income tax effects:
2020
2019
2018
Before
Tax
Net of
Before
Tax
Net of
Before
Tax
Net of
($ in millions)
tax
effect
tax
tax
effect
tax
tax
effect
tax
Foreign currency translation
adjustments:
Foreign currency translation adjustments
(
2
)
(
130
)
—
(
130
)
(
641
)
(
627
)
Gain on liquidation of foreign subsidiary
—
—
—
—
—
—
(
31
)
—
(
31
)
Changes attributable to divestments
—
(
2
)
—
(
2
)
—
Net change during the year
(
2
)
(
132
)
—
(
132
)
(
660
)
(
646
)
Available-for
-sale securities:
Net unrealized gains (losses) arising
during the year
(
7
)
(
2
)
(
5
)
(
4
)
Reclassification adjustments for net
(gains) losses included in net income
(
18
)
(
14
)
(
1
)
—
—
Changes attributable to divestments
(
3
)
—
(
3
)
—
—
—
—
—
—
Net change during the year
(
3
)
(
3
)
(
4
)
(
3
)
Pension and other postretirement
plans:
Prior service (costs) credits arising
during the year
(
12
)
(
11
)
(
7
)
Net actuarial gains (losses) arising
during the year
(
243
)
(
200
)
(
293
)
(
220
)
(
411
)
(
352
)
Amortization of prior service cost (credit)
included in net income
(
11
)
—
(
11
)
(
25
)
(
3
)
(
28
)
(
19
)
(
5
)
(
24
)
Amortization of net actuarial loss included
in net income
(
25
)
(
31
)
(
22
)
Net losses from pension settlements
included in net income
(
132
)
(
6
)
(
4
)
Changes attributable to divestments
(
35
)
—
—
—
—
—
—
Net change during the year
(
161
)
(
178
)
(
142
)
(
327
)
(
295
)
Cash flow hedge derivatives:
Net gains (losses) arising during the year
—
—
(
51
)
(
49
)
Reclassification adjustments for net (gains)
losses included in net income
(
2
)
(
9
)
—
(
9
)
Net change during the year
—
(
31
)
(
28
)
Total
other comprehensive income (loss)
(
164
)
(
282
)
(
249
)
(
1,022
)
(
972
)
F-78
The following table shows changes in “Accumulated other
comprehensive loss” (OCI) attributable to ABB, by
component, net of tax:
Unrealized
Pension and
Unrealized
Foreign
gains (losses)
other post-
gains (losses)
Accumulated
currency
retirement
other
translation
for-sale
plan
flow hedge
comprehensive
($ in millions)
adjustments
securities
adjustments
derivatives
loss
Balance at January 1, 2018
(
2,693
)
(
1,672
)
(
4,345
)
Cumulative effect of changes in
accounting principles
(1)
—
(
9
)
—
—
(
9
)
Other comprehensive (loss) income
before reclassifications
(
627
)
(
4
)
(
359
)
(
49
)
(
1,039
)
Amounts reclassified from OCI
(
19
)
Total other
comprehensive (loss) income
(
646
)
(
3
)
(
295
)
(
28
)
(
972
)
Less:
Amounts attributable to noncontrolling
interests
(
15
)
—
—
—
(
15
)
Balance at December 31, 2018
(
3,324
)
(
4
)
(
1,967
)
(
16
)
(
5,311
)
Adoption of an accounting
standard update
(2)
—
—
(
36
)
—
(
36
)
Other comprehensive (loss) income
before reclassifications
(
130
)
(
214
)
(
310
)
Amounts reclassified from OCI
(
2
)
(
9
)
Total other
comprehensive (loss) income
(
132
)
(
142
)
(
249
)
Less:
Amounts attributable to noncontrolling
interests
(
6
)
—
—
—
(
6
)
Balance at December 31, 2019
(
3,450
)
(
2,145
)
(
5
)
(
5,590
)
Other comprehensive (loss) income
before reclassifications
(
157
)
Amounts reclassified from OCI
(
17
)
Total
other comprehensive (loss) income
Less:
Amounts attributable to noncontrolling
interests
—
—
—
Balance at December 31, 2020
(
2,460
)
(
1,556
)
(
3
)
(
4,002
)
(1)
Amounts relate
to the adoption
of two accounting
standard updates
in 2018 regarding
the Recognition
and measurement
of financial
assets and financial
liabilities and
Revenue from contracts
with customers.
