AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-16429
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ABB LTD
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SWITZERLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
AFFOLTERNSTRASSE 44
CH-8050 ZURICH
SWITZERLAND
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
----------------------------------------------------------- ---------------------------------------------
AMERICAN DEPOSITARY SHARES, NEW YORK STOCK EXCHANGE
EACH REPRESENTING ONE REGISTERED SHARE
REGISTERED SHARES, PAR VALUE CHF 2.50 NEW YORK STOCK EXCHANGE*
------------------------------
* 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.
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: 1,200,009,432 Registered
Shares
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 / / Item 18 /X/
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TABLE OF CONTENTS
PAGE
--------
Item 1. Identity of Directors, Senior Management and Advisers....... 5
Item 2. Offer Statistics and Expected Timetable..................... 5
Item 3. Key Information............................................. 5
Item 4. Information on the Company.................................. 22
Item 5. Operating and Financial Review and Prospects................ 55
Item 6. Directors, Senior Management and Employees.................. 116
Item 7. Major Shareholders and Related Party Transactions........... 128
Item 8. Financial Information....................................... 130
Item 9. The Offer and Listing....................................... 131
Item 10. Additional Information...................................... 137
Item 11. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 152
Item 12. Description of Securities Other than Equity Securities...... 154
Item 13. Defaults, Dividend Arrearages and Delinquencies............. 154
Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds........................................... 154
Item 15. Controls and Procedures..................................... 154
Item 16. Reserved.................................................... 155
Item 17. Financial Statements........................................ 155
Item 18. Financial Statements........................................ 155
Item 19. Exhibits.................................................... 155
INTRODUCTION
ABB Ltd is a corporation organized under the laws of Switzerland. In this
annual report, "the ABB Group," "ABB," "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 1999 exchange offers 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 of our registered shares) are
referred to as "ADSs." The registered shares of ABB Ltd are referred to as
"shares."
We have prepared this annual report on the basis of information that we have
or that we have obtained from sources we believe to be reliable.
Our principal corporate offices are located at Affolternstrasse 44, CH-8050
Zurich, Switzerland, telephone number 011-41-43-317-7111.
FINANCIAL AND OTHER INFORMATION
ABB Ltd has prepared its statutory unconsolidated financial statements in
accordance with the Swiss Federal Code of Obligations. The consolidated
financial statements of ABB Ltd, including the notes thereto, as of
December 31, 2002, 2001 and 2000 and for the years then ended (our "Consolidated
Financial Statements") have been prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP").
In this annual report: (i) "$," "U.S. dollars" and "USD" refer to the lawful
currency of the United States of America; (ii) "CHF" and "Swiss francs" refer to
the lawful currency of Switzerland; (iii) "E" and "euro" refer to the lawful
currency of the participating members states of the European Union (the "EU");
(iv) "SEK" and "Swedish krona" refer to the lawful currency of Sweden; and
(v) "L," "sterling," "pounds sterling" and "GBP" refer to the lawful currency of
the United Kingdom.
Except as otherwise stated, all monetary amounts in this annual report are
presented in U.S. dollars. Where specifically indicated, amounts in Swiss francs
have been translated into U.S. dollars. These translations are provided for
convenience only, and they are not representations that the Swiss franc could be
converted into U.S. dollars at the rate indicated. These translations have been
made using the noon buying rate in the City of New York for cable transfers as
certified for customs purposes by the Federal Reserve Bank of New York as of the
date indicated for each amount. The noon buying rate for Swiss francs on
December 31, 2002 was $1.00 = CHF 1.3833. The noon buying rate for Swiss francs
on June 25, 2003 was $1.00 = CHF 1.3257.
On May 7, 2001, we effected a share split in a four-for-one ratio to reduce
the nominal value of our shares from CHF 10 each to CHF 2.50 each. For more
information about the share split, see "Item 10. Additional
Information--Description of Share Capital and Articles of Incorporation--The
Share Split." Unless otherwise noted, all share figures in this annual report
reflect the share split.
FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements. 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 industry in which we operate.
2
These forward-looking statements include, but are not limited to the
following:
- statements in "Item 3. Key Information--Dividends and Dividend Policy"
regarding our policy on future dividend payments;
- statements in "Item 4. Information on the Company" regarding our
management objectives and the timing of intended disposals; and
- statements in "Item 5. Operating and Financial Review and Prospects"
regarding our management objectives, as well as trends in results, prices,
volumes, operations, margins and overall market trends.
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 the actual results of our operations,
financial condition and liquidity, and the development of the countries and the
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 the 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:
- We are subject to ongoing litigation and substantial liabilities arising
out of asbestos claims from discontinued operations.
- If we are unable to reduce and/or refinance our debt, our ability to
operate and obtain liquidity through additional sources may be constrained
and our ability to operate as a going concern may be at risk.
- If we are not able to comply with the stringent covenants contained in our
credit facility, our financial position will be adversely affected.
- Our ability to bid for large contracts depends on our ability to obtain
performance guarantees from financial institutions.
- We have retained performance guarantees related to our divested power
generation and nuclear businesses.
- We have retained liability for environmental remediation costs relating to
businesses that we sold in 1999 and 2000 and we could be required to make
payments in respect of these retained liabilities in excess of established
reserves.
- Bidding on large, long-term fixed price projects exposes our businesses to
risk of loss.
- We may continue to experience losses under some long-term contracts.
- We operate in very competitive 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.
- Our business is affected by the global economic and political climate. A
major terrorist event or prolonged military action could adversely affect
our financial condition and results of operations.
3
- We are subject to environmental laws and regulations in the countries in
which we operate. We incur costs to comply with such regulations and our
ongoing operations may expose us to environmental liabilities.
- We may be the subject of product liability claims.
- Our operations in emerging markets expose us to risks associated with
conditions in those markets.
- Our Oil, Gas and Petrochemicals business may experience losses if the oil
and gas industry generally experiences a downturn.
- Our international operations expose us to the risk of fluctuations in
currency exchange rates.
- We may encounter difficulty in managing our business due to the global
nature of our operations.
- Our reputation and our ability to do business may be impaired by corrupt
behavior by any of our employees or agents or those of our subsidiaries.
We urge you to read the 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 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.
4
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. 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.
Our selected financial data are presented in the following tables in
accordance with U.S. GAAP and have been derived from our published consolidated
financial statements.
Our consolidated financial statements as of and for each of the years ended
December 31, 2002 and 2001 were audited by Ernst & Young AG, except for the 2002
and 2001 consolidated financial statements of ABB Holdings Inc., a wholly owned
subsidiary, the 2002 and 2001 financial statements of Jorf Lasfar Energy
Company, a corporation in which we have a 50% interest, the 2002 and 2001
consolidated financial statements of Swedish Export Credit Corporation, in which
we had a 35% interest as of December 31, 2002, and the 2001 financial statements
of Scandinavian Reinsurance Company Limited, a wholly owned subsidiary, which
were audited by other independent auditors. Ernst & Young AG's report on our
2002 consolidated financial statements, which appears elsewhere herein, includes
an explanatory paragraph which describes an uncertainty about our ability to
continue as a going concern. The auditors' report on the 2002 consolidated
financial statements of Swedish Export Credit Corporation includes an
explanatory paragraph that describes a restatement to previously reported
amounts for the year ended December 31, 2001.
Our consolidated financial statements as of and for each of the years ended
December 31, 2000, 1999 and 1998, before reclassifications for operations
discontinued in 2002, were audited jointly by Ernst & Young AG and KPMG Klynveld
Peat Marwick Goerdeler SA. The adjustments that were applied to reclassify
amounts related to operations discontinued in 2002 reflected in the consolidated
financial statements for the year ended December 31, 2000 were audited by
Ernst & Young AG. The reclassifications that were applied to reclassify amounts
related to operations discontinued in 2002 reflected in the Consolidated
Financial Statements as of December 31, 2000 and 1999 and for each of the years
ended December 31, 1999 and 1998 have not been audited.
5
INCOME STATEMENT DATA(1):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
-------- ------------- -------- ----------- -----------
(RESTATED)(2) (UNAUDITED) (UNAUDITED)
($ IN MILLIONS EXCEPT PER SHARE DATA)
Revenues................................ 18,295 19,382 19,355 20,428 18,642
Cost of sales(3)........................ (13,769) (14,877) (14,198) (14,743) (13,100)
------- ------- ------- ------- -------
Gross profit............................ 4,526 4,505 5,157 5,685 5,542
Selling, general and administrative
expenses.............................. (4,033) (3,993) (4,055) (4,696) (4,304)
Amortization expense(4)................. (41) (195) (190) (167) (55)
Other income (expense), net(5).......... (58) (160) 261 92 (45)
------- ------- ------- ------- -------
Earnings before interest and taxes...... 394 157 1,173 914 1,138
Interest and dividend income............ 193 381 387 593 475
Interest and other finance expense...... (336) (604) (454) (637) (465)
------- ------- ------- ------- -------
Income (loss) from continuing operations
before taxes and minority interest.... 251 (66) 1,106 870 1,148
Provision for taxes..................... (83) (63) (300) (222) (262)
Minority interest....................... (71) (36) (40) (27) (15)
------- ------- ------- ------- -------
Income (loss) from continuing
operations............................ 97 (165) 766 621 871
Income (loss) from discontinued
operations, net of tax(6)............. (880) (501) 677 739 (389)
Cumulative effect of change in
accounting principles (SFAS 133), net
of tax(7)............................. -- (63) -- -- --
------- ------- ------- ------- -------
Net income (loss)....................... (783) (729) 1,443 1,360 482
======= ======= ======= ======= =======
Basic earnings (loss) per share(8):
Income (loss) from continuing
operations.......................... 0.09 (0.15) 0.65 0.52 0.73
Net income (loss)..................... (0.70) (0.64) 1.22 1.15 0.40
Diluted earnings (loss) per share(8):
Income (loss) from continuing
operations.......................... (0.08) (0.15) 0.65 0.52 0.73
Net income (loss)..................... (0.83) (0.64) 1.22 1.15 0.40
BALANCE SHEET DATA(1):
DECEMBER 31,
-------------------------------------------------------
2002 2001 2000 1999
-------- ------------- ----------- -----------
(RESTATED)(2) (UNAUDITED) (UNAUDITED)
($ IN MILLIONS)
Cash and equivalents............................. 2,478 2,442 1,245 1,486
Marketable securities............................ 2,135 2,924 4,193 4,764
Total assets..................................... 29,533 32,305 30,962 30,578
Long-term borrowings............................. 5,376 5,003 3,763 3,026
Total debt(9).................................... 7,952 9,704 7,286 6,344
Capital stock and additional paid-in capital..... 2,027 2,028 2,082(11) 2,071
Total stockholders' equity....................... 1,013 1,975 5,171(11) 4,271
Net operating assets(10)......................... 11,258 10,744 11,567(11) 10,613
6
CASH FLOW DATA(1):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
-------- ------------- -------- ----------- -----------
(RESTATED)(2) (UNAUDITED) (UNAUDITED)
($ IN MILLIONS)
Net cash provided by operating activities... 19 1,983 747 371 1,596
Net cash provided by (used in) investing
activities................................ 2,651 (1,218) (489) (109) (1,072)
Net cash provided by (used in) financing
activities................................ (2,812) 677 (392) (1,187) 587
OTHER FINANCIAL AND OPERATING DATA(1):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
-------- ------------- -------- ----------- -----------
(RESTATED)(2) (UNAUDITED) (UNAUDITED)
($ IN MILLIONS)
Purchases of property, plant and
equipment................................. 602 761 553 839 768
Depreciation and amortization(4)............ 611 787 836 795 648
Research and development.................... 550 593 660 820 780
Order-related development(12)............... 249 405 555 770 674
------------------------------
(1) In June 1999, ABB Ltd issued approximately 295 million registered shares
(1,180 million, as adjusted for the share split) to the stockholders of ABB
AB, a Swedish publicly listed company, and ABB AG, a Swiss publicly listed
company. Preparatory to this transaction, ABB AG declared a special dividend
such that, as a result, neither ABB AB nor ABB AG had operations or assets
other than their respective 50% ownership interests in ABB Asea Brown
Boveri Ltd. In exchange, the stockholders of ABB AB and ABB AG tendered all
issued shares of the two companies except for 3% of total issued ABB AB
stock. The stockholders of ABB AB who did not tender their shares for
ABB Ltd shares received cash of $438 million in return for their shares of
ABB AB and the equivalent number of registered shares of ABB Ltd
(approximately 20 million) were sold to third parties, resulting in a total
of approximately 1,200 million issued shares of ABB Ltd as of June 28, 1999.
These transactions resulted in ABB Ltd being the single parent entity for
the ABB Group.
(2) Selected Financial Data reported for prior years have been reclassified to
conform to the current year's presentation. As more fully described in
Note 13 to the Consolidated Financial Statements, we have restated our 2001
Consolidated Financial Statements and Notes thereto to reflect changes in
our share of the earnings (losses) of an equity-accounted investee that
restated its 2001 earnings to correct an error in accounting for the fair
value of certain financial instruments.
(3) Prior to 2001, we estimated certain reserves for unpaid claims and expenses
in our Insurance business by calculating the present value of funds required
to pay losses at future dates. As of 2001, the timing and amount of future
claims payments have become more uncertain. Therefore, the discounted value
can no longer be reliably estimated. Instead, we now show the expected
future claims at full face value, resulting in a net charge of $295 million
to cost of sales in the 2001 Consolidated Income Statement. This is a
non-cash charge, which will be recovered through higher earnings over the
life of the insurance contracts. For additional information, see "Item 5.
Operating and Financial Review and Prospects" and Note 15 to the
Consolidated Financial Statements.
(4) Includes goodwill amortization of $155 million, $152 million, $133 million
and $55 million in 2001, 2000, 1999 and 1998, respectively. In accordance
with the adoption of Statement of Financial Accounting Standards No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, after January 1, 2002, goodwill is no
longer amortized but is charged to operations when specified tests indicate
that the goodwill is impaired. For additional information, see Note 2 to the
Consolidated Financial Statements.
(5) During 2002, 2001, 2000 and 1999, we incurred restructuring charges and
related asset write-downs of $271 million, $221 million, $192 million and
$141, respectively, relating to a number of restructuring initiatives
throughout the world. During 1998, we incurred $274 million in restructuring
costs, of which $144 million related to additional employee terminations and
severance actions in conjunction with a major restructuring plan announced
in 1997. These restructuring costs were accrued in the respective periods
pursuant to the requirements of EITF 94-3, LIABILITY RECOGNITION FOR CERTAIN
EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING
CERTAIN COSTS INCURRED IN A RESTRUCTURING).
7
(6) In 2001, we recorded a charge of $470 million related to the retained
asbestos liability of our disposed power generation segment. During 2000, we
recorded gains on the disposal of our power generation segment, which
included our investment in ABB ALSTOM POWER NV and our nuclear business,
which were partly offset by a $70 million provision related to our retained
asbestos liability, a $300 million provision for estimated environmental
remediation costs, $136 million of accumulated foreign currency translation
losses and operating losses associated with these businesses. In 1999, we
recorded a gain on the formation of a joint venture with ALSTOM S.A., ABB
ALSTOM POWER NV, as well as a gain on the disposal of our transportation
segment, offset by a $300 million provision related to our retained asbestos
liability and contract loss provisions of $560 million. As a result, our
Consolidated Financial Statements present the net assets and results of
operations of these segments, including charges incurred subsequent to the
disposals, as discontinued operations. For additional information, see "Item
5. Operating and Financial Review and Prospects" and Notes 4 and 17 to the
Consolidated Financial Statements.
(7) We accounted for the adoption of Statement of Financial Accounting Standards
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
(SFAS 133), as a change in accounting principle. Based on our outstanding
derivatives at January 1, 2001, we recognized the cumulative effect of the
accounting change as a loss in the Consolidated Income Statement. For
additional information, see Note 2 to the Consolidated Financial Statements.
(8) The number of shares and earnings per share data in the Consolidated
Financial Statements have been presented as if ABB Ltd shares had been
issued for all periods presented and as if the four-for-one split of
ABB Ltd shares in May 2001 had occurred as of the earliest period presented.
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 and that any proceeds from such exercises were
used to acquire shares of our stock at the average market price during the
year or the period the securities were outstanding, if shorter. Potentially
dilutive securities comprise: outstanding written call options, if dilutive;
the securities issued under our management incentive plan, to the extent the
average market price of our stock exceeded the exercise prices of such
instruments; shares issuable in relation to outstanding convertible bonds,
if dilutive; and outstanding written put options, for which net share
settlement at average market price of our stock was assumed, if dilutive
(see Notes 2, 21 and 23 to the Consolidated Financial Statements).
(9) Total debt, also referred to as total borrowings, is equal to the sum of
short-term borrowings and long-term borrowings.
(10) Net operating assets is calculated based upon total assets (excluding cash
and equivalents, marketable securities, current loans receivable, taxes and
deferred charges) less current liabilities (excluding borrowings, taxes,
provisions and pension-related liabilities).
(11) Audited.
(12) Order-related development activities are customer- and project-specific
development efforts that we undertake to develop or adapt equipment and
systems to the unique needs of our customers in connection with specific
orders or projects. Order-related development amounts are initially recorded
in inventories as part of the work in progress of a contract and then are
reflected in cost of sales at the time revenue is recognized in accordance
with our accounting policies.
8
DIVIDENDS AND DIVIDEND POLICY
Payment of dividends is subject to general business conditions, the ABB
Group's current and expected financial condition and performance and other
relevant factors including growth opportunities.
Dividends may be paid only if ABB Ltd has sufficient distributable profits
from previous business years or sufficient free reserves to allow the
distribution of a dividend. In addition, at least 5% of ABB Ltd's annual net
profits must be retained and booked as general legal reserves, unless these
reserves already amount to 20% of ABB Ltd's nominal share capital. As a holding
company, ABB Ltd's main sources of income are dividends, interest and debt
payments from its subsidiaries. At December 31, 2002, of the CHF 6,647 million
stockholders' equity recorded in the unconsolidated statutory financial
statements of ABB Ltd prepared in accordance with Swiss law, CHF 3,000 million
was share capital, another CHF 3,545 million was restricted and CHF 102 million
was available for distribution.
The declaration of any dividend proposed by the board of directors of
ABB Ltd requires approval at a general meeting of shareholders. In addition, the
statutory auditors must confirm that the dividend proposal of the board of
directors conforms to statutory law and the articles of incorporation of
ABB Ltd. In practice, the shareholders' meeting usually approves dividends as
proposed by the board of directors, if the board of directors' proposal is
confirmed by the statutory auditors.
Dividends are usually due and payable no earlier than three trading days
after the shareholders' resolution. Dividends for which no payment has been
requested within five years after the due date accrue to ABB Ltd and are
allocated to its free reserves. For information about the deduction of
withholding taxes from dividend payments, see "Item 10. Additional
Information--Taxation."
ABB Ltd has established a dividend access facility for its shareholders who
are resident in Sweden under which these shareholders may register with
Vardepapperscentralen VPC AB (Sweden) ("VPC"), as holder of up to 600,004,716
shares, and receive dividends in Swedish krona equivalent to the dividend paid
in Swiss francs without deductions of Swiss withholding tax. For further
information, see "Item 10. Additional Information--Taxation."
Because ABB Ltd pays cash dividends, if any, in Swiss francs (subject to the
exception for certain shareholders in Sweden described above), exchange rate
fluctuations will affect the U.S. dollar amounts received by holders of ADSs
upon conversion by Citibank, N.A., the depositary, of those cash dividends.
ABB Ltd is prohibited from declaring or paying dividends under the terms of
our $1.5 billion revolving credit facility for as long as the facility is
outstanding. See "Item 5. Operating and Financial Review and
Prospects--Liquidity and Capital Resources--Credit Facilities."
The following table sets forth in Swiss francs and in U.S. dollars
(translated at the noon buying rate on December 31, 2002) the dividend paid per
share with respect to the years ended December 31, 2002, 2001, 2000 and 1999. At
the annual general meeting of ABB Ltd in May 2003, the shareholders approved the
proposal of the board of directors that no dividend be paid with respect to the
year ended December 31, 2002.
DIVIDEND PER SHARE
-------------------------
YEAR ENDED DECEMBER 31, (CHF) ($)
-----------------------
2002..................................................... -- --
2001..................................................... -- --
2000..................................................... 0.75 0.45
1999..................................................... 0.75 0.45
9
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."
WE ARE SUBJECT TO ONGOING LITIGATION AND SUBSTANTIAL LIABILITIES ARISING OUT OF
ASBESTOS CLAIMS FROM DISCONTINUED OPERATIONS.
When we sold our 50% interest in ABB ALSTOM POWER NV ("ABB ALSTOM POWER") to
ALSTOM S.A. ("ALSTOM") in May 2000, we retained ownership of Combustion
Engineering Inc. ("Combustion Engineering"), a subsidiary that had conducted
part of our discontinued power generation business and that now owns commercial
real estate that it leases to third parties. Together with other third parties,
Combustion Engineering is a co-defendant in numerous lawsuits in the United
States in which the plaintiffs claim damages for personal injury arising from
exposure to asbestos in equipment or materials that Combustion Engineering
allegedly supplied or was responsible for, primarily during the early 1970s and
before. Other ABB Group entities have sometimes been named as defendants in
asbestos claims. These entities include ABB Lummus Global Inc. ("Lummus") (which
is part of our Oil, Gas and Petrochemicals business and was formerly a
subsidiary of Combustion Engineering) and Basic Incorporated ("Basic") (which is
currently a subsidiary of Asea Brown Boveri Inc. and was formerly a subsidiary
of Combustion Engineering).
THE CREATION OF THE CE SETTLEMENT TRUST AND THE PURSUIT OF A PRE-PACKAGED
BANKRUPTCY PLAN.
PRE-PACKAGED BANKRUPTCY PLAN. In October 2002, we and Combustion
Engineering determined that it was likely that the expected asbestos-related
costs of Combustion Engineering would exceed the value of its assets ($812
million as of September 30, 2002) if its historical settlement policies
continued into the future. We and Combustion Engineering determined to resolve
the asbestos liability of Combustion Engineering and its affiliates by
reorganizing Combustion Engineering under Chapter 11, the principal business
reorganization chapter of the U.S. Bankruptcy Code. We and Combustion
Engineering determined to structure the Chapter 11 reorganization as a
"pre-packaged plan," in which acceptances of the plan would be solicited prior
to the filing of the Chapter 11 case, thus reducing the duration and expense of
the bankruptcy proceedings.
CE SETTLEMENT TRUST. Beginning in October 2002, we and Combustion
Engineering conducted extensive negotiations with representatives of certain
asbestos claimants with respect to a pre-packaged plan. On November 22, 2002,
Combustion Engineering and the asbestos claimants' representatives entered into
a Master Settlement Agreement for settling open asbestos-related personal injury
claims that had been lodged against Combustion Engineering prior to November 15,
2002. Combustion Engineering also agreed, pursuant to the Master Settlement
Agreement, to form and fund a CE Settlement Trust (the "CE Settlement Trust") to
fund and administer the payment of asbestos-related personal injury claims
settled under the Master Settlement Agreement. Under its terms, eligible
claimants became entitled to receive a percentage of the value of their claim
from the CE Settlement Trust while retaining a claim against Combustion
Engineering for the unpaid
10
balance. The trust was to be funded with cash and other assets valued at
approximately $450 million.
ASBESTOS PI TRUST. On January 17, 2003, we announced that we and Combustion
Engineering had reached an agreement on a proposed pre-packaged plan with
certain representatives of asbestos claimants with existing asbestos-related
personal injury claims against Combustion Engineering (encompassing claimants
who had lodged claims prior to November 15, 2002 and claimants who had lodged
claims after that date and were not eligible to participate in the Master
Settlement Agreement), and with the proposed representative of persons who may
be entitled to bring asbestos-related personal injury claims in the future. The
pre-packaged plan provides for the creation of a trust, the Asbestos PI Trust,
which is separate and distinct from the CE Settlement Trust, and addresses
"Asbestos PI Trust Claims," which consist of present and future asbestos-related
personal injury claims (including the claims previously settled pursuant to the
Master Settlement Agreement only to the extent of any unpaid portions thereof)
that arise directly or indirectly from any act, omission, products or operations
of Combustion Engineering, Lummus or Basic. If the pre-packaged plan is
confirmed and ultimately becomes effective, a channelling injunction would be
issued under the U.S. Bankruptcy Code pursuant to which the Asbestos PI Trust
Claims against ABB Ltd and its affiliates (including Combustion Engineering,
Lummus and Basic), would be channelled to the Asbestos PI Trust. This would mean
that the sole recourse of a holder of an Asbestos PI Trust Claim would be to the
Asbestos PI Trust and such holder would have no right to assert such a claim
against ABB Ltd and its affiliates (including Combustion Engineering, Lummus and
Basic). The trust would be funded with cash and other assets valued at
approximately $800 million.
THE BANKRUPTCY LITIGATION AND THE POSSIBILITY OF APPEAL.
OVERVIEW. The pre-packaged plan, including the channelling order, will
become effective when the U.S. Bankruptcy Court recommends the issuance of, or
issues, a confirmation order, the confirmation order is issued or affirmed, as
the case may be, by the U.S. District Court and has become a final order that is
not subject to appeal, and the other conditions to the effectiveness of the
pre-packaged plan have been satisfied. So long as the effectiveness of the
pre-packaged plan has not been stayed, the Plan may become effective at such
earlier date as the parties to the Chapter 11 case agree if a confirmation order
has been issued. Following the Bankruptcy Court's order recommending issuance
of, or issuing, a confirmation order, interested parties have a ten-day period
during which they may file with the U.S. District Court an appeal of the order.
The U.S. District Court rules on these appeals as part of determining whether to
issue or affirm the confirmation order. However, even if the U.S. District Court
issues or affirms the confirmation order, the U.S. District Court's order is
itself subject to appeal. Objectors filing such appeals may seek to stay the
effectiveness of the channelling injunction pending the outcome of their
appeals. We cannot be certain that a confirmation order will be issued or, if
issued, whether or not it will be appealed. We also cannot be certain of the
duration or outcome of any appeal process. Regardless of whether or not the
pre-packaged plan becomes effective, the Master Settlement Agreement remains
effective and has settled approximately 80,000 asbestos-related personal injury
claims that had been lodged against Combustion Engineering.
PRESENT STATUS. On June 23, 2003, the U.S. Bankruptcy Court issued an Order
Approving the Disclosure Statement but Recommending Withholding of Confirmation
of the Plan of Reorganization for Combustion Engineering for Ten Days and
related findings of fact (collectively, the "Ruling"). The Ruling approved the
disclosure statement, which was the document used as the basis for soliciting
approval of the pre-packaged plan from asbestos claimants, and verified the
voting results that approved the pre-packaged plan. Although the Ruling did not
confirm the pre-packaged plan, it indicates that the U.S. Bankruptcy Court will
recommend that the pre-packaged plan be confirmed
11
if we and Combustion Engineering can establish to the court's satisfaction the
following two matters:
- that adequate efforts were made to identify, notify and solicit votes on
the pre-packaged plan from creditors with claims only against Lummus and
only against Basic that were not related to claims against Combustion
Engineering; and
- that there are segregated funds available and a mechanism to pay only such
creditors of Lummus and Basic as evidenced by documents setting forth
payment procedures in this regard.
The Ruling provides us and Combustion Engineering an opportunity to submit
additional information to the U.S. Bankruptcy Court by July 3, 2003 to establish
these matters to the court's satisfaction. We have submitted the additional
information for the court's consideration prior to the deadline. We believe that
the submitted information will be sufficient to satisfy the U.S. Bankruptcy
Court. If, however, we and Combustion Engineering cannot provide information
addressing these matters to the court's satisfaction, we expect that we and
Combustion Engineering would have to take additional action (possibly including
soliciting votes from creditors of Lummus and Basic) to establish for the U.S.
Bankruptcy Court that these requirements are satisfied before the U.S.
Bankruptcy Court would recommend confirmation of, or confirm, the pre-packaged
plan. We cannot be certain that we and Combustion Engineering would be able to
satisfy the U.S. Bankruptcy Court with respect to these requirements or that the
court would recommend confirmation of, or confirm, the pre-packaged plan.
If the U.S. Bankruptcy Court recommends confirmation of, or confirms, the
pre-packaged plan, based on the proceedings to date, we would expect that the
most likely objections that appellants would raise in the appeal process may
include the following:
- arguments that Combustion Engineering is not permitted to obtain a
channelling injunction that protects Combustion Engineering's affiliates
with respect to claims against Combustion Engineering;
- arguments that asbestos claims against Lummus and Basic cannot be made
subject to a channelling injunction;
- arguments that the disclosure provided in connection with the solicitation
of acceptances of the pre-packaged plan did not satisfy the required
standards;
- arguments that claimants covered by the plan would fare better outside the
pre-packaged plan;
- arguments that the pre-packaged plan improperly affects the rights and
obligations of insurance carriers who have continuing obligations to
provide insurance coverage with respect to Combustion Engineering's
asbestos liabilities; and
- arguments that the pre-packaged plan fails to address properly the
indemnification rights of certain insurers.
If any of these objections are made in the appeal process, we and Combustion
Engineering will vigorously contest them, but we cannot assure you that we and
Combustion Engineering will succeed.
ONGOING EXPOSURE. As discussed in more detail under "Item 5. Operating and
Financial Review and Prospects--Contingencies and Retained Liabilities--Asbestos
Claims," based on our expectation that the pre-packaged plan will be confirmed
and ultimately affirmed, we have accrued a liability of $1,118 million as of
December 31, 2002, reflected in our Consolidated Balance Sheet, for resolution
of the asbestos-related personal injury claims against Combustion Engineering,
Lummus and Basic. Nonetheless, we cannot be certain of the duration of the
asbestos-related
12
litigation process, its outcome or its eventual cost to us. In particular,
ongoing asbestos-related litigation resulting from a prolonged appeals process
may hinder our ability to raise funds through capital markets transactions or
otherwise, thereby limiting our ability to reduce our indebtedness. As described
below, if we are unable to reduce our indebtedness, we may be unable to fund our
obligations when due and may therefore be unable to continue as a going concern.
If the pre-packaged plan is not confirmed and affirmed or the confirmation or
affirmation of the pre-packaged plan is later overturned, our ultimate liability
for the resolution of asbestos-related personal injury claims and our reserves
related thereto might change in a manner that would be uncertain and could have
a material adverse impact on our financial position, results of operations and
liquidity.
For further information on the asbestos-related personal injury litigation,
see "Item 5. Operating and Financial Review and Prospects--Contingencies and
Retained Liabilities--Asbestos Claims."
IF WE ARE UNABLE TO REDUCE AND/OR REFINANCE OUR DEBT, OUR ABILITY TO OPERATE AND
OBTAIN LIQUIDITY THROUGH ADDITIONAL SOURCES MAY BE CONSTRAINED AND OUR ABILITY
TO OPERATE AS A GOING CONCERN MAY BE AT RISK.
As of March 31, 2003, our total debt amounted to approximately
$8.2 billion. Not all of our cash and marketable securities are freely available
to offset our total debt, as described in "Item 5. Operating and Financial
Review and Prospects--Liquidity and Capital Resources--Restrictions on Transfer
of Funds." Since the beginning of 2002, our level of indebtedness and our credit
ratings have limited our access to the commercial paper market. Consequently, we
renegotiated our $3 billion credit facility and replaced it in December 2002
with a $1.5 billion 364-day revolving credit facility. Our high debt level means
that we must allocate more of our available cash to pay interest on the debt. It
also could affect our competitiveness by limiting our ability to respond to
changing market conditions, invest in new products and technologies or make
other strategic investments.
We have announced a series of planned divestments of significant businesses,
including our Oil, Gas and Petrochemicals business, our Building Systems
business, the portion of our Structured Finance business that has not already
been sold and our Equity Ventures business, all of which we estimate will
generate total proceeds in excess of $2 billion. We will depend on the proceeds
from these divestments not only to reduce our debt but also to meet our
liquidity needs (to the extent our credit facility permits us to retain
proceeds). We cannot offer any assurance that we will be able to divest these
businesses on terms acceptable to us, within an acceptable time frame. If we are
unable to complete these divestments in accordance with our plan, we may not be
able to reduce our level of debt significantly in the near term.
In addition to generating proceeds through disposals, we may need to seek
additional sources of liquidity, including through further borrowings and
capital market transactions, to fund our obligations in the short to medium
term. As a consequence of our high debt level, it may be more difficult for us
to raise additional liquidity on terms that are favorable to us. We may have to
pay substantial interest rates on new bond offerings, bank borrowings or any
other form of debt security, grant security interests in our assets to lenders
and arrange for such security interests and borrowings to be senior in priority
to existing security interests and borrowings. To the extent we are unable to
fund our obligations or to obtain additional sources of funding, we may be
unable to satisfy our obligations as they become due and therefore may not be
able to continue as a going concern.
IF WE ARE NOT ABLE TO COMPLY WITH THE STRINGENT COVENANTS CONTAINED IN OUR
CREDIT FACILITY, OUR FINANCIAL POSITION WILL BE ADVERSELY AFFECTED.
We have been drawing on our $1.5 billion credit facility to fund daily
operations and repay other debt since January 2003. The facility is secured by
assets which had a net value of
13
$3.5 billion as of December 31, 2002, including the shares of companies forming
our Oil, Gas and Petrochemicals business, specific stand-alone businesses and
certain regional holding companies. The facility contains certain financial
covenants in respect of minimum interest coverage, total gross debt, a maximum
level of debt in subsidiaries other than those specified as borrowers under the
facility, a minimum level of consolidated net worth in 2003 and specific
negative pledges.
In addition, to ensure the continued availability of the credit facility, we
must achieve minimum levels of proceeds from the disposal of specified assets
and businesses and/or equity issuances during 2003, or we may elect to include,
for the purpose of the covenant calculation, the proceeds from other defined
discretionary sources, subject to limitations. If we are unable to comply with
the covenants in the credit facility, we will be required to renegotiate the
facility with our lenders or to replace the facility. In light of our credit
rating and consolidated net losses, we can offer no assurance that we would be
able to renegotiate or replace the facility on terms that are acceptable to us,
if at all. If this were to occur, our obligation to repay borrowings under our
credit facility and other debt instruments could be accelerated by our
creditors. Unless we could arrange alternative financing, we could not repay
such borrowings if they were accelerated.
OUR ABILITY TO BID FOR LARGE CONTRACTS DEPENDS ON OUR ABILITY TO OBTAIN
PERFORMANCE GUARANTEES FROM FINANCIAL INSTITUTIONS.
In the normal course of our business and in accordance with industry
practice, we provide performance guarantees on large projects, including
long-term operation and maintenance contracts, which guarantee our own
performance. These guarantees may include guarantees that a project will be
completed or that a project or particular equipment will achieve defined
performance criteria. If we fail to attain the defined criteria, we must make
payments in cash or in kind. Performance guarantees frequently are requested in
relation to bids for large projects, both in our core power and automation
businesses and in our Oil, Gas and Petrochemicals business.
