ABB(US:ABBNY)2023-02-23 22:38PART I Key Information The company faces principal business, operational, and legal risks from the volatile global environment and cybersecurity threats Risk Factors The company's business is exposed to global economic volatility, emerging market instability, and operational risks - The company's business is exposed to risks from the volatile global economic environment, political conditions, and trade sanctions, with revenues from countries identified as state sponsors of terrorism being less than 1% of total revenues in 2022282931 - Operations in emerging markets, which accounted for approximately 40% of consolidated revenues in 2022, expose ABB to risks such as economic and political instability34 - ABB faces significant operational risks, including supply chain constraints for materials like semiconductors, cybersecurity threats, and challenges in realizing benefits from strategic M&A activities445354 - The company is subject to legal and regulatory risks, including compliance with evolving data privacy laws like GDPR, examinations by tax authorities, and potential environmental liabilities727375 - General risks include the inability to attract and retain qualified personnel and potential exposure to litigation and legal claims across the business7879 Information on the Company ABB is a global technology leader in electrification and automation, operating through four business areas with a focus on sustainability Introduction ABB operates in over 100 countries across four Business Areas under a decentralized 'The ABB Way' model - ABB is a technology leader in electrification and automation, with approximately 105,000 employees operating in over 100 countries across four Business Areas8182 - In 2022, ABB completed the sale of its remaining 19.9% investment in Hitachi Energy to Hitachi8286 - The company operates under 'The ABB Way,' a decentralized model where Divisions have full accountability for results and target an annual productivity improvement of at least 3%9395 Businesses The company's four business areas—Electrification, Motion, Process Automation, and Robotics—drive its revenue and operations Business Area Overview (2022) | Business Area | 2022 Revenues | Employees (as of Dec 31, 2022) | | :--- | :--- | :--- | | Electrification | $14.1 billion | ~52,300 | | Motion | $6.7 billion | ~21,100 | | Process Automation | $6.0 billion | ~20,100 | | Robotics & Discrete Automation | $3.2 billion | ~10,700 | - The Electrification Business Area provides electrical distribution and management technologies, generating $14.1 billion in revenues in 2022112114126127 - The Motion Business Area provides motors, generators, and drives, generating $6.7 billion in revenues in 2022128130141142 - The Process Automation Business Area offers integrated automation and electrical systems, generating $6.0 billion in revenues in 2022 after spinning off its Turbocharging Division143145148155156 - The Robotics & Discrete Automation Business Area provides robotics and machine automation solutions, generating $3.2 billion in revenues in 2022157163164 Capital Expenditures Capital expenditures in 2022 focused on upgrading production facilities, primarily in mature markets Total Capital Expenditures | Year | Amount (in millions) | | :--- | :--- | | 2022 | $762 | | 2021 | $820 | | 2020 | $694 | - In 2022, capital expenditures were primarily focused on mature markets for upgrading existing production facilities, with emerging markets accounting for 24% of total capex180 Supplies and Raw Materials The company manages commodity price risk and supply chain disruptions for key materials like copper and semiconductors - The primary raw materials used are copper, aluminum, steel, and various plastics, with commodity price risk managed through derivative contracts and price escalation clauses183186 - In 2022, ABB experienced delays and shortages, particularly for semiconductors, and implemented mitigation actions such as building buffer stocks and approving new suppliers187 Patents and Trademarks ABB maintains a significant intellectual property portfolio with approximately 25,000 patents and applications - As of December 31, 2022, ABB holds a portfolio of approximately 25,000 pending patent applications and granted patents190 Sustainability Activities The company's 2030 sustainability strategy focuses on enabling a low-carbon society and promoting social progress - ABB's 2030 sustainability strategy is built on four pillars: enabling a low-carbon society, preserving resources, promoting social progress, and integrity193 - Key 2030 commitments include achieving carbon neutrality in its own operations and doubling the number of women in senior management roles to 25%193 - In 2022, the share of green electricity used increased to 81% from 51% in 2021, and women in senior management positions increased to 17.8%197198 Organizational Structure ABB Ltd is the Swiss-domiciled ultimate parent company of the ABB Group - ABB Ltd is the ultimate parent company, domiciled in Switzerland, and is the sole shareholder of ABB Asea Brown Boveri Ltd207 Operating and Financial Review and Prospects The company achieved revenue growth in 2022 despite macroeconomic challenges, though cash flow decreased due to working capital needs Key Financial Performance Indicators (2022 vs 2021) | Metric | 2022 | 2021 | Change (USD) | Change (Local Currency) | | :--- | :--- | :--- | :--- | :--- | | Orders | $33,988M | $31,868M | +7% | +13% | | Revenues | $29,446M | $28,945M | +2% | +9% | | Income from Operations | $3,337M | $5,718M | -42% | N/A | | Net Income attributable to ABB | $2,475M | $4,546M | -46% | N/A | | Cash Flow from Operations | $1,287M | $3,330M | -61% | N/A | | Order Backlog (Year-End) | $19,867M | $16,607M | +20% | +26% | - Active portfolio management continued with the spin-off of the Turbocharging Division and the sale of the remaining interest in Hitachi Energy218 - The company returned $7.8 billion of cash proceeds from the Power Grids divestment to shareholders through share buyback programs228 Analysis of Results of Operations Consolidated orders and revenues grew in 2022, though net income was impacted by divestment gains in the prior year Consolidated Orders by Business Area (in millions) | Business Area | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Electrification | $15,901 | $14,381 | 11% | | Motion | $7,896 | $7,616 | 4% | | Process Automation | $6,825 | $6,779 | 1% | | Robotics & Discrete Automation | $4,116 | $3,844 | 7% | | Total | $33,988 | $31,868 | 7% | Consolidated Revenues by Business Area (in millions) | Business Area | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Electrification | $14,105 | $13,187 | 7% | | Motion | $6,745 | $6,925 | (3)% | | Process Automation | $6,044 | $6,259 | (3)% | | Robotics & Discrete Automation | $3,181 | $3,297 | (4)% | | Total | $29,446 | $28,945 | 2% | - Other income (expense), net, was a loss of $75 million in 2022 compared to a gain of $2,632 million in 2021, primarily due to a $313 million charge for regulatory penalties301302 - The effective tax rate increased to 22.3% in 2022 from 18.3% in 2021, mainly due to non-deductible regulatory penalties308 Business Analysis Performance varied across business areas, with strong growth in Electrification offsetting challenges in other segments Operational EBITA by Business Area (in millions) | Business Area | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Electrification | $2,328 | $2,121 | 10% | | Motion | $1,163 | $1,183 | (2)% | | Process Automation | $848 | $801 | 6% | | Robotics & Discrete Automation | $340 | $355 | (4)% | - Electrification's orders grew 17% in local currency, driven by strong demand in buildings, e-mobility, and data centers321324 - Motion's orders grew 11% in local currency, though the divestment of the Mechanical Power Transmission Division had a negative impact331335 - Process Automation's orders increased 8% in local currency, impacted by the spin-off of the Turbocharging Division342345 - Robotics & Discrete Automation's orders rose 16% in local currency, driven by EV investments, but revenue growth was hindered by component shortages353357 Liquidity and Capital Resources The company shifted to a net debt position due to lower operating cash flow and significant shareholder returns - The company shifted from a net cash position to a net debt position of $2,779 million at year-end 2022, driven by shareholder returns and lower cash from operations372373 Consolidated Statement of Cash Flows Summary (in millions) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $1,287 | $3,330 | $1,693 | | Net cash provided by investing activities | $981 | $2,307 | $6,760 | | Net cash used in financing activities | ($2,394) | ($4,968) | ($8,175) | - Cash flow from operating activities decreased by 61% to $1,287 million in 2022, mainly due to a significant buildup in working capital and regulatory penalty payments415 - ABB maintains a $2 billion multicurrency revolving credit facility, which was undrawn as of December 31, 2022383 Directors, Senior Management and Employees The report details the corporate governance structure, compensation policies, and major shareholding information Board of Directors The Board of Directors consists of 10 members and operates with three primary committees - The Board of Directors for the 2022-2023 term consists of 10 members, with Peter R Voser as Chairman440457 - The Board has three committees: the Finance, Audit and Compliance Committee (FACC), the Governance and Nomination Committee (GNC), and the Compensation Committee (CC)442449 Executive Committee The Executive Committee, led by the CEO, is responsible for the day-to-day management of the company - As of December 31, 2022, the Executive Committee (EC) is led by CEO Björn Rosengren and includes the presidents of the four Business Areas485487 Shares The company executed a $3 billion share buyback program in 2022, reducing the number of outstanding shares - As of December 31, 2022, ABB's market capitalization was approximately CHF 52 billion501502 - In April 2022, ABB launched a share buyback program of up to $3 billion to complete the return of cash proceeds from the Power Grids divestment505 Shareholders Investor AB is the largest shareholder, controlling 13.5% of voting rights - As of December 31, 2022, Investor AB, Sweden, was the largest shareholder, controlling 13.5% of the voting rights521522523 Compensation Executive compensation is strongly linked to performance, with a significant variable pay component tied to financial and sustainability targets - Aggregate Board compensation for the 2022-2023 term was CHF 4.38 million, with members required to take at least 50% in restricted shares543585590 - Aggregate Executive Committee (EC) compensation for 2022 was CHF 36.0 million, with variable pay representing 56% of the CEO's total compensation552553 - The 2022 Annual Incentive Plan (AIP) payout averaged 118.3% of target, and the 2019 Long-Term Incentive Plan (LTIP) vested at 121.0% of target556 - Starting in 2022, the LTIP includes a sustainability measure with a 20% weighting, based on the reduction of GHG emissions579634 Major Shareholders and Related Party Transactions U.S. holders own approximately 11% of share capital, and all related party transactions are conducted at arm's length - As of December 31, 2022, U.S. holders held approximately 11% of ABB's