(2)
Amounts relate
to the adoption
of an accounting
standard update
in 2019 regarding
the Tax
Cuts and Jobs
Act of 2017.
F-79
The following table reflects amounts reclassified out of
OCI in respect of Foreign currency translation
adjustments and Pension and other postretirement plan
adjustments:
($ in millions)
Location of (gains) losses
Details about OCI components
reclassified from OCI
2020
2019
2018
Foreign currency
translation adjustments:
Gain on liquidation of foreign subsidiary
Other income (expense), net
—
—
(
31
)
Changes attributable to divestments:
Other income (expense), net
—
—
Other income (expense), net
—
(
2
)
Income from discontinued
operations, net of tax
—
—
Amounts reclassified from OCI
(
2
)
(
19
)
Pension and other postretirement
plan adjustments:
Amortization of prior service cost (credit)
Non-operational pension (cost) credit
(1)
(
11
)
(
25
)
(
19
)
Amortization of net actuarial loss
Non-operational pension (cost) credit
(1)
Net losses from pension
settlements and curtailments
Non-operational pension (cost) credit
(1)
Changes attributable to divestments
Income from discontinued
operations, net of tax
(2)
—
—
Total
before tax
Tax
Income tax expense
(
157
)
(
40
)
(
31
)
Changes in tax attributable to divestments
Income from discontinued
operations, net of tax
(2)
(
35
)
—
—
Amounts reclassified from OCI
(1)
Amounts include
a total of $
Income from discontinued
operations (see
Note 3).
(2)
Amounts represent
the reclassification
of OCI relating
to pensions,
including tax,
on divestment
of the Power
Grids business.
The amounts reclassified out of OCI in respect of Unrealized
gains (losses) on available‑for‑sale securities and
Unrealized gains (losses) of cash flow hedge derivatives
were not significant in 2020, 2019 and 2018.
Note 22—Restructuring and related expenses
OS program
In December 2018, the Company announced a
two-year
its business model
and structure through the implementation of a new organizational
structure driven by its businesses.
The program resulted in the elimination of the country
and regional structures within the previous matrix organization,
including the elimination of the three regional Executive
Committee roles. The operating businesses are now responsible
for both their customer-facing activities and business
support functions, while the remaining Group-level
corporate
activities primarily focus on Group strategy,
portfolio and performance management and capital allocation. During
the
year ended December 2020, the total program costs, originally
estimated to be $
$
December 31, 2020, the Company has incurred substantially
all costs related to the OS program.
F-80
The following table outlines the costs incurred in 2020,
2019, 2018 and the cumulative costs incurred under the
program per operating segment as well as Corporate and
Other:
Cumulative costs
Costs incurred in
incurred up to
($ in millions)
2020
2019
2018
December 31, 2020
Electrification
Industrial Automation
Motion
Robotics & Discrete Automation
—
Corporate and Other
Total
The Company recorded the following expenses, net of
change in estimates, under this program:
Cumulative costs
Costs incurred in
incurred up to
($ in millions)
2020
2019
2018
December 31, 2020
Employee severance costs
Estimated contract settlement, loss order and other costs
—
Inventory and long-lived asset impairments
—
Total
Restructuring expenses recorded for this program are included
in the following line items in the Consolidated
Income Statements:
($ in millions)
2020
2019
2018
Total cost of sales
Selling, general and administrative expenses
Non-order related research and development expenses
Other income (expense), net
Total
Liabilities associated with the OS program are included
primarily in Other provisions.
The following table
shows the activity from the beginning of the program
to December 31, 2020:
Contract settlement,
Employee
loss order
($ in millions)
severance costs
Total
Liability at January 1, 2018
—
Expenses
—
Liability at December 31, 2018
—
Expenses
Cash payments
(
44
)
(
1
)
(
45
)
Change in estimates
(
30
)
—
(
30
)
Exchange rate differences
(
3
)
—
(
3
)
Liability at December 31, 2019
Expenses
Cash payments
(
91
)
(
15
)
(
106
)
Change in estimates
(
10
)
—
(
10
)
Exchange rate differences
Liability at December 31, 2020
F-81
Other restructuring-related activities
In addition, during 2020,
2019 and 2018, the Company executed various other
restructuring‑related activities
and incurred the following charges, net of changes
in estimates:
($ in millions)
2020
2019
2018
Employee severance costs
Estimated contract settlement, loss order and other costs
Inventory and long-lived asset impairments
Total
Expenses associated with these activities are recorded in
the following line items in the Consolidated Income
Statements:
($ in millions)
2020
2019
2018
Total cost of sales
Selling, general and administrative expenses
Non-order related research and development expenses
Other income (expense), net
Total
At December 31, 2020 and 2019, $
restructuring-related liabilities and is primarily included
in “Other provisions”.