Some customers will require that performance guarantees be issued by a
financial institution in the form of a letter of credit, surety bond or other
financial guarantee. If we cannot obtain such a guarantee from a financial
institution on reasonable terms, we could be prevented from bidding on or
obtaining the contract or our costs would be higher, which would reduce the
profitability of the contract. Financial institutions will consider our credit
ratings and financial position in the guarantee approval process. Our current
credit rating and financial position do not prevent us from obtaining such
guarantees from financial institutions, but they can make the process more
difficult or expensive. If we cannot obtain guarantees from financial
institutions in the future, there could be a material impact on our consolidated
financial position, liquidity or results of operations.
WE HAVE RETAINED PERFORMANCE GUARANTEES RELATED TO OUR DIVESTED POWER GENERATION
AND NUCLEAR BUSINESSES.
We have retained performance guarantees related to the power generation
business that we contributed to the ABB ALSTOM POWER joint venture. The
guarantees primarily consist of performance guarantees, advance payment
guarantees, product warranty guarantees and other miscellaneous guarantees under
certain contracts such as indemnification for personal and property injuries,
taxes and compliance with labor laws, environmental laws and patents. The
guarantees have maturity dates ranging from one to ten years and in some cases
have no definite expiry. ALSTOM and its subsidiaries have primary responsibility
for performing the obligations that are the subject of the guarantees. In
connection with the sale to ALSTOM of our interest in the joint venture in
May 2000, ALSTOM and ALSTOM POWER have undertaken to indemnify us and hold us
harmless against any claims arising under these guarantees. Due to the nature of
product warranty guarantees and certain other guarantees, we are unable to
develop an estimate of the maximum potential amount of future payments for these
guarantees. Our best estimate of the total maximum
14
potential exposure under all quantifiable guarantees we issued on behalf of our
former power generation business was approximately $2.2 billion as of
December 31, 2002. This maximum potential exposure, as required by Financial
Accounting Standards Board Interpretation No. 45 ("FIN 45"), is measured based
on the fair value of the guarantee at its inception and does not reflect any
discounting of our assessment of actual exposure under the guarantees.
In connection with the sale of our nuclear technology business to British
Nuclear Fuels plc ("BNFL") in 2000, one of our subsidiaries retained obligations
under surety bonds relating to the performance by the nuclear technology
business under certain contracts entered into prior to the sale to BNFL. The
surety bonds have maturity dates ranging from one to nine years. Pursuant to the
purchase agreement, BNFL is required to indemnify us and hold us harmless
against any claims arising under these bonds. Our maximum potential exposure
under these bonds at December 31, 2002 was approximately $640 million. This
maximum potential exposure, as required by FIN 45, is measured based on the fair
value of the guarantee at its inception and does not reflect any discounting of
our assessment of actual exposure under the guarantees.
As of December 31, 2002, no losses have been recognized in connection with
the guarantees and bonds relating to the divested power generation and nuclear
businesses. We have not concluded that a loss is probable under these guarantees
and, therefore, we have not recorded a provision as of December 31, 2002.
However, if we are required to fund payments under these guarantees following
failures of the divested businesses to perform their obligations, and if ALSTOM
or BNFL, as the case may be, is unable to fulfill its undertaking to indemnify
us, we could incur material losses.
WE HAVE RETAINED LIABILITY FOR ENVIRONMENTAL REMEDIATION COSTS RELATING TO
BUSINESSES THAT WE SOLD IN 1999 AND 2000 AND WE COULD BE REQUIRED TO MAKE
PAYMENTS IN RESPECT OF THESE RETAINED LIABILITIES IN EXCESS OF ESTABLISHED
RESERVES.
We retained liability for environmental remediation costs at two sites in
the United States that were operated by our nuclear business, which we sold in
April 2000 to BNFL. We have retained all environmental liabilities associated
with Combustion Engineering's Windsor, Connecticut facility and a portion of the
liabilities associated with our ABB C-E Nuclear Power, Inc. ("ABB C-E Nuclear
Power") subsidiary's Hematite, Missouri facility. The primary environmental
liabilities associated with these sites relate to the costs of remediating
radiological and chemical contamination upon decommissioning the facilities.
Based on the information that BNFL has made publicly available, we believe
remediation may take until 2013 at the Hematite site and until 2008 at the
Windsor site. At the Windsor site, we believe that a significant portion of such
remediation costs will be the responsibility of the United States government
pursuant to federal law, although the exact amount of such responsibility cannot
reasonably be estimated. In connection with the sale of the nuclear business in
April 2000, we established a reserve of $300 million in respect of estimated
remediation costs related to these facilities. Expenditures charged to the
remediation reserve were $12 million and $6 million during 2002 and 2001,
respectively. It is possible that we could be required to make expenditures in
excess of the reserve, in a range of amounts that cannot reasonably be
estimated. See "Item 5. Operating Review and Financial Prospects--Contingencies
and Retained Liabilities--Environmental."
BIDDING ON LARGE, LONG-TERM FIXED PRICE PROJECTS EXPOSES OUR BUSINESSES TO RISK
OF LOSS.
Approximately 6% of the total U.S. dollar amount of orders booked in 2002
were "large orders," which we define as orders from third parties involving at
least $15 million worth of products or systems. Portions of our business involve
orders related to long-term projects that can take many months or even years to
complete. Additionally, such projects are typically performed on a fixed price
or turnkey basis and are awarded on a competitive bidding basis. We may expend
15
significant resources, both in management time as well as money, on bidding for
projects that we are not awarded.
Additionally, fixed priced contracts are inherently risky because of the
possibility of underbidding and the fact that we assume substantially all of the
risks associated with completing the project and the post-completion warranty
obligations. We also assume the project's technical risk, meaning that we must
tailor our products and systems to satisfy the technical requirements of a
project even though, at the time we are awarded the project, we may not have
previously produced such a product or system. The revenue, cost and gross profit
realized on such contracts can vary, sometimes substantially, from our original
projections because of changes in conditions, including but not limited to:
- unanticipated technical problems with the equipment being supplied or
developed by us which may require that we spend our own money to remedy
the problem;
- changes in the cost of components, materials or labor;
- difficulties in obtaining required governmental permits or approvals;
- project modifications creating unanticipated costs;
- delays caused by local weather conditions; and
- suppliers' or subcontractors' failure to perform.
These risks are exacerbated if the duration of the project is long-term
because there is an increased risk that the circumstances upon which we
originally bid and developed a price will change in a manner that increases our
costs. In addition, we sometimes bear the risk of delays caused by unexpected
conditions or events. Our long-term, fixed price projects often make us subject
to penalties if we cannot complete portions of the project in accordance with
agreed-upon time limits. Therefore, losses can result from performing large,
long-term projects on a fixed price or turnkey basis. For example, in 2002 and
2001, the operating income of our Oil, Gas and Petrochemicals business was
adversely affected by cost overruns amounting to $224 million and $140 million,
respectively.
In connection with large, long-term projects, we routinely undertake
substantial customer- and project-specific development efforts. In 2002 and
2001, we incurred order-related development expenditures of approximately
$249 million and $405 million, respectively. Order-related development amounts
are initially recorded in inventories as part of the work in progress of a
contract and then are reflected in cost of sales at the time revenue is
recognized in accordance with our accounting policies. To the extent that
revenues on these projects cannot be recognized, we would not recover the
order-related development expenditures. Additionally, to the extent that
order-related development expenditures in a specific project exceed
expectations, the profit margin on that project will be adversely affected.
WE MAY CONTINUE TO EXPERIENCE LOSSES UNDER SOME LONG-TERM CONTRACTS.
In several of our businesses, including the downstream business of our Oil,
Gas and Petrochemicals division, our Building Systems business and certain
businesses within our Automation Technologies division, we continue to be party
to long-term, fixed price contracts. Some of these contracts have resulted in
losses due to, among other things, our inability to make proper estimates during
the tendering process and weaknesses in project execution that have caused cost
overruns. In 2002, the Oil, Gas and Petrochemicals business, the Building
Systems business, the Automation Technologies division and the Power
Technologies division reported losses from cost overruns amounting to
approximately $224 million, $134 million, $31 million and $20 million,
respectively. We believe we have identified the major weaknesses that partially
16
contributed to these losses. In 2002, we adopted a selective bidding approach
aimed at reducing project risks and securing better margins. However, our new
approach may not be successful and, in any event, we may continue to experience
losses on the contracts we entered into prior to adopting our new approach until
they expire or are terminated.
WE OPERATE IN VERY COMPETITIVE MARKETS AND COULD BE ADVERSELY AFFECTED IF WE
FAIL TO KEEP PACE WITH TECHNOLOGICAL CHANGES.
We operate in very competitive environments in several specific respects,
including product performance, developing integrated systems and applications
that address the business challenges faced by our customers, pricing, new
product introduction time and customer service. The relative importance of these
factors differs across the geographic markets and product areas that we serve.
The markets for our products and services are characterized by evolving industry
standards (particularly for our automation technology products and systems),
rapidly changing technology (in both our power and automation businesses) and
increased competition as a result of deregulation (particularly for our power
technology products and systems). For example, for a number of years power
transmission and distribution providers throughout the world have been
undergoing substantial deregulation and privatization. This has increased their
need for timely product and service innovations that increase efficiency and
allow them to compete in a deregulated environment. Additionally, the continual
development of advanced technologies for new products and product enhancements
is an important way in which we maintain acceptable pricing levels. If we fail
to keep pace with technological changes in the industrial sectors that we serve,
we may experience price erosion and lower margins.
The principal competitors for our automation technology products and
services include Emerson Electric Co. ("Emerson"), General Electric Company
("General Electric"), Honeywell International, Inc. ("Honeywell"), Invensys plc
("Invensys") and Siemens AG ("Siemens"). We primarily compete with ALSTOM,
Schneider Electric SA ("Schneider") and Siemens in sales of our power technology
products and systems to our utilities customers. The principal competitors with
our Oil, Gas and Petrochemicals business include Bechtel Group, Inc. ("Bechtel
Group"), Cooper Cameron Corporation ("Cooper Cameron"), Halliburton Company
("Halliburton"), Aker Kvaerner ASA ("Aker Kvaerner"), Samsung, Technip-Coflexip
S.A. ("Technip-Coflexip"), FMC Technologies, Inc. (FMC Technologies") and Fluor
Corporation ("Fluor"). All of our 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. Our failure to
anticipate or respond quickly to technological developments or customer
requirements could adversely affect our business, results of operations and
financial condition.
INDUSTRY CONSOLIDATION COULD RESULT IN MORE POWERFUL COMPETITORS AND FEWER
CUSTOMERS.
Our competitors in all of our business divisions 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 among our
customers' industries (such as the marine and cruise industry, the automotive,
aluminum, steel, pulp and paper, 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 its
business. Additionally, as our customers become larger and more concentrated,
they could exert pricing pressure on all suppliers, including ABB. For example,
in an industry such as power
17
transmission, which historically has consisted of large and concentrated
customers such as utilities, price competition can be a factor in determining
which products and services will be selected by a customer.
OUR BUSINESS IS AFFECTED BY THE GLOBAL ECONOMIC AND POLITICAL CLIMATE. A MAJOR
TERRORIST EVENT OR PROLONGED MILITARY ACTION COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our business has been adversely affected by the global economic downturn,
particularly by depressed economic conditions in Europe and the United States.
The business environment is influenced by numerous political uncertainties,
which will continue to affect the global economy and the international capital
markets. The threat of a major terrorist attack and the fear of prolonged
military action have exacerbated volatility in the financial markets and caused
consumer, corporate and financial confidence to weaken. As a result, many
companies have experienced difficulties in achieving their revenue goals and
have cancelled or delayed investments, expansions and recruitment.
In periods of slow growth or decline, our customers are more likely to
decrease expenditures on the types of products and systems we supply and we are
more likely to experience decreased revenues as a result. We believe that
investments by our customers will continue to be weak, especially in Europe and
the Americas. Our Power Technologies division is affected by the level of
investments by utilities, and our Automation Technologies division is affected
by conditions in a broad range of industries, including the automotive,
pharmaceutical, pulp and paper, metals and minerals and manufacturing and
consumer industries. Our Oil, Gas and Petrochemicals business is affected by
conditions in the oil, gas and petrochemicals industry. If the current global
economic and political climate fails to improve, this could have a material
adverse effect on our 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, PVC resin to manufacture PVC cable and
chloroparafine as a flame retardant. We use inorganic lead as a counterweight in
robots that we produce. These are considered to be hazardous substances in many
jurisdictions in which we operate. We may be subject to liabilities for
environmental contamination if we do not comply with applicable laws regulating
such hazardous substances, and such liabilities can be substantial. 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 strict liability
for remediation of releases of hazardous substances, which could result in our
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.
18
WE MAY BE THE SUBJECT OF PRODUCT LIABILITY CLAIMS.
A malfunction in or the inadequate design of products, systems and services
that we design and manufacture could result in product liability claims.
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 against us typically involve claims of personal
injury or property damage. If the claimant runs a commercial business, claims
are often made also for financial losses arising from interruption of operations
consequential to property damage. Because of our broad offering of products,
these claims arise in different contexts, including the following:
- If our power technology products and systems are defective, there is a
substantial risk of fires, explosions and power surges and significant
damage to electricity generating, transmission and distribution
facilities.
- If our automation technology products and systems are defective, our
customers could suffer significant damage to facilities that rely on these
products and systems to properly monitor and control their manufacturing
processes.
- Our Oil, Gas and Petrochemicals business makes and installs equipment and
systems used in oil and gas exploration, production and refining. These
products handle petroleum-based substances which can be highly combustible
and which can result in significant fires or explosions if we improperly
design, manufacture or install equipment.
If a very large product liability claim were sustained, 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. 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
or results of operations. Additionally, a well-publicized actual or perceived
problem could adversely affect our market reputation which could result in a
decline in demand for our products.
OUR OPERATIONS IN EMERGING MARKETS EXPOSE US TO RISKS ASSOCIATED WITH CONDITIONS
IN THOSE MARKETS.
We operate in the emerging markets of Latin America, Asia, the Middle East
and Africa. In 2002, approximately 25% of our consolidated revenues were
generated from these emerging markets. Operations in emerging markets 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 markets;
- political or social instability, which makes our customers less willing to
make investments in such regions and complicates 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 operate, which 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;
- significant fluctuations in interest rates and currency exchange rates;
- the imposition of unexpected taxes or other payments on our revenues in
these markets; and
19
- the introduction of exchange controls and other restrictions by foreign
governments.
In addition, the legal and regulatory systems of the emerging markets
identified above are less developed and less well-enforced than in
industrialized countries. Therefore, our ability to protect our contractual and
other legal rights in those regions could be limited. We cannot offer any
assurance that our exposure to conditions in emerging markets will not adversely
affect our financial condition and results of operations.
OUR OIL, GAS AND PETROCHEMICALS BUSINESS MAY EXPERIENCE LOSSES IF THE OIL AND
GAS INDUSTRY GENERALLY EXPERIENCES A DOWNTURN.
Our Oil, Gas and Petrochemicals business depends on the condition of the oil
and gas industry and particularly on capital expenditure budgets of the
companies engaged in the exploration, development and production of oil and gas.
Our upstream oil and gas activities are substantially dependent on the condition
of the offshore exploration and development market. The prices of oil and gas
and their uncertainty in the future, along with forecasted growth in world oil
and gas demand, will strongly influence the extent of offshore exploration and
development activities. Offshore oil and gas field capital expenditures also are
influenced by the sale and expiration dates of offshore leases, the discovery
rate of new oil and gas reserves in offshore areas, local and international
political and economic conditions, environmental regulation, coordination by the
Organization of Petroleum Exporting Countries, the ability of oil and gas
companies to access or generate capital and the cost of such capital. Similarly,
our businesses that provide products, systems and services to the downstream
refining and petrochemical industry are affected by capital expenditure budgets
of our customers, which are, in turn, affected by refinery margins and prices
for petrochemical products such as ethylene and polypropylene. In 2002, the Oil,
Gas and Petrochemicals business generated revenues of $3,854 million. These
revenues are reflected in the results of discontinued operations, reflecting our
intention to sell this business. An adverse effect on the financial results of
this division could have a material adverse effect on our consolidated results
of operations.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO THE RISK OF FLUCTUATIONS IN CURRENCY
EXCHANGE RATES.
CURRENCY TRANSLATION RISK. The results of operations and financial position
of most of our non-U.S. subsidiaries are reported in the currencies of countries
in which those subsidiaries reside. That financial information is then
translated into U.S. dollars at the applicable exchange rates for inclusion in
our Consolidated Financial Statements. In 2002, approximately 77% of our
consolidated revenues were generated in local currencies and translated into
U.S. dollars. Of that amount, the following percentages were reported in the
following local currencies:
- Euro, approximately 33%;
- Swedish krona, approximately 8%;
- Swiss franc, approximately 5%;
- Norwegian krona, approximately 6%; and
- British pound, approximately 3%.
The exchange rates between these currencies and the U.S. dollar fluctuate
substantially, which has a significant translation effect on our reported
consolidated results of operations and financial position. In 2001, the U.S.
dollar appreciated against most of the currencies in which our subsidiaries
reported results of operations, but this trend reversed in 2002. In particular,
in 2002 the U.S. dollar weakened by approximately 6% against the euro, 8%
against the Swiss franc, 13% against the Norwegian krona and 7% against the
Swedish krona. In 2001, the U.S. dollar
20
strengthened by approximately 4% against the euro, 3% against the Norwegian
krona and 11% against the Swedish krona, and the exchange rate between the U.S.
dollar and Swiss franc remained flat.
This resulted in the increase of reported revenues and earnings before
interest and taxes when consolidated and translated into U.S. dollars, based on
average annual exchange rates, of approximately 3% and 4%, respectively, in 2002
and the reduction of reported revenues and earnings before interest and taxes
when consolidated and translated into U.S. dollars, based on average annual
exchange rates, of approximately 4% and 7%, respectively, in 2001.
CURRENCY TRANSACTION RISK. Currency risk exposure also affects our
operations when our sales are denominated in currencies that are different from
those in which our manufacturing costs are incurred. In this case, if after the
time that the parties agree on a price, the value of the currency in which the
purchase price is to be paid weakens relative to the currency in which we incur
manufacturing costs, there would be a negative impact on the profit margin for
any such transaction. This transaction risk may exist regardless of whether or
not there is also a translation risk as described above.
Currency exchange rate fluctuations in those currencies in which we incur
our principal manufacturing expenses (the euro, Swedish krona and Swiss franc)
may distort competition between us and our competitors whose costs are incurred
in other currencies. If our principal currencies appreciate in value against
such other currencies, our competitiveness may be weakened.
For further information on our currency translation and transaction risk,
see "Item 11. Quantitative and Qualitative Disclosures about Market Risk."
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, with
approximately 65% of our employees located in Europe, approximately 18% in the
Americas, approximately 12% in Asia and approximately 5% in the Middle East and
Africa. In order to manage our day-to-day operations, we must overcome cultural
and language barriers and assimilate different business practices. 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 and monitor group-wide standards and directives across our
global network. Our failure to successfully manage 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.
OUR REPUTATION AND OUR ABILITY TO DO BUSINESS MAY BE IMPAIRED BY CORRUPT
BEHAVIOR BY ANY OF OUR EMPLOYEES OR AGENTS OR THOSE OF OUR SUBSIDIARIES.
While we and our subsidiaries are committed to conducting business in a
legal and ethical manner, there is a risk that our employees or agents may take
actions that violate either the U.S. Foreign Corrupt Practices Act or
legislation promulgated pursuant to the 1997 OECD Convention on Combating
Bribery of Foreign Public Officials in International Business Transactions or
other applicable anti-corruption regulations. These actions could result in
monetary penalties against us or our subsidiaries and could damage our
reputation and, therefore, our ability to do business. In addition to the risks
that arise in countries that have experienced governmental corruption, there is
also a risk that we will not be able to ensure that our internal control
policies and procedures will protect us from fraud or other criminal acts
committed by our employees. For a description of incidents involving improper or
illegal conduct by our employees or agents, see "Item 8. Financial
Information--Legal Proceedings."
21
In 2000, our internal audit group discovered during a regular compliance
follow-up that several employees in the London region of our Manufacturing and
Consumer Industries division (the business of which is now part of our
Automation Technologies division) had intentionally concealed losses in 1999 and
part of 2000 arising from contracts for which revenues were insufficient to
cover costs. We believe that these activities were isolated in the London region
of this division and did not extend to other operations. As a result of our
investigation, we terminated the individuals involved and replaced the local
management in the London region. If we had not discovered these activities, our
net income for 1999 and 2000 would have been overstated by $30 million and
$10 million, respectively. In 2001, we identified and recorded additional costs
of approximately $25 million relating to these activities.
ITEM 4. INFORMATION ON THE COMPANY
INTRODUCTION
We are a global provider of power and automation technologies that enable
utility and industry customers to improve performance while lowering
environmental impact. We work with our customers to engineer and install
networks, facilities and plants with particular emphasis on enhancing efficiency
and productivity for customers that source, refine, transmit and distribute
energy. We apply our expertise to develop creative ways of integrating our
products and systems with our customers' business processes to enhance their
productivity and efficiency.
HISTORY OF THE ABB GROUP
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 and, by 1980, was among the
world's ten largest electrical engineering groups.
Brown Boveri & 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, Brown Boveri expanded its operations throughout
Europe and broadened its business operations to include a wide range of
electrical engineering activities. By 1980, Brown Boveri had more than 100,000
employees.
In January 1988, Asea AB and BBC Brown Boveri AG each contributed almost all
of their businesses to newly formed ABB Asea Brown Boveri Ltd, of which they
each owned 50%. Between 1988 and 1990, ABB made acquisitions for consideration
totaling $5.2 billion, including the purchase of Westinghouse Electric Corp.'s
worldwide power transmission and distribution operations. During the 1990s, the
ABB Group further expanded its operations in Central and Eastern Europe, North
America, South America and Asia. 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 its shares to the shareholders of ABB AG
and ABB AB, the two publicly traded 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, and are no longer publicly traded.
ABB Ltd shares are currently traded on the SWX Swiss Exchange (virt-x), the
Stockholm Exchange, the London Stock Exchange, the Frankfurt Stock Exchange and
the New York Stock Exchange (in the form of ADSs).
22
ORGANIZATIONAL STRUCTURE
In 2001, we realigned our worldwide business operations, replacing our six
existing business segments with seven business divisions structured along
customer groups. Four divisions, Utilities, Process Industries, Manufacturing
and Consumer Industries, and Oil, Gas and Petrochemicals, were established to
serve end-user customers. Two divisions, Power Technology Products and
Automation Technology Products, were established to serve the four end-user
divisions as well as certain external customers. Our Financial Services division
served the ABB Group's businesses and external customers.
In April 2002, we announced our intention to sell our Building Systems
business area (part of our Manufacturing and Consumer Industries division). The
remaining business areas of the Manufacturing and Consumer Industries division
were combined with our Process Industries division to form a new Industries
division. In November 2002, we sold most of our Structured Finance business
(part of our Financial Services division) and announced that we would sell the
remaining Structured Finance businesses that are unrelated to our core
businesses. The remaining activities in the Financial Services division were
transferred to the Corporate and Non-Core Activities divisions.
Effective January 1, 2003, we further realigned our business divisions to
combine the Power Technology Products and Utilities divisions into a new Power
Technologies division and our Automation Technology Products and Industries
divisions into a new Automation Technologies division. Our Oil, Gas and
Petrochemicals division, which we intend to divest in 2003, was reclassified as
a discontinued operation along with a number of other businesses in 2002. Our
remaining activities were grouped into a Non-Core Activities division. We began
reporting our financial results to reflect this new structure starting with our
results for the three months ended March 31, 2003.
We streamlined our divisional structure to sharpen our focus on power and
automation technologies, to increase efficiency and to create a sustainable
lower cost base. We consider the Power Technologies and Automation Technologies
divisions to be our core divisions, and our management intends to focus its
attention on, and future investments in, these divisions. The following chart
illustrates the formation of our two core divisions:
23
[LOGO]
[LOGO]
Our Non-Core Activities division comprises businesses and activities that do
not fit within our long-term strategic focus on our power and automation
technologies. We have decided to sell many of these businesses, and we continue
to consider our options with respect to others. The division currently includes
the following:
- our Insurance business area, which was part of our former Financial
Services division;
24
- our Equity Ventures business area and the remaining portion of the
Structured Finance business area that was not sold to General Electric
Capital Corporation ("GE Capital") in 2002 (except the Financial Advisory
business, which has been part of our Corporate activities from the
beginning of October 2002), both of which were part of our former
Financial Services division;
- our Building Systems business area;
- our New Ventures business area; and
- our Customer Service, Group Processes and Logistic Systems business areas.
The makeup of our Corporate division, as well as the activities that are
classified as discontinued operations, are described in detail under "--Business
Divisions--Corporate" and "--Discontinued Operations."
The following table sets forth the amount and percentage of ABB Group
revenues derived from each of our business divisions for the fiscal years ended
December 31, 2002 and 2001, based on our current organizational structure:
REVENUES(1) PERCENTAGE OF REVENUES(1)
-------------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER, 31
-------------------------- --------------------------
2002 2001 2002 2001
------------ ----------- ------------- ----------
(UNAUDITED) (UNAUDITED) (%)
($ IN MILLIONS)
Power Technologies........................ 7,103 6,873 35.9 33.5
Automation Technologies................... 8,482 8,508 42.9 41.5
Non-Core Activities....................... 4,186 5,130 21.2 25.0
------ ------ ------ ------
Subtotal.................................. 19,771 20,511 100.0 100.0
====== ======
Corporate/Other and Eliminations.......... (1,476) (1,129)
------ ------
Consolidated Revenues..................... 18,295 19,382
====== ======
------------------------
(1) Based on estimated figures for our core divisions.
For a breakdown of our consolidated revenues derived from each geographic
region in which we operate, see "Item 5. Operating and Financial Review and
Prospects--Summary Financial Data."
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 501 Merritt 7,
Norwalk, Connecticut 06851.
25
STEP CHANGE PROGRAM
In 2002, we introduced the Step Change Program, which is designed to
increase the competitiveness of our core businesses, reduce overhead costs and
streamline operations, resulting in over $800 million of cost savings on an
annual basis by mid-2004. We expect the savings to be roughly evenly divided
between our two core divisions, Power Technologies and Automation Technologies,
and a third category of overhead and headquarters costs. The Step Change Program
is being implemented by a steering committee which is led by Gary Steel, our
head of human resources, and includes our chief financial officer and the heads
of the Power Technologies and Automation Technologies divisions. The primary
focus of the program is on the 19 countries in which we have our largest
operations. We expect approximately 50% of the cost savings to be achieved in
our four largest country operations, Germany, Sweden, Switzerland and the United
States.
In addition to eliminating between 10,000 and 12,000 jobs over the period,
the Step Change Program involves a large number of measures, identified and
executed by each business unit, aimed at reducing costs. Because the program is
aimed at achieving sustainable, permanent savings, measures that have a one-off
effect are not considered part of the Step Change Program. ABB expects to
achieve over $800 million in savings by implementing over 1,300 measures.
Although some measures result in large cost savings, such as the $15 million
savings resulting from concentrating and consolidating locations in Germany,
small measures involving less than $1 million of cost savings make up a large
proportion of the Step Change projects. For example, our operations in Brazil
have reduced paper consumption and printing costs by more than 50% to
approximately $60,000 a year. The progress of the Step Change Program is
monitored centrally using standardized reporting by the business units.
For more information on the Step Change Program, see "Item 5. Operating and
Financial Review and Prospects--Restructuring Expenses--Step Change Program."
INDUSTRIAL IT
The modern industrial enterprise consists of numerous information
systems--control, maintenance, procurement, production, sales and
management--all full of vital information but often working in isolation. The
concept behind Industrial IT is to integrate these systems into a seamless,
easily navigated framework from which information can be selected, retrieved and
acted upon rapidly. The integration of Industrial IT-enabled products into our
customers' business processes provides our customers with increased information
flow about their business systems in a useful form. Industrial IT allows our
customers to make intelligent decisions based on the most current and accurate
information and to react quickly to changing conditions. Additionally, by
incorporating advanced technology into our products and systems, we can increase
the speed of our customers' manufacturing and information processes without
exceeding manufacturing constraints.
Our goal is to ensure that the products and systems that we offer across our
various businesses will be easy to use, compatible with each other, and will fit
within our Industrial IT concept. We are developing a common architecture across
the range of our products and systems so that they can be easily combined with
each other and with our customers' systems. We intend to improve compatibility
in succeeding generations of each of our products and systems.
As of May 1, 2003, approximately 35,000 ABB products had been certified as
meeting our Industrial IT standards. Each certified product is assigned to a
product suite and is named according to what it does and how it fits into the
Industrial IT system.
26
BUSINESS DIVISIONS
POWER TECHNOLOGIES DIVISION
OVERVIEW
The Power Technologies division serves electric, gas and water utilities as
well as industrial and commercial customers, with a broad range of products,
systems and services for power transmission, distribution and power plant
automation. The division had 145 manufacturing plants and 41,200 employees as of
January 1, 2003.
POWER INDUSTRY BACKGROUND
The portions of an electricity grid that operate at highest voltages are
"transmission" systems, while those at lower voltages are "distribution"
systems. Transmission systems link power generation sources to distribution
systems. Distribution networks then branch out over shorter distances to carry
electricity from the transmission system to end users. These electricity
networks incorporate sophisticated devices to control and monitor operations and
to prevent damage from failures or stresses.
Electricity is transformed at different stages in the delivery process
between the source and the ultimate end user. For example, electrical power is
often generated in large power plants at 10 to 20 kilovolts. Because this
voltage is too low to be transmitted efficiently, transformers are used to
increase the voltage of electricity (up to 1,100 kilovolts) for long-distance
transmission. This reduces losses and increases the amount of power that can be
carried per line.
Transformers are also used to decrease the voltage at the local end for
distribution to end users, such as residential, commercial or industrial
consumers. An electric utility distribution system comprises distribution
substations and networks, both overhead and underground. Some large industrial
and commercial facilities receive electricity at higher voltage levels from the
transmission or distribution network, while most industrial, commercial and
residential users receive electricity from distribution network feeders at lower
voltages.
There is a global trend toward deregulation and privatization of the power
industry, which is creating a more competitive environment for our customers.
This trend is evident in the United States, parts of Latin America and Western
Europe, particularly in the United Kingdom and the Nordic countries. It is
accelerating elsewhere in Europe and is developing in other regions. The
creation of a free market for electricity requires our customers to become more
cost-efficient and reliable to compete as a lowest-cost provider among power
suppliers. Grid operators must be able to deliver power to customers that are
hundreds or thousands of miles away within a few minutes. As more
disturbance-sensitive loads (such as computers and telecommunications systems)
have been added to networks, demand for reliable, high-quality electricity is
increasing. Power suppliers can achieve this efficiency and reliability in a
number of ways, including the following:
- Replacing and modernizing assets and investing in information
technology-based control and monitoring equipment and communications
networks to control and supervise power networks based on instantaneous
access to information.
- Upgrading current technologies and introducing new technologies to improve
network reliability, increase network power rating and enhance the control
of power flow through existing transmission and distribution assets.
27
BUSINESS AREAS
The following table sets forth the approximate proportion of the Power
Technologies division's revenue generated in 2002 by each of the business areas
in the division:
PROPORTION OF
BUSINESS AREA DIVISION REVENUES(1)
------------- --------------------
Power Systems............................................... 28%
Utility Automation Systems.................................. 16%
High-Voltage Products....................................... 17%
Medium-Voltage Products..................................... 14%
Power Transformers.......................................... 14%
Distribution Transformers................................... 11%
------------------------
(1) Based on estimated 2002 figures for our core divisions.
Two of the division's business areas--Power Systems and Utility Automation
Systems--primarily provide engineering services drawing on the ABB Group's
complete range of products and services. The other four business
areas--High-Voltage Products, Medium-Voltage Products, Power Transformers and
Distribution Transformers--are mainly product manufacturing businesses.
POWER SYSTEMS
Our Power Systems business area undertakes turnkey contracts to install and
upgrade transmission and distribution systems incorporating components
manufactured by this division and the Automation Technologies division, as well
as those manufactured by third parties.
We are a leader in high-voltage direct current ("HVDC") technology. HVDC
transmission is an advanced technology for transporting electricity over long
distances. It reduces power losses, increases system stability and provides a
more controllable flow than high-voltage alternating current. An HVDC
transmission system typically includes converters, which change alternating
current to direct current and then back to alternating current when it reaches
the terminal point, and transmission lines, either above or below ground.
Advances in converter and cable technology have enabled us to introduce a system
called HVDC Light-TM-. Converter stations for HVDC Light-TM- are approximately
one-fifth the size of conventional HVDC technology for the same rated power.
HVDC Light-TM- extends the range of applications for high-voltage direct
current. Typical applications include interconnection of separate networks that
operate on different frequencies or provide variational power quality, such as
wind parks. The system can also be used as a substitute for local power
generation in remote areas, islands or oil platforms.
We also provide flexible AC transmission systems ("FACTS") to enhance power
grid stability, improve power quality and thus increase transmission capability.
FACTS devices include series compensators, static VAR compensators ("SVCs") and
SVC Light-TM- (based on the same unique technology as HVDC Light-TM-).
HVDC, HVDC Light-TM-, FACTS, and SVC Light-TM- systems rely on advanced
power semiconductor components. Our in-house power semiconductor unit enables us
to develop and manufacture tailor-made components to maximize the performance of
these systems. This business area supplies power semiconductor devices to other
ABB businesses and to external customers in the power transmission and
distribution, drives, and transportation markets.
The Power Systems business area also supplies substations to interconnect
electricity grids operating on different voltage levels, to sectionalize
portions of the grid and to protect the electrical system against damage from
outside sources such as lightning and overload. By sectionalizing the
28
grid, power can be rerouted from portions of the transmission system that are
experiencing problems to sections that are functioning properly, thereby
enhancing the overall reliability of the power supply. This business area
delivers complete air and gas insulated substations for power transmission.
Substations are also necessary in a power distribution network to sectionalize
and reduce the voltage of the main power lines and cables to the lower voltages
required for efficient distribution and consumption. For power distribution,
this business area sells traditional custom-engineered substations as well as
compact, modular substations, which require less space than a conventional
substation and thus are particularly well suited for urban settings. It also
offers prefabricated secondary substations that can be installed more quickly
than traditional substations, and which transform electricity to consumer-level
voltages.
Power Systems also delivers the engineering, procurement and construction
("EPC") of overhead transmission lines, one of the main subsystems in a
transmission network. ABB in-house engineering and manufacturing of steel
transmission towers and composite insulators also add value in the delivery of a
transmission line project. Power Systems also provides studies on the design of
new transmission lines and system optimization that take into account technical,
economic and environmental considerations.
This business area offers service contracts and support for management of
existing power transmission and distribution assets, including both ABB products
and those manufactured by third parties. In addition, it offers asset management
services including technical consulting (system diagnostics, network analysis,
planning and optimization), commercial consulting (cost reduction programs,
investment strategies, reengineering of business processes) and execution
(maintenance strategies, logistics).
UTILITY AUTOMATION SYSTEMS
Our Utility Automation Systems business area applies its power industry and
automation expertise to integrate products manufactured by both the Power
Technologies and the Automation Technologies divisions, as well as those of
third parties, to provide utility customers with automation systems tailored for
their generating plants or transmission and distribution networks.