total share capital and voting rights761 - Transactions with related parties are conducted on an arm's length basis and are not considered material763764 Financial Information The company settled a major legal case regarding the Kusile project and proposes an increased dividend for fiscal year 2022 - ABB settled with authorities regarding the Kusile project, recording a provision of approximately $325 million in Q3 2022 for this matter767 - The Board of Directors has proposed a dividend of CHF 0.84 per share for the fiscal year 2022, an increase from the prior year770773774 Additional Information This section covers corporate structure, material contracts, exchange controls, and key tax implications for shareholders - Material contracts include a $2 billion multicurrency revolving credit facility and indentures for various notes guaranteed by ABB Ltd801802803 - Dividends paid by ABB are subject to a 35% Swiss federal withholding tax, which may be partially refunded for U.S. residents under the tax treaty806807 - For U.S. federal income tax purposes, distributions are generally treated as dividends, and ABB believes it was not a Passive Foreign Investment Company (PFIC) for 2022817818 Quantitative and Qualitative Disclosures About Market Risk The company manages foreign exchange, interest rate, and commodity risks through a comprehensive hedging policy - The company uses derivative instruments to hedge transactional foreign exchange exposures, commodity price risks, and interest rate risks831833835 Market Risk Sensitivity Analysis (Potential Loss in Fair Value) | Risk Type | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Foreign Exchange (10% move) | $511 million | $367 million | | Interest Rate (100 bps shift) | $163 million | $270 million | | Equity (10% move) | $4 million | $13 million | | Commodity (10% move) | $10 million | $11 million | PART II Controls and Procedures Management confirmed the effectiveness of the company's disclosure controls and internal control over financial reporting as of year-end 2022 - The CEO and CFO concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective849 - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework852 Principal Accountant Fees and Services Total fees paid to the principal accountant, KPMG AG, amounted to $45.7 million for the 2022 fiscal year Principal Accountant Fees (in millions) | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fees | $36.6 | $34.5 | | Audit-Related Fees | $8.6 | $13.0 | | Tax Fees | $0.4 | $0.5 | | Other Fees | $0.1 | $0.1 | | Total | $45.7 | $48.1 | - All services performed by KPMG in 2022 and 2021 were pre-approved by the Finance, Audit and Compliance Committee (FACC)861 Purchase of Equity Securities by Issuer and Affiliated Purchasers The company repurchased 111.4 million shares in 2022 as part of its capital return programs - In 2022, ABB purchased a total of 111,394,500 of its own shares862 - A new share buyback program of up to $3 billion was launched in April 2022, planned to run until the March 2023 AGM864 PART III Financial Statements This section presents the audited Consolidated Financial Statements for fiscal years 2020-2022, prepared under U.S. GAAP Consolidated Income Statements The income statement reflects revenue growth but a decrease in net income compared to the prior year Consolidated Income Statement Summary (in millions) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenues | $29,446 | $28,945 | $26,134 | | Gross profit | $9,710 | $9,467 | $7,878 | | Income from operations | $3,337 | $5,718 | $1,593 | | Income from continuing operations, net of tax | $2,637 | $4,730 | $345 | | Net income attributable to ABB | $2,475 | $4,546 | $5,146 | Earnings Per Share Attributable to ABB Shareholders (in $) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Basic EPS (Net Income) | 1.30 | 2.27 | 2.44 | | Diluted EPS (Net Income) | 1.30 | 2.25 | 2.43 | Consolidated Balance Sheets The balance sheet shows a decrease in total assets and stockholders' equity at year-end 2022 Consolidated Balance Sheet Summary (in millions) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $19,570 | $18,695 | | Total assets | $39,148 | $40,260 | | Total current liabilities | $16,529 | $15,568 | | Total liabilities | $25,876 | $24,303 | | Total ABB stockholders' equity | $12,777 | $15,579 | | Total liabilities and stockholders' equity | $39,148 | $40,260 | Consolidated Statements of Cash Flows Cash flow from operations decreased significantly in 2022, driven by working capital changes Consolidated Statement of Cash Flows Summary (in millions) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $1,287 | $3,330 | $1,693 | | Net cash provided by investing activities | $981 | $2,307 | $6,760 | | Net cash used in financing activities | ($2,394) | ($4,968) | ($8,175) | | Net change in cash and equivalents | ($315) | $588 | $357 | Notes to the Consolidated Financial Statements The notes provide detailed disclosures on divestments, acquisitions, debt, and pension obligations - The company completed the sale of its Power Grids business to Hitachi in 2020 for net cash consideration of $9.241 billion, recognizing an initial net gain of $5.141 billion10091011 - In 2022, acquisitions totaled $195 million, and the company completed the spin-off of its Turbocharging Division (Accelleron)1022102310251028 - Total debt increased to $7,678 million at year-end 2022 from $5,561 million in 2021, primarily due to new bond issuances10931094 - The company's defined benefit pension plans were overfunded by a net of $326 million at year-end 20222441167 - Unrecognized tax benefits related to transfer pricing and other tax positions totaled $1,350 million at the end of 20228961156