Note 23—Operating segment and geographic data
The Chief Operating Decision Maker (CODM) is the Chief
Executive Officer.
The CODM allocates resources
to and assesses the performance of each operating segment
using the information outlined below.
The Company is
organized into the following segments,
based on products and services: Electrification, Industrial Automati
on, Motion,
and Robotics & Discrete Automation. The remaining operations
of the Company are included in Corporate and Other
.
A description of the types of products and services provided
by each reportable segment is as follows:
•
Electrification:
safe, smart and sustainable electrical flow from the substation
to the socket. The portfolio of increasingly
digital and connected solutions includes electric vehicle
charging infrastructure, renewable power
solutions, modular substation packages, distribution automation
products, switchboard and panelboards,
switchgear, UPS solutions, circuit breakers,
measuring and sensing devices, control products, wiring
accessories, enclosures and cabling systems and intelligent
home and building solutions, designed to
integrate and automate lighting, heating, ventilation, security
and data communication networks. The
products and services are delivered through five operating
Divisions: Distribution Solutions, Smart Power,
Smart Buildings, Installation Products and Power Conversion
.
•
Industrial Automation:
develops and sells a broad range of industry-specific, integrated
automation and
electrification systems and solutions, as well as digital solutions,
lifecycle services and artificial
intelligence applications for the process
and hybrid industries. Products and solutions include process
and
discrete control technologies, advanced process control
software and manufacturing execution systems,
sensing, measurement and analytical instrumentation,
electric ship propulsion systems and large
turbochargers. In addition, the Business Area offers
a comprehensive range of services ranging from repair
to advanced services such as remote monitoring, preventive
maintenance, asset performance management
and cybersecurity services. The products and services
are delivered through five operating Divisions:
Energy Industries, Process Industries, Marine &
Ports, Turbocharging, and Measurement
& Analytics.
F-82
•
Motion:
manufactures and sells drives, motors, generators, traction converters
and mechanical power
transmission products that are driving the low-carbon
future for industries, cities, infrastructure and
transportation. These products, digital technology and
related services enable industrial customers to
increase energy efficiency,
improve safety and reliability,
and achieve precise control of their processes.
Building on over 130 years of cumulative experience in electric
powertrains, the Business Area combines
domain expertise and technology to deliver the
optimum solution for a wide range of applications in all
industrial segments. In addition, the Business Area, along
with partners, has an unmatched global service
presence. These products and services are delivered
through six operating Divisions: Motors & Generators,
Drive Products, System Drives, Service, Traction
and Mechanical Power Transmission.
•
Robotics & Discrete Automation:
Divisions: Robotics and Machine
Automation. Robotics includes: industrial robots, software,
robotic
solutions and systems, field services, spare parts, and
digital services. Machine Automation specializes in
solutions based on its programmable logic controllers
(PLC), industrial PCs (IPC), servo motion, transport
systems and machine vision. Both Divisions offer
engineering and simulation software as well as a
comprehensive range of digital solutions.
Corporate and Other:
includes headquarters, central research and development, the Company’s
real estate
activities, Corporate Treasury
Operations, historical operating activities of certain divested
businesses and other
non-core operating activities.
The primary measure of profitability on which the operating
segments are evaluated is Operational EBITA,
which represents income from operations excluding:
•
amortization expense on intangibles arising upon acquisitions
(acquisition-related amortization),
•
restructuring,
related and implementation costs,
•
changes in the amount recorded for obligations related to
divested businesses occurring after the
divestment date (changes in obligations related to
divested businesses),
•
changes in estimates relating to opening balance sheets of
acquired businesses (changes in pre-acquisition
estimates),
•
gains and losses from sale of businesses (including fair
value adjustment on assets and liabilities held for
sale),
•
acquisition-
and divestment-related expenses and integration costs,
•
other income/expense relating to the Power Grids joint
venture,
•
certain other non-operational items, as well as
•
foreign exchange/commodity timing differences
in income from operations consisting of: (a) unrealized
gains and losses on derivatives (foreign exchange, commodities,
embedded derivatives), (b) realized gains
and losses on derivatives where the underlying hedged
transaction has not yet been realized, and
(c) unrealized foreign exchange movements on receivables/payables
(and related assets/liabilities).