In the area of power plant automation, the Utility Automation Systems
business area offers complete system integration of instrumentation, control and
electrical ("ICE") equipment for the power generation market. The services
offered by the business area include combustion management, plant performance
optimization, condition monitoring and asset management.
For water plants, the business area offers system integration for all ICE
applications in water systems, including automation services for water treatment
plants, distribution systems, waste water collection systems and wastewater
treatment. The business area offers turnkey pumping stations and control systems
for water leakage management, lift-station monitoring and optimization of plant
performance.
The Utility Automation Systems business area offers high-end supervisory
control and data acquisition ("SCADA") systems to power and gas customers. SCADA
systems are used to monitor and control energy transmission, distribution and
power generation management systems. They are also used to operate market
systems for power networks by tracking energy costs, end-user consumption and
retail and wholesale prices, among other things. In addition, this business area
offers customer care systems and asset management systems for electrical
networks, district heating networks and gas networks. These allow utilities to
optimize their business by improving the performance of their installed network
equipment to meet changing customer requirements and new market conditions.
29
This business area also provides system integration for substations used in
power generation, transmission and distribution. Its offering includes small
electrical SCADA systems, wide area protection systems, feeder automation
systems and power system monitoring, which provides real-time information that
enables utilities to make informed system-related decisions.
The business area provides wireless and fixed communication systems for
power, water and gas utilities, including both operational and corporate
communication networks. It offers fiber optics, microwave radio and power line
applications for data networking and broadband network management, as well as
teleprotection and substation communication networks and voice switching
management systems.
The Utility Automation Systems business area offers a range of service
capabilities aimed at reducing the in-house operational and maintenance
requirements of utility customers. It offers service contracts for spare parts
management, support agreements, software and hardware upgrades and retrofits,
service consulting, asset management and training.
HIGH-VOLTAGE PRODUCTS
The High-Voltage Products business area provides power utilities with
electricity transmission equipment that allows them to operate more efficiently
and with lower environmental impact, both of which are significant business
concerns in a deregulating market environment. The business area manufactures
the principal components of power transmission systems (50 to 800 kilovolts),
including air- and gas-insulated switchgear and generator circuit breakers,
cables, capacitors, high-voltage and generator circuit breakers, disconnectors,
grounding switches, instrument transformers, surge arrestors, power lines and
transmission towers. Its products and components also include polymer insulators
for lines and switchgear, circuit breaker drives, cable accessories and fittings
for overhead lines. Many of the business area's products are integrated into the
offering of the Power Systems business area or are sold through external channel
partners such as EPC firms. Typical applications include high-voltage
substations and large-scale power grid connections over long distances.
MEDIUM-VOLTAGE PRODUCTS
The Medium-Voltage Products business area develops products and systems that
reduce outage times and improve power quality and control, which are key to
improving operational efficiency of both utility and industrial customers. It
supplies switching equipment both directly to end users and through distributors
and original equipment manufacturers (OEMs). Most of its products provide
connections between higher voltage substations and lower voltage uses. It
produces a comprehensive line of medium-voltage equipment (1 to 50 kilovolts),
including products such as indoor and outdoor switch disconnectors, breakers,
reclosers, fuses, contactors, instrument transformers and sensors as well as
air- and gas-insulated switchgear, motor control centers, and ring main units
for primary and secondary distribution. It also produces indoor and outdoor
modular systems, compact substations and power distribution centers. As with the
High-Voltage Products business area, many of its components form part of the
offering of the Power Systems business area. In addition, a significant portion
of its products are sold through external channel partners such as OEMs.
POWER TRANSFORMERS
The Power Transformers business area designs and manufactures power
transformers (72.5 to 800 kilovolts) for utility, transportation and industrial
customers, as well as transformer components such as bushings and tap changers.
The business area also produces insulation material. Transformers are typically
used for power transmission and distribution systems, such as in large
30
substations. Generator transformers are used in power generation when it is
necessary to increase power voltage from a power plant for long-distance
transmission. Industrial transformers are mainly delivered to the steel and
aluminum industry, which need their own high-voltage transformers and
substations on-site to service their heavy electricity requirements. Finally,
the business area produces traction transformers used in electric locomotives.
Customers in the components business come both from the transformer and
electrical motor industry. The business area also provides a wide range of
transformer service and retrofit solutions for utilities and industry customers.
DISTRIBUTION TRANSFORMERS
The Distribution Transformers business area manufactures distribution
transformers for use in industrial facilities, commercial buildings and utility
distribution networks to step down electrical voltage to the levels needed by
end users. The business area manufactures and sells a full range of power
distribution transformers (up to 72.5 kilovolts), including oil-type, dry-type
and special application distribution transformers. Although oil-type
transformers are more commonly used, demand for dry-type transformers is growing
because they minimize fire hazards and have applications in high-density office
buildings, windmills, offshore drilling platforms, naval vessels and high-volume
industrial plants.
CUSTOMERS
The Power Technologies division's principal customers are electric, gas and
water utilities, owners and operators of power transmission systems, utilities
that own or operate networks and owners and operators of power generating
plants. Other customers include gas transmission companies, local distribution
companies and multi-utilities, which are involved in the transmission or
distribution of more than one commodity. The division also serves industrial and
commercial customers, such as operators of large commercial buildings and heavy
industrial plants. In 2002, the division's ten largest customers accounted for
approximately 17% of its business volume, and its 40 largest customers accounted
for approximately 24% of its business volume.
GEOGRAPHIC MARKETS
The following table sets forth the proportion of Power Technologies
division's third-party revenues derived from each geographic region (based on
the location of the customer) in which the ABB Group operates:
YEAR ENDED
DECEMBER 31,
-----------------------
2002 2001
-------- --------
(%)
Europe...................................................... 34 36
The Americas................................................ 33 35
Asia........................................................ 20 17
Middle East and Africa...................................... 13 12
--- ---
TOTAL....................................................... 100 100
=== ===
SALES AND MARKETING
The Power Technologies division sells its products individually through its
four product business areas and as parts of larger systems through its two
engineering business areas. Most product sales are made through the division's
own direct sales force, which is enhanced by industrial representatives and
agents where appropriate. Direct sales account for about 75% of the division's
31
total product sales, and sales through external channel partners, such as
wholesalers, distributors and OEMs, account for the remaining 25%. Sales in the
engineering business areas are handled primarily by the division's specialized
sales engineering teams, although the division uses system integrators and other
third-party sellers from time to time.
COMPETITION
On a global basis, the Power Technologies division's principal competitors
are ALSTOM, Schneider and Siemens. In the distribution transformers market, the
division also competes with companies such as Cooper Cameron and Howard
Industries. In the utility automation area, the division's principal competitors
are ALSTOM, Emerson, GE Harris, Honeywell, Invensys and Siemens.
RESEARCH AND DEVELOPMENT
Research and development expenses for the Power Technologies division
amounted to approximately $166 million for 2002. The division's research and
development activities in 2002 primarily related to streamlining product
portfolios in all business areas. The aim is to increase product standardization
and thus improve the efficiency of our design, supply, manufacturing, sales and
distribution functions. Related research has focused on technologies that enable
faster production cycles, mainly in the areas of new materials, design and
Industrial IT tools. In the Utility Automation Systems business area, research
continued to focus on the standardization of controls and protection systems,
with the goal of reducing costs in the production of substation automation
systems, power plant controls and SCADA systems.
CAPITAL EXPENDITURES
The Power Technologies division's capital expenditures for property, plant
and equipment were $117 million in 2002. Principal investments in 2002 included
investments to replace existing equipment, particularly in Europe and the United
States, mainly in the High-Voltage and the Distribution Transformers business
areas.
AUTOMATION TECHNOLOGIES DIVISION
OVERVIEW
The Automation Technologies division provides products, systems, software
and services for the automation and optimization of industrial and commercial
processes. Key technologies include measurement and control, instrumentation,
process analysis, drives and motors, power electronics, robots and low-voltage
products. This division had approximately 150 manufacturing, software and
application centers and 56,600 employees as of January 1, 2003.
We are a recognized market leader in our core automation products and
systems, with particular strength in process automation systems (including
supervisory control and data acquisition, or SCADA, systems), quality control
systems, advanced robotics, process instrumentation (including analytical
measurement devices) and alternating current, or AC, drives.
The Automation Technologies division offers its products, both as separately
sold devices and as part of a total automation system, through three
product-based business areas and three industry-based business areas, as
discussed below. Stand-alone products, often sold in cooperation with channel
partners such as distributors, wholesalers and OEMs, account for approximately
60% of the division's sales volumes. Systems sales account for about 20% of
total division revenues, and our service business accounts for the remaining 20%
of division revenues. The division focuses on developing synergies and
efficiencies among its business areas, such as common marketing, software re-use
and streamlined geographic sales and service networks.
32
AUTOMATION INDUSTRY BACKGROUND
Our customers use automation technologies primarily to improve product
quality, productivity and consistency in industrial and manufacturing
applications. The automation market can be divided into three sectors:
- PROCESS AUTOMATION refers to control systems applied in processes where
the main objective is continuous production, such as oil and gas,
electricity, chemicals and pulp and paper. Product lines for this market
include instrumentation, analytical measurement and control products and
systems, as well as motors and drives. This division offers complete
process automation systems that incorporate medium and low-voltage
switchgear, synchronized drive systems, instrument and control and
advanced diagnostic packages. Its products also include software to
optimize the manufacturing and business processes.
- FACTORY AUTOMATION refers to discrete operations which manufacture
individual items used mainly within the automotive, packaging and consumer
goods industries. Product lines for this market include robots and robot
cells, which include standardized and tailored systems for discrete
applications such as painting, picking, packing, palletizing, welding and
assembly. This division provides a comprehensive set of systems using
these technologies, including application-specific software and
configuration tools.
- BUILDING AUTOMATION comprises product lines and applications particularly
targeted at the building industry. Product lines for this market include a
wide range of low-voltage products for control of climate, lighting and
security, as well as software for optimal management of the energy cost of
buildings.
The Automation Technologies division manufactures products and systems
relating to all three sectors, primarily focusing on process automation products
and systems, as well as robotics technologies for factory automation. The
division provides to its customers the full range of ABB's products on a
stand-alone basis, or as part of systems involving conceptual design, detailed
engineering, project management, installation and commissioning, as well as
after-sales services and system optimization during the full life span of the
system.
The Automation Technologies division product range has been enhanced through
a number of strategic acquisitions in recent years. In early 1999, ABB acquired
Elsag Bailey Process Automation, a leading global provider of control,
instrumentation and process analytical products whose offering significantly
extended our reach both in terms of automation technology and geography. In
mid-2001, we acquired Entrelec, a French supplier of industrial automation and
control products, including electrical connecting devices, time relays,
signaling and safety devices and wiring accessories for the housing market. This
acquisition further diversified our product range and expanded our customer base
in European and American markets.
In mid-2001, this division entered into a ten-year strategic alliance with
The Dow Chemical Company ("Dow") in which Dow agreed to use our Industrial IT
automation systems in nearly all of its new automation projects, as well as in
retrofits of existing systems. Another significant strategic cooperation was
forged in 2001 through a framework agreement with the original equipment
manufacturer York International (United States), a long-time customer, for
simplified account service, pricing and joint development spanning multiple
product lines. In late 2002, the division was awarded two contracts for
long-term asset management services totaling more than $130 million at
papermaker Carter Holt Harvey Limited (New Zealand) and petrochemical leader ENI
Group (Italy). The division has similar strategic relationships with nearly 100
customers, and has been successful in expanding the scope of such agreements
over time to cover additional ABB products and services.
33
Our customers are increasingly under pressure to deliver their products more
quickly to their customers and to respond rapidly to changing customer
preferences. At the same time, constant price pressure requires them to find
ways to decrease production costs. Furthermore, as the quality of products
becomes more equalized among our customers' competitors, our customers
increasingly focus on design and branding to distinguish their products from
those of their competitors. This change in focus means that much of the
manufacturing and production activities are outsourced to sub-suppliers, which
may manufacture products for a number of different companies in a given
industry. The consolidation in the manufacturing role enables the sub-suppliers
to provide products at a lower cost and presents further opportunities for ABB
to provide flexible solutions for automation.
BUSINESS AREAS
The following table sets forth the approximate amount of the Automation
Technologies division's revenue generated in 2002 by each of the business areas
in the division:
PROPORTION OF
BUSINESS AREA DIVISION REVENUES(1)
------------- --------------------
Low-Voltage Products and Instruments........................ 28%
Paper, Minerals, Marine and Turbocharging................... 22%
Drives and Motors........................................... 16%
Robotics, Automotive and Manufacturing...................... 14%
Petroleum, Chemical and Consumer............................ 13%
Control Platform and Enterprise Products.................... 7%
------------------------
(1) Based on estimated 2002 figures for our core divisions.
The Automation Technologies division offers its products, both as separately
sold devices and as part of complete automation systems, through three
product-based business areas (Low-Voltage Products and Instruments; Drives and
Motors; and Control Platform and Enterprise Products) and three industry-based
business areas (Paper, Minerals, Marine and Turbocharging; Robotics, Automotive
and Manufacturing; and Petroleum, Chemical and Consumer).
LOW-VOLTAGE PRODUCTS AND INSTRUMENTS
The Low-Voltage Products and Instruments business area manufactures circuit
breakers, controls, switches and fuse gear that are used in industrial
electrical applications to protect, switch and control industrial equipment. In
addition, our acquisition of Entrelec provided us with a range of connectors,
terminal blocks and protection and monitoring devices that are used primarily in
industrial applications.
Customers increasingly require low-voltage products with built-in
intelligence, self-regulation and energy efficiency capabilities. To meet these
requirements, we have recently launched several new product families for motor
protection, monitoring and communications via advanced electronic sensing and
feedback systems to control power distribution to industrial motors.
This business area also makes line protection products, wiring accessories
and enclosures and cable systems that are primarily used for control and
protection in building installations. It also produces European Installation
Bus/Powernet systems, which integrate and automate a building's electrical
installations, ventilation, security and data communication networks. Although
it provides low-voltage products and systems for building automation, this
business area is not involved in the execution of building system projects and
installations (which is the business of the non-core Building Systems business
area).
34
The process instrumentation products manufactured by this business area
interact with the division's Open Control System products and include products
for the measurement of process variables such as pressure, temperature, volume
and flow. The increasing sophistication of many process automation systems often
requires thousands of measurement points for such variables. These
instrumentation products are sold separately or in combination with control
systems. The various analytical measurement devices produced by this business
area form an important part of instrumentation and control systems. These
devices measure chemical characteristics while process instrumentation products
measure physical characteristics. This business area's analytical product
offerings include gas analyzers, chromatographs, spectrometers and paper quality
control systems, which perform either sample-based or continuous measurement of
properties such as chemical or physical composition (for example, the water and
fiber content of paper or the composition of gas), energy content and
environmental emissions. These products are sold separately or through the
end-user business areas as part of complete systems.
PAPER, MINERALS, MARINE AND TURBOCHARGING
The Automation Technologies division's product offerings for the pulp and
paper industries include quality control systems for pulp and paper mills,
control systems, drive systems, on-line sensors, actuators and field
instruments. On-line sensors measure product properties, such as weight,
thickness, color, brightness, moisture content and additive content. 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.
We increasingly package our products with sophisticated software
applications that link the production process to the customer's business
planning functions. In this way, we can improve our customer's ability to plan
and schedule the utilization and output from the mill which, in turn, enhances
our customer's ability to meet its commercial objectives.
We offer our customers in the metals and minerals industries specialized
products and services, as well as total production systems. We design, plan,
engineer, supply, erect and commission electric equipment, drives, motors and
equipment for automation and supervisory control within a variety of areas
including mining, mineral handling, aluminum smelting, hot and cold steel
applications and cement production.
In the marine field, we provide global shipbuilders with power and
automation technologies for luxury cruise liners, ferries, tankers, offshore oil
rigs and special purpose vessels. We design, engineer, build, supply and
commission electrical systems and software for marine power generation, power
distribution and diesel electric propulsion, as well as turbochargers to improve
efficiency for diesel and gasoline engines. The main markets for these products
and services are manufacturers of vessels within the oil and gas upstream
industries (such as exploration/production and shuttle transport) and the cruise
and ferry industries. An example of our innovation within the area of marine
propulsion is the Azipod-Registered Trademark- (azimuthing podded) propulsion
system, which we developed in a joint venture with leading shipbuilders. The
Azipod-Registered Trademark- system improves vessel maneuverability at low
speeds, resulting in faster docking and embarkation, lower operating costs and
increased vessel capacity. In 2001, we introduced a Compact
Azipod-Registered Trademark- product for use on smaller vessels. In addition to
their marine uses, ABB turbochargers are used in various heavy-equipment
applications such as construction.
DRIVES AND MOTORS
The Drives and Motors business area focuses on the ongoing development of
low-voltage and medium-voltage AC drive products and systems for industrial,
commercial and residential
35
applications. Drives provide motion and torque while adding control and
efficiency to equipment such as fans, pumps, compressors, conveyors, kilns,
centrifuges, mixers, hoists, cranes, extruders, printing machinery and textile
machines. Our drives are used in the building automation, marine, power,
transportation and manufacturing industries, among others.
The Drives and Motors business area also produces a range of power
electronics products. It produces static excitation and synchronizing systems
that provide stability for power stations, as well as high power rectifiers that
convert AC power to DC power for very high-amperage applications such as
furnaces in zinc plants and aluminum and magnesium smelters. The business area
also manufactures frequency converters that use state-of-the-art semiconductor
technology to convert electrical power into the type and frequency required by
individual customers.
In addition, this business area supplies a comprehensive range of electrical
motors and generators, including high-efficiency motors that conform to leading
environmental and efficiency standards. Efficiency is an important criterion for
selection by customers, because electric motors account for nearly two-thirds of
the electricity consumed by industrial plants. This business area manufactures
synchronous motors for the most demanding applications and a full range of low
and high-voltage induction motors.
ROBOTICS, AUTOMOTIVE AND MANUFACTURING
The Robotics, Automotive and Manufacturing business area develops and
manufactures industrial robots and related equipment for the automotive industry
and other manufacturing industries. This business area designs, installs and
commissions automation systems for customers in the automotive industry and
their sub-suppliers, incorporating software developed by its engineers into its
range of products, as well as those manufactured by the Power Technologies
division. The products and systems are used in such areas as press shop, body
shop, paint shop, power train assembly, trim and final assembly.
In addition to serving the automotive industry, this business area provides
complete production automation systems for industry segments ranging from metal
and glass fabrication to telecommunications. Manufacturers use our flexible
automation and advanced robotics products for applications involving multiple
tasks such as welding, material handling, painting, picking, packing and
palletizing. For example, we provide painting systems for mobile phones, as well
as robot cells to produce base stations for telecom companies. This business
area incorporates software developed by its engineers into its automation
products and the power products manufactured by the Power Technologies division
to maximize energy efficiency and provide a secure power supply for
manufacturing lines. Our services include design and project management,
engineering, installation, training and life-cycle care of the complete
production line.
PETROLEUM, CHEMICAL AND CONSUMER
The Petroleum, Chemical and Consumer business area supplies
application-specific equipment and systems to the fine chemical, food and
beverage, pharmaceutical, oil and gas, personal care, and agriculture milling
industries. Its product portfolio includes control systems, instruments and
analytic devices, safety systems, drives and motors. In the petroleum sector, it
provides onshore, offshore and subsea production technology, gas gathering and
processing, refining, transportation and distribution applications. In the
pharmaceuticals and fine chemicals areas, the business area provides software
and solutions for applications including manufacturing, packaging, quality
control and compliance with regulatory agencies. Like other end-user business
areas, it also offers full-service contracts, in which it takes over in-house
maintenance activities for customers and applies strategies to reduce overall
maintenance costs and helps optimize these investments.
36
CONTROL PLATFORM AND ENTERPRISE PRODUCTS
The Control Platform and Enterprise Products business area develops, markets
and sells control products and systems within the Industrial IT architecture.
The business area emphasizes Open Control Systems, including batch control
systems, supervisory control and data acquisition systems, and, to a lesser but
increasing extent, programmable logic controls ("PLCs") and remote terminal
units ("RTUs"). Control systems are the hubs that link instrumentation, devices
and systems for control and supervision of an industrial process. One primary
advantage of using products and systems that conform to the Industrial IT
architecture (which we refer to as Industrial IT Control Systems) instead of
traditional Open Control Systems is that information is rendered accessible by
parties across an organization at any point in the manufacturing process.
Control systems also enable customers to integrate their production systems
with their enterprise, resource and planning systems thereby providing a link to
their ordering, billing and shipping processes. This linkage, combined with the
connection of our Industrial IT Control Systems to field instrumentation and
automation power products, allows customers to manage their entire manufacturing
and business process based on instantaneous access to useful information.
Additionally, this coordination allows customers to employ information received
from instrumentation and measurement products to increase production efficiency,
optimize their assets and reduce environmental waste. These features of
Industrial IT Control Systems enable customers to react quickly to changing
circumstances based on accurate information while decreasing the possibility of
errors, human or otherwise.
The Control Platform and Enterprise Products business area also offers batch
control and supervisory control and data acquisition systems. Batch control
systems control the production of a variety of products in shorter runs, such as
certain pharmaceuticals. Supervisory control and data acquisition systems are
used to collect and manage data over wide areas or long distances such as those
involved in operating electric power networks.
This business area also provides a comprehensive range of force measurement
products designed to improve control, productivity and quality in a wide variety
of processes. These products measure flatness, roll force, strip and web
tension, strip width, position and torque. These technologies are sold to the
metal fabrication, paper and other industries.
CUSTOMERS
The Automation Technologies division's end customers are primarily companies
in the chemical, life sciences (pharmaceuticals), automotive, marine,
turbocharging, metals, minerals, mining, cement, paper, petroleum, food and
beverage and printing industries. In each of these industries, we sell both
through direct sales forces as well as through third-party channels, such as
distributors, wholesalers, installers and OEMs.
37
GEOGRAPHIC MARKETS
The following table sets forth the proportion of Automation Technologies
division's third-party revenues derived from each geographic region (based on
the location of the customer) in which the ABB Group operates:
YEAR ENDED
DECEMBER 31,
-----------------------
2002 2001
-------- --------
(%)
Europe...................................................... 63 62
The Americas................................................ 19 22
Asia........................................................ 14 13
Middle East and Africa...................................... 4 3
--- ---
TOTAL....................................................... 100 100
=== ===
SALES AND MARKETING
In each of the Automation Technologies division's business areas, sales are
made both through direct sales forces as well as through third-party channel
partners, such as distributors, wholesalers, installers and OEMs. The proportion
of direct sales compared to channel partner sales varies among the different
industries, product technologies and geographic markets. For the division as a
whole, approximately 40% of products are sold through channel partners, with the
remainder sold through the division's own direct sales channels.
COMPETITION
The Automation Technologies division's principal competitors vary by product
line but include Emerson, General Electric, Honeywell, Invensys, Metso
Automation Inc., Rockwell Automation, Inc., Siemens, Voith AG, Aspen
Technologies, Inc. and Yokogawa Electric Corporation.
RESEARCH AND DEVELOPMENT
Research and development expenses for the Automation Technologies division
amounted to approximately $283 million for 2002.
An important focus of the division's research programs is the group-wide
commitment to Industrial IT. The Automation Technologies division is responsible
for the development of the Industrial IT platform architecture and the base
Industrial IT control products and systems. As a result, the division's research
is heavily focused on intelligent, "information enabled" products and devices
that may be integrated easily to provide better access to real-time information
across the business enterprise. Increasing "productization" of automation
technologies is intended to yield a growing portfolio of reusable building
blocks that may be easily deployed and bundled by customers, channel partners
and the division itself.
CAPITAL EXPENDITURES
The Automation Technologies division's capital expenditures for property,
plant and equipment were $133 million in 2002. Principal investments in 2002
were primarily related to ordinary course purchases of machinery and equipment.
NON-CORE ACTIVITIES
Following is a description of our principal businesses in the Non-Core
Activities division.
38
INSURANCE
Our Insurance business area provides international reinsurance and insurance
underwriting through Sirius International and specialized primary insurance in
the United States through Sirius America. In reinsurance, the reinsurer, in
return for a premium payment, provides coverage to a primary insurance company
for all or a specific portion of the primary insurer's obligation to its
customer. The business area's brokerage companies, Komposit in Germany and ABB
Insurance Brokers in Switzerland, provide services to ABB companies and
third-party clients. Our network of branches and local companies comprises
locations in Sweden, Germany, Belgium, Switzerland, Singapore and the United
States.
An important and growing part of the reinsurance portfolio is the excess of
loss accounts, mainly in the property, marine, aviation, oil and energy sectors.
This type of insurance provides coverage against all or a specified portion of
losses on underlying insurance contracts to the extent they exceed an agreed
level of losses.
The Financial Risks unit applies sophisticated techniques to handling risk
in commercial contracts, export projects and other complex risks within a
company's operations. For example, the unit structures, prices and underwrites
certain credit risk portfolios, whose benefit can include increased return on
capital for customers. It also structures insurance and reinsurance deals for
reinsurance customers.
Investment income is a substantial component of this business area's
results. We pursue prudent policies in managing our own funds and cooperate with
investment managers to maximize returns within set guidelines.
We determine our insurance liability based on reports from primary insurers
that we reinsure and underwriting associations, as well as on our management's,
including in-house actuaries', estimates. These estimates include incurred but
not reported losses, salvage and subrogation recoveries. We seek to reduce the
loss from our underwriting liabilities by reinsuring certain levels of risks
with other insurance enterprises or reinsurers. We use recoverable amounts to
cover both our paid and unpaid losses. We estimate these recoverable amounts in
a manner consistent with the claim liability associated with the relevant
reinsurance policy. Contracts where it is not reasonably possible that the
reinsurer may realize a significant loss from the insurance risk generally do
not meet the conditions for reinsurance accounting and are recorded as deposits.
Provisions for unearned premiums and claims are calculated on a pro rata or
more conservative basis over the period for which coverage is provided.
Expected trends of frequency, severity and other factors inherent in the
loss reserve estimates can vary significantly as claims are settled.
Accordingly, ultimate losses may materially differ from the amounts we have
currently provided for.
39
The following table sets forth a reconciliation of the beginning and ending
gross liability for unpaid claims and claim expenses and a reconciliation of the
gross liability to the corresponding net liability:
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
($ IN MILLIONS)
Net liability, beginning of year............................ 1,729 937 814
Reinsurance recoverable, beginning of year.................. 324 268 254
----- ----- -----
Gross liability, beginning of year.......................... 2,053 1,205 1,068
Gross incurred claims and claim expenses related to:
Current year................................................ 326 466 402
Prior years................................................. 221 638 (19)
----- ----- -----
Total....................................................... 547 1,104 383
Gross payments for claims and claim expenses related to:
Current year................................................ 42 64 71
Prior years................................................. 691 417 184
----- ----- -----
Total....................................................... 733 481 255
Other....................................................... 100 225 9
Gross liability, end of year................................ 1,967 2,053 1,205
Reinsurance recoverable, end of year........................ 337 324 268
----- ----- -----
Net liability, end of year.................................. 1,630 1,729 937
===== ===== =====
Prior to 2001, we presented a portion of our insurance reserves on a
discounted basis, which estimated the present value of funds required to pay
losses at future dates. During 2001, the timing and amount of claims payments
being ceded to us in respect of prior years' finite risk reinsurance contracts
changed and could not be reliably determined at December 31, 2001. Therefore, we
did not discount our loss reserves, resulting in a charge to losses and loss
adjustment expenses in 2001 of $295 million, which is disclosed in the "Other"
line item above. We believe that this variability in ceded loss payments will
preclude us from discounting our loss reserves in the future until reliably
determinable amounts and timing of these payments can be re-established.
Accordingly, as of December 31, 2002 and 2001, the insurance reserves have not
been presented on a discounted basis.
In 2001, the gross liability for unpaid claims and claim expenses included
$138 million for underwriting losses, of which $48 million were related to
expected claims due to the events of September 11, 2001. Other severe losses in
2001 included losses relating to the Petrobras oil rig, the Toulouse chemicals
factory explosion, Texas storms, the Sri Lanka aircraft attacks, a Seattle
earthquake, Taiwan floods and certain satellite failures.
As we conduct our business in multiple currencies, we continuously evaluate
currency risk and use derivatives such as currency forward contracts to reduce
the currency risk. Currency translation is included in "Other" in the table
above and represents the majority of amounts in this line item with the
exception of the $295 million adjustment for discounting of our loss reserves,
discussed above.
The following information presents the development of the estimated year-end
liability for unpaid claims and claim adjustment expenses for the four years
prior to 2002. Sufficient data is
40
only available for periods subsequent to 1997, as certain acquisitions and
substantial changes to our Insurance business systems prevent us from obtaining
reliable information prior to 1998.
The first line of the table reflects our estimated liability for unpaid
claims and claim adjustment expenses recorded at the balance sheet date for each
of the indicated years. This liability represents the estimated amount of losses
and loss adjustment expenses for claims arising in all prior years that are
unpaid at the balance sheet date, including estimated losses that had been
incurred but not yet reported to us.
The amounts following the first line of the table reflect the re-estimated
amount of the previously recorded liability based on experience as of the end of
the succeeding year. The estimate may change as additional information becomes
available related to claims in any individual year. These changes are reflected
in our operating results in the year the estimate is changed. The "Cumulative
gross deficiency (redundancy)" line below represents the aggregate change in the
reserve estimates from the original balance sheet dates through December 31,
2002. The amounts shown are cumulative in nature. For example, a deficiency
recognized in 2002 relating to losses incurred prior to December 31, 1998 would
be included in the cumulative deficiency amount for each year in the period 1998
through 2002. However, the deficiency would be reflected only in our 2002
operating results.
The next section of the table reflects the cumulative amount paid with
respect to the re-estimated liability as of the end of each succeeding year. The
last section of the table reflects the gross liability, reinsurance recoverable
and net liability recorded at each year-end. The difference between the gross
liability and re-estimated gross liability represents the "Cumulative gross
deficiency (redundancy)."
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
($ IN MILLIONS)
Gross liability for unpaid claims and claim adjustment
expenses.............................................. 731 1,068 1,205 2,053 1,967
Gross liability re-estimated as of:
One year later.......................................... 624 844 1,650 1,887 --
Two years later......................................... 602 1,083 1,597 -- --
Three years later....................................... 611 998 -- -- --
Four years later........................................ 648 -- -- -- --
Cumulative gross deficiency (redundancy)................ (83) (70) 391 (166) --
Cumulative amount of gross liability paid as of:
One year later.......................................... 184 212 447 622 --
Two years later......................................... 218 488 861 -- --
Three years later....................................... 352 707 -- -- --
Four years later........................................ 482 -- -- -- --
Gross liability, end of year............................ 731 1,068 1,205 2,053 1,967
Reinsurance recoverable, end of year.................... 161 254 268 324 337
--- ----- ----- ----- -----
Net liability, end of year.............................. 570 814 937 1,729 1,630
Re-estimated gross liability............................ 648 998 1,597 1,887 --
Cumulative gross deficiency (redundancy)................ (83) (70) 391 (166) --
41
EQUITY VENTURES
Our Equity Ventures business area develops, owns and operates infrastructure
projects in various countries. Equity Ventures originally focused its investment
activities on independent power projects because it provided business
opportunities for ABB's former power generation division. Subsequent projects
also were selected primarily to develop opportunities to sell ABB equipment and
systems. Therefore, the Equity Ventures portfolio reflects some of the
businesses in which ABB was engaged when the investments were made. At the end
of 2002, Equity Ventures' portfolio consisted of investments in eight power
generation projects, one power transmission system and two airports. We have
investments in the form of equity, subordinated debt and shareholder loans in
these projects. A team of commercial, financial, technical and legal specialists
manages this portfolio of investments. The total value of our investments in
these projects at the end of 2002 was approximately $670 million. We currently
have commitments to invest approximately $45 million further in three of the
projects in our current portfolio. Our Equity Ventures business area is not
pursuing further project development or additional investments, as we have
determined to sell this business.
STRUCTURED FINANCE
Structured Finance provides financing, including export, trade and project
financing and asset-based leasing and lending.
ABB Export Bank, a Swiss commercial bank with extensive experience in
export, trade and project finance, is part of the Structured Finance business
area. It arranges export, trade and project financing. Backed by national export
credit agencies or bilateral and multilateral institutions such as the World
Bank, ABB Export Bank lends money to buyers in various countries, in all
currencies accepted by the agency involved. In support of ABB equipment supply,
ABB Export Bank has financed exports from most countries with an ABB
manufacturing base, using those countries' export credit agencies.
We sold our 35% interest in Swedish Export Credit Corporation to the
Government of Sweden, the owner of the remaining 65% share, on June 30, 2003.
For more information, see "--Recent Developments and Significant
Transactions--Significant Divestitures." Swedish Export Credit Corporation, with
assets of approximately $15 billion, specializes in long-term export finance to
sectors such as telecommunications, automotive, transportation, energy, and
process industries like pulp and paper and petrochemicals. We also have
determined to sell the remaining businesses in Structured Finance.
BUILDING SYSTEMS
The Building Systems business area designs, builds and maintains complete
installations for industrial, infrastructure and commercial facilities,
integrating products manufactured by the Power Technologies and Automation
Technologies divisions, as well as those from third-party suppliers.
Customers increasingly demand complete systems and related applications that
cover a wide range of essential functions, from lighting and ventilation systems
to monitoring, control and communication systems that ensure the most efficient
use of electricity throughout an entire building. This business area has
developed a "Total Technical Solutions" concept that bundles together
electrical, mechanical and other technical installations, eliminating the need
to coordinate the work of several suppliers, with specific applications for
facilities with high technical content such as arenas, hospitals, data centers
and "clean rooms." Building Systems incorporates software and voice and data
communications networks into building systems that monitor their own performance
to achieve the best balance between energy consumption on the one hand and
comfort and security on the other.
42
We have determined to sell our Building Systems business.
NEW VENTURES
New Ventures was established in 2001 as a "fast lane" business incubator
that would strengthen the ABB Group by finding, developing and investing in new
business opportunities, both inside and outside the company. It has three
investment arms--the Industrial IT Venture Fund and Operational Ventures, which
focus on investment opportunities outside the company, and Innovisions, which
focuses on opportunities within the ABB Group. It is involved in providing both
seed funding for start-ups and growth funding for mature businesses. It also
directly manages several majority-owned companies. We have determined to sell
the businesses comprising New Ventures.
CUSTOMER SERVICE
Our Customer Service operations consist of overhaul, repair and rewinding of
rotating machine products manufactured by the Automation Technologies division,
as well as those from third-party suppliers.
Customers are increasingly outsourcing their service activities. With
respect to rotating machines, our service offering has evolved from single
rotating machine repair to responsibility for complete machine parks. ABB
workshops have developed a "Total Motor Management" concept that bundles
together all services of electrical, mechanical and other technical aspects,
eliminating the customer's need to coordinate the work of several service
providers.
GROUP PROCESSES
Group Processes was formed as a business division in January 2001 to drive
growth and cut costs by establishing common working processes and a common IT
infrastructure for the entire ABB Group. The areas of focus included supply and
demand chain management, project management, financial processes, internal
auditing, quality control and marketing and sales. The division also provided
shared services in areas such as accounting and payroll and training through
local services centers in many countries. The division also provided IT
infrastructure services and applications support.
The division was dissolved in October 2002 and many of its responsibilities
were moved into the core divisions to more closely link them to those
businesses. The financial processes, internal auditing and shared services
activities were moved into the Group's finance function, under the auspices of
our chief financial officer. The IT operations were moved into the newly created
office of the chief information officer as of February 2003.
LOGISTIC SYSTEMS
The Logistic Systems business area provides information technology packages
and automation services to airports for baggage and material handling and air
traffic management, as well as turnkey electromechanical systems and airfield
lighting systems. It provides power and automation systems for crane
manufacturers for container terminals and harbors. This business area also
delivers software and automation systems to optimize the flow of inventory in
warehouses, from receiving to shipping.
CORPORATE
Our corporate activities comprise headquarters and stewardship, research and
development, our Financial Advisory business and other activities.
43
Headquarters and stewardship activities include the operations of our head
office in Zurich, Switzerland, and the corresponding local Group holding
companies in approximately 65 countries. These operations cover staff functions
with group-wide responsibilities, such as finance and controlling, audit, tax,
legal affairs, communications and human resources. Management costs associated
with the core divisions are not included in this item.
We made a strategic decision to transform the Financial Advisory business, a
part of Structured Finance that was not sold to GE Capital, into a newly created
ABB Group function, effective from the beginning of October 2002. Since then,
the Financial Advisory business has been part of the Group's Corporate
activities. The Financial Advisory business acts as a service center to provide
advice to the Power Technologies and Automation Technologies with respect to
arranging financing for customer projects. The objective of the Financial
Advisory business is to enable the core divisions to increase sales and to
manage project-related financial risks.
Other activities include our real estate, treasury services and
consolidation operations. Our real estate operations manage the Group's
portfolio of land and buildings. The ongoing focus of these activities is to
sell these assets where feasible and lease them back to local ABB companies.
Treasury services were previously operated on a for-profit basis in the former
Financial Services division. Since the end of 2002, however, these activities
have focused on internal ABB treasury activities only and operate as a cost
center. Consolidation covers the elimination of earnings from certain
intra-Group transactions.
DISCONTINUED OPERATIONS
OVERVIEW
We have adopted, with effect from January 1, 2002, Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG LIVED ASSETS. SFAS 144 broadened the presentation of
discontinued operations to include disposal transactions involving less than an
entire reporting segment, if certain criteria are met. The purpose of SFAS 144
was to allow for historically comparable data to be available to investors
without the distortions created by divestments or operation abandonments,
thereby improving the predictive value of financial statements.
The following businesses are included in our Consolidated Financial
Statements as discontinued operations:
- All of our Oil, Gas and Petrochemicals business, which is discussed in
detail below. We intend to sell this business in 2003.
- The majority of our Structured Finance business, which we sold to GE
Capital in November 2002. This business provided debt capital for projects
and equipment, and asset-based financing (such as leasing).
- Our Metering business, which we sold to Ruhrgas Industries GmbH in
December 2002. This business produced electricity, water, energy and gas
meters, metering systems and load control systems.
- A number of other businesses sold in 2002 including: the components
business of ABB Trasmissione and Distribuzione S.p.A (Italy), which was
sold to EB Rebosio S.r.l.; Energy Information Systems Ltd of the United
Kingdom, which was sold to ALSTOM; and the ABB Drying Business (a division
of ABB Inc. comprising a number of legal entities), which was sold to
Andritz AB and Andritz Ltd.
- Various abandoned businesses for which a buyer could not be found.
44
OIL, GAS AND PETROCHEMICALS
OVERVIEW
Our Oil, Gas and Petrochemicals business supplies a comprehensive range of
products, systems and services to the global oil, gas and petrochemicals
industries, from the development of onshore and offshore exploration
technologies to the design and supply of production facilities, refineries and
petrochemicals plants.
The oil, gas and petrochemicals industry is typically divided into two
markets:
- UPSTREAM MARKETS: Equipment, systems and services for onshore and offshore
oil and gas exploration and production, including our areas of principal
focus: subsea production, floating production systems and modification and
maintenance.
- DOWNSTREAM MARKETS: Processing of hydrocarbon raw materials, including
refineries, petrochemical and chemical plants, gas processing and
pipelines.
Our activities in this business are relatively evenly split between the
upstream market and the downstream market, although large projects may shift the
balance from year to year. Our upstream business focuses principally on the
modification and maintenance, subsea and floating production markets. Our
activities in the downstream markets range from EPC projects, engineering and
project management services to licensing of technology to the refining and
petrochemical industries.
One of the strengths of the Oil, Gas and Petrochemicals business is its
research and development capabilities. Upstream, the business continues to focus
on making oil and gas exploration and production more economical, no matter
where the natural resources are found. Downstream, the business is improving oil
and gas conversion technology so refineries can manufacture fuels to stringent
environmental specifications.
PRODUCTS AND SERVICES
The services, products and systems of the Oil, Gas and Petrochemicals
business include:
DOWNSTREAM
- EPC projects, such as refineries and petrochemical plants, using ABB
products and products procured from third parties;
- assembly of gas treatment and processing systems and heat transfer
equipment;
- licensing of process technologies;
UPSTREAM
- production and assembly of offshore production equipment, including
specialized subsea equipment for production, controls and power
distribution;
- production of onshore and offshore pressure-containing equipment;
- provision of project management and procurement services; and
- modification and maintenance services for both offshore and onshore
facilities.
In the upstream market, the division is a global producer of equipment and
services for oil and gas exploration and production.
45
The division designs and manufactures subsea oil and gas production
equipment for conventional subsea development as well as for deep waters. It
offers a broad range of services, with particular expertise in offshore
production, including:
- front-end engineering and design studies, employing the division's
technical and market expertise to develop a plan for building all or a
portion of a production facility;
- procurement of materials and equipment to be used in oil and gas
production facilities, including equipment from the Oil, Gas and
Petrochemicals division and other ABB business divisions;
- management of projects for the development of a production facility; and
- modification and maintenance, in which we apply our expertise to
troubleshoot and make repairs and/or make proposals about enhancing
productivity and efficiency.
In the downstream market, the Oil, Gas and Petrochemicals business is a full
service engineering company. In addition to expertise in EPC projects, it
licenses approximately 50 process technologies in the refining, chemical,
petrochemical and polymer fields. It has particular expertise in ethylene
process technologies through ABB Lummus Global, which is part of the ABB Group.
Ethylene is used as a raw material in a wide variety of plastics. It also
provides modernization and maintenance services for refining and petrochemical
facilities in the downstream market.
Contracts for the Oil, Gas and Petrochemicals business's products and
projects in both the upstream and downstream markets include both turnkey
contracts and contracts providing for reimbursement of design, procurement,
project management, construction management and commissioning. The business
seeks to integrate its planning and project management expertise with the
equipment that it produces, particularly in the turnkey EPC projects.
The Oil, Gas and Petrochemicals business is also active in the design and
fabrication of a wide variety of gas treatment systems. It produces equipment
that cleanses (tail gas clean-up) and neutralizes (acid gas sweetening) the
hazardous components of gasses that result from the petrochemical refining
process before those gasses are released into the atmosphere. Its services in
this area and in the area of gas processing for producing products such as
ethylene and propane include project definition, installation, training and
technical assistance.
CUSTOMERS
The Oil, Gas and Petrochemicals business serves a range of customers,
including multinational integrated oil and gas companies, independent local and
regional oil companies, national (I.E., state-owned) oil companies, drilling
contractors, engineering contractors, independent exploration and production
companies and petrochemical companies.
SALES AND MARKETING
All sales and distribution activities of the Oil, Gas and Petrochemicals
business, in both upstream and downstream oil and gas markets, are handled
directly through dedicated sales forces with respect to both product and project
sales.
46
COMPETITION
The Oil, Gas and Petrochemicals division's competitors include the
following:
UPSTREAM MARKET DOWNSTREAM MARKET
--------------- -----------------
- Cooper Cameron - Bechtel Group
- FMC Technologies - Fluor
- Halliburton - Foster Wheeler Corporation
- Aker Kvaerner - Haldor Topsoe A/S
- Technip-Coflexip - Institut Francais du Petrol (IFP)
- Kellog Brown & Root (a unit of
Halliburton)
- Snamprogetti S.p.A.
- Technip-Coflexip
- UOP LLP
RESEARCH AND DEVELOPMENT
Research and development expenses for the Oil, Gas and Petrochemicals
division amounted to approximately $46 million for 2002. On the downstream side,
key research and development activities included completion of a demonstration
unit at the Tianjin Petrochemical Complex in China for catalytic hydrogenation
distillation technology used to produce ethylene, propylene and hexene 1.
Research was also carried out in ultra-large pore catalysts used in chemical
processing, development of polypropylene resins, improved refinery processes and
cracking technology used to create petrochemical products from hydrocarbon
resources.
On the upstream side, key research areas included remote control of subsea
oil and natural gas extraction in hostile environments, technology for
installing and operating subsea systems in water depths up to 3,000 meters and
specialized "tension leg" floating systems for deep water oil exploration in
benign environments and small oil fields that require cost-effective resource
recovery systems.
CAPITAL EXPENDITURES
The Oil, Gas and Petrochemicals division's capital expenditures for
property, plant and equipment were $34 million in 2002. The capital expenditures
during this period related primarily to purchases of machinery and equipment in
the United States, Great Britain, Italy and Norway.
CAPITAL EXPENDITURES
Total capital expenditures for property, plant and equipment and intangible
assets for the ABB Group (excluding discontinued operations) amounted to
$447 million, $571 million and $439 million in 2002, 2001 and 2000,
respectively. The majority of the capital expenditures in 2002 related to
replacement of existing equipment and improvements in existing production and
testing sites, primarily in Switzerland, Germany, the United States and Sweden.
Total divestitures of property, plant and equipment amounted to $456 million,
$167 million and $200 million in 2002, 2001 and 2000, respectively. Of the total
divestitures in 2002, approximately $300 million related to the sale and
leaseback of substantially all of our properties in Sweden.
SUPPLIES AND RAW MATERIALS
We purchase a variety of raw materials for use in our production and project
execution processes. The main materials used in our products, by weight, are
steel, copper, aluminum,
47
mineral oil and various plastics. We also purchase a variety of fabricated
products and electronic components.
We operate a worldwide supply chain management network with employees
dedicated to this function in business areas and key countries. The supply chain
management network uses the scale of the ABB Group to maximize the efficiency of
supply networks. We expanded our eBusiness activities within the last two years,
including e-procurement for materials and services, and further developed
advanced supplier collaboration tools and a supplier information system.
For many commodities that we purchase, including steel, fabricated copper
and aluminium products and products derived from crude oil, a slowdown in global
economic growth and changes in our sourcing strategy allowed us to stabilize or
reduce prices for these commodities in 2002 compared to 2001. In the United
States, however, certain tariffs led to a substantial increase in carbon steel
prices, which affected several of our businesses.
In the field of electronic components, subassemblies or fabricated products,
prices decreased on average by approximately 4% in 2002 compared to 2001.
Component lead times remained relatively short, with no shortages.
There can be no assurance that our ability to obtain sufficient raw
materials will not be adversely affected by unforeseen developments. In
addition, the price of raw materials may vary, perhaps substantially, from year
to year.
We hedge our exposure to commodity risk arising from the changes in prices
of raw materials. We manage copper and aluminum price risk using swap and
forward contracts based on the London Metal Exchange price for these
commodities. Our hedging policy is designed to minimize volatility and create a
stable cost base for the ABB Group. Hedging has the effect of minimizing the
unfavorable impact of price increases in commodities, but it also limits the
favorable impact of decreasing prices. In most cases, the gains and losses
derived from our commodity hedging transactions are deferred and reflected in
the cost of goods sold when the underlying physical transaction takes place. In
addition to using hedging to reduce our exposure to fluctuations in raw
materials prices, in some cases we can reduce this risk by incorporating changes
in raw materials prices into the prices of our products.
RESEARCH AND DEVELOPMENT
Each year, we invest significantly in research and development. Our research
and development area focuses on developing and commercializing the core
technologies of our businesses that are of strategic importance to our future
growth. In 2002, 2001 and 2000, we invested $550 million, $593 million and
$660 million, respectively, or approximately 3.0%, 3.1% and 3.4% of annual
revenues, respectively, on research and development activities. We also had
expenditures of $249 million, $405 million and $555 million, respectively, or
approximately 1.4%, 2.1% and 2.9%, respectively, of annual revenues in 2002,
2001 and 2000, on order-related development activities. These are customer- and
project-specific development efforts that we undertake to develop or adapt
equipment and systems to the unique needs of our customers in connection with
specific orders or projects. Order-related development amounts are initially
recorded in inventories as part of the work in progress of a contract and then
are reflected in cost of sales at the time revenue is recognized in accordance
with our accounting policies.
In addition to continuous product development, and order-related engineering
work, we develop future technology platforms for technology applications in our
automation and power businesses in our Group research and development labs,
which operate on a global basis. Through active management of our investment in
research and development, we seek to maintain a balance between short-term and
long-term research and development programs and optimize our return on
investment.
48
Our global computer network links our engineers and scientists to facilitate
the exchange of ideas and foster the development of new products and systems. A
significant part of our research and development activities is carried out in
our nine research and development centers in the United States, Europe and Asia.
In 2002 and 2001, we streamlined our portfolio of projects and sharpened the
focus of our corporate research programs considerably. We have concentrated our
research and development resources in two globally operating Group research and
development laboratories, which focus on automation and power technologies,
eliminating previous overlaps. In addition, we have shifted our resources toward
new technologies, such as Industrial IT and wireless applications. This new
focus has led to a reduction of more than 200 employees working in corporate
research and development.
We are building up new research and development activities in the United
States and Asia, while moving away from research and development relating to
mature technologies in Europe.
Our two global research and development laboratories are strategically
focused on two key areas of research: automation and power. They coordinate
their research and link--in a fully networked, online environment--our
scientists and engineers with one another, and with partner universities,
research institutes and organizations.
Recent developments include:
- a broad campaign to implement our proprietary ABB Industrial IT
architecture in all our products and systems;
- a set of innovations relating to robots, including software for easy
programming of robot applications, as well as the development of high
precision robots for consumer products and manufacturing applications;
- comprehensive software packages to serve the deregulated energy markets;
- design optimized grids to facilitate the business processes of energy
providers;
- new products for the electrical power market to increase the efficiency,
power quality and safety of the power transmission and distribution
systems;
- applications of power electronics in powerful drives for use in marine
vessels, together with innovative propulsion concepts; and
- exploration of nanotechnologies, the design of material on a molecular
base, for a variety of applications in our industry as well as
micro-electromechanical systems in automation and power applications.
PATENTS AND TRADEMARKS
We believe that intellectual property has become as important as tangible
assets for a technology group such as ABB. Over the past ten years, we have
almost doubled our total number of first patent filings, and we intend to
continue our aggressive approach to seeking patent protection. Currently, we
have over 16,000 patent applications and registrations, of which approximately
8,000 are pending applications. In 2002, we filed patent applications for more
than 500 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 the reputation associated with the ABB brand.
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ENVIRONMENTAL ACTIVITIES
Our commitment to sustainable development comprises five key elements:
- to take part in initiatives that foster economic, environmental, social
and educational development;
- to offer our customers eco-efficient products that reduce environmental
impact over their complete life cycles;
- to share our latest technologies with developing countries;
- to ensure that all our operations and processes comply with applicable
environmental standards and legislation; and
- to choose suppliers that have sustainability policies and systems similar
to our own.
Our research and development program includes significant efforts related to
improving the environmental impact of our products and systems. Through the
development and application of advanced technologies, we seek to improve the
operating efficiency of our products, reduce their emissions and minimize their
use of resources and energy. For example, our drive systems significantly reduce
energy consumption and ensure optimum operation of customers' equipment.
To continuously improve the environmental performance of our own operations,
we are implementing environmental management systems according to the ISO 14001
standard on all our sites. We have implemented the ISO 14001 in 98% of our
manufacturing facilities and service workshops (approximately 510 sites) and our
environmental management program now includes operations in more than 50
countries. We also require every operating unit within the ABB Group to
implement an environmental management system that aims continuously to improve
its environmental performance. We are now implementing an adapted environmental
management system in our non-manufacturing organizations.
We have introduced the concept of Environmental Product Declarations to
communicate the environmental performance of our core products. These describe
the salient 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 14025. To date, 50
declarations have been produced for major product lines, nine of which have been
externally certified by agencies such as Det Norske Veritas (DNV) of Norway and
the RINA Management System Certification Society in Italy.
We have expanded the scope of our environmental reporting in recent years.
In 2002, our formal reporting system covered approximately 80% of our employees.
The parts of our business that are not yet covered by our reporting system have
very limited environmental aspects. A total of 29 accidents were reported in
2002, none of which had a material environmental impact.
One of our corporate objectives is to phase out the use of the hazardous
substances that are recorded on our list of "restricted" substances. Priorities
for replacement are set by each business using criteria such as the
environmental aspects of alternatives, the risk of the substance escaping into
the environment, how hazardous the substance is, whether we can use the
substance under strict control and whether there are any technically acceptable
alternatives.
We have retained liability for environmental remediation costs at two sites
in the United States that were operated by our former nuclear business, which we
have sold to BNFL. The primary environmental liabilities associated with these
sites relate to the costs of remediating radiological contamination upon
decommissioning the facilities. In connection with the sale of the nuclear
business, in April 2000, we established a reserve of $300 million in respect of
estimated remediation costs related to these facilities. For further
information, see "Item 5. Operating and Financial Review and
Prospects--Contingencies and Retained Liabilities--Environmental."
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REGULATION
Our operations are subject to numerous other governmental laws and
regulations including those governing 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 U.S. Securities Exchange Act
of 1934, as amended, we are subject to the U.S. Foreign Corrupt Practices Act's
antibribery provisions with respect to our conduct around the world.
Our operations are also subject to the 1997 Organization of Economic
Cooperation and Development Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions, as implemented by the 34
signatory countries. The convention obliges signatories to adopt national
legislation that makes it a crime to bribe foreign public officials. As of
December 31, 2002, those countries which have adopted implementing legislation
and have ratified the convention include the United States, Switzerland and
several European nations in which we have significant operations.
We and our subsidiaries conduct business in certain countries known to
experience governmental corruption. While we and our subsidiaries are committed
to conducting business in a legal and ethical manner, there is a risk that our
employees or agents may take actions that violate either the U.S. Foreign
Corrupt Practices Act or legislation promulgated pursuant to the 1997 OECD
Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions. These actions could result in monetary penalties against
us or our subsidiaries and could damage our reputation and, therefore, our
ability to do business.
RECENT DEVELOPMENTS AND SIGNIFICANT TRANSACTIONS
SIGNIFICANT ACQUISITIONS
We have not engaged in any material acquisitions since the end of 2001. In
2001 and 2000, we made the strategic acquisitions described below to strengthen
our position in the process automation industry. We also made other acquisitions
in those years to enhance our service and technology offerings across our
business areas. We paid aggregate consideration of $154 million, $597 million
and $896 million in the acquisitions that we completed during 2002, 2001 and
2000, respectively.
In June 2001, we completed the acquisition of Entrelec Group, a France-based
supplier of industrial automation and control products, for total aggregate
consideration of $284 million. The acquisition of Entrelec, which had operations
in 17 countries, diversified our product range and expanded our customer base in
high growth markets.
In June 2000, we acquired for aggregate consideration of $130 million the
oil and gas service activities of Umoe ASA, a Norwegian service company in the
oil and gas industry, to support our further growth in the oil and gas service
market.
SIGNIFICANT DIVESTITURES
From 2000 through 2002, we engaged in a number of significant divestitures
in furtherance of our strategy of focusing on our core businesses. Additionally,
the divestitures in 2002 were part of our strategy to reduce our indebtedness by
raising proceeds from disposals and by disposing of businesses with indebtedness
assumed by the buyers. In 2002, 2001 and 2000, we received aggregate cash
consideration of $2,545 million, $283 million and $1,963 million, respectively,
from divestitures.
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On June 30, 2003, we completed the sale of our 35% interest in Swedish
Export Credit Corporation to the Kingdom of Sweden for total cash consideration
of SEK 1,240 million (approximately $157 million as of June 30, 2003).
In May 2003, we sold our interest in Sinopec Corp. in China for
approximately $84 million.
In March 2003, we sold our aircraft leasing business for approximately
$90 million. The business consisted of a portfolio of loans and leases related
to commuter aircraft and helicopters used primarily in the northern European and
Nordic markets.
In December 2002, we completed the sale of our Metering business, consisting
of water and electricity metering, to Ruhrgas Industries GmbH for cash proceeds
of $223 million.
In November 2002, we sold to GE Capital most of our Structured Finance
business, which included our global infrastructure financing, equipment leasing
and financing businesses. We received total proceeds of $2,000 million
(including a contingent payment of $20 million to be released to us in the
future based on amounts ultimately collected by GE Capital) and transferred
$578 million of debt to GE Capital. GE Capital has the option to require us to
repurchase certain designated assets upon the occurrence of certain events. We
retained approximately $900 million in leasing assets related to our core
businesses, representing approximately 15% of the total assets of the Structured
Finance business area, as well as our financial advisory unit, which primarily
serves our core divisions with advice on arranging financing for customer
projects. See "Item 10. Additional Information--Material Contracts--Sale
Agreement for Structured Finance Business."
In January 2002, we disposed of our Air Handling business for cash proceeds
of $113 million (the sales price of $147 million included a vendor note of
$34 million issued by the purchaser) to Global Air Movement (Luxembourg) SARL.
In May 2000, we disposed of our power generation business, which included
our investment in the ABB ALSTOM POWER joint venture. We received cash proceeds
of $1,197 million from ALSTOM in exchange for our joint venture interest.
In April 2000, we sold our worldwide nuclear business to BNFL for
approximately $485 million. The divested business also included nuclear control
systems. We have retained liability for certain specific environmental
remediation costs at two sites in the United States that were operated by our
nuclear business. Also in connection with the sale, one of our subsidiaries
retained obligations under surety bonds relating to the performance by the
nuclear business under certain contracts entered into prior to the sale to BNFL,
and BNFL agreed to indemnify us against payments under those surety bonds.
For a further discussion of our commitments and retained liabilities
relating to the above divested businesses, see "Item 5. Operating and Financial
Review and Prospects--Contractual Obligations and Commercial Commitments" and
"--Contingencies and Retained Liabilities."
In connection with our strategy to focus on our core automation and power
technology businesses, we have announced our intention to divest a number of
additional businesses, including the Oil, Gas and Petrochemicals business,
Building Systems, ABB Export Bank and our Equity Ventures participations.
SIGNIFICANT SUBSIDIARIES
ABB Ltd is the parent company of the ABB Group, which is comprised of over
700 subsidiaries worldwide. Besides ABB Ltd, the only other listed company in
the ABB Group is Asea Brown Boveri Ltd, India, which is listed at the exchanges
in Bombay (BSE and NSE), Ahmadabad, New Delhi and Calcutta.
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The following table sets forth, as of March 31, 2003, the name, jurisdiction
of incorporation and ownership interest held in our significant subsidiaries:
COMPANY NAME / LOCATION JURISDICTION ABB INTEREST %
----------------------- ------------ ---------------
Asea Brown Boveri S.A., Buenos Aires........................ Argentina 100.00
ABB Australia Pty Limited, Sydney........................... Australia 100.00
ABB AG, Vienna.............................................. Austria 100.00
ABB Ltda., Osasco........................................... Brazil 100.00
ABB Bulgaria EOOD, Sofia.................................... Bulgaria 100.00
ABB Inc., St. Laurent, Quebec............................... Canada 100.00
ABB (China) Ltd., Beijing................................... China 100.00
Asea Brown Boveri Ltda., Bogota............................. Colombia 99.99
ABB Technology SA, Abidjan.................................. Cote D'Ivoire 99.00
ABB Ltd., Zagreb............................................ Croatia 100.00
ABB s.r.o., Prague.......................................... Czech Republic 100.00
ABB A/S, Skovlunde.......................................... Denmark 100.00
Asea Brown Boveri S.A., Quito............................... Ecuador 96.87
Asea Brown Boveri S.A.E., Cairo............................. Egypt 100.00
ABB AS, Tallinn............................................. Estonia 100.00
ABB Oy, Helsinki............................................ Finland 100.00
ABB S.A., Paris La Defense.................................. France 100.00
ABB AG, Mannheim............................................ Germany 100.00
ABB Automation Products GmbH, Eschborn...................... Germany 100.00
ABB Gebaudetechnik AG, Mannheim............................. Germany 100.00
ABB Process Industries GmbH, Eschborn....................... Germany 100.00
Asea Brown Boveri S.A., Metamorphossis Attica............... Greece 100.00
ABB (Hong Kong) Lrd., Hong Kong............................. Hong Kong 100.00
ABB Engineering Trading and Service Ltd., Budapest.......... Hungary 100.00
Asea Brown Boveri Ltd., Bombay.............................. India 52.11
ABB Ltd., Dublin............................................ Ireland 100.00
ABB Technologies Ltd., Tirat Carmel......................... Israel 99.99
ABB S.p.A., Milan........................................... Italy 100.00
ABB Space S.p.A., Milan..................................... Italy 100.00
ABB Trasmissione & Distribuzione S.p.A., Milan.............. Italy 100.00
ABB K.K., Tokyo............................................. Japan 100.00
ABB Ltd., Seoul............................................. Korea 100.00
ABB Holdings Sdn. Bhd., Subang Jaya......................... Malaysia 100.00
Asea Brown Boveri S.A. de C.N., Tlalnepantla................ Mexico 100.00
ABB BV, Rotterdam........................................... Netherlands 100.00
ABB Holdings BV, Amsterdam.................................. Netherlands 100.00
Lummus Worldwide Contracting B.V. (LUWOCO), The Hague....... Netherlands 100.00
ABB Limited, Auckland....................................... New Zealand 100.00
ABB Holding AS, Billingstad................................. Norway 100.00
Asea Brown Boveri S.A., Lima................................ Peru 99.99
Asea Brown Boveri Inc., Paranaque, Metro Manila............. Philippines 100.00
ABB Sp. Zo.o., Warsaw....................................... Poland 95.98
ABB S.G.P.S, S.A., Amadora.................................. Portugal 100.00
Asea Brown Boveri Ltd., Moscow.............................. Russia 100.00
ABB Contracting Company Ltd., Riyadh........................ Saudi Arabia 65.00
ABB Holdings Pte. Ltd., Singapore........................... Sinagpore 100.00
ABB Holdings (Pty) Ltd., Sunninghill........................ South Africa 80.00
Asea Brown Boveri S.A., Madrid.............................. Spain 100.00
ABB AB, Vasteras............................................ Sweden 100.00
ABB Building Systems AB, Vasteras........................... Sweden 100.00
Sirius International Forsakrings AB (publ), Stockholm....... Sweden 100.00
ABB Asea Brown Boveri Ltd., Zurich.......................... Switzerland 100.00
ABB Holding AG, Zurich...................................... Switzerland 100.00
ABB Ltd., Zurich............................................ Switzerland 100.00
ABB Schweiz Holding AG, Baden............................... Switzerland 100.00
ABB Limited, Samutprakarn................................... Thailand 100.00
ABB Holding A.S., Istanbul.................................. Turkey 99.95
ABB Ltd., KIev.............................................. Ukraine 100.00
ABB Industries (L.L.C.), Dubai.............................. United Arab Emirates 49.00
ABB Ltd., London............................................ United Kingdom 100.00
ABB Holdings Inc., Norwalk.................................. United States 100.00
ABB Inc., Raleigh, NC....................................... United States 100.00
Asea Brown Boveri Inc., Norwalk, CT......................... United States 100.00
Asea Brown Boveri S.A., Caracas............................. Venezuela 100.00
ABB (Private) Ltd., Harare.................................. Zimbabwe 100.00
53
DESCRIPTION OF PROPERTY
As of December 31, 2002, the ABB Group had approximately 100 manufacturing,
production and development facilities of over 10,000 square meters each
throughout the world. A substantial portion of our production and development
activities is conducted in Germany, the United States, Sweden, Switzerland,
Finland, Norway and Italy. We also own or lease other properties, including
office buildings, warehouses, research and development facilities and sales
offices in approximately 90 countries. We own approximately 55% of the buildings
and approximately 80% of the land on which our facilities are located and lease
the remainder.
We own essentially all of the machinery and equipment used in our
manufacturing operations. In certain countries, we have entered into
sale-leaseback agreements, notably in Sweden and Switzerland. Our sale-leaseback
arrangements generally pertain to administrative buildings and partly to
manufacturing facilities. In June 2002, we sold our property portfolio in
Sweden, consisting of offices, and industrial and warehousing assets, to
London & Regional Properties Ltd. for $300 million. 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 or, to
a lesser extent, lease it to third parties.
It is our general policy to maintain facilities and equipment at quality
levels assuring continuous production at good efficiency and safety standards.
The net book value of our property, plant and equipment as of December 31, 2002
was $2,792 million, of which machinery and equipment represented $1,259 million
and land and buildings represented $1,276 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.
54
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS
AND THE RELATED NOTES AND OTHER FINANCIAL INFORMATION CONTAINED ELSEWHERE IN
THIS ANNUAL REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER "RISK FACTORS"
ELSEWHERE IN THIS ANNUAL REPORT. SEE "FORWARD-LOOKING STATEMENTS" AT THE
BEGINNING OF THIS ANNUAL REPORT.
OVERVIEW
We are a global provider of power and automation technologies that enable
utility and industry customers to improve performance while lowering
environmental impact.
During 2001, we realigned our worldwide enterprise around customer groups,
replacing our former business segments with four end-user divisions; two channel
partner divisions, and a financial services division. The four end-user
divisions--Utilities, Process Industries, Manufacturing and Consumer Industries,
and Oil, Gas and Petrochemicals--served end-user customers with products,
systems and services. The two channel partner divisions--Power Technology
Products and Automation Technology Products--served external channel partners
such as wholesalers, distributors, OEMs and system integrators directly and
end-user customers indirectly through the end-user divisions. The Financial
Services division provided services and project support for both internal and
external customers.
The Utilities division served electric, gas and water utilities--whether
state-owned or private, global or local, operating in liberalized or regulated
markets--with a portfolio of products, services and systems. The division's
principal customers were generators of power, owners and operators of power
transmission systems, energy traders and local distribution companies. The
Utilities division employed approximately 14,800 people as of December 31, 2002.
In April 2002, we merged our Process Industries division and our
Manufacturing and Consumer Industries division to form a new Industries
division. The Industries division served the automotive, cement, chemical,
distribution, electronics, food and beverage, life sciences, marine, metals,
mining, paper, petroleum, printing and telecommunications industries with
application-specific power and automation technology. The Industries division
employed approximately 23,300 people as of December 31, 2002.
The Power Technology Products division covered the entire spectrum of
technology for power transmission and power distribution including transformers,
switchgear, breakers, capacitors and cables as well as other products, platforms
and technologies for high- and medium-voltage applications. Power technology
products are used in industrial, commercial and utility applications. These
products were sold through our end-user divisions as well as through external
channel partners, such as distributors, contractors and OEMs and system
integrators. The Power Technology Products division employed approximately
26,400 people as of December 31, 2002.
The Automation Technology Products division provided products, software and
services for the automation and optimization of industrial and commercial
processes. Key technologies include measurement and control, instrumentation,
process analysis, drives and motors, power electronics, robots and low voltage
products. These technologies were sold to customers through the end-user
divisions as well as through external channel partners such as wholesalers,
distributors, OEMs and system integrators. The Automation Technology Products
division employed approximately 33,300 people as of December 31, 2002.
The Oil, Gas and Petrochemicals division supplied a comprehensive range of
products, systems and services to the global oil, gas and petrochemicals
industries, from the development of
55
onshore and offshore exploration technologies to the design and supply of
production facilities, refineries and petrochemicals plants. The Oil, Gas and
Petrochemicals division employed approximately 11,900 people as of December 31,
2002. We announced in 2002 that we intend to dispose of this business division.
See "--Accounting for Discontinued Operations."
The Financial Services division supported our businesses and customers with
financial solutions in structured finance, leasing, project development and
ownership (Equity Ventures), financial consulting, the insurance businesses and
treasury activities. In 2002, a significant part of the division's structured
finance and leasing activities were sold to GE Capital. Proprietary trading
activities in Treasury Centers ceased and remaining treasury activities were
integrated in Corporate. The insurance and project development and ownership
activities were transferred to Non-Core Activities.
The Non-Core Activities division was created in the fourth quarter of 2002
to group the businesses and activities that do not fit within our long-term
strategic focus on our power and automation technologies. We have decided to
sell many of these businesses, and we continue to consider our options with
respect to others. As of December 31, 2002, the Non-Core Activities division
included the following:
- our Insurance business area (part of the former Financial Services
division);
- our Equity Ventures business area and the remaining Structured Finance
business that was not sold to GE Capital (except the Financial Advisory
business, which has been part of our Corporate activities from the
beginning of October 2002), which were part of our former Financial
Services division (we intend to divest these businesses);
- our Building Systems business area, which we intend to divest in 2003;
- our New Ventures business area, which we intend to divest;
- our Air Handling business, which we sold in January 2002 (included in the
Non-Core Activities division for reporting purposes); and
- our Customer Service, Group Processes, and Logistic Systems business areas
and the Semiconductors business, which, effective January 1, 2003, became
part of the Power Technologies division;
Corporate includes Headquarters, Corporate Research and Development, Group
Real Estate, as well as, beginning in 2002, Treasury Services and our Financial
Advisory business.
Effective January 1, 2003, we established two new divisions: Automation
Technologies, which combines the former Automation Technology Products and
Industries divisions and employed approximately 56,600 people as of January 1,
2003; and Power Technologies, which combines the former Power Technology
Products and Utilities divisions and employed approximately 41,200 people as of
January 1, 2003. We streamlined our divisional structure to sharpen our focus on
power and automation technologies, to increase efficiency and to create a
sustainable lower cost base. We consider the Power Technologies and Automation
Technologies divisions to be our core divisions, and our management intends to
focus its attention on, and future investments in, these divisions.
The discussion that follows reflects how we managed and reported our
businesses during 2002. Therefore, we discuss the Utilities, Industries, Power
Technology Products and Automation Technology Products divisions as well as
Non-Core Activities. We have included a separate discussion of Discontinued
Operations.
56
MANAGEMENT OVERVIEW
Our exposure to asbestos claims and our high debt levels have weighed
heavily on us during recent years and have forced management to focus intensely
on ensuring our ability to continue on a going concern basis.
In 2001 and 2002, we incurred significant net losses, partly as a result of
a greater-than-anticipated increase in the number of and amounts demanded to
settle certain asbestos-related claims against our subsidiary, Combustion
Engineering (see "--Contingencies and Retained Liabilities" and Note 17 to the
Consolidated Financial Statements), as well as the weak performance of some of
the businesses that are now classified as non-core activities and discontinued
operations and an overall weakening of global markets. These operating losses,
combined with the effect of a repurchase of our own shares in 2001 and other
factors, have decreased our consolidated stockholders' equity from $5.2 billion
at December 31, 2000 to $1.0 billion at December 31, 2002. Our low equity base,
high debt levels and the uncertainty with respect to the timing of the
resolution to the asbestos issue have impacted our ability to finance our core
and non-core operations and to repay maturing debt.