Certain other non-operational items generally includes:
certain regulatory, compliance
and legal costs, certain
asset write downs/impairments (including impairment
of goodwill) and certain other fair value changes,
as well as other
items which are determined by management on a case‑by‑case basis.
F-83
The CODM primarily reviews the results of each segment
on a basis that is before the elimination of profits
made on inventory sales between segments. Segment
results below are presented before these eliminations, with a total
deduction for intersegment profits to arrive at the Company
’s consolidated Operational
EBITA. Intersegment
sales and
transfers are accounted for as if the sales and transfers were
to third parties, at current market prices.
The following tables present disaggregated segment
revenues from contracts with customers for 2020, 2019
and 2018:
2020
($ in millions)
Electrification
Industrial
Automation
Motion
Robotics &
Discrete
Automation
Corporate and
Other
Total
Geographical markets
of which: United States
of which: China
Product type
—
(
24
)
—
(1)
(
927
)
Total
revenues
(
898
)
2019
($ in millions)
Electrification
Industrial
Automation
Motion
Robotics &
Discrete
Automation
Corporate and
Other
Total
Geographical markets
of which: United States
of which: China
Product type
—
—
(1)
(
947
)
Total
revenues
(
870
)
F-84
2018
($ in millions)
Electrification
Industrial
Automation
Motion
Robotics &
Discrete
Automation
Corporate and
Other
Total
Geographical markets
of which: United States
of which: China
Product type
—
(1)
(
913
)
Total
revenues
(
598
)
(1)
Intersegment
revenues until
June 30, 2020,
include sales
to the Power
Grids business,
which is presented
as discontinued
operations,
and are not eliminated
from Total
revenues (see Note
3).
Revenues by geography reflect the location of the customer.
In 2020, 2019 and 2018 the United States and
China are the only countries where revenue exceeded
10 percent of Total revenues
.
In each of 2020, 2019 and 2018
more than
F-85
The following tables present Operational EBITA,
the reconciliations of consolidated Operational EBITA
to
Income from continuing operations before taxes, as well as Depreciation
and amortization, and Capital expenditure for
2020, 2019 and 2018, as well as Total
assets at December 31, 2020, 2019 and 2018:
($ in millions)
2020
2019
2018
Operational EBITA:
Electrification
Industrial Automation
Motion
Robotics & Discrete Automation
Corporate and Other:
— Non-core and divested businesses
(
133
)
(
145
)
(
291
)
— Stranded corporate costs
(
40
)
(
225
)
(
297
)
— Corporate costs and Other intersegment elimination
(
372
)
(
418
)
(
498
)
Total
Acquisition-related amortization
(
263
)
(
265
)
(
273
)
Restructuring, related and implementation costs
(1)
(
410
)
(
300
)
(
172
)
Changes in obligations related to divested businesses
(
218
)
(
36
)
(
106
)
Changes in pre-acquisition estimates
(
11
)
(
22
)
(
8
)
Gains and losses from sale of businesses
(
2
)
Fair value adjustment on assets and liabilities held for sale
(
33
)
(
421
)
—
Acquisition-
and divestment-related expenses and integration costs
(
74
)
(
121
)
(
204
)
Other income/expenses relating to the Power Grids joint
venture
(
20
)
—
—
Foreign exchange/commodity timing differences in
income from operations:
Unrealized gains and losses on derivatives (foreign exchange,
commodities, embedded derivatives)
(
1
)
Realized gains and losses on derivatives where the underlying
hedged
transaction has not yet been realized
(
23
)
Unrealized foreign exchange movements on receivables/payables
(and
(
33
)
(
7
)
(
9
)
Certain other non-operational items:
Costs for planned divestment of Power Grids
(
86
)
(
141
)
—
Regulatory, compliance
and legal costs
(
7
)
(
7
)
(
34
)
Business transformation costs
(
31
)
(
19
)
(
17
)
Executive Committee transition costs
(
1
)
(
14
)
—
Favorable resolution of an uncertain purchase price adjustment
—
Gain on sale of investments
—
—
Gain on liquidation of a foreign subsidiary
—
—
Asset write downs/impairments & certain other fair value changes
(2)
(
239
)
(
4
)
(
25
)
Other non-operational items
(
7
)
(
2
)
Income from operations
Interest and dividend income
Interest and other finance expense
(
240
)
(
215
)
(
262
)
Losses from extinguishment of debt
(
162
)
—
—
Non-operational pension (cost) credit
(
401
)
Income from continuing operations before
taxes
(1)
Amounts in 2020
and 2019 include
$
(2)
Amount in 2020
includes goodwill
impairment charges
of $
F-86
Depreciation and
Total assets
(1), (2)
amortization
Capital expenditures
(1)
at December 31,
($ in millions)
2020
2019
2018
2020
2019
2018
2020
2019
2018
Electrification
Industrial Automation
Motion
Robotics & Discrete
Automation
Corporate and Other
Consolidated
(1)
Capital expenditures
and Total
assets are after
intersegment
eliminations
and therefore
reflect third
-party activities
only.