With respect to the asbestos issue, based on current information, we expect
that the initiated proceedings will provide an adequate resolution to the issue
as discussed in more detail in "--Contingencies and Retained Liabilities" and
Note 17 to the Consolidated Financial Statements. However, until Combustion
Engineering's pre-packaged Chapter 11 plan of reorganization is finally approved
and injunctive relief has been provided to bar future claims from being made and
is no longer subject to appeal, the ultimate settlement amount of
asbestos-related claims and the potential exposure to liability for Combustion
Engineering's asbestos-related claims remain uncertain.
In late 2001 and during 2002, the commercial paper market, on which we had
significantly relied in the past, largely diminished as a funding source and our
credit ratings fell below investment grade. As a consequence, we have faced
challenges in replacing or repaying maturing short-term debt during 2002. On
December 17, 2002, as a replacement of credit facilities obtained in
December 2001 and during 2002, we entered into a 364-day $1.5 billion credit
facility to fund ongoing liquidity requirements. Details of the credit facility
as well as the maturing short-term debt in 2003 are more fully discussed in
"--Liquidity and Capital Resources--Credit Facilities" and Note 14 to the
Consolidated Financial Statements.
Given our financial position, the weak performance in non-core activities
and discontinued operations and the overall status of the international
financial markets, we had to accept a number of stringent covenants in the new
facility agreement (see "--Liquidity and Capital Resources--Credit Facilities"
and Note 14 to the Consolidated Financial Statements), including requirements to
meet asset divestment proceeds targets, the fulfillment of which is a condition
to the continued availability of funding under the terms of the facility. We
also had to provide security for the facility.
Management believes that the important steps taken in 2002, including the
divestment of a large portion of the Structured Finance business (see
"--Acquisitions, Investments and Divestitures--Divestitures" and Note 3 to the
Consolidated Financial Statements), significant debt reduction and refinancing
of short-term debt to extend the maturity profile of our debt (see "--Liquidity
and Capital Resources" and Note 14 to the Consolidated Financial Statements),
introduction of a simplified organizational structure, and continuous strong
performance of core businesses, as well as our plans for 2003, should ensure
continued availability of the credit facility during 2003 (maximum of
$1.5 billion).
However, because of the stringent nature of the covenants in the credit
facility, management believes that it is prudent to plan for possible adverse
developments that may jeopardize our ability
57
to rely on continued funding under the credit facility. Therefore, based upon a
proposal of our board of directors, on May 16, 2003, the annual shareholders'
meeting approved an amendment to the existing provisions in the articles of
incorporation on conditional share capital as to (i) an increase in the
conditional share capital from CHF 200 million to CHF 750 million, of which
CHF 525 million may be used for the exercise of conversion rights and/or
warrants granted in connection with the issuance of bonds or similar financial
instruments, and (ii) an extension of the use of the contingent capital for new
financial instruments.
Management's principal plans for 2003 include intensified operational
improvements of the core businesses, for example, through the Step Change
Program (see "--Restructuring Expenses--Step Change Program" and Note 24 to the
Consolidated Financial Statements). Management's plans also include continued
large divestments that it estimates will contribute proceeds in excess of
$2 billion (in particular the Oil, Gas and Petrochemicals division, the
Buildings Systems business, remaining parts of the Structured Finance business
and the Equity Ventures business), the closing of non-core activities and the
reduction of total debt by applying the proceeds received from these
divestments.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
GENERAL
We prepare our Consolidated Financial Statements on the basis of U.S. GAAP.
The preparation of our financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates, including those related to costs expected to be incurred
to complete projects, product guarantees and warranties, bad debts, inventories,
investments, intangible assets, income taxes, financing operations,
restructuring, long-term service contracts, pensions and other post-retirement
benefits and contingencies and litigation, on an ongoing basis. 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
these estimates under different assumptions or conditions.
The following critical accounting policies, and the related judgments,
assumptions and estimates involved in the application of these policies could
materially affect the amounts reported in our Consolidated Financial Statements.
These policies should be considered in reviewing our Consolidated Financial
Statements and the discussion below.
REVENUE AND COST OF SALES RECOGNITION
We recognize revenues in accordance with the U.S. Securities and Exchange
Commission's Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION
IN FINANCIAL STATEMENTS. We recognize substantially all revenues from the sale
of manufactured products upon transfer of title, including the risks and rewards
of ownership, to the customer, which generally occurs upon shipment of products.
On contracts for sale of manufactured products requiring installation, which can
only be performed by us, revenues are deferred until installation of the
products is complete. Revenues from short-term fixed price contracts to deliver
services are recognized upon completion of required services to the customer.
Revenues from contracts which contain customer acceptance provisions are
deferred until customer acceptance occurs or the contractual acceptance period
has lapsed.
These revenue recognition methods assume collectibility of the revenues
recognized. When recording the respective accounts receivable, loss reserves are
calculated to estimate those
58
receivables that will not be collected. These reserves assume a level of default
based on historical information, as well as knowledge about specific invoices
and customers. There remains the risk that greater defaults will occur than
estimated. As such, the amount of revenues recognized might exceed that which
will be collected, resulting in a deterioration of earnings in the future. This
risk is likely to increase in a period of significant negative industry or
economic trends.
Sales under long-term fixed price contracts are recognized using the
percentage-of- completion method of accounting. We principally use the
cost-to-cost or delivery events method to measure progress towards completion on
contracts. We determine the method to be used by type of contract based on our
judgment as to which method best measures actual progress towards completion.
The percentage of completion method of accounting involves the use of
assumptions and projections, relating to future material, construction and
overhead costs. As a consequence, there is a risk that total contract costs will
exceed those which we originally estimated. These risks are exacerbated if the
duration of the project is long-term, because there is a higher probability that
the circumstances upon which we originally developed the estimates will change
in a manner that increases our costs. Factors that could cause costs to increase
include:
- delays caused by unexpected conditions or events;
- unanticipated technical problems with the equipment being supplied or
developed by us which may require that we incur additional costs to remedy
the problem;
- changes in the cost of components, materials or labor;
- difficulties in obtaining required governmental permits or approvals;
- project modifications creating unanticipated costs;
- suppliers' or subcontractors' failure to perform; and
- penalties incurred as a result of not completing portions of the project
in accordance with agreed-upon time limits.
Changes in our initial assumptions, which we review on a regular basis
between two balance sheet dates, may result in revisions to total estimated
costs, current income and anticipated income. We recognize these changes in the
period in which the changes in estimate are determined. We believe that this
approach, referred to as the "catch-up approach," produces more accurate
information because the cumulative revenue-to-date reflects the current
estimates of the stage of completion. Additionally, losses on fixed price
contracts are recognized in the period when they are identified and are based
upon the anticipated excess of contract costs over the related contract sales.
We accrue anticipated costs for warranties on products when we recognize the
revenue on the related contracts. Warranty costs include calculated costs
arising from imperfections in design, material and workmanship, performance
guarantees (technical risks) and delays in contract fulfillment. Although we
generally make assessments on an overall, statistical basis, we make individual
assessments on orders with risks resulting from order-specific conditions or
guarantees, such as plants or installations. There is a risk that actual
warranty costs will exceed the amounts provided for, which would result in a
deterioration of earnings in the future when these actual costs are determined.
Sales under cost-reimbursement contracts are recognized as costs are
incurred. Shipping and handling costs are recorded as a component of cost of
sales.
59
GOODWILL AND OTHER INTANGIBLE ASSETS IMPAIRMENT
Our accounting policies for accounting for goodwill and other intangible
assets changed on January 1, 2002. In accordance with Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), GOODWILL AND OTHER INTANGIBLE ASSETS,
we ceased to amortize goodwill on that date. Consequently, amortization expenses
reflected on our Consolidated Income Statement decreased to $41 million in 2002
from $195 million and $190 million in 2001 and 2000, respectively, in continuing
operations. Goodwill amortization expense in discontinued operations was
$36 million and $22 million in 2001 and 2000, respectively. We were required to
perform an initial impairment review of our goodwill on January 1, 2002, and an
annual impairment review on October 1. This impairment review required us to
apply a fair value estimate to the reporting entities (business areas) to which
the goodwill is applicable, as opposed to the individual assets of each acquired
company as before. This expanded the impairment analysis to include the future
cash flows of the businesses owned before an acquisition that have benefited
from an acquisition. Estimating future cash flows requires us to make
significant estimates and judgments involving variables such as sales volumes,
sales prices, sales growth, production and operating costs, capital
expenditures, market conditions and other economic factors. As in the previously
applicable impairment analysis, if we determine through the impairment review
process that goodwill has been impaired, we record the impairment charge in
other income (expense), net, on our Consolidated Income Statement.
Prior to January 1, 2002, we assessed the impairment of goodwill and other
identifiable intangible assets whenever events or changes in circumstances
indicated that the carrying value may not be recoverable. Some factors we
considered important in conducting an impairment review included the following:
- significant underperformance relative to historical or projected future
operating results;
- significant changes in the manner of our use of the acquired assets or the
strategy for our overall business; and
- significant negative industry or economic trends.
When we determined that the carrying value of goodwill and other identified
intangible assets might not be recoverable based upon the existence of one or
more of the above indicators of impairment, we measured any impairment based on
a projected discounted cash flow method using a discount rate commensurate with
the risk inherent in our current business model. In assessing the recoverability
of our goodwill and other intangible assets, we were required to make
assumptions regarding estimated future cash flows, discount rates and other
factors to determine the fair value of the assets. If our experience resulted in
decreases to our forecasted cash flows or increases to the discount rate used,
we were required to record impairment charges for these assets.
RESTRUCTURING
We recorded significant provisions in connection with our restructuring
programs. These provisions include estimates pertaining to employee termination
costs and the settlements of contractual obligations resulting from our actions.
Although we do not anticipate significant changes, the actual costs may differ
from these estimates. These costs are recorded primarily in other income
(expense), net, on our Consolidated Income Statement. See "--Restructuring
Expenses."
TAXES
In preparing our Consolidated Financial Statements we are required to
estimate income taxes in each of the jurisdictions in which we operate. We
account for deferred taxes by using the asset
60
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. The differences are measured using
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 we
determine that 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 this allowance in a period, we expense
the allowance within the tax provision in the Consolidated Income Statement.
Unforeseen changes in tax rates and tax laws, as well as differences in our
projected taxable income compared to our actual taxable income, may affect these
estimates.
CONTINGENCIES
We are subject to proceedings, lawsuits and other claims related to
environmental, labor, product and other matters. We are required to assess the
likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies is made after careful analysis of each
individual issue, often with assistance from both internal and external counsel
and technical experts. The required amount of reserves with respect to any
matter may change in the future due to new developments in that matter,
including a change in approach to the matter, such as a change in settlement
strategy.
PENSION AND POST-RETIREMENT BENEFITS
As more fully described in Note 20 to our Consolidated Financial Statements,
we operate several pension plans which cover the majority of our employees. We
use actuarial valuations to determine our pension and post-retirement benefit
costs and credits. The amounts calculated depend on a variety of key
assumptions, including discount rates and expected return on plan assets. We are
required to consider current market conditions, including changes in interest
rates, in selecting these assumptions. The discount rate is adjusted annually
based on changes in long-term, highly rated corporate bond yields. Decreases in
the discount rate result in an increase in the projected benefit obligation and
to pension costs (as shown in Note 20 to our Consolidated Financial Statements).
The expected return on plan assets is adjusted annually based on current and
expected 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. If the expected rate of return on assets of 6.15% was to
decrease by 0.5% to 5.65%, then our 2003 pension costs would increase by
approximately $26 million.
Under U.S. GAAP, we accumulate and amortize over future periods actual
results that differ from the assumptions used. Therefore, actual results
generally affect our recognized expense and recorded liabilities for pension and
other post-retirement benefit obligations in future periods.
The "unfunded" balance of a pension plan is the difference between the
projected obligation to employees and the fair value of the plan assets. At
December 31, 2002, the unfunded balance of the pension benefits was
$1,879 million. In accordance with Statement of Financial Accounting Standards
No. 87 ("SFAS 87"), EMPLOYERS' ACCOUNTING FOR PENSIONS, we have recorded on the
Consolidated Balance Sheet a net liability of $653 million. The difference is
primarily due to an unrecognized actuarial loss of $1,168 million, which is
amortized using the "minimum corridor" approach as defined by SFAS 87. The
unfunded balance, which can increase or decrease based on the performance of the
financial markets or changes in our assumption rates, does not represent a
mandatory short-term cash obligation. We comply with all appropriate statutory
funding requirements.
61
We have multiple non-pension post-retirement benefit plans. Our health care
plans are generally contributory, with participants' contributions adjusted
annually. For purposes of estimating our health care costs, we have assumed
health care cost increases to be 12.92% for 2002, then gradually declining to
6.46% in 2012, and to remain at that level thereafter.
Assumed health care cost trends have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost increases would have had the following effects at December 31,
2002:
ONE-PERCENTAGE- ONE-PERCENTAGE-
POINT INCREASE POINT DECREASE
--------------- ---------------
($ IN MILLIONS)
Effect on total of service and interest cost components..... 2 (2)
Effect on accumulated post-retirement benefit obligation.... 26 (22)
INSURANCE
We generally recognize premiums in earnings on a pro rata basis over the
period coverage is provided. Premiums earned include estimates of certain
premiums not yet paid. These premium receivables include premiums relating to
retrospectively rated contracts. For such contracts, a provisional premium is
paid that will eventually be adjusted. We include an estimated value of the
actual premium in receivables. Unearned premiums represent the portion of
premiums written that is applicable to the unexpired terms of reinsurance
contracts or certificates in force. These unearned premiums are calculated by
the monthly pro rata method or are based on reports from ceding companies that
we reinsure.
Insurance liabilities are reflected in accrued liabilities and other, on our
Consolidated Balance Sheet and are determined on the basis of reports from
primary insurers that we reinsure and underwriting associations, as well as on
management's, including in-house actuaries', estimates. These estimates include
incurred but not reported losses, salvage and subrogation recoveries. Changes to
these estimated liabilities are recognized as an increase or decrease to cost of
sales in the period in which they are identified. Inherent in the estimates of
losses are expected trends of frequency, severity and other factors that could
vary significantly as claims are settled. We estimate expected trends using
actuarial methods widely used in the insurance industry, such as the
Bornheutter-Ferguson method, utilizing our historically paid and incurred
losses. Accordingly, ultimate losses could vary significantly from the amounts
currently provided for.
We seek to reduce the loss from our underwriting liabilities by reinsuring
certain levels of risks with other insurance enterprises or reinsurers. We used
recoverable amounts for both paid and unpaid losses. We estimate these
recoverable amounts in a manner consistent with the claim liability associated
with the reinsurance policy. The risk of collectibility of these reinsurance
receivables arises from disputes relating to the policy terms and the ability of
the reinsurer to pay.
ACCOUNTING FOR DISCONTINUED OPERATIONS
We have adopted, with effect from January 1, 2002, Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG LIVED ASSETS. SFAS 144 broadened the presentation of
discontinued operations to include disposal transactions involving less than an
entire reporting segment, if certain criteria are met. The purpose of SFAS 144
was to allow for historically comparable data to be available to investors
without the distortions created by divestments or operation abandonments,
thereby improving the predictive value of financial statements. SFAS 144
requires the accumulated earnings and associated costs, net of taxes, of
divestments and certain restructuring programs to be grouped in discontinued
operations below income from continuing operations in the Consolidated Income
Statement and the related
62
assets and liabilities to be grouped in the specific lines of assets and
liabilities in discontinued operations in the Consolidated Balance Sheet. In the
Consolidated Statement of Cash Flows, we have included these businesses in the
individual line items within cash from operating, investing and financing
activities.
The "income (loss) from discontinued operations, net of tax" line item in
the Consolidated Income Statement includes the following items:
- All of our Oil, Gas and Petrochemicals business, which supplies a
comprehensive range of products, systems and services to the global oil,
gas and petrochemicals industries, from the development of onshore and
offshore exploration technologies to the design and supply of production
facilities, refineries and petrochemicals plants.
- The majority of our Structured Finance business, which we sold to GE
Capital in November 2002. This business provided debt capital for projects
and equipment, and asset-based financing (such as leasing).
- Our Metering business, which we sold to Ruhrgas Industries GmbH in
December 2002. This business produced electricity, water, energy and gas
meters, metering systems and load control systems.
- A charge of $420 million taken in 2002 as part of the pre-packaged plan of
reorganization for Combustion Engineering under Chapter 11 of the United
States Bankruptcy Code. The status of Combustion Engineering is described
in "--Contingencies and Retained Liabilities" and in Note 17 to the
Consolidated Financial Statements.
- A number of other businesses sold in 2002 including: the components
business of ABB Trasmissione and Distribuzione S.p.A (Italy), which was
sold to EB Rebosio S.r.l.; Energy Information Systems Ltd of the United
Kingdom, which was sold to ALSTOM; and the ABB Drying Business (a division
of ABB Inc. comprising a number of legal entities), which was sold to
Andritz AB and Andritz Ltd.
- Various abandoned businesses for which a buyer could not be found.
- Legal and professional fees related to the above disposals.
Income (loss) from discontinued operations was a loss of $880 million, net
of tax, for the year ended 2002, a loss of $501 million for 2001 and income of
$677 million in 2000. The income (loss) from discontinued operations, net of
tax, for the above items is detailed below.
YEAR ENDED DECEMBER 31,
--------------------------------------
DISCONTINUED OPERATIONS 2002 2001 2000
----------------------- -------- -------- --------
($ IN MILLIONS)
Oil, Gas and Petrochemicals................................. (121) 8 105
Structured finance.......................................... (190) 8 (7)
Metering.................................................... (54) 14 19
Combustion Engineering...................................... (420) (470) (70)
Power Generation............................................ -- -- 638
Other divested businesses................................... (20) (7) (4)
Abandoned business/Other.................................... (75) (54) (4)
---- ---- ---
Income (loss) from discontinued operations, net of tax...... (880) (501) 677
==== ==== ===
The table above includes the businesses' operational results, currency
translation adjustments, capital gains and losses on sale, goodwill write-offs
and other costs.
63
A review of the operating results of the principal discontinued operations
can be found below under "--Analysis of Results of Operations--Business
Divisions--Discontinued Operations." For a further discussion of discontinued
operations, see Note 3 to the Consolidated Financial Statements.
We expect to continue to identify non-core businesses for disposal. As a
business meets the criteria of SFAS 144, we will reflect the results of
operations from the business as income (loss) from discontinued operations, net
of tax, in our Consolidated Income Statement and the related assets and
liabilities in discontinued operations in our Consolidated Balance Sheet. We
will reclassify the prior years' presentation to reflect these planned disposals
on a comparable basis.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), BUSINESS COMBINATIONS, and
SFAS 142, which modified the accounting for business combinations, goodwill and
identifiable intangible assets. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Goodwill from acquisitions completed after that date is not amortized, but is
charged to operations when specified tests indicate that the goodwill is
impaired, that is, when the goodwill's fair value is lower than its carrying
value. SFAS 141 also specifies types of acquired intangible assets that must be
recognized and reported separately from goodwill, and that will be amortized
over their useful lives.
SFAS 142 required us to evaluate our existing intangible assets and goodwill
and to make any necessary reclassifications in order to conform with the new
separation requirements in respect of acquired intangible assets and goodwill at
the date of adoption. We re-assessed the estimated useful lives and residual
values of all intangible assets other than goodwill and determined that no
adjustments regarding amortization periods were necessary.
SFAS 142 required us to perform an assessment of whether there is an
indication that goodwill is impaired as of January 1, 2002. To accomplish this,
we (1) identified our reporting units, (2) determined the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units and (3) determined the
fair value of each reporting unit. We determined that no impairment of goodwill
existed at January 1, 2002. All goodwill amortization also ceased at that date.
We recognized goodwill amortization expense of $155 million and $152 million and
goodwill amortization expense in discontinued operations of $36 million and
$22 million in 2001 and 2000, respectively. Accordingly, loss from continuing
operations in 2001 and income from continuing operations in 2000 would have been
$10 million ($0.01 per share) and $918 million ($0.77 per share), respectively,
and net loss in 2001 and net income in 2000 would have been $538 million ($0.48
per share) and $1,617 million ($1.36 per share), respectively, if we had not
recognized amortization expense for goodwill that is no longer being amortized
in accordance with SFAS 142.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 ("SFAS 143"), ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS, which is effective for fiscal years beginning after
June 15, 2002. SFAS 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and normal operation of long-lived assets. It requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and allocated
to expense over its useful life. We adopted SFAS 143 effective January 1, 2003.
The adoption of SFAS 143 did not have a material impact on our results of
operations.
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
which supersedes Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, while retaining many of its requirements
64
regarding impairment loss recognition and measurement. In addition, SFAS 144
broadens the presentation of discontinued operations to include more sold and
abandoned businesses. We adopted this statement effective January 1, 2002, and,
as a result, reflected the assets, liabilities and results of operations of
several businesses and groups of assets as discontinued operations for all
periods presented to the extent these businesses and groups of assets met the
new criteria during 2002. Disposals and abandonments in previous years were not
re-evaluated or reclassified. See "--Discontinued Operations."
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44
AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, which
rescinded previous requirements to reflect all gains and losses from debt
extinguishment as extraordinary. We elected to early adopt the new standard
effective April 1, 2002, and, as a result, the gains from extinguishment of debt
of $12 million recorded as extraordinary items in 2001 are no longer reflected
in extraordinary items.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 ("SFAS 146"), ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. The standard is effective January 1, 2003, and is applied
to restructuring plans initiated after that date.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 ("FIN 45"), GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS. FIN 45 requires the guarantor to recognize a liability for the
non-contingent component of a guarantee; that is, the obligation to stand ready
to perform in the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of the guarantee at
its inception. The recognition of the liability is required even if it is not
probable that payments will be required under the guarantee or if the guarantee
was issued with a premium payment or as part of a transaction with multiple
elements. FIN 45 also requires additional disclosures related to guarantees in
our financial statements. The recognition measurement provisions of FIN 45 are
effective for all guarantees entered into or modified after December 31, 2002.
We have adopted the disclosure requirements of FIN 45 as of December 31, 2002.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148 ("SFAS 148"), ACCOUNTING FOR
STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE--AN AMENDMENT OF FINANCIAL
ACCOUNTING STANDARDS BOARD STATEMENT NO. 123. SFAS 148 amends SFAS 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation. In addition, SFAS 148 requires more
prominent disclosures in our financial statements about the method of accounting
used for stock-based employee compensation and the effect of the method used on
reported results. We have elected to continue with our current practice of
applying the recognition and measurement principles of APB No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, which requires us to recognize, except in special
circumstances, compensation expense for warrants issued under our management
incentive plan only if the share price exceeds the exercise price of the
warrants on date of grant, which is not generally the case. We have adopted the
disclosure requirements of SFAS 148 as of December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN
46 requires existing unconsolidated variable interest entities ("VIEs") to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. FIN 46 applies immediately to VIEs
created after January 31, 2003 and to VIEs in which an enterprise obtains an
interest after that date. For
65
VIEs in which an enterprise holds a variable interest that was acquired before
February 1, 2003, FIN 46 applies for periods beginning after June 15, 2003. We
have substantially completed our assessment of the effects of the adoption of
FIN 46 for all VIEs created before January 31, 2003, and we do not expect such
effects to be material to our Consolidated Financial Statements.
In November 2002, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued EITF 00-21, ACCOUNTING FOR REVENUE ARRANGEMENTS WITH
MULTIPLE DELIVERABLES, which was amended in January 2003 and requires that
(a) revenue should be recognized separately for separate units of accounting in
multiple deliverables arrangement, (b) revenue for a separate unit of accounting
should be recognized only when the arrangement consideration is reliably
measurable and the earnings process is substantially complete and
(c) consideration should be allocated among the separate units of accounting
based on their relative fair value. EITF 00-21 is applicable to transactions
entered into after January 1, 2004. We believe that EITF 00-21 will not result
in a significant change in our practice of accounting for arrangements involving
delivery or performance of multiple products and services.
RESTRUCTURING EXPENSES
ELSAG BAILEY RESTRUCTURING PROGRAM
During the first quarter of 1999, in connection with our purchase of Elsag
Bailey, we implemented a restructuring plan intended to consolidate operations
and gain operational efficiencies. The plan called for workforce reductions of
approximately 1,500 salaried employees, primarily in Germany and the United
States. Restructuring charges and related write downs of $192 million were
included in other income (expense), net, during 2000, of which approximately
$90 million related to the continued integration of Elsag Bailey. The
restructuring was substantially complete at the end of 2000.
2001 RESTRUCTURING PROGRAM
In July 2001, we announced a restructuring program (the "2001 program")
anticipated to extend over 18 months. The 2001 program was initiated in an
effort to improve productivity, reduce our cost base, simplify product lines,
reduce multiple location activities and perform other downsizing in response to
weakening markets and consolidation of major customers in certain industries. We
believe that the 2001 program will produce cost benefits amounting to
$500 million annually beginning in 2003. We expect the termination of
approximately 12,000 employees will contribute approximately 75% of our
recurring cost savings on an annual basis by reducing the associated payroll and
payroll-related benefits. Additionally, we expect that the reduction of multiple
location activities through the closure of specified facilities will contribute
approximately 25% of our recurring cost savings as a consequence of the lease,
utility and other overhead costs associated with this reduction.
In 2001, we recognized restructuring charges of $109 million relating to
workforce reductions and $71 million related to lease terminations and other
exit costs associated with the 2001 program. These costs are included in other
income (expense), net. Termination benefits of $32 million were paid to
approximately 2,150 employees and $31 million was paid to cover costs associated
with lease terminations and other exit costs. Workforce reductions included
production, managerial and administrative employees. At December 31, 2001,
accrued liabilities included $78 million for termination benefits and
$39 million for lease terminations and other exit costs.
As a result of the 2001 program, certain assets, inventories and property,
plant and equipment have been identified as impaired or will no longer be used
in continuing operations. We recorded $41 million in 2001 to write down these
assets to fair value. These costs are included in cost of sales and other income
(expense), net.
66
In 2002, we recognized charges of $166 million related to workforce
reductions and charges of $38 million related to lease terminations and other
exit costs associated with the 2001 program. These costs are included in other
income (expense), net. Based on changes in our original estimate, a $21 million
reduction in the amounts accrued for workforce reductions, lease terminations
and other exit costs has been included in other income (expense), net. The
effect of translating local currencies into U.S. dollars for reporting purposes
resulted in a $24 million increase in the liabilities accrued for workforce
reductions, lease terminations and other exit costs. Termination benefits of
$149 million were paid to approximately 4,000 employees and $29 million was paid
to cover costs associated with lease terminations and other exit costs.
Workforce reductions include production, managerial and administrative
employees. At December 31, 2002, accrued liabilities included $94 million for
termination benefits and $52 million for lease terminations and other exit
costs. The 2001 program was substantially completed during 2002 and the
remaining liability will be paid through 2003.
As a result of the 2001 program, certain assets, inventories and property,
plant and equipment have been identified as impaired or will no longer be used
in continuing operations. We recorded $18 million in 2002 to write down these
assets to fair value. These costs are included in cost of sales and other income
(expense), net.
STEP CHANGE PROGRAM
In October 2002, we announced the Step Change Program. We estimate that the
restructuring cost under the program will be approximately $300 million and
$200 million, in 2003 and 2004, respectively. The goals of the program are to
increase competitiveness of our core businesses, reduce overhead costs and
streamline operations. We believe that the Step Change Program will produce cost
benefits amounting to over $800 million annually beginning in mid-2004. We
expect the termination of between 10,000 and 12,000 employees will contribute
approximately 40% of our recurring cost savings on an annual basis by reducing
the associated payroll and payroll-related benefits. Additionally, we expect
that productivity increases as a result of production streamlining and the
continued consolidation of office space and manufacturing facilities will
generate approximately 30% of the cost savings. We expect to realize the
remaining 30% of cost savings through improved supply chain management,
outsourcing of selected activities and other cost reduction measures. We expect
the cost savings to be roughly evenly divided between our two core divisions,
Power Technologies and Automation Technologies, and a third category of
overheads and headquarters.
In 2002, related to the Step Change Program, we recognized restructuring
charges of $51 million related to workforce reductions and $26 million related
to lease terminations and other exit costs associated with the restructuring
program. These costs are included in other income (expense), net. Termination
benefits of $13 million were paid to approximately 200 employees and $1 million
was paid to cover costs associated with lease terminations and other exit costs.
Workforce reductions include production, managerial and administrative
employees. At December 31, 2002, accrued liabilities included $38 million for
termination benefits and $25 million for lease terminations and other exit
costs.
67
As a result of the Step Change Program, certain assets have been identified
as impaired or will no longer be used in continuing operations. We recorded
$2 million to write down these assets to fair value. These costs are included in
other income (expense), net.
2001 PROGRAM STEP CHANGE OTHER TOTAL
------------ ----------- -------- --------
(IN $ MILLIONS)
YEAR ENDED DECEMBER 31, 2002
Restructuring charge for workforce reduction......... 166 51 -- 217
Restructuring charge for lease terminations and
other.............................................. 38 26 -- 64
Write down cost...................................... 18 2 -- 20
Change in estimate................................... (21) -- (9) (30)
--- --- --- ---
Total restructuring charges and related asset
write-downs........................................ 201 79 (9) 271
=== === === ===
Total cash payments during the year.................. 178 14 -- 192
Total accrued liabilities at the end of the year..... 146 63 -- 209
YEAR ENDED DECEMBER 31, 2001
Restructuring charge for workforce reduction......... 109 -- -- 109
Restructuring charge for lease terminations and
other.............................................. 71 -- -- 71
Write down cost...................................... 41 -- -- 41
Change in estimate................................... -- -- -- --
--- --- --- ---
Total restructuring charges and related asset
write-downs........................................ 221 -- -- 221
=== === === ===
Total cash payments during the year.................. 63 -- -- 63
Total accrued liabilities at the end of the year..... 117 -- -- 117
For more information about the Step Change Program, see "Item 4. Information
on the Company--Introduction--Step Change Program."
ACQUISITIONS, INVESTMENTS AND DIVESTITURES
ACQUISITIONS AND INVESTMENTS
In 2002, 2001 and 2000, we paid aggregate consideration of $154 million,
$597 million and $896 million, respectively, related to acquisitions and
investments in joint ventures and affiliated companies completed in those years.
Payments made net of cash acquired were $144 million, $578 million and
$893 million in 2002, 2001 and 2000, respectively.
In 2002, we made no significant acquisitions. We increased our investments
in a small number of companies in which we had a controlling interest, and we
acquired an Italian small-ticket leasing business from Xerox (which was later
sold as part of Structured Finance).
In June 2001, we completed the acquisition of Entrelec Group, a France-based
supplier of automation and control products, for total aggregate consideration
of $284 million. The acquisition of Entrelec, which had operations in 17
countries, diversified our product range and expanded our customer base in
high-growth markets.
In June 2000, we acquired for aggregate consideration of $130 million the
oil and gas service activities of Umoe ASA, a Norwegian service company in the
oil and gas industry, to support our further growth in that market.
In June 2000, we also entered into a share subscription agreement to acquire
a 42% interest in b-business partners B.V. Pursuant to the terms of the
agreement, we committed to invest a total of $278 million, of which $69 million
was paid in 2000 and $134 million was paid during the first half of 2001. In
December 2001, Investor AB acquired 90% of our investment and capital
commitments for approximately book value, or the equivalent of $166 million in
cash. After this initial transaction, b-business partners B.V. repurchased 50%
of its outstanding shares, which resulted in a return of
68
capital to us of $10 million. After these transactions, we retain a 4%
investment in b-business partners B.V. and we are committed to provide
additional capital to b-business partners B.V. of approximately $4 million (a
euro-denominated commitment that may fluctuate with exchange rates). Further,
b-business partners B.V. retains a put right to cause us to repurchase 150,000
shares of b-business partners B.V. at a cost of approximately $16 million (a
euro-denominated commitment that may fluctuate with exchange rates). The 2001
transactions are reflected in our Consolidated Statements of Cash Flows and
included in the aggregate total amounts of investments ($578 million, net of
cash acquired) and divestment ($283 million, net of cash disposed).
DIVESTITURES
In 2002, 2001 and 2000, we received aggregate cash consideration of
$2,545 million, $283 million and $1,963 million, respectively, from dispositions
and recognized net gains (losses) of $(96) million, $34 million and
$931 million, respectively. The material dispositions are described below. Cash
received from sales of businesses, net of cash disposed, was $2,509 million,
$283 million and $1,499 million in 2002, 2001 and 2000, respectively.
On June 30, 2003, we completed the sale of our 35% interest in Swedish
Export Credit Corporation to the Government of Sweden for total cash
consideration of SEK 1,240 million (approximately $157 million as of June 30,
2003).
In May 2003, we sold our interest in Sinopec Corp. in China for
approximately $84 million.
In March 2003, we sold our aircraft leasing business for approximately
$90 million. The business consisted of a portfolio of loans and leases related
to commuter aircraft and helicopters used primarily in the northern European and
Nordic markets.
In November 2002, we sold to GE Capital most of our Structured Finance
business, which included our global infrastructure financing, equipment leasing
and financing businesses. We received cash proceeds of $2,000 million (including
a contingent payment of $20 million to be released to us in the future based on
amounts alternatively collected by GE Capital) and transferred $578 million of
debt to GE Capital. GE Capital has the option to require us to repurchase
certain designated assets upon the occurrence of certain events. We recognized a
loss of approximately $190 million within income (loss) from discontinued
operations, net of tax, of which approximately $146 million relates to the loss
on disposal. (The difference of $44 million is attributable to the operational
result, amounts for interest expense, taxes, minority interest and other items.)
In December 2002, we completed the sale of our Metering business, consisting
of water and electricity metering, to Ruhrgas Industries GmbH for cash proceeds
of $223 million. We recognized a loss on disposal of $48 million (including a
goodwill write-off of $65 million) which is included in the total loss of
$54 million within income (loss) from discontinued operations, net of tax. (The
difference of $6 million is attributable to the operational result, amounts for
interest expense, taxes, minority interest and other items.) Also, we disposed
of a number of smaller businesses for cash proceeds of $209 million and
recognized an aggregate net gain of $24 million.
In January 2002, we sold our Air Handling business to Global Air Movement
(Luxembourg) SARL for cash proceeds of $113 million and a vendor note of
$34 million issued by the purchaser and recognized a gain in other income
(expense), net of $74 million.
In 2000, we disposed of our Power Generation segment, which included our
investment in the ABB ALSTOM POWER joint venture and our nuclear technology
business. We received cash proceeds of $1,197 million from ALSTOM in exchange
for our joint venture interest and recognized a gain of $734 million
($713 million, net of tax). We also received proceeds of $485 million from the
sale of the nuclear technology business and recognized a gain of $55 million
($17 million, net of tax). The net gain from the sale of the nuclear technology
business reflects a $300 million provision for environmental remediation. The
gains were also offset by operating losses associated with these
69
businesses. Our Consolidated Financial Statements reflect our former Power
Generation segment as discontinued operations.
For a discussion of our commitments and retained liabilities relating to the
divested businesses described above, see "--Contractual Obligations and
Commercial Commitments" and "--Contingencies and Retained Liabilities."
We have announced our intention to divest a number of businesses, including
nearly all of the Oil, Gas and Petrochemicals division, Building Systems, ABB
Export Bank and our equity ventures participations.
SUMMARY FINANCIAL DATA
The following table shows the amount and percentage of ABB Group revenues
derived from each of our business divisions (see Note 25 to our Consolidated
Financial Statements):
REVENUES PERCENTAGE OF REVENUES
------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
(RESTATED) (RESTATED)
($ IN MILLIONS) (%)
Utilities............................... 4,826 5,634 5,460 20.6 22.5 22.0
Industries.............................. 4,412 4,995 5,443 18.9 19.9 22.0
Power Technology Products............... 4,355 3,961 3,587 18.7 15.8 14.5
Automation Technology Products.......... 5,035 4,756 4,671 21.6 19.0 18.9
Non-Core Activities
Insurance............................. 657 956 805 n/a n/a n/a
Equity Venture........................ 21 35 41 n/a n/a n/a
Structured Finance.................... 92 133 126 n/a n/a n/a
Building Systems...................... 2,372 2,568 2,506 n/a n/a n/a
New Ventures.......................... 132 113 108 n/a n/a n/a
Other Non-Core Activities............. 912 1,325 1,236 n/a n/a n/a
------ ------ ------ ----- ----- -----
Non-Core Activities Subtotal............ 4,186 5,130 4,822 17.9 20.4 19.5
Corporate/Other......................... 527 612 780 2.3 2.4 3.1
------ ------ ------ ----- ----- -----
SUBTOTAL................................ 23,341 25,088 24,763 100.0 100.0 100.0
Consolidation effect and eliminations... (5,046) (5,706) (5,408)
------ ------ ------
CONSOLIDATED REVENUES................... 18,295 19,382 19,355
====== ====== ======
We conduct business in approximately 100 countries around the world. The
following table shows the amount and percentage of our consolidated revenues
derived from each geographic region (based on the location of the customer) in
which we operate:
REVENUES PERCENTAGE OF REVENUES
------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
(RESTATED) (RESTATED)
($ IN MILLIONS) (%)
Europe.................................. 10,265 10,852 12,104 56.2 55.9 62.6
The Americas............................ 4,101 4,863 4,673 22.4 25.1 24.1
Asia.................................... 2,603 2,435 1,741 14.2 12.6 9.0
Middle East and Africa.................. 1,326 1,232 837 7.2 6.4 4.3
------ ------ ------ ----- ----- -----
TOTAL................................... 18,295 19,382 19,355 100.0 100.0 100.0
====== ====== ====== ===== ===== =====
70
FACTORS AFFECTING COMPARABILITY
EXCHANGE RATES
We report our financial results in U.S. dollars. A significant amount of our
revenues, expenses, assets and liabilities are denominated in other currencies
due to our global operations. As a consequence, movements in exchange rates
affect:
- our profitability,
- the comparability of our results between periods, and
- the carrying value of our assets and liabilities.
When we incur expenses that are not denominated in the same currency as the
related revenues, foreign exchange rate fluctuations could adversely affect our
profitability.
We must translate non-U.S. dollar denominated results of operations, assets
and liabilities to U.S. dollars in our consolidated financial statements.
Balance sheet items are translated to U.S. dollars using year-end exchange rates
and income statement and cash flow items are translated using average exchange
rates during the relevant period. As a consequence, increases and decreases in
the value of the U.S. dollar against other currencies will affect our reported
results of operations and the value of our assets and liabilities in our
consolidated balance sheet, even if our results of operations or the value of
those assets and liabilities has not changed when denominated in their original
currency. These translations could significantly affect the comparability of our
results between financial periods and/or result in significant changes to the
carrying value of our assets, liabilities and stockholders' equity.
Our cash flow is calculated using the average exchange rates and the balance
sheet items are calculated using the year-end exchange rates. The effect of
these exchange differences resulted in an increase of $141 million, and
decreases of $72 million and $84 million, in 2002, 2001 and 2000, respectively,
to our total cash flow.
Because fluctuations in exchange rates affect the comparability of our
results between periods, the discussion of our results of operations below
provides, when relevant, information with respect to orders, revenues and
earnings before interest and taxes as reported in local currencies.
In 2002, the euro reversed its 2001 trend and strengthened against the U.S.
dollar, reaching an exchange rate of $1.05 = E1.00 at the end of 2002, with a
deterioration in the first quarter being offset by a second quarter recovery and
then a period of stability prior to further appreciation in December 2002. The
average exchange rate for the year was $0.94 = E1.00. The Swiss franc also
appreciated against the U.S. dollar, reaching $0.72 = CHF 1.00 at the end of
2002. It had a similar development in relation to the euro, with deterioration
in the first quarter being offset by a second quarter recovery and then followed
a period of stability prior to further appreciation in December 2002. The
average Swiss franc exchange rate for 2002 was $0.64 = CHF 1.00.
In 2001, the euro weakened against the U.S. dollar, reaching an exchange
rate of $0.88 = E1.00 at the end of 2001, with the deterioration in the first
half recovering in part in the second half of 2001. The average exchange rate
for the year was $0.89 = E1.00. The Swiss franc also declined against the U.S.
dollar in the first half of 2001, reaching a low in May and June 2001, with a
recovery in the fourth quarter of 2001. However, the Swiss franc declined
slightly for the year, closing at $0.59 = CHF 1.00. The average Swiss franc
exchange rate for 2001 was $0.59 = CHF 1.00.
In 2000, the euro weakened against the U.S. dollar from its opening level of
$1.00 = E1.00 to a closing exchange rate of $0.93 = E1.00. The average exchange
rate for 2000 was also $0.93 = E1.00. The Swiss franc also declined versus the
U.S. dollar in 2000, from an opening level of $0.63 = CHF 1.00 to a year-end
closing exchange rate of $0.61 = CHF 1.00.
71
For more information, see "Item 11. Quantitative and Qualitative Disclosures
about Market Risk--Currency Fluctuations and Foreign Exchange Risk."
INTER-DIVISIONAL SALES
We evaluate the performance of our divisions based upon earnings before
interest and taxes, or operating income, which excludes interest and dividend
income, interest expense, provision for taxes, minority interest and income
(loss) from discontinued operations, net of tax. We also measure each division's
revenues considering both third-party customer sales as well as inter-divisional
sales.
In mid-2001, we replaced our former business segments with business
divisions structured along customer groups. Our product divisions (Power
Technology Products and Automation Technology Products divisions) served our
end-user divisions (Utilities and Industries), as well as external channel
partners such as wholesalers, distributors, OEMs and system integrators. Under
this new divisional structure, account managers in the end-user divisions were
responsible for marketing all of ABB's products, systems and services to
end-user customers. Accordingly, sales of stand-alone products manufactured by
the product divisions were sold to end-user customers by the end-user divisions.
These product sales are referred to as "pull-through sales." Pull-through sales
made by the end-user divisions to customers were attributed to the end-user
divisions. The inter-divisional sales made by product divisions to end-user
divisions were reflected in the results of each product division and were
eliminated in our consolidated results.
In order to present divisional information on a comparable basis for all
years presented, we estimated the amount of pull-through sales and the related
earnings before interest and taxes that would have resulted from sales by the
product divisions to the end-user divisions under the new divisional structure
in 2000 and 2001. Our divisional results reflect actual pull-through sales and
earnings before interest and taxes during 2002. Because our estimates of total
year pull-through sales in 2001 were higher than the actual amount of
pull-through sales reported in 2002, there are several instances in which a
division's orders and revenues have decreased in 2002 as compared to 2001. There
is no impact on our reported consolidated third-party revenues or earnings
before interest and taxes related to these pull-through sales, as
inter-divisional transactions and the related earnings before interest and taxes
are eliminated in the consolidation process.
In addition to pull-through sales, which result from our organizational
structure in 2001 and 2002 and relate only to the sale of products, other types
of inter-divisional sales of products and services are also eliminated on
consolidation. A significant proportion of inter-divisional sales in 2002
represented the sale of standard products by our product divisions to the
end-user divisions for incorporation into a system or turnkey project. As of
January 1, 2003, we created two new core divisions, the Power Technologies
division and the Automation Technologies division, each of which combines a
former end-user division and a former product division, as outlined in "Item 4.
Information on the Company--Introduction--Organizational Structure." As a
consequence, we expect the volume of inter-divisional sales to decrease
substantially in 2003.
72
ORDERS
We book an order when a binding contractual agreement has been concluded
with the customer covering, at a minimum, the price and the scope of products or
services to be supplied. Approximately 6% of the total U.S. dollar value of our
orders booked in 2002 were "large orders", which we define as orders from third
parties involving at least $15 million worth of products or systems. Portions of
our business, particularly in our Utilities and Industries divisions, involve
orders related to long-term projects which can take many months or even years to
complete. Revenues related to these large orders are typically recognized on a
percentage of completion basis over a period, ranging from several months to
several years.
The level of orders can fluctuate from year to year. Arrangements included
in particular orders can be complex and non-recurring. Although large orders are
more likely to result in revenues in future periods, the level of large orders,
and orders generally, cannot be used to predict accurately future revenues or
operating performance. Orders that are placed can be cancelled, delayed or
modified by the customer. These actions can have the effect of reducing or
eliminating the level of expected revenues or delaying the realization of
revenues. The Utilities and the Industries divisions' total orders contained
approximately 12% and 9%, respectively, of large orders, in 2002.
PERCENTAGE OF COMPLETION ACCOUNTING
When we undertake a long-term, fixed price project, we recognize costs,
revenues and profit margin from that project in each period based on the
percentage of the project completed. Profit margin is based on our estimate of
the amount by which total contract revenues will exceed total contract costs at
completion. The nature of this accounting method is such that refinements of the
estimating process for changing conditions and new developments are continuous.
Accordingly, as work progresses or as change orders are approved and estimates
are revised, contract margins may be increased or reduced. Expected losses on
loss contracts are recognized in full immediately.
In an effort to reduce the amount of risk associated with fixed price
contracts we have shifted our focus to reimbursable contracts, in which we
charge our customers the sum of our materials, production, logistics,
administrative and financial costs, together with a negotiated operating profit
margin. Additionally, we expect the planned disposal of the Oil, Gas and
Petrochemicals division to further reduce our exposure to risk from long-term
fixed price contracts.
ANALYSIS OF RESULTS OF OPERATIONS
CONSOLIDATED
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
ORDERS
Orders for the ABB Group (excluding discontinued operations) decreased
$1,560 million, or 8%, to $18,112 million in 2002 from $19,672 million in 2001.
As reported in local currencies, orders declined by 10% in 2002 compared to
2001. The level of orders in 2002 compared to 2001 increased in the Automation
Technologies division, Power Technologies division and Industries division
(after excluding the "pull-through effect"), but this increase was more than
offset by reductions within the Utilities division and Non-Core Activities.
REVENUES
Revenues for the ABB Group decreased by $1,087 million, or 6%, to
$18,295 million in 2002 from $19,382 million in 2001. As reported in local
currencies, revenues decreased by 8% in 2002 compared to 2001. This reflects the
effect of translating revenues generated in local currencies into the U.S.
dollar, which weakened against most of our local currencies. This decrease in
revenues on a consolidated basis was primarily within Non-Core Activities.
73
UTILITIES DIVISION revenues decreased by $808 million, or 14%, in 2002
compared to 2001 (a 15% decrease as reported in local currencies). The decrease
in revenues was primarily due to a reduction in revenues from "pull-through"
sales, or sales of pull-through volumes. Excluding this effect, revenues were
flat.
INDUSTRIES DIVISION revenues decreased by $583 million, or 12%, in 2002
compared to 2001 (a 14% decrease as reported in local currencies). The decrease
in revenues was also primarily due to a reduction in pull-through volumes.
Excluding this effect, revenues were flat.
POWER TECHNOLOGY PRODUCTS DIVISION revenues increased by $394 million, or
10%, in 2002 compared to 2001 (a 9% increase as reported in local currencies),
primarily due to increases in the High-Voltage Technology and Power Transformers
business areas and a modest increase in the Medium-Voltage business area.
AUTOMATION TECHNOLOGY PRODUCTS DIVISION revenues increased by $279 million,
or 6%, in 2002 compared to 2001 (a 3% increase as reported in local currencies),
primarily reflecting growth in the Robotics business area.
NON-CORE ACTIVITIES revenues decreased by $944 million, or 18%, in 2002
compared to 2001 (a 22% decrease as reported in local currencies). This decrease
resulted from the cessation of certain re-insurance activities within the
Insurance business area, the sale of the Air Handling business in January 2002,
market downturns within the Building Systems business area and the strategic
reduction of our presence in some of the markets of the Logistic Systems and
Customer Service business areas.
A more detailed discussion of the results of our individual divisions
follows in "--Business Divisions."
COST OF SALES
Cost of sales for the ABB Group decreased by $1,108 million, or 7%, to
$13,769 million in 2002 from $14,877 million in 2001. As a percentage of
revenues, cost of sales decreased from 77% in 2001 to 75% in 2002. The decrease
was primarily attributable to improvements within the Power Technology Products
and Automation Technology Products divisions and the non-recurrence of a number
of costs from 2001 within Non-Core Activities. In 2001, within Non-Core
Activities, as a result of a change in the accounting estimate for reinsurance
reserves, a $295 million non-cash charge was booked, along with a charge for
$138 million in underwriting losses in the Insurance business area.
Additionally, we recorded costs and provisions related to alternative energy
projects of $55 million in the New Ventures business area in 2001. The
non-recurrence of these costs in 2002 in Non-Core Activities has been partly
offset by project write-downs, closure and restructuring costs within the
Building Systems business area. The Utilities division cost of sales
deteriorated due to the execution of low-margin systems projects taken before
2001 in the Power Systems business area. We have adopted a selective bidding
approach within the Utilities division aimed at reducing project risks and
securing better margins.
Our cost of sales consists primarily of labor, raw materials and related
components. Cost of sales also includes provisions for warranty claims, contract
losses and project penalties, as well as order-related development expenses
related to projects for which we have recognized corresponding revenues.
Order-related development expenditures amounted to $249 million and
$405 million in 2002 and 2001, respectively. Order-related development amounts
are initially recorded in inventories as part of the work in progress of a
contract, and then reflected in cost of sales at the time revenue is recognized.
74
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $40 million, or
1%, to $4,033 million in 2002 from $3,993 million in 2001. As reported in local
currencies, selling, general and administrative expenses decreased 2% in 2002
compared to 2001. Improvements in selling, general and administrative expenses
were the result of the continuing group-wide cost reduction and efficiency
improvement initiatives from 2001 and the recovery of payments from two former
chief executive officers. These improvements were slightly offset by the
group-wide integration costs of group processes, along with a reduction in the
rate of capitalization of internally developed software. As a percentage of
revenues, selling, general and administrative expenses increased to 22% in 2002
from 21% in 2001. Non-order related research and development costs, which are
included in selling, general and administrative expenses, were $550 million and
$593 million in 2002 and 2001, respectively. For the year 2002, the Automation
Technology Products and Power Technology Products divisions incurred non-order
related research and development costs of $219 million and $119 million,
respectively. The remaining costs were shared among the other divisions.
AMORTIZATION EXPENSE
Amortization expense decreased by $154 million, or 79%, to $41 million in
2002 from $195 million in 2001. This decrease reflects the implementation of
SFAS 142, pursuant to which we ceased to amortize goodwill arising from
acquisitions, with effect from January 1, 2002. The expense in 2002 primarily
reflects the amortization of intellectual property related to the 1999
acquisition of Elsag Bailey Process Automation N.V.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, typically consists of: our share of income or
loss on investments, principally from our Equity Ventures business area; gains
or losses from sales of businesses, investments and property, plant and
equipment; license income; and restructuring charges. Other income (expense),
net, improved by $102 million, or 64%, to an expense of $58 million in 2002 from
an expense of $160 million in 2001. The increase in capital gains to
$119 million in 2002 from $56 million in 2001 primarily reflected the gain on
the sale of our Air Handling business in January 2002. In addition, income from
equity accounted companies, license income and other increased to $177 million
in 2002 from $95 million in 2001 (primarily related to our investment in the
Swedish Export Credit Corporation). Amounts in 2001 from our investment in the
Swedish Export Credit Corporation were restated as described in Note 13 to the
Consolidated Financial Statements. These increases were partly offset by the
combined effects of the increase in restructuring expenses to $261 million in
2002 from $220 million in 2001 and the increase in asset write-downs of both
tangible and intangible assets to $93 million in 2002 from $91 million in 2001.
EARNINGS BEFORE INTEREST AND TAXES
Earnings before interest and taxes, or operating income, increased
$237 million, or 151%, to $394 million in 2002 from $157 million in 2001. As
reported in local currencies, earnings before interest and taxes improved by
143% in 2002 when compared to 2001. The increase is primarily attributable to
the lower cost of sales percentage, the cessation of goodwill amortization in
2002 and higher income from equity accounted companies. As a percentage of
revenues, earnings before interest and taxes increased from 1% in 2001 to 2% in
2002.
NET INTEREST AND OTHER FINANCE EXPENSE
Net interest and other finance expense consists of interest and dividend
income offset by interest and other finance expense. In 2002, the benefit from
the gain on the 4.625% convertible unsubordinated bonds due 2007 and lower
market interest rates were partially offset by higher financing costs and the
unfavorable impact of our lower credit ratings. Net interest and other
75
finance expense decreased by $80 million, or 36%, to an expense of $143 million
in 2002 from an expense of $223 million in 2001.
Interest and dividend income decreased by $188 million, or 49%, to
$193 million in 2002 from $381 million in 2001, primarily due to the sale of
trading securities following the cessation of proprietary trading in Treasury
Centers and the reduction in market interest rates.
Interest and other finance expense decreased by $268 million, or 44%, to
$336 million in 2002 from $604 million in 2001, primarily as a result of a
reduction in total borrowings and the recognition of income of $215 million
related to the recognition of the fair value of an embedded derivative contained
in the convertible bonds that we issued in May 2002. This unrealized gain
resulted from the application of Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, which required us to mark to market the value of the equity
conversion option in the bonds. The value of this option will fluctuate
inversely to our share price and will be reflected in future annual earnings.
See "--Financial Position" for a more detailed discussion of the application of
SFAS 133 to our bonds. These gains within interest and other finance expense
were partially offset by costs of $99 million associated with our debt
refinancing.
PROVISION FOR TAXES
Provision for taxes increased by $20 million, or 32%, to $83 million in 2002
from $63 million in 2001. The increase in the provision primarily reflects the
increase in income from continuing operations before taxes and minority interest
from a loss of $66 million in 2001 to income of $251 million in 2002. As a
percentage of income from continuing operations before taxes and minority
interest, the effective tax rate in 2002 was 33.1% in 2002. Despite the loss on
the Group level in 2001, taxes were payable by various Group subsidiaries and in
various foreign jurisdictions in which the Group operates. The 2001 tax
provision reflects the inclusion in 2001 of the provision for our reinsurance
business located in a low tax jurisdiction and the reclassification in 2001 of a
$12 million gain on extinguishment of debt. Excluding the tax effect of these
items, the effective tax rate in 2001 would have been 29.2%. We generally
conduct our tax planning activities to achieve a tax structure for ABB that
provides for an effective tax rate of approximately 30% on our operations. For
further information, see Note 18 to the Consolidated Financial Statements.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income (loss) from continuing operations improved by $262 million to an
income of $97 million in 2002 from a loss of $165 million in 2001. The
improvement reflected the impact of the items discussed above.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
Loss from discontinued operations, net of tax, increased by $379 million to
$880 million in 2002 from $501 million in 2001. Taxes on discontinued operations
increased by $33 million to an expense of $72 million in 2002 from an expense of
$39 million in 2001. This net loss reflects losses
76
relating to the following businesses, which we have divested or are planning to
divest or discontinue.
YEAR ENDED
DECEMBER 31,
------------------------------
DISCONTINUED OPERATIONS 2002 2001 2000
----------------------- -------- -------- --------
($ IN MILLIONS)
Oil, Gas and Petrochemicals................................. (121) 8 105
Structured Finance.......................................... (190) 8 (7)
Metering.................................................... (54) 14 19
Combustion Engineering...................................... (420) (470) (70)
Power Generation............................................ -- -- 638
Other divested businesses................................... (20) (7) (4)
Abandoned businesses/Other.................................. (75) (54) (4)
---- ---- ---
Income (loss) from discontinued operations, net of tax...... (880) (501) 677
==== ==== ===
A detailed discussion of the results of the significant discontinued
businesses follows in "--Business Divisions."
NET INCOME (LOSS)
As a result of the loss from discontinued operations, net of tax, discussed
above, net loss increased by $54 million, or 7%, to $783 million in 2002 from
$729 million in 2001.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share represented a loss per share of $0.70 in
2002 compared to a loss per share of $0.64 in 2001, largely resulting from the
factors mentioned above negatively impacting net income. Basic loss per share
from discontinued operations was $0.79 in 2002 compared to a loss per share of
$0.43 in 2001. Basic earnings (loss) per share from continuing operations was
earnings per share of $0.09 in 2002 compared to a loss per share of $0.15 in
2001, primarily as a result of the improvement in cost of sales and the
cessation of goodwill amortization.
In 2002, the potential common shares issuable pursuant to our convertible
bonds were included in the computation of diluted earnings (loss) per share. The
diluted earnings (loss) per share represented a loss per share of $0.83 in 2002
compared to a loss per share of $0.64 in 2001, largely resulting from the
factors mentioned above negatively impacting net income. Diluted loss per share
from discontinued operations was $0.75 in 2002 compared to diluted loss per
share from discontinued operations of $0.43 in 2001, reflecting the increase in
the loss from discontinued operations discussed above. Diluted earnings (loss)
per share from continuing operations improved to a loss of $0.08 per share in
2002 from a loss per share of $0.15 in 2001, primarily a result of the
improvement in cost of sales and the cessation of goodwill amortization.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
ORDERS
Orders for the ABB Group (excluding discontinued operations) decreased
$1,236 million, or 6%, to $19,672 million in 2001 from $20,908 million in 2000.
As reported in local currencies, orders declined by 1% in 2001 compared to 2000.
The level of orders in 2001 compared to 2000 increased in the Power Technologies
division and Utilities division, with decreases in the other divisions.
REVENUES
Revenues for the ABB Group increased by $27 million to $19,382 million in
2001 from $19,355 million in 2000. As reported in local currencies, revenues
increased by 5% in 2001
77
compared to 2000. This reflects the significant effect of translating revenues
generated in local currencies into the U.S. dollar, which strengthened against
most of our local currencies.
UTILITIES DIVISION revenues increased by $174 million, or 3%, in 2001
compared to 2000 (a 7% increase as reported in local currencies). Revenues
increased in all business areas except Utility Services.
INDUSTRIES DIVISION revenues decreased by $448 million, or 8%, in 2001
compared to 2000 (a 4% decrease as reported in local currencies). The reduction
in the Automotive and Manufacturing business area as a result of the global
economic slowdown in the automotive industry was partly offset by an increase in
the Marine and Turbocharging and Petroleum, Chemical and Life Sciences business
areas.
POWER TECHNOLOGY PRODUCTS DIVISION revenues increased by $374 million, or
10%, in 2001 compared to 2000 (a 16% increase as reported in local currencies).
Revenues increased in most of the business areas, with our High-Voltage Products
business area being the main contributor to the revenue increase.
AUTOMATION TECHNOLOGY PRODUCTS DIVISION revenues increased by $85 million,
or 2%, in 2001 compared to 2000 (a 7% increase as reported in local currencies).
Revenue growth was strongest in our Drives and Power Electronics business area,
offset in part by a decline in our Robotics business area.
NON-CORE ACTIVITIES revenues increased by $308 million, or 6%, in 2001
compared to 2000 (a 12% increase as reported in local currencies). This increase
primarily reflected improved revenues from our Insurance business area.
A more detailed discussion of the individual divisions follows in
"--Business Divisions."
COST OF SALES
Cost of sales for the ABB Group increased by $679 million, or 5%, to
$14,877 million in 2001 from $14,198 million in 2000. As a percentage of
revenues, cost of sales increased from 73% in 2000 to 77% in 2001. The increase
in the cost of sales as a percentage of revenues was primarily attributable to
Non-Core Activities, in particular a $295 million non-cash charge from a change
in accounting estimate for reinsurance reserves within the Insurance business
area. Prior to 2001, we presented a portion of our insurance reserves on a
discounted basis, which estimated the present value of funds required to pay
losses at future dates. During 2001, the timing and amount of claims payments
being ceded to us in respect of prior years' finite risk reinsurance contracts
changed and could no longer be reliably determined at December 31, 2001.
Therefore, we have not discounted our loss reserves, resulting in a charge to
losses and loss adjustment expenses in 2001 of $295 million. In addition, our
Insurance business area also recorded provisions for $138 million in
underwriting losses, including $48 million in provisions for expected claims
arising from the events of September 11, 2001. Additionally, there were costs
and provisions for alternative energy projects of $55 million in the New
Ventures business area. Order-related development expenditures for the ABB Group
amounted to $405 million and $555 million, in 2001 and 2000, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $62 million, or
2%, to $3,993 million in 2001 from $4,055 million in 2000. The decrease reflects
group-wide cost reduction and efficiency improvement initiatives. As a
percentage of revenues, selling, general and administrative expenses remained
flat at 21%. Non-order related research and development costs are mostly
included in selling, general and administrative expenses, and were $593 million
in 2001 and $660 million in 2000.
78
AMORTIZATION EXPENSE
Amortization expense increased by $5 million, or 3%, to $195 million in 2001
from $190 million in 2000, attributable to slightly higher amortization of
purchased goodwill and intangibles, in particular from the acquisition of
Entrelec Group in June 2001. In accordance with SFAS 142, goodwill is no longer
amortized as of January 1, 2002.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, deteriorated by $421 million, to an expense of
$160 million in 2001 from an income of $261 million in 2000. The change was
primarily related to the benefit in 2000 of $434 million from capital gains,
which was not repeated, as against $56 million in 2001. The significant capital
gains in 2000 primarily resulted from the sale of non-core property and
businesses. Restructuring expenses increased by $28 million to $220 million in
2001 from $192 million in 2000. Also included were asset write-downs of both
tangible and intangible assets ($91 million in 2001, $17 million in 2000), and
income from equity accounted companies, license income and other of $95 million
in 2001 and $36 million in 2000. (The income from equity accounted companies was
affected by the restatement of an equity investment in Note 13 to the
Consolidated Financial Statements.)
EARNINGS BEFORE INTEREST AND TAXES
Earnings before interest and taxes, or operating income, decreased
$1,016 million, or 87%, to $157 million in 2001 from $1,173 million in 2000. As
reported in local currencies, earnings before interest and taxes declined by 83%
in 2001 compared to 2000. The decrease was primarily attributable to the higher
cost of sales in 2001, and the significantly lower capital gains recorded in
2001 compared to 2000. When adjusted for capital gains of $56 million in 2001
and $434 million in 2000, operating income decreased by 86% in 2001 compared to
2000. As a percentage of revenues, reported operating income decreased from 6%
in 2000 to 1% in 2001.
NET INTEREST AND OTHER FINANCE EXPENSE
Net interest and other finance expense consists of interest and dividend
income and interest and other finance expense. Net interest and other finance
expense increased by $156 million to an expense of $223 million in 2001 from an
expense of $67 million in 2000. Interest and dividend income decreased by
$6 million, or 2%, to $381 million in 2001 from $387 million in 2000 due to a
nominal reduction in interest-earning marketable securities. Interest and other
finance expense increased by $150 million, or 33%, to $604 million in 2001 from
$454 million in 2000. This increase was primarily the result of a higher net
debt position, which arose to fund our share repurchases in 2001, as well as
costs associated with the listing of our shares in the United States. The
increase also related to the change in fair value of the cash-settled call
options that we purchased in June 2000 to hedge the exposure to fluctuations in
fair value of the warrant appreciation rights granted under our management
incentive plan. For a detailed description of the hedging costs related to our
management incentive plan, see Note 21 to the Consolidated Financial Statements.
Interest expense reflects fluctuations, which may be substantial, in the level
of borrowings throughout the year as required by the operating needs of our
business.
PROVISION FOR TAXES
Provision for taxes decreased by $237 million, or 79%, to $63 million in
2001 from $300 million in 2000. The decrease in the provision primarily reflects
the reduction in income from continuing operations before taxes and minority
interests, which declined from an income of $1,106 million in 2000 to a loss of
$66 million in 2001. As a percentage of income from continuing operations before
taxes and minority interest, the effective tax rate in 2000 was 27.1%. Despite
the loss on the Group level in 2001, taxes were payable by various Group
subsidiaries and in various foreign jurisdictions in which the Group operates.
The 2001 tax provision reflects the inclusion in 2001 of the provision
79
for our reinsurance business located in a low tax jurisdiction and the
reclassification in 2001 of a $12 million gain on extinguishment of debt.
Excluding the tax effect of these items, the effective tax rate in 2001 would
have been 29.2%. We generally conduct our tax planning activities to achieve a
tax structure for ABB that provides for an effective tax rate of approximately
30% on our operations. For further information, see Note 18 to the Consolidated
Financial Statements.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income (loss) from continuing operations decreased by $931 million to a loss
of $165 million in 2001 from an income of $766 million in 2000. The decrease
reflects the impact of the items discussed above.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
Loss from discontinued operations, net of tax, was $501 million in 2001,
compared to an income, net of tax, of $677 million in 2000. Taxes on
discontinued operations decreased by $89 million to an expense of $39 million in
2001 from an expense of $128 million in 2000. The net loss from discontinued
operations reflects the significant reduction in gains from the sale of
discontinued operations and an additional provision taken for the asbestos
liabilities relating to our discontinued Power Generation segment. In 2000, we
recorded gains of $730 million on the sale of our interest in the ABB ALSTOM
POWER joint venture and our nuclear technology business, which were not repeated
in 2001. During 2001, we experienced a substantial increase in the level of new
asbestos claims as well as an increase in settlement costs per claim. In light
of this, we recorded a charge of $470 million. See "--Contingencies and Retained
Liabilities."
NET INCOME (LOSS)
As a result of the factors discussed above, net income decreased to a loss
of $729 million in 2001 from an income of $1,443 million in 2000. The net loss
in 2001 primarily reflects the significantly lower level of gains from sales of
businesses, including discontinued business, and higher cost of sales, which
includes the non-cash charge related to our reinsurance business. We also
recorded a one-time after tax charge of $63 million due to the cumulative effect
of the change in accounting principles upon adoption of the Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES.
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share was a loss per share of $0.64 in
2001 compared to an income per share of $1.22 in 2000, largely resulting from
the factors mentioned above which negatively impacted net income. Basic and
diluted loss per share from discontinued operations were $0.43 in 2001 compared
to earnings per share of $0.57 in 2000, reflecting the loss from discontinued
operations discussed above as opposed to a gain in 2000. Basic and diluted
earnings (loss) per share from continuing operations decreased to a loss of
$0.15 in 2001 from earnings of $0.65 per share in 2000, primarily as a result of
decreases in gross margin and capital gains and a higher interest expense in
2001.
BUSINESS DIVISIONS
OVERVIEW
In April 2002, we merged our Process Industries division and our
Manufacturing and Consumer Industries division to form a new Industries
division. Segment data are presented below to reflect this change and prior
period data have been restated accordingly.
In order to streamline our structure and improve operational performance, we
have, as of January 1, 2003, put in place two divisions: Power Technologies,
which combines the Power Technology Products and Utilities divisions; and
Automation Technologies, which combines the
80
Automation Technology Products and Industries divisions. The discussion of our
results of operations by business division set forth below is based on our
reporting structure in 2002 and does not reflect this new division reporting.
Revenues, earnings before interest and taxes (or operating income) and
operating margins from continuing operations by division for the fiscal years
2002, 2001 and 2000 and net operating assets as of December 31, 2002, 2001 and
2000 are as follows (see also Note 25 to the Consolidated Financial Statements):
REVENUES NET OPERATING ASSETS
------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
(RESTATED) (RESTATED)
($ IN MILLIONS) ($ IN MILLIONS)
Utilities................................ 4,826 5,634 5,460 992 790 755
Industries............................... 4,412 4,995 5,443 1,129 924 829
Power Technology Products................ 4,355 3,961 3,587 1,389 1,283 1,302
Automation Technology Products........... 5,035 4,756 4,671 2,278 2,287 2,436
Non-Core Activities
Insurance.............................. 657 956 805 1,397 1,093 912
Equity Venture......................... 21 35 41 1,096 1,160 556
Structured Finance..................... 92 133 126 1,346 1,789 1,309
Building Systems....................... 2,372 2,568 2,506 68 (23) 57
New Ventures........................... 132 113 108 308 262 60
Other Non-Core Activities.............. 912 1,325 1,236 (456) (795) 583
------ ------ ------ ------ ------ ------
Non-Core Activities Subtotal............. 4,186 5,130 4,822 3,759 3,486 3,477
Corporate/Other.......................... 527 612 780 9,344 7,320 5,335
Consolidation effect and eliminations.... (5,046) (5,706) (5,408) (7,633) (5,346) (2,567)
------ ------ ------ ------ ------ ------
CONSOLIDATED FIGURES..................... 18,295 19,382 19,355 11,258 10,744 11,567
====== ====== ====== ====== ====== ======
EARNINGS BEFORE
INTEREST AND TAXES
(OPERATING INCOME) OPERATING MARGINS
------------------------------------ --------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------ --------------------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
(RESTATED) (RESTATED)
($ IN MILLIONS) (%)
Utilities................................... 75 158 251 1.6 2.8 4.6
Industries.................................. 145 151 197 3.3 3.0 3.6
Power Technology Products................... 353 234 244 8.1 5.9 6.8
Automation Technology Products.............. 373 364 445 7.4 7.7 9.5
Non-Core Activities
Insurance................................. 40 (342) 98 n/a n/a n/a
Equity Venture............................ 38 76 70 n/a n/a n/a
Structured Finance........................ 116 27 47 n/a n/a n/a
Building Systems.......................... (114) 20 57 n/a n/a n/a
New Ventures.............................. (68) (167) (12) n/a n/a n/a
Other Non-Core Activities................. (171) (66) (43) n/a n/a n/a
---- ---- ----- ---- ---- ----
Non-Core Activities Subtotal................ (159) (452) 217 (3.8) (8.8) 4.5
Corporate/Other............................. (317) (165) (135) n/a n/a n/a
Consolidation effect and eliminations....... (76) (133) (46) n/a n/a n/a
---- ---- ----- ---- ---- ----
CONSOLIDATED OPERATING INCOME/MARGINS....... 394 157 1,173 2.2 0.8 6.1
==== ==== ===== ==== ==== ====
81
DIVISION COSTS
Cost of sales and selling, general and administrative expenses comprise the
most significant part of operating expenses for all divisions. Cost of sales
includes costs related to the sale of products and services, which comprise,
among other things, the cost of raw materials, components, order-related
research and development and procurement costs. Selling, general and
administrative expenses include the overhead related to the sales force and all
costs related to general management, human resources, financial control,
corporate finance and non-order related research and development.
Selling, general and administrative expenses as a percentage of revenues are
typically higher in the Automation Technology Products division compared to our
other industrial divisions, due to relatively higher volumes attributable to
smaller units of sales.