(2)
At December 31,
2020, 2019 and
2018, Corporate
and Other includes
$
assets in the
Power Grids business
which is reported
as discontinued
operations (see
Note 3). In addition,
at December 31,
2020,
Corporate and
Other includes
$
Other geographic information
Geographic information for long-lived assets was as follows:
Long-lived assets at
December 31,
($ in millions)
2020
2019
Europe
The Americas
Asia, Middle East and Africa
Total
Long‑lived assets represent “Property,
plant and equipment, net” and “Operating lease right-of-use assets” and
are shown by location of the assets. At December 31, 2020,
approximately
Company’s long‑lived assets were
located in the United States, China and Switzerland,
respectively. At December
31,
2019, approximately
United States, China and Switzerland, respectively.
TABLE OF CONTENTS
Part IprintItem 1. Identity Of Directors, Senior Management and AdvisersprintItem 2. Offer Statistics and Expected TimetableprintItem 3. Key InformationprintItem 4. Information on The CompanyprintItem 4A. Unresolved Staff CommentsprintItem 5. Operating and Financial Review and ProspectsprintItem 6. Directors, Senior Management and EmployeesprintItem 7. Major Shareholders and Related Party TransactionsprintItem 8. Financial InformationprintItem 9. The Offer and ListingprintItem 10. Additional InformationprintItem 11. Quantitative and Qualitative Disclosures About Market RiskprintItem 12. Description Of Securities Other Than Equity SecuritiesprintPart IIprintItem 13. Defaults, Dividend Arrearages and DelinquenciesprintItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsprintItem 15. Controls and ProceduresprintItem 16A. Audit Committee Financial ExpertprintItem 16B. Code Of EthicsprintItem 16C. Principal Accountant Fees and ServicesprintItem 16D. Exemptions From The Listing Standards For Audit CommitteesprintItem 16E. Purchase Of Equity Securities By Issuer and Affiliated PurchasersprintItem 16F. Change in Registrant S Certifying AccountantprintItem 16G. Corporate GovernanceprintItem 16H. Mine Safety DisclosureprintPart IIIprintItem 17. Financial StatementsprintItem 18. Financial StatementsprintItem 19. ExhibitsprintNote 1 The CompanyprintNote 2 Significant Accounting PoliciesprintNote 3 Discontinued OperationsprintNote 4 Acquisitions, Divestments and Equity-accounted CompaniesprintNote 5 Cash and Equivalents, Marketable Securities and Short-term InvestmentsprintNote 6 Derivative Financial InstrumentsprintNote 7 Fair ValuesprintNote 8 Receivables, Net and Contract Assets and Liabilities Receivables, Net Consisted Of The Following:printNote 8 Receivables, Net and Contract Assets and LiabilitiesprintNote 9 Inventories, Net Inventories, Net Consisted Of The Following:printNote 9 Inventories, NetprintNote 10 Property, Plant and Equipment, Net Property, Plant and Equipment, Net Consisted Of The Following:printNote 10 Property, Plant and Equipment, NetprintNote 11 Goodwill and Intangible Assets The Changes in Goodwill Were As Follows:printNote 11 Goodwill and Intangible AssetsprintNote 12 DebtprintNote 13 Other Provisions, Other Current Liabilities and Other Non-current LiabilitiesprintNote 14 LeasesprintNote 15 Commitments and ContingenciesprintNote 16 Income Taxes Income Tax Expense Consisted Of The Following:printNote 16 Income TaxesprintNote 17 Employee BenefitsprintNote 18 Share Based Payment ArrangementsprintNote 19 Stockholders' EquityprintNote 20 Earnings Per ShareprintNote 21 Other Comprehensive IncomeprintNote 22 Restructuring and Related ExpensesprintNote 23 Operating Segment and Geographic Dataprint