Further details of the divisional performances follow.
UTILITIES
In the utilities sector, our main customers are power utilities whom we
serve with power transmission and distribution products, systems and services.
We also serve gas and water utilities. Demand in the power utilities markets has
been driven in recent years primarily by deregulation and privatization, which
result in a more competitive environment for our customers. In particular,
utilities continue to look for ways to optimize existing assets. This trend is
well advanced--but ongoing--in the United States, Western Europe and parts of
Latin America. Management believes that it is also spreading into other parts of
Europe and many emerging markets.
In North America, utilities continue to reduce the investment in new power
generation capacity and, as a result, also in power transmission systems. This
trend has been partially offset by grid interconnections and upgrading projects
to improve existing systems. Demand in Latin America has been impacted by the
political and economic uncertainties. As a result, a number of projects were
delayed into 2003. European utilities invested cautiously in 2002 as they waited
for the regulatory environment to stabilize. Development in Middle East, Africa
and Asia was positive.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
ORDERS
Orders decreased by $1,978 million, or 31%, to $4,458 million in 2002 from
$6,436 million in 2001. Currency fluctuations did not impact the order
comparison. Inter-division orders amounted to $224 million in 2002 (representing
5% of total division orders in 2002) and $164 million in 2001 (representing 3%
of total division orders in 2001). Excluding the pull-through effect, orders
decreased by 26%. This decrease was primarily related to the Power Systems
business area, which experienced significant reduction in large orders compared
to 2001, when we took two large orders from China and Brazil with a combined
value of more than $500 million. In addition, a selective bidding approach aimed
at reducing project risks and securing better margins reduced the number of bids
and, consequently, the order intake.
REVENUES
Revenues decreased by $808 million, or 14%, to $4,826 million in 2002 from
$5,634 million in 2001. As reported in local currencies, revenues decreased by
15%. Inter-division revenues amounted to $220 million in 2002 (representing 5%
of total division revenues in 2002) and $148 million in 2001 (representing 3% of
total division revenues in 2001). Excluding the impact of pull-through sales,
which fell in 2002 compared to 2001, revenues remained flat. Revenues were
sustained by the high order backlog at the end of 2001.
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OPERATING INCOME
Earnings before interest and taxes, or operating income, decreased by
$83 million, or 53%, to $75 million in 2002 from $158 million in 2001. As
reported in local currencies, earnings before interest and taxes decreased by
49%. Excluding capital gains of $11 million ($15 million in 2001), the impact of
pull-through sales, the restructuring charges and related asset write-downs of
$31 million ($24 million in 2001) and the goodwill amortization expense of
$24 million in 2001, earnings before interest and taxes decreased by 37%.
Operating income in the Power Systems business area decreased mainly due to the
execution of low-margin projects taken before 2001. This decrease was partly
offset by higher earnings in the Utility Automation business area, which
benefited from an improved cost base.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
ORDERS
Orders increased by $201 million, or 3%, to $6,436 million in 2001 from
$6,235 million in 2000. As reported in local currencies, orders increased by 7%
in 2001 compared to 2000. Inter-division orders amounted to $164 million in 2001
(representing 5% of total division orders in 2001) and $279 million in 2000
(representing 4% of total division orders in 2000). The order improvement
included a $360 million order in China for the Power Systems business area,
announced in the fourth quarter of 2001. This order related to a project
involving the construction of a HVDC power transmission system linking
hydropower plants in central China to the Guangdong province. In addition, large
orders in the Power Systems business area during 2001 included a $182 million
project order from Brazil. In 2001, large orders represented approximately 17%
of the division's total orders.
REVENUES
Revenues increased by $174 million, or 3%, to $5,634 million in 2001 from
$5,460 million in 2000. As reported in local currencies, revenues increased 7%
in 2001 compared to 2000. Inter-division revenues amounted to $148 million in
2001 (representing 3% of total division revenues in 2001) and $136 million in
2000 (representing 2% of total division revenues in 2000). All business areas
except Utility Services reported higher revenues in 2001 compared to 2000 due to
strong order intake in 2000. Revenues in the Utility Services business area in
2000 reflected the invoicing of a major portion of the contract delivery
(amounting to $100 million) upon reaching certain milestones with respect to a
large Commonwealth Edison power transmission and distribution system upgrade
project in Chicago. This unusually high level of revenues was not repeated in
2001.
OPERATING INCOME
Earnings before interest and taxes, or operating income, decreased by
$93 million, or 37%, to $158 million in 2001 from $251 million in 2000. There
was no significant effect from translating local currency earnings into U.S.
dollars. Operating income included capital gains of $15 million in 2001
($54 million in 2000). When adjusted for capital gains, earnings before interest
and taxes decreased by 27%. The reduction primarily related to the Power Systems
business area, where competition-driven price deterioration reduced margins, and
fixed costs related to projects that were deferred negatively impacted
profitability.
INDUSTRIES
Customers of our Industries division span a broad range of sectors and
regions. Consequently, demand is influenced by many factors and can vary
significantly among customer groups within a
83
given time period. Demand influences are similar to those seen in the Automation
Technology Products markets, although Industries' offering goes beyond products
to systems and services.
In 2002, the consolidation trend in the paper industry continued, resulting
in flat demand. Petrochemical and chemical markets were weak (except in India
and China) due to high oil prices. However, demand for oil and gas production
projects continued. Demand in the metals and mining industry was stable.
Overall, the automotive market was down in 2002, driven largely by reduced
spending by OEMs.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
ORDERS
Orders decreased by $251 million or 5%, to $4,614 million from
$4,865 million in 2001. As reported in local currencies, orders decreased by 7%
in 2002. Inter-division orders amounted to $101 million in 2002 (representing 2%
of total division orders in 2002) and $110 million in 2001 (representing 2% of
total division orders in 2001). Excluding the pull-through effect, orders
increased by 9%. Strong demand in India and China led to the increased order
intake in the Petroleum, Chemical and Life Sciences business area as well as the
Paper, Printing, Metals and Minerals business area, which partially offset
decreased orders in the Marine and Turbocharging business area.
REVENUES
Revenues decreased by $583 million, or 12%, to $4,412 million from
$4,995 million in 2001. As reported in local currencies, revenues decreased by
14% in 2002. Inter-division revenues amounted to $110 million in 2002
(representing 3% of total division revenues in 2002) and $101 million in 2001
(representing 2% of total division revenues in 2001). Excluding the pull-through
effect, revenues remained flat. Revenues mainly increased in the Petroleum,
Chemical and Life Sciences business area due to strong order backlog at the end
of 2001 and improved market conditions in the Middle East, Africa and Asia. This
increase was offset by a reduction in revenues in the Automotive and
Manufacturing business area.
OPERATING INCOME
Earnings before interest and taxes, or operating income, decreased by
$6 million, or 4%, to $145 million from $151 million in 2001. As reported in
local currencies, earnings before interest and taxes decreased by 6% in 2002
compared to 2001. Excluding the pull-through effect, restructuring charges and
related asset write-downs of $59 million ($38 million in 2001) and goodwill
amortization expense of $41 million in 2001, earnings before interest and taxes
decreased by 6%. All business areas contributed to this reduction with the
exception of the Marine and Turbocharging business area, which maintained its
earnings at 2001 levels. Earnings in 2002 were also affected by a non-recurring
charge of $20 million.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
ORDERS
Orders decreased by $879 million, or 15%, to $4,865 million in 2001 from
$5,744 million in 2000. As reported in local currencies, orders decreased by
12%. Inter-division orders amounted to $110 million in 2001 (representing 2% of
total division orders in 2001) and $81 million in 2000 (representing 1% of total
division orders in 2000). Orders increased significantly in the Petroleum,
Chemical and Life Sciences business area, offsetting decreases in the Paper,
Printing, Metals and Minerals and Marine and Turbocharging business areas.
Orders decreased significantly in our
84
Automotive and Manufacturing business area, particularly in the United States,
Germany and Sweden. Additionally, large order intake decreased, as well as
orders for standard products, particularly robots supplied by the Automation
Technology Products division.
REVENUES
Revenues decreased by $448 million, or 8%, to $4,995 million in 2001 from
$5,443 million in 2000. As reported in local currencies, revenues decreased by
4% in 2001 compared to 2000. Inter-division revenues amounted to $101 million in
2001 (representing 2% of total division revenues in 2001) and $79 million in
2000 (representing 1% of total division revenues in 2000). The decrease in the
division's revenues mainly arose from the impact of the global economic slowdown
in our Automotive and Manufacturing business area. This was partly offset by
increases in our Marine and Turbocharging business area because of the high
order backlog from 2000 and in the Petroleum, Chemical and Life Sciences
business area due to improved market conditions.
OPERATING INCOME
Earnings before interest and taxes, or operating income, decreased by
$46 million, or 23%, to $151 million in 2001 from $197 million in 2000. As
reported in local currencies, earnings before interest and taxes declined by 22%
in 2001 compared to 2000. The Automotive and Manufacturing business area in
Germany was impacted by a number of project losses and initiated restructuring
to improve the efficiency of project execution. In the United States,
repositioning of selected activities within the Telecom and Product
Manufacturing Industries business area led to lower operating margins. These
were partly offset by improvements in cost controls and project management in
the Petroleum, Chemical and Life Sciences business area, as well as revenue
growth in the Marine and Turbocharging business area.
POWER TECHNOLOGY PRODUCTS
The market for Power Technology Products comprises mainly power utilities
around the world, in particular, their power transmission and distribution
activities, and some industrial customers. Ongoing deregulation and
privatization in these markets are driving demand by increasing competition in
the market. This has led to industry consolidation and pressures on the
utilities to make existing plants more competitive by modernizing equipment and
outsourcing activities such as service and maintenance. The trend is advanced
but continuing in the United States, Western Europe, and parts of Latin America.
It is beginning to take hold in most other markets as well.
Industrial demand weakened towards the end of 2002. Additionally, utility
orders decreased in the second half of the year mainly due to a lower demand in
North America. The political and economic climate in Latin America resulted in a
drop of market volumes caused by a delay of order placement rather than
structural demand weakness. The Asian and the Middle East and African markets,
particularly China, continued showing strong demand in all business areas.
Markets in Europe were mixed.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
ORDERS
Orders increased by $166 million, or 4%, to $4,387 million in 2002 from
$4,221 million in 2001. As reported in local currencies, orders increased by 3%
in 2002. Inter-division orders amounted to $2,241 million in 2002 (representing
51% of total division orders in 2002) and $2,947 million in 2001 (representing
70% of total division orders in 2001). Orders remained flat in all business
areas except the Medium-Voltage Technology business area, which increased
orders, primarily from improving demand in Asia.
85
REVENUES
Revenues increased by $394 million, or 10%, to $4,355 million in 2002 from
$3,961 million in 2001. As reported in local currencies, revenues increased by
9% in 2002. Inter-division revenues amounted to $2,191 million in 2002
(representing 50% of total division revenues in 2002) and $2,547 million in 2001
(representing 64% of total division revenues in 2001). The High-Voltage
Technology and Power Transformers business areas increased revenues
significantly while the Medium-Voltage Technology business area showed a modest
increase and the Distribution Transformers business area's revenues were flat. A
higher order backlog at the end of 2001 and strong demand in Asia Pacific
markets during 2002 contributed to this development.
OPERATING INCOME
Earnings before interest and taxes, or operating income, increased by
$119 million, or 51%, to $353 million in 2002 from $234 million in 2001. As
reported in local currencies, earnings before interest and taxes increased by
50% in 2002. When adjusted for restructuring charges and related asset
write-downs of $29 million ($52 million in 2001) and goodwill amortization
expense of $6 million in 2001, earnings before interest and taxes showed an
increase of 31% in 2002 compared to 2001. This improvement was driven by a 9%
workforce reduction, a 30% reduction in overlapping product lines and a 17%
reduction in production lines.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
ORDERS
Orders increased by $150 million, or 4%, to $4,221 million in 2001 from
$4,071 million in 2000. As reported in local currencies, orders increased by 9%
in 2001 compared to 2000. Inter-division orders amounted to $2,947 million in
2001 (representing 70% of total division orders in 2001) and $2,428 million in
2000 (representing 60% of total division orders in 2000). Our Power Transformers
business area recorded strong order growth mainly due to a large order booked
for a Chinese power link project. Our High-Voltage Technology business area
increased orders substantially in the United States, Brazil, China and Russia.
Orders in our Distribution Transformers and Medium-Voltage Technology business
areas showed more modest growth as a result of the economic slowdown in North
America, which affected the building and infrastructure markets.
REVENUES
Revenues increased by $374 million, or 10%, to $3,961 million in 2001 from
$3,587 million in 2000. As reported in local currencies, revenues increased by
16% in 2001 compared to 2000. Inter-division revenues amounted to
$2,547 million in 2001 (representing 64% of total division revenues in 2001) and
$2,162 million in 2000 (representing 60% of total division revenues in 2000).
Our High-Voltage Technology business area showed a substantial revenue increase,
generated in the Americas and Europe through increased volumes in high-voltage
breakers and systems activities. Other distribution and transmission products
recorded high single-digit or low double-digit growth in local currencies.
OPERATING INCOME
Earnings before interest and taxes, or operating income, decreased by
$10 million, or 4%, to $234 million in 2001 from $244 million in 2000. As
reported in local currencies, earnings before interest and taxes remained
unchanged in 2001 compared to 2000. Excluding the effect of increased
restructuring charges of $52 million in 2001 ($38 million in 2000), earnings
before interest and taxes improved slightly as a result of revenue growth and
operational improvements. However, these gains were offset in part by lower
product prices and the postponement of certain orders.
86
AUTOMATION TECHNOLOGY PRODUCTS
We serve a wide variety of industrial sectors and countries with our
automation products, and thus demand can vary significantly by region and
industry, and is subject to changes in the business cycle. While the overall
global market demand for process automation products and systems stabilized at a
reduced level in most markets in 2002 compared to 2001, there were areas of
increased demand, as well as areas with continued weakness. Demand in Asia was
strong, with good growth maintained particularly in China, where economic growth
continued at a good pace. Market demand in the Americas remained weak with
reduced investments especially from the automotive and pulp and paper sectors.
Markets in Europe were mixed, with good demand in Finland, France, Spain, and
Sweden but continued weakness in Germany and some other countries. Demand
remained strong in the Middle East and Africa.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
ORDERS
Orders increased by $405 million, or 9%, to $5,074 million from
$4,669 million in 2001. As reported in local currencies, orders increased by 5%
in 2002 compared to 2001. Inter-division orders amounted to $1,299 million in
2002 (representing 26% of total division orders in 2002) and $1,872 million in
2001 (representing 40% of total division orders in 2001). Higher demand for
robotics products in several industries led to higher orders in the Robotics
business area. Overall, demand from industrial customers in the strong Chinese
market fueled a significant order increase for both the Low-Voltage Products and
Drives and Power Electronics business areas.
REVENUES
Revenues increased by $279 million, or 6%, to $5,035 million from
$4,756 million in 2001. As reported in local currencies, revenues increased by
3% in 2002 compared to 2001. Inter-division revenues amounted to $1,287 million
in 2002 (representing 26% of total division revenues in 2002) and
$1,864 million in 2001 (representing 39% of total division revenues in 2001).
Increased demand in the Robotics and Low Voltage Products business areas lifted
revenues. Revenues were lower in Control and Force Measurement and Electrical
Machines business areas, mainly due to weaker demand.
OPERATING INCOME
Earnings before interest and taxes, or operating income, increased by
$9 million, or 2%, to $373 million in 2002 from $364 million in 2001. As
reported in local currencies, earnings before interest and taxes decreased by 1%
in 2002 compared to 2001. Improved volumes resulted in a significant increase in
earnings before interest and taxes in the Robotics business area and a moderate
increase in the Low-Voltage Products business area. The Electrical Machines
business area increased earnings before interest and taxes due to cost
improvements from streamlining a number of production facilities. These positive
developments were partly offset by a reduction in earnings in the Control and
Force Measurement business area due to continued low demand in the process
automation market, particularly in the United States. When adjusted for the
restructuring charges and related asset write-downs of $80 million in 2002
($43 million in 2001) and goodwill amortization expense $54 million in 2001,
earnings decreased by 2%.
87
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
ORDERS
Orders decreased by $218 million, or 4%, to $4,669 million in 2001 from
$4,887 million in 2000. As reported in local currencies, orders were flat in
2001 compared to 2000. Inter-division orders amounted to $1,872 million in 2001
(representing 40% of total division orders in 2001) and $2,202 million in 2000
(representing 45% of total division orders in 2000). Our Drives and Power
Electronics business area increased orders in 2001 and improved market share,
while our Robotics business area was negatively affected by the decline in the
automotive industry. Order levels in all other business areas decreased as they
were impacted by increasingly difficult market conditions. Despite difficult
conditions, our Instrumentation and Low-Voltage Products business areas
maintained their market shares.
REVENUES
Revenues increased by $85 million, or 2%, to $4,756 million in 2001 from
$4,671 million in 2000. As reported in local currencies, revenues increased by
7% in 2001 compared to 2000. Inter-division revenues amounted to $1,864 million
in 2001 (representing 39% of total division revenues in 2001) and
$2,137 million in 2000 (representing 46% of total division revenues in 2000).
Revenue growth was especially strong in our Drives and Power Electronics
business area. Supported by the strong order backlog at the end of 2000, our
Electrical Machines and Low-Voltage Products business areas increased revenues.
Offsetting in part the revenue increase was a significant decline in our
Robotics and Control and Force Measurement business areas due to the downturn in
the automotive industry and ongoing consolidation in the pulp, paper and metals
industries, respectively.
OPERATING INCOME
Earnings before interest and taxes, or operating income, decreased by
$81 million, or 18%, to $364 million in 2001 from $445 million in 2000. As
reported in local currencies, earnings before interest and taxes decreased by
14% in 2001 compared to 2000. In our Robotics business area, reduced revenues
resulted in significantly reduced operating income. Operating income in our
Low-Voltage Products business area declined in 2001, reflecting the divestiture
of certain profitable, but non-core, businesses. Earnings before interest and
taxes in our Drives and Power Electronics business area increased due to
increased volume development; however, this development did not fully offset
reduction in earnings in other business areas.
NON-CORE ACTIVITIES
At the end of 2002, we decided to group a number of business activities
together that were not directly linked to the core divisions. The results of
these activities are reported separately under the heading of Non-Core
Activities. These comprise primarily the Equity Ventures business area, the
remaining parts of the Structured Finance business area not sold to GE Capital,
the Building Systems business area, and a number of other activities, including
the Semiconductors business, Customer Service, Air Handling, Logistic Systems,
Group Processes and the New Ventures business areas. The Insurance business area
was also included in this group, although we intend to continue this as a
separate business.
The Financial Services division was dissolved in 2002 following the
divestment of the majority of the Structured Finance business area, the
cessation of new reinsurance activity in Scandinavian Reinsurance Company
Limited, Bermuda (part of the Insurance business area) and the cessation of
proprietary trading in June 2002 in the former Treasury Centers business area
(which was
88
subsequently moved to Corporate as Treasury Services). We intend to divest
Equity Ventures business area and the remaining Structured Finance businesses.
In April 2002, we announced the planned divestment of the Building Systems
business area. In October 2002, the Group Processes division, which was formed
in 2001 to establish common working processes and common infrastructure for the
ABB Group, was dissolved, with most of the activities terminated and the
remainder transferred to the core divisions. Our presence in some of the markets
of Logistic Systems and Customer Service is being strategically reduced. In
October 2002, we announced a restructuring program in New Ventures to cease a
number of activities and to transfer the remaining activities to other business
areas. Our Air Handling business was sold in January 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
ORDERS
Orders decreased by $911 million, or 18%, to $4,161 million in 2002 from
$5,072 million in 2001. As reported in local currencies, orders decreased by 22%
in 2002 compared to 2001. The reduction in orders was primarily attributable to
the cessation of new re-insurance activity in Scandinavian Reinsurance Company
Limited, Bermuda (part of the Insurance business area), the negative impact of
market downturns across Europe on the Building Systems business area, the sale
of Air Handling and the planned reduction of our presence in some of the markets
of the Logistic Systems and Customer Service business areas.
Inter-division orders amounted to $877 million in 2002 (representing 21% of
total division orders in 2002) and $880 million in 2001 (representing 17% of
total division orders in 2001). A significant portion of inter-division orders
came from the Group Processes business area (included within "Other Non-Core
Activities"), which accounted for 75% and 70% of the inter-division orders in
2002 and 2001, respectively. The Building Systems business area accounted for
15% and 16%, respectively, of the inter-division orders in 2002 and 2001,
respectively.
REVENUES
Revenues decreased by $944 million, or 18%, to $4,186 million in 2002 from
$5,130 million in 2001. As reported in local currencies, revenues declined by
22% in 2002 compared to 2001. The decrease in revenues is for the reasons
outlined below.
Inter-division revenues amounted to $901 million in 2002 (representing 22%
of total division revenues in 2002) and $814 million in 2001 (representing 16%
of total division revenues in 2001). A significant portion of inter-division
revenues came from the Group Processes business area (included within "Other
Non-Core Activities"), which accounted for 73% and 76% of the inter-division
revenues in 2002 and 2001, respectively. The Building Systems business area
accounted for 17% and 18%, respectively, of the inter-division revenues in 2002
and 2001, respectively.
INSURANCE revenues decreased by $299 million, or 31%, to $657 million in
2002 from $956 million in 2001. The decrease in revenues was primarily due to
the cessation of new re-insurance activity in Scandinavian Reinsurance Company
Limited, Bermuda.
EQUITY VENTURES revenues decreased by $14 million, or 40%, to $21 million in
2002 from $35 million in 2001. Fee revenues and charge-outs dropped as
development projects have been canceled, leading to no further actual or
potential future revenues from such projects. This business has mainly equity
accounted investments, which do not result in the recognition of orders and
revenues.
89
REMAINING STRUCTURED FINANCE revenues decreased by $41 million, or 31%, to
$92 million in 2002 from $133 million in 2001. The decrease in revenues was due
to higher refinancing costs leading to no new significant business investments
being made.
BUILDING SYSTEMS revenues decreased by $196 million, or 8%, to
$2,372 million in 2002 from $2,568 million in 2001. The decrease in revenues was
due to market downturns across Europe, particularly Germany.
NEW VENTURES revenues increased by $19 million, or 17%, to $132 million in
2002 from $113 million in 2001. The increase in revenues was due to the delivery
of a significant renewable energy project for which the order was received in
2001.
Of the remaining businesses, revenues decreased by $413 million, or 31%, to
$912 million in 2002 from $1,325 million in 2001. The decrease was due to the
sale of Air Handling and the deliberate reduction of our presence in some of the
markets of the Logistic Systems and Customer Service business areas.
OPERATING INCOME
Earnings before interest and taxes, or operating income, improved by
$293 million to a loss of $159 million in 2002 from a loss of $452 million in
2001. The improvement was primarily attributable to the non-recurrence of a
number of costs from 2001. The decrease in operating income is for the reasons
outlined below.
INSURANCE operating income improved by $382 million, to an income of
$40 million in 2002 from a loss of $342 million in 2001. The improvement was the
result of the non-recurrence of a number of costs from 2001. Prior to 2001, we
presented a portion of our insurance reserves on a discounted basis, which
estimated the present value of funds required to pay losses at future dates.
During 2001, the timing and amount of claims payments being ceded to us in
respect of prior years' finite risk reinsurance contracts changed and could not
be reliably determined at December 31, 2001. Therefore, we did not discount our
loss reserves resulting in a charge to losses and loss adjustment expenses in
2001 of $295 million. In addition, the Insurance business area also recorded
provisions for $138 million in underwriting losses, including provisions
totaling $48 million relating to the events of September 11, 2001, leading to
substantial additional negative insurance results.
EQUITY VENTURES operating income decreased by $38 million, or 50%, to
$38 million in 2002 from $76 million in 2001. The decrease was the result of
reduced returns from investments and the effects of closing down development and
office activities.
REMAINING STRUCTURED FINANCE operating income increased by $89 million, or
330%, to $116 million in 2002 from $27 million in 2001. This increase primarily
came from our 35% interest in the Swedish Export Credit Corporation in Sweden.
Amounts in 2001 from our investment in the Swedish Export Credit Corporation
were restated as described in Note 13 to the Consolidated Financial Statements.
BUILDING SYSTEMS operating income decreased by $134 million to a loss of
$114 million in 2002 from an income of $20 million in 2001. The decrease was due
to project write-downs in Germany, Sweden, United Kingdom and Denmark, closure
costs in Italy and Poland and restructuring costs in Germany.
NEW VENTURES operating income increased by $99 million to a loss of
$68 million in 2002 from a loss of $167 million in 2001. The improvement was due
to the non-recurrence of costs and provisions for alternative energy projects of
$55 million and $44 million of asset write-downs in 2001.
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Of the remaining businesses, operating income decreased by $105 million to a
loss of $171 million in 2002 from a loss of $66 million in 2001. The decrease
was due to the reduction in revenues mentioned above and higher costs within
Group Processes.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
ORDERS
Orders decreased by $77 million, or 1%, to $5,072 million in 2001 from
$5,149 million in 2000. As reported in local currencies, orders increased by 4%
in 2001 compared to 2000. The reduction in orders was due to a 9%, or
$237 million, decrease within Building Systems, partly offset by a 19%, or
$151 million, increase within Insurance.
Inter-division orders amounted to $880 million in 2001 (representing 17% of
total division orders in 2001) and $893 million in 2000 (representing 16% of
total division orders in 2000). A significant portion of inter-division orders
came from the Group Processes business area (included within "Other Non-Core
Activities"), which accounted for 70% and 60% of the inter-division orders in
2001 and 2000, respectively. The Building Systems business area accounted for
16% and 21%, respectively, of the inter-division orders in 2001 and 2000,
respectively.
REVENUES
Revenues increased by $308 million, or 6%, to $5,130 million in 2001 from
$4,822 million in 2000. As reported in local currencies, revenues increased by
12% in 2001 compared to 2000. The increase in revenues is for the reasons
outlined below.
Inter-division revenues amounted to $814 million in 2001 (representing 16%
of total division revenues in 2001) and $836 million in 2000 (representing 16%
of total division revenues in 2000). A significant portion of inter-division
revenues came from the Group Processes business area (included within "Other
Non-Core Activities"), which accounted for 76% and 63% of the inter-division
revenues in 2001 and 2000, respectively. The Building Systems business area
accounted for 18% and 15%, respectively, of the inter-division revenues in 2001
and 2000, respectively.
INSURANCE revenues increased by $151 million, or 19%, to $956 million in
2001 from $805 million in 2000. The increase was due to higher insurance
premiums resulting from an increase in demand for re-insurance and a reduction
in capacity as a result of the September 11 events.
EQUITY VENTURES revenues decreased by $6 million, or 15%, to $35 million in
2001 from $41 million in 2000. This business has mainly equity accounted
investments, which do not result in the recognition of orders and revenues.
REMAINING STRUCTURED FINANCE revenues increased by $7 million, or 6%, to
$133 million in 2001 from $126 million in 2000.
BUILDING SYSTEMS revenues increased by $62 million, or 2%, to
$2,568 million in 2001 from $2,506 million in 2000.
NEW VENTURES revenues increased by $5 million, or 5%, to $113 million in
2001 from $108 million in 2000.
Of the remaining businesses, revenues increased by $89 million, or 7%, to
$1,325 million in 2001 from $1,236 million in 2001.
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OPERATING INCOME
Earnings before interest and taxes, or operating income, decreased by
$669 million to a loss of $452 million in 2001 from an income of $217 million in
2000. The reasons for the decrease in operating income are outlined below.
INSURANCE operating income decreased by $440 million, to a loss of
$342 million in 2001 from an income of $98 million in 2000. The reduction in
operating income was principally the result of a $295 million non-cash charge in
2001 relating to our reinsurance business. Prior to 2001, we presented a portion
of our insurance reserves on a discounted basis, which estimated the present
value of funds required to pay losses at future dates. During 2001, the timing
and amount of claims payments being ceded to us in respect of prior years'
finite risk reinsurance contracts changed and could not be reliably determined
at December 31, 2001. Therefore, we did not discount our loss reserves resulting
in a charge to losses and loss adjustment expenses in 2001 of $295 million. In
addition, the Insurance business area also recorded provisions for $138 million
in underwriting losses, including provisions totaling $48 million relating to
the events of September 11, 2001, leading to substantial additional negative
insurance results. The benefit of the non-recurrence of these costs was
partially offset by lower revenues.
EQUITY VENTURES operating income increased by $6 million, or 9%, to
$76 million in 2001 from $70 million in 2000. The increase was the result of
successful refinancing, improved performance and achievements of milestones in
infrastructure projects.
REMAINING STRUCTURED FINANCE operating income decreased by $20 million, or
43%, to $27 million in 2001 from $47 million in 2000. The decrease was primarily
due to the reduced level of income from our 35% interest in Swedish Export
Credit Corporation in Sweden. Results from our investment in the Swedish Export
Credit Corporation in 2001 were restated as described in Note 13 to the
Consolidated Financial Statements.
BUILDING SYSTEMS operating income decreased by $37 million, or 65%, to
$20 million in 2001 from $57 million in 2000. The decrease was due to project
losses and higher costs related to over-capacity in the United Kingdom,
Australia, Poland and Germany.
NEW VENTURES operating income decreased by $155 million to a loss of
$167 million in 2001 from a loss of $12 million in 2000. The decrease was due to
costs and provisions incurred in 2001 for alternative energy projects of
$55 million and $44 million for asset write-downs.
Of the remaining businesses, operating income decreased by $23 million to a
loss of $66 million in 2001 from a loss of $43 million in 2000.
CORPORATE AND ELIMINATION
Corporate consists of Treasury Services, Corporate Research and Development,
Group Real Estate and Headquarters/Stewardship costs. Following the cessation of
proprietary trading in 2002 in the former Treasury Centers business area, all of
the remaining functions were transferred to Corporate as Treasury Services.
The elimination of inter-division transactions, such as pull-through sales
and intra-company interest, are included in the elimination line.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Total operating cost from corporate and elimination of inter-division
transactions increased by $95 million, to $393 million in 2002 from
$298 million in 2001. Headquarters/Stewardship operating costs decreased by
$47 million to $156 million in 2002 from $203 million in 2001, mainly due to
one-time events (including the recovery of payments from two former chief
executive officers).
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Corporate Research and Development costs decreased by $10 million to
$93 million in 2002 from $103 million in 2001 as a result of the reorganization
in our global research and development centers and the related headcount
reductions. Other (including Treasury Services, Real Estate and intra-company
eliminations) operating costs increased by $152 million to a cost of
$144 million in 2002 from an income of $8 million in 2001, mainly due to a
reduction in rental income as a result of asset sales, increased lease
obligations in Real Estate, the reduced trading result of Treasury Services
following the cessation of proprietary trading and a higher elimination of
intra-group profit in ending inventory compared to 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Total operating cost from corporate and elimination of inter-division
transactions increased by $117 million to $298 million in 2001 from
$181 million in 2000. Headquarters/Stewardship operating costs decreased by
$47 million to $203 million in 2001 from $250 million in 2000. Corporate
Research and Development expenses increased by $7 million to $103 million in
2001 from $96 million in 2000 due to higher non-order related research
activities during 2001, mainly in the area of Industrial IT. Other (including
Treasury Services, Real Estate and intra-company eliminations) operating income
decreased by $157 million to an income of $8 million in 2001 from an income of
$165 million in 2000 (an increase in operating costs of $157 million), mainly
due to a reduction in rental income as a result of asset sales and increased
lease obligations within Real Estate.
DISCONTINUED OPERATIONS
Our Oil, Gas and Petrochemicals division, significant components of our
Structured Finance activities sold to GE Capital, our Metering business and a
number of other businesses have been included in discontinued operations in
accordance with SFAS 144. For further information on discontinued operations,
see Note 3 to the Consolidated Financial Statements.
An operational overview of the significant components of discontinued
operations follows.
OIL, GAS AND PETROCHEMICALS
Capital expenditures by customers of the Oil, Gas and Petrochemicals
division are influenced by oil company expectations about the oil price, which
is determined by supply and demand for crude oil and natural gas products, the
energy price environment that results from supply and demand imbalances and
consolidation of the oil and gas markets. Key factors that may influence the
worldwide oil and gas market include production restraint of OPEC nations and
other oil-producing countries, global economic growth, technological progress in
oil exploration and production and the maturity of the resource base. The
downstream markets are in the short term influenced by capacity utilization and
in the longer term by factors such as economic growth, substitution of products
and demand for more environmentally friendly products.
OPEC oil price management combined with reduced oil production in Latin
America and speculative purchases due to issues in the Middle East led the oil
price towards the high end of the OPEC target band of $22 to $28 per barrel
during 2002. These increased prices were not driven by increased consumption, as
underlying growth in demand is weak due to the current global environment. With
the exception of Northwest Europe, investments in exploration and production in
the upstream market (from the well or bore hole to the refinery) increased in
all regions, particularly West Africa and Russia. The upstream modification and
maintenance market is growing as a result of larger installed capacity and more
mature fields with changed field characteristics. Most downstream markets
remained at a reduced level in 2002, with the exception of investment in
refineries driven by clean fuel regulations, particularly in Russia. We expect
upstream markets in 2003 to increase slightly, with downstream activity
remaining at a low level throughout 2003.
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YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Orders increased by $222 million, or 7%, to $3,625 million in 2002 from
$3,403 million in 2001. As reported in local currencies, orders increased by 3%
in 2002. In 2002, orders included $23 million received from our other divisions,
compared to $15 million in 2001. The increase in large orders of 22%, mostly
driven by the award of an ExxonMobil Sakhalin order within our downstream
business, offset a general reduction resulting from a shift in the market from
fixed price contracts to lower-risk reimbursable contracts, which allow a more
balanced sharing of risks and opportunities between customer and contractor. The
increase in the downstream business offset a general reduction in the upstream
business.
Revenues increased by $380 million, or 11%, to $3,869 million in 2002 from
$3,489 million in 2001. As reported in local currencies, revenues increased by
7% in 2002. The increases came from improvements in the upstream and downstream
businesses, reflecting a high order backlog going into 2002 and a relatively
high level of order intake in 2002. In 2002, revenues included $15 million of
sales to our other divisions, compared to $11 million in 2001.
Earnings before interest and taxes, or operating income, decreased by
$96 million to a loss of $17 million in 2002 from an income of $79 million in
2001. (These values differ from the loss on discontinued operations by amounts
for interest expense, taxes, minority interest and other items.) Currency
fluctuations did not affect the comparison between 2002 and 2001. The impact in
earnings from the increased revenues was more than offset by cost overruns and
project delays, which resulted in a charge of $224 million in 2002, primarily in
four large downstream fixed price projects, booked several years ago.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Orders decreased by $520 million, or 13%, to $3,403 million in 2001 from
$3,923 million in 2000. As reported in local currencies, orders decreased by 12%
in 2001 compared to 2000. In 2001, orders included $15 million received from our
other divisions, compared to $9 million in 2000. In 2001, approximately half of
the total order volume in the division comprised large orders. From the
particularly high level of large orders in 2000, the upstream business continued
to grow, but was offset by reductions in the downstream business. Although
orders decreased in 2001 compared to 2000, we experienced high tendering
activity in the division in 2001.
Revenues increased by $693 million, or 25%, to $3,489 million in 2001 from
$2,796 million for 2000. As reported in local currencies, revenues increased by
28% in 2001 compared to 2000. This growth was primarily generated by the large
order intake in 2000 and also by a full year of revenues from Umoe, the oil and
gas company acquired in the second half of 2000. In 2001, revenues included
$11 million of sales to our other divisions compared to $22 million in 2000.
Revenues improved in our upstream business area, but the downstream business
area remained flat in 2001 compared to 2000.
Earnings before interest and taxes, or operating income, decreased by
$78 million, or 50%, to $79 million in 2001 from $157 million in 2000. (These
values differ from the loss on discontinued operations by amounts for interest
expense, taxes, minority interest and other items.) As reported in local
currencies, earnings before interest and taxes decreased by 49% in 2001 compared
to 2000. Earnings before interest and taxes were adversely affected by cost
overruns and project delays, the majority of which related to two large
projects. The remaining underlying business developed positively, benefiting
from the higher revenues.
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STRUCTURED FINANCE
Demand continued in major European markets and in the United States for
lease financing products--including small, standardized leases for office
equipment such as copy machines and printers--as companies focused on balance
sheet management due to increased funding rates. In light of its own higher
refinancing rates, Structured Finance amended its strategy and did not pursue
further significant investments in financial leases or lending to infrastructure
projects during 2002.
PERIOD FROM JANUARY 1 TO NOVEMBER 30, 2002 COMPARED WITH YEAR ENDED
DECEMBER 31, 2001
Revenues increased by $42 million, or 19%, to $262 million in 2002 from
$220 million in 2001. The 2002 figure is for 11 months of trading as most of the
Structured Finance business was sold to GE Capital at the end of November 2002.
The revenue increase reflected the acquisition of a portfolio of small, mainly
standardized leases as well as growth in the existing portfolio of such small
leases.
Earnings before interest and taxes, or operating income, decreased by
$26 million, or 51%, to $25 million in 2002 from $51 million in 2001. (These
values differ from the loss on discontinued operations by amounts for the loss
on disposal, interest expense, taxes, minority interest and other items.) The
2002 figure is for 11 months of trading. The lower operating income in general
reflected the change in strategy to refrain from new lease and financing
transactions, leading to a corresponding reduction in business activity during
2002. In addition, earnings from the increased sale of small leases could not
compensate for lower earnings in other units.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenues increased by $64 million, or 41%, to $220 million in 2001 from
$156 million in 2000. The increased revenues resulted from the acquisition of a
portfolio of small, mainly standardized leases and from its growing financial
receivables portfolio, including financial leases, and lending to infrastructure
projects.
Earnings before interest and taxes, or operating income, increased by
$4 million, or 9%, to $51 million in 2001 from $47 million in 2000. (These
values differ from the loss on discontinued operations by amounts for interest
expense, taxes, minority interest and other items.) The increase resulted from
higher income from the expanded financial receivables portfolio. Structured
Finance also successfully sold various lease transactions during 2001.
METERING
Demand in the electricity and water meter markets was weak in North America
as a result of reduced capital expenditures by large energy utilities. The
economic instability in Latin America led to a downturn in demand in both
Argentina and Brazil. Operations in Germany were affected by the slowdown in the
domestic building industry.
PERIOD FROM JANUARY 1 TO DECEMBER 4, 2002 COMPARED WITH YEAR ENDED
DECEMBER 31, 2001
Revenues decreased by $76 million, or 17%, to $372 million in 2002 from
$448 million in 2001. The 2002 figure is for 11 months trading, as the business
was sold to Ruhrgas Industries GmbH at the beginning of December 2002. The
revenues during the 11 months decreased as a result of the weak market
conditions in North America, Latin America and Germany.
Earnings before interest and taxes, or operating income, decreased by
$11 million, or 38%, to $18 million in 2002 from $29 million in 2001. (These
values differ from the loss on discontinued operations by amounts for the loss
on disposal, interest expense, taxes, minority interest and other
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items.) The 2002 earnings figure is for 11 months of trading. The decrease for
the 11 months was a result of decreased revenues in North America, Latin America
and Germany, partially offset by new product introductions, the impact of
restructuring actions in a number of units and a reduction in goodwill
amortization.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenues decreased by $9 million, or 2%, to $448 million in 2001 from
$457 million in 2000. The decrease originated primarily in the United Kingdom
due to reduced investment by the water companies, a fall in export business due
to the loss of previously held contracts in Hong Kong and Sri Lanka and
competing low cost imports from China and Eastern Europe
Earnings before interest and taxes, or operating income, decreased by
$9 million, or 24%, to $29 million in 2001 from $38 million in 2000. (These
values differ from the loss on discontinued operations by amounts for interest
expense, taxes, minority interest and other items.) The decrease was due to weak
economic conditions in North America, leading to a significant drop off in
demand for high performance meters and systems in electricity, and the impact of
lower volumes and pricing pressure in the United Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
PRINCIPAL SOURCES OF FUNDING
In 2002, as in 2001 and 2000, we managed our liquidity using cash from
operations, bank borrowings, the proceeds from the issuance of debt securities,
divestment proceeds, as well as the sales of receivables under our
securitization programs. The reductions in our credit rating during 2002
described below have restricted our access to the debt markets and, as a result,
we have relied increasingly on proceeds from divestments, bank borrowings, cash
from operations and additionally in 2003, from the sale of treasury shares
(raising approximately $156 million from the sale of 80 million treasury shares
in two transactions).
We believe that our ability to obtain funding from the sources described
above will continue to provide the cash flows necessary to satisfy our working
capital requirements and capital expenditure requirements, as well as meet our
financial commitments for the next 12 months. This, however, is dependent on the
continued availability of the sources of funding discussed below. See
"--Management Overview."
Due to the nature of our operations, 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.
CREDIT RATINGS
Debt ratings are an assessment by the rating agencies of the credit risk
associated with our company and are based on information provided by us or other
sources that the rating agencies consider reliable. Lower ratings generally
result in higher borrowing costs and reduced access to capital markets.
At December 31, 2001, our long-term ratings were A2 and AA- from Moody's
Investors Service and Standard & Poor's Rating Services, respectively. By
March 31, 2002, these ratings had been lowered to Baa2 and A, respectively. In
the fourth quarter of 2002, there were further rating downgrades, and, at
December 31, 2002, our long-term company ratings were Ba3 and BBB- (our
long-term unsecured debt was rated B1 and BB+) from Moody's and Standard &
Poor's, respectively. On January 13, 2003, Standard & Poor's further lowered our
long-term rating to BB+ and our unsecured long-term debt to BB-. The Moody's
ratings have remained unchanged since December 31, 2002.
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COMMERCIAL PAPER
We significantly relied on the commercial paper market in 2001 and 2000. At
December 31, 2001, our outstanding commercial paper balance amounted to
$3,297 million (representing 34% of total borrowings). The downgrades of our
ratings in 2002, combined with the increased negative sentiment of investors
towards corporate borrowers in the commercial paper market, and the
uncertainties related to the asbestos issue (see "--Contingencies and Retained
Liabilities"), meant that it was increasingly difficult for us to rely upon the
commercial paper markets. During the first three months of 2002, the commercial
paper market largely diminished as a funding source and we drew on our credit
facility (discussed under "--Credit Facilities") to ensure that we would be able
to satisfy our commercial paper obligations maturing mainly during the first
half of 2002. At December 31, 2002, the outstanding commercial paper balance
amounted to $478 million (representing 6% of total borrowings) and matured and
was repaid during the first four months of 2003.
INTEREST RATES
We have obtained financing in a range of currencies and maturities and on
various interest rate terms. We use derivatives to reduce the exposures created
by such debt issuances. For example, to reduce our exposure to interest rates,
we use interest rate swaps to effectively convert fixed rate borrowings into
floating rate liabilities and we use cross currency swaps to effectively convert
foreign currency denominated bonds into U.S. dollar liabilities. After
considering the effects of interest rate swaps, the effective average interest
rate on our floating rate long-term borrowings (including current maturities) of
$5,252 million and our fixed rate long-term borrowings (including current
maturities) of $1,035 million was 3.0% and 5.0%, respectively. This compares
with an effective rate of 2.7% for floating rate long-term borrowings and 5.3%
for fixed-rate long-term borrowings as of December 31, 2001. A discussion of our
use of derivatives to modify the characteristics of our long-term borrowings is
contained in Note 14 to our Consolidated Financial Statements and in "Item 11.
Quantitative and Qualitative Disclosures about Market Risk--Interest Rate Risk."
CONVERTIBLE BONDS AND NOTES
In 2002, we had several note issuances, including the issuance of bonds
convertible into our shares, as sources of funding.
In May 2002, we issued $968 million aggregate principal amount of
convertible unsubordinated bonds due 2007. The bonds pay interest semi-annually
in arrears at a fixed annual rate of 4.625% and each $1,000 principal amount of
bonds is convertible into 87.7489 fully paid ABB ordinary shares at an initial
conversion price of 18.48 Swiss francs (converted into U.S. dollars at a fixed
conversion rate of 1.6216 Swiss francs per U.S. dollar). The conversion price is
subject to adjustment provisions to protect against dilution or change in
control. The bonds are convertible at the option of the bondholder at any time
from June 26, 2002 up to and including May 2, 2007. We may, at any time on or
after May 16, 2005, redeem the outstanding bonds at par plus accrued interest if
(1) for a certain number of days during a specified period of time, the official
closing price of ABB shares on virt-x exceeds 130% of the conversion price or
(2) at least 85% in aggregate principal amount of bonds originally issued have
been exchanged, redeemed or purchased and cancelled. We have the option to
redeem the bonds when due, in cash, ordinary shares or any combination thereof,
provided that the total number of ordinary shares used does not exceed
84,940,935, subject to certain amendments as defined in the terms and conditions
of the bonds.
Also in May 2002, we issued L200 million (approximately $292 million)
aggregate principal amount of bonds due 2009, which pay interest semi-annually
in arrears at 10% per annum. We also issued in May 2002 E500 million
(approximately $466 million) aggregate principal amount of bonds due 2008, which
pay interest annually in arrears at 9.5% per annum.
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The sterling-denominated bonds and the euro-denominated bonds contain
certain clauses linking the interest paid on the bonds to the credit rating
assigned to the bonds. If the rating assigned to these bonds by both Moody's and
Standard & Poor's remains at or above Baa3 and BBB-, respectively, then the
interest rate on the bonds remains at the level at issuance, that is 10% and
9.5%, for the sterling-denominated and euro-denominated bonds, respectively. If
the rating assigned by either Moody's or Standard & Poor's decreases below Baa3
or BBB-, respectively, then the annual interest rate on the bonds increases by
1.5% per annum to 11.5% and 11%, for the sterling-denominated and
euro-denominated bonds, respectively. If after such a rating decrease, the
rating assigned by both Moody's and Standard & Poor's returns to a level at or
above Baa3 and BBB-, respectively, then the interest rates on the bonds return
to their original levels. As a result of the downgrade of our long-term credit
rating by Moody's to Ba2 on October 31, 2002, this step-up clause in interest
was triggered on both bonds. The increase in interest costs is effective for
interest periods beginning after the payment of the coupon accruing at the date
of the downgrade. This increase in interest rates had no significant impact on
2002 interest expense but will affect our interest costs in 2003 and future
years if our credit ratings do not return to at least both Baa3 and BBB- from
Moody's and Standard & Poor's, respectively.
A cross currency swap has been used to modify the characteristics of the
sterling-denominated bonds and an interest rate swap to modify the
euro-denominated bonds. After considering the impact of the cross currency and
interest rate swaps, the sterling-denominated bonds effectively became a
floating rate U.S. dollar obligation, while the euro-denominated bonds became a
floating rate euro obligation. In both cases, the floating rate resets every
three months. See Note 14 to our Consolidated Financial Statements.
Almost all of our publicly traded bonds contain cross-default clauses which
would allow the bondholders to demand repayment if we were to default on certain
borrowings at or above a specified threshold amount.
CREDIT FACILITIES
As a result of our difficulty in accessing the commercial paper market, we
drew $2,845 million of the $3,000 million 364-day revolving credit facility put
in place in December 2001 to support our commercial paper issuance and for
general corporate purposes. However, the facility contained a clause whereby if
our long-term debt rating fell below either A3 or A- from Moody's and
Standard & Poor's, respectively, the terms of the facility were to be
renegotiated. On March 25, 2002, Moody's downgraded our long-term debt to Baa2,
thereby triggering the minimum rating clause in the facility and requiring the
facility to be renegotiated. In April 2002, we amended the credit facility to
remove the terms requiring renegotiation of the facility if our ratings fell
below specified levels and to introduce certain covenants.
Pursuant to the terms of the amended $3,000 million revolving credit
facility, the proceeds from the issuance of the convertible bonds, the
sterling-denominated bonds and the euro-denominated bonds discussed above were
used to repay and reduce the amount available under the facility to
$1,315 million at June 30, 2002. In accordance with the terms of the facility,
the proceeds from the sale/leaseback of real estate located in Sweden, announced
in the second quarter of 2002, were also used to repay and further reduce the
amount available and outstanding under the facility to $1,000 million by
September 30, 2002. This amount was repaid in December 2002 and the facility
closed.
In December 2002, we established a new $1.5 billion 364-day revolving credit
facility. The facility was amended in June 2003. The facility includes a 364-day
term-out option whereby up to a maximum amount of $750 million (less half of the
proceeds from the issuance of certain long-term debt instruments) may be
extended for up to a further 364 days in the form of term loans. The
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amount and availability of the term-out option are subject to certain
conditions, including our ability to demonstrate through a business plan, at the
time of exercising the option, that including the proceeds of the term-out
option, we will have at least $300 million of available cash (as defined in the
facility agreement) throughout 2004. Additionally, our senior management must
certify that our independent auditors will accept the assumptions underlying the
business plan in the context of their audit work for the financial year which
commenced on January 1, 2003. Assuming the term-out option is fully drawn in the
amount of $750 million, the amounts converted into term loans will be reduced by
$150 million on July 1, 2004, $250 million on October 1, 2004, and $350 million
on December 15, 2004, being the final maturity date of the facility.
As of December 31, 2002, no amounts had been drawn under this new facility.
Subsequent to the year-end 2002, amounts have been drawn under the facility
within the facility's monthly drawing limits. During the fourth quarter of 2003,
the maximum amount available under the facility will reduce in steps from
$1,500 million to $1,000 million at the beginning of December 2003.
The amount available under the facility will be further reduced by all, or a
portion, of the net proceeds from the disposal of certain significant businesses
and assets (including a specified amount of the proceeds from the sale of our
Oil, Gas and Petrochemicals business) and by the proceeds from specified debt
financing. The agreement provides that proceeds from specified disposals will
not reduce the amount available under the facility until such proceeds exceed
certain thresholds. Amounts available under the facility will also be reduced by
the proceeds from the issuance of certain long-term debt, equity or
equity-linked instruments.
The amounts drawn under the credit facility are guaranteed by ABB Ltd and by
a number of our European and U.S. subsidiaries (subject to certain
jurisdictional limits). The new facility is secured by a package of assets with
a net carrying value of $3,500 million, including the shares of the Oil, Gas and
Petrochemicals division (which is earmarked for divestment and is included in
assets and liabilities in discontinued operations), specific stand-alone
businesses and certain regional holding companies. The facility is also secured
by certain intra-group loans.
The facility also contains certain financial covenants in respect of minimum
interest coverage (EBITDA to gross interest expense), total gross debt, a
maximum level of debt in subsidiaries other than those specified as borrowers
under the facility, a minimum level of consolidated net worth during 2003, as
well as specific negative pledges. We must meet the requirements of the
financial covenants at each quarter-end commencing December 31, 2002. In
addition, in order to ensure the continued availability of the credit facility,
we must obtain minimum levels of proceeds from the disposal of specified assets
and businesses and/or equity issuances during 2003. Our compliance with this
covenant is measured at intervals during 2003. In the event that, at any
measurement date, our proceeds from the scheduled disposals and/or equity
issuances are less than the required amount, we may elect to include for the
purposes of the covenant calculation the proceeds from other defined
discretionary sources. The extent to which these other discretionary sources of
proceeds may be included in the calculation is capped by the facility. As of
March 31, 2003, the last measurement date, we were in compliance with such
financial covenants.
The facility prohibits the voluntary prepayment of any other banking
facility, the prepayment or early redemption of any bonds or capital market
instruments, the repurchase of any shares of ABB and the declaration or payment
of dividends by ABB Ltd as long as the facility is outstanding.
SECURITIZATION PROGRAMS
In addition to the aforementioned primary sources of liquidity and capital
resources, we also sell certain trade receivables to Qualifying Special Purpose
Entities ("QSPEs"), unrelated to us, primarily through two revolving-period
securitization programs. Under the two securitization programs, neither QSPE
commits to purchase our trade receivables, and the QSPEs may at any
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time refuse to continue purchasing our trade receivables. If both QSPEs
simultaneously refuse to purchase additional receivables, then we would
experience a temporary loss of cash flow from the sale of trade receivables over
a period of several weeks until new trade receivables generated by us began to
convert to cash in the normal course of our business.
Solely for the purpose of credit enhancement from the perspective of the
QSPEs, we retain an interest in the sold receivables. Pursuant to the
requirements of the revolving-period securitizations, we effectively bear the
risk of potential delinquency or default associated with trade receivables sold
or interests retained. The fair value of the retained interests at December 31,
2002 and 2001 was approximately $497 million and $264 million, respectively.
We retain servicing responsibility relating to the sold receivables. Cash
settlement with the QSPEs in 2001 and through the third quarter of 2002 took
place monthly on a net basis which gave us daily access to the cash moving
through the securitization programs.
One of the securitization programs contained a credit rating trigger whereby
if our company rating went below both BBB (Standard & Poor's) and Baa2
(Moody's), the benefits of keeping collection proceeds from customers between
two settlements would be reduced. The second securitization program also
contained a credit rating trigger and similar consequences but the rating
trigger point occurred when our company rating went below either BBB
(Standard & Poor's) or Baa2 (Moody's).
In the case of the first program, the credit rating trigger was tripped in
early November 2002. In November 2002, a number of structural changes to the
program were agreed and implemented for credit enhancement purposes. These
changes included twice-monthly settlements, the sale of additional receivables
as security, changes in the eligibility criteria for receivables to be sold and
the establishment of certain banking and collection procedures in respect of the
sold receivables.
In the case of the second securitization program, the credit rating trigger
was tripped in October 2002. Changes to the program were made and included net
cash settlement twice per month and daily transfers of collections of sold
receivables, as well as a fixed percentage of retained interest on the sale of
new receivables. Subsequent to 2002, further amendments to the program have been
agreed and implemented, including the return to a dynamic calculation of the
retained interest on the receivables sold rather than a fixed percentage. In
addition, under the amended terms, if our company rating is below BB+
(Standard & Poor's) or Ba3 (Moody's), then the QSPE would have the right to
require that collection of the sold receivables be made directly to the accounts
of the QSPE rather than via our company.
As discussed above, we retain an interest in the sold receivables. Retained
interests at December 31, 2002 and 2001 amounted to $514 million and
$269 million, respectively. Pursuant to the terms of the securitization
programs, receivables more than 90 days overdue are considered delinquent. An
increase in delinquency rates compared to historic levels will cause an increase
in the retained interest. Ultimately, if the customer defaults, we will be
responsible for absorbing the amount. Historically, these default amounts have
not been significant. The increase in the retained interest during 2002 was
primarily a result of required changes in the programs discussed above. The
creditworthiness of the underlying sold receivables, as measured by late
payments and failures to pay by our customers, did not decline significantly
during 2002.
The net cash paid to QSPEs during 2002 was $384 million, while in 2001, the
net cash received from QSPEs was $86 million. The sale of additional receivables
as security, the increased frequency of transfers of collections to the QSPEs
and the increase in the retained interest required by the QSPEs all contributed
to the cash flows with the QSPEs representing a net cash outflow for the year
2002 rather than a net cash inflow as in 2001.
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The total cost of $37 million and $33 million in 2002 and 2001,
respectively, related to the securitization of trade receivables, is included in
the determination of current earnings.
At December 31, 2002 and 2001, of the gross trade receivables sold, the
total trade receivables for which cash has not been collected at those dates
amounted to $1,026 million and $1,058 million, respectively.
For a further discussion of our securitization programs, see Note 2 and
Note 7 to our Consolidated Financial Statements.
RESTRICTIONS ON TRANSFER OF FUNDS
We face restrictions on the transfer of funds in various countries due to
local regulations and foreign exchange restrictions. Funds, other than regular
dividends, fees or loan repayments, cannot be transferred offshore from these
countries and are deposited locally. As a consequence, these funds are not
available within our treasury system to meet short-term cash obligations.
These restricted funds are reported as cash on our Consolidated Balance
Sheet, but we do not consider these funds in our calculation of the available
cash position for the Group. As a result of these restrictions on the transfer
of funds, as of March 31, 2003, approximately $450 million of our cash was not
immediately accessible for Group financing and debt repayment purposes.
Currency and other local regulatory restrictions exist in the following
countries where the ABB Group operates: Brazil, China, Egypt, India, Korea,
Malaysia, Norway, Russia, South Africa, Thailand and Turkey.
FINANCIAL POSITION
BALANCE SHEET
During 2002, the divestments and discontinuations of certain businesses were
treated as discontinued operations pursuant to SFAS 144, as discussed in detail
under "Accounting for Discontinued Operations" above. Accordingly, the balance
sheet data for all periods presented have been restated to present the financial
position and results of operations of the businesses meeting the criteria of
SFAS 144 as assets and liabilities in discontinued operations. In the Statement
of Cash Flows, the effects of the discontinued operations are not segregated, as
permitted by Statement of Financial Accounting Standards No.95, STATEMENT OF
CASH FLOWS.
Our operating assets, excluding cash and equivalents and assets in
discontinued operations, increased by $76 million to $14,382 million at
December 31, 2002, from $14,306 million at December 31, 2001. Operating assets
include marketable securities, receivables, inventories and prepaid expenses.
The increase reflected a $483 million increase in receivables, a $573 million
increase in prepaid expenses and other, including a $384 million increase in the
fair value of derivatives, as required by SFAS 133 (which requires derivative
assets and liabilities to be reported on the balance sheet). The increase also
reflects the impact of translating balance sheet amounts from local currencies
to U.S. dollars for reporting purposes. These increases were offset by a
decrease in marketable securities of $789 million driven by the cessation of our
reinsurance business and the sale of the portfolio of marketable securities held
by the Treasury Centers business area in connection with the discontinuation of
its proprietary trading activities. In addition, inventories, net decreased by
$191 million.
Current operating liabilities, excluding liabilities in discontinued
operations, include accounts payable, short-term borrowings including current
maturities of long-term borrowings, accrued liabilities and insurance reserves
(which form part of the normal operations of our insurance business), among
other items. Current operating liabilities decreased by $794 million to
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$16,030 million at December 31, 2002 from $16,824 million at December 31, 2001,
reflecting our strategy to reduce our overall debt position and lengthen our
maturity profile. The decrease was largely driven by the reduction of short-term
borrowings by $2,125 million. Offsetting this decrease in part was the
$1,219 million increase in accrued liabilities and other, mainly due to the
reclassification of $806 million from other liabilities in 2002, as well as an
additional provision in 2002 and a $310 million increase in the fair value of
derivatives, as required by SFAS 133.
Financing receivables, which includes receivables from leases and loans
receivable, decreased by $284 million to $1,802 million at December 31, 2002
from $2,086 million at December 31, 2001. The decrease was principally due to
the reduced lending activities in the Treasury Centers business area during
2002.
Investments and other assets decreased by $129 million to $1,515 million at
December 31, 2002 from $1,644 million at December 31, 2001. The decrease was due
to a reduction of securities contributed to the Swedish pension fund, which was
partially offset by the increase from improved returns on investments in
projects with ABB equity participation, particularly with respect to our
investment in Swedish Export Credit Corporation.
Property, plant and equipment increased nominally by $39 million to
$2,792 million at December 31, 2002 from $2,753 million at December 31, 2001.
Reductions in property, plant and equipment from the sale of real estate
properties and normal levels of depreciation and disposition of non-core
property, plant and equipment were more than offset, primarily by the effect of
translating balance sheet amounts into U.S. dollars.
Intangible assets increased nominally by $137 million to $2,912 million at
December 31, 2002 from $2,775 million at December 31, 2001, mainly due to the
translation of balance sheet items into U.S. dollars. In accordance with
SFAS 142, goodwill is no longer amortized as of January 1, 2002.
Our net debt position (defined as total debt minus cash and equivalents and
marketable securities), excluding assets and liabilities in discontinued
operations, amounted to $3,339 million at December 31, 2002, compared to
$4,338 million at December 31, 2001. This decrease was due to the planned
reduction of our borrowings through the sale of non-core businesses,
particularly, the sale of the Structured Finance and Metering businesses, as
well as the sale of real estate. Not all of our cash and marketable securities
are freely available to offset our total debt, as described in "--Restrictions
on Transfer of Funds."
Total borrowings decreased by $1,752 million to $7,952 million at
December 31, 2002 from $9,704 million at December 31, 2001. Short-term
borrowings, including current maturities of long-term debt, decreased by
$2,125 million, or 45%, to $2,576 million outstanding at December 31, 2002 from
$4,701 million outstanding at December 31, 2001. Long-term borrowings increased
by $373 million, or 7%, to $5,376 million at December 31, 2002 from
$5,003 million at December 31, 2001. The increase in 2002 mainly reflected the
impact of translating balance sheet amounts from local currencies to U.S.
dollars for reporting purposes. This increase was partly offset by $215 million
relating to our convertible bonds issued during 2002. The shares of ABB Ltd that
will be issued if the bonds are converted are denominated in Swiss francs, while
the bonds are denominated in U.S. dollars. Under SFAS 133, and as clarified in
discussions with the Securities and Exchange Commission, a component of the
bonds must be accounted for as a derivative. A portion of the issuance proceeds
is deemed to relate to the value of the derivative upon issuance and subsequent
changes in value of the derivative are recorded through earnings and as an
adjustment to the carrying value of the bond. This allocation of a portion of
the proceeds to the derivative creates a discount on issuance, which is
amortized to earnings over the life of the bond. The value of the derivative
moves inversely to movements in our share price. As a result of the decline on
our share price since the issuance of the bonds in May 2002, we have recorded a
gain in 2002 from the change in fair value of the derivative, partially offset
by amortization of the
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effective discount, resulting in a net decrease to interest and other finance
expense of $215 million, with a corresponding reduction in long-term borrowings.
If in 2003 our share price increases compared to the level at December 31, 2002,
this will result in an increase in interest and finance expense and a
corresponding increase in the carrying value of the bonds in 2003. Long-term
debt at December 31, 2002 as a percentage of total debt was 68% compared to 52%
at December 31, 2001.
CASH FLOW
The consolidated statement of cash flows can be summarized into main
activities as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
($ IN MILLIONS)
Net income (loss), net of adjustments for non-cash items.... (399) 1,228 883
Changes in net operating assets............................. 418 755 (136)
SUB-TOTAL: CASH FLOWS PROVIDED BY OPERATIONS................ 19 1,983 747
Acquisitions, investments, divestitures, net................ 2,365 (295) 606
Asset purchases, net of disposals........................... (126) (609) (315)
Other investing activities.................................. 412 (314) (780)
SUB-TOTAL: CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................................ 2,651 (1,218) (489)
Change in borrowings with maturities of 90 days or less..... (1,677) (69) 609
Other borrowings, net of repayments......................... (1,138) 2,708 (653)
Treasury and capital stock transactions..................... 0 (1,393) 244
Other financing activities.................................. 3 (569) (592)
SUB-TOTAL: CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................................ (2,812) 677 (392)
Effects of exchange rate changes............................ 141 (72) (84)
Increase (decrease) in cash................................. (1) 1,370 (218)
CASH FLOW FROM OPERATING ACTIVITIES
Net cash provided by operating activities in 2002 decreased by
$1,964 million to $19 million from $1,983 million in 2001. During 2002, the net
loss, net of adjustments for non-cash items, was $399 million, as compared to a
net income, net of such adjustments, of $1,228 million in 2001, representing a
decrease of $1,627 million in 2002. This decrease was primarily driven by
reduced non-cash earnings in non-core businesses and discontinued operations. In
addition, increased cash payments towards restructuring expenses of
$129 million and an increase of $119 million in payments related to asbestos
litigation also contributed to this decrease. Net operating assets include
marketable securities held for trading purposes, trade receivables, inventories,
payables and other assets and liabilities. Debt and equity securities that are
bought and held principally for the purpose of sale in the near term are
classified as trading securities. Marketable securities classified as
available-for-sale are treated as part of investing activities. Net cash
provided by net operating assets decreased by $337 million to $418 million in
2002 from $755 million in 2001. This decrease in other assets and liabilities,
net, was primarily related to a net cash outflow of $384 million under the
securitization programs, a reduction of $285 million in the total volume of
advances from customers and an increase of $278 million in unbilled receivables
and contract inventories which exceeded the level experienced in 2001. In
addition, the decrease from trade payables of $657 million resulted from the
timing of payments in 2002 as compared to 2001. Offsetting this decrease in part
was $498 million in net cash proceeds from the sale of marketable securities
(trading) due to the cessation of proprietary trading activities in Treasury
Centers business area and a reduction in other trade receivables of
$627 million and inventories of $367 million, primarily resulting from our
continued focus on reducing our working capital levels.
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Net cash provided by operating activities in 2001 increased by
$1,236 million to $1,983 million from $747 million in 2000. Net income, net of
adjustments for non-cash items, increased by $345 million in 2001, from
$883 million in 2000 to $1,228 million in 2001. This was further supported by
the decrease in net operating assets of $755 million in 2001, as compared to the
increase in net operating assets of $136 million in 2000. The increase in net
cash provided by operating activities in 2001 was primarily due to the increase
in trade payables and non-trade payables.
CASH FLOW FROM INVESTING ACTIVITIES
Investing activities include: acquisitions of, investments in and
divestitures of businesses; purchases of property, plant and equipment, net of
disposals; net investments in marketable securities that are not held for
trading purposes; and accounts receivable from leases and third-party loans
(financing receivables). Net investments in available-for-sale marketable
securities and financing receivables are summarized in the table above as "other
investing activities." Net cash provided by investing activities increased by
$3,869 million to $2,651 million in 2002 from net cash used in investing
activities of $1,218 million in 2001.
Net cash flow resulting from purchases of, investments in, and divestitures
of businesses increased to $2,365 million provided in 2002 from $295 million
used in 2001. In 2002, cash used for acquisitions of new businesses totaled
$144 million compared to $578 million in 2001. These cash outflows in 2002 were
more than offset by disposals of businesses for an amount of $2,509 million.
Major disposals during 2002 included the sale of our Air Handling, Structured
Finance and Metering businesses.
Cash used for purchases of property, plant and equipment, net of disposals,
decreased by $483 million to $126 million in 2002 from $609 million in 2001.
This decrease resulted from increased proceeds from the disposal of property,
plant and equipment.
Cash provided by other investing activities increased to $412 million in
2002, as compared to $314 million used in 2001. This increase primarily resulted
from a substantial reduction in investments in financing receivables,
particularly from the reduced lending activities in the Treasury Centers
business area due to the cessation of proprietary trading activities. The
increase was offset in part by a decrease in net cash flow from the purchase and
sale of marketable securities that are not held for trading purposes, from
$593 million in 2001 to $148 million in 2002.
Net cash used in investing activities increased to $1,218 million in 2001
from $489 million in 2000. Net cash flow resulting from purchases of,
investments in, and divestitures of businesses decreased to $295 million used in
2001 from $606 million provided in 2000. In 2001, cash used for acquisitions of
new businesses totaled $578 million (including $284 million, related to the
acquisition of Entrelec). These cash outflows were only partially offset by cash
proceeds from disposals of businesses for an amount of $283 million. In 2000,
cash used for acquisitions totaling $893 million was more than offset by cash
from sale of businesses, which amounted to $1,499 million and primarily related
to the divestiture of our remaining interest in ABB ALSTOM POWER joint venture
and the nuclear technology business.
CASH FLOW FROM FINANCING ACTIVITIES
Our financing activities primarily include net borrowings, both from the
issuance of debt securities and directly from banks, treasury and capital stock
transactions and payment of dividends. Net cash used in financing activities
increased by $3,489 million to $2,812 million from $677 million provided in
2001. Cash used in total borrowings, net, increased by $5,454 million to
$2,815 million in 2002, as compared to $2,639 million provided in 2001. Cash
used in long-term borrowings increased by $3,846 million to $1,138 million in
2002 from $2,708 million provided in
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2001. In addition, cash used in borrowings with maturities of 90 days or less
increased by $1,608 million to $1,677 million in 2002 from $69 million cash used
in 2001. These are in line with our strategy to reduce our overall debt and
lengthen our debt maturity profile. There were no treasury and capital stock
transactions and dividends payouts in 2002, compared to $1,393 million used in
treasury and capital stock transactions and $502 million used in dividend
payouts during 2001.
Net cash provided by financing activities increased by $1,069 million to
$677 million provided in 2001, as compared to $392 million used in 2000. Cash
provided by long term borrowings, net of repayments, increased by
$3,361 million to $2,708 million provided in 2001, as compared to $653 million
repaid in 2000. This was partially offset by a decrease of $678 million in cash
flow from borrowings with maturities of 90 days or less from $609 million cash
provided in 2000 to $69 million of cash used in 2001. Our level of borrowings
increased significantly during the first nine months of 2001 mainly due to the
financing of the repurchase of our own shares, as well as a higher level of
activity in project financing. Toward year-end 2001, we decreased our borrowings
significantly through a strong increase in our cash from operations. During
2001, we used $1,393 million of cash for the purchase of our shares for
treasury, offset by proceeds from the sale of options to purchase our shares. In
April 2001, we paid dividends of $502 million, as compared to $531 million with
respect to 2000.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations and principal
payments under our debt instruments, leases and certain other agreements as of
December 31, 2002:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN AFTER
TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
-------- --------- --------- --------- --------
($ IN MILLIONS)
Long-term debt obligations.................... 7,040 1,664 2,348 1,359 1,669
Commercial paper obligations.................. 478 478 -- -- --
Other short-term debt obligations............. 434 434 -- -- --
Operating lease obligations................... 1,754 329 482 326 617
COMMERCIAL COMMITMENTS
All guarantees issued before January 1, 2003 are accounted for in accordance
with Statement of Financial Accounting Standards No. 5 ("SFAS 5"), ACCOUNTING
FOR CONTINGENCIES. Provisions are recorded in the Consolidated Financial
Statements at the time it becomes probable we will incur losses pursuant to a
guarantee.
In November 2002, the Financial Accounting Standards Board issued FIN 45,
the disclosure requirements of which are effective for financial statements
relating to periods ending after December 15, 2002. FIN 45 requires that 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" as
defined by FIN 45 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.
Certain guarantees issued or modified after December 31, 2002 will be
accounted for in accordance with FIN 45. Upon issuance of certain guarantees, a
liability, equal to the fair value of
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the guarantee, will be recorded. For further discussion of FIN 45, see "--New
Accounting Pronouncements."
Performance guarantees represent obligations where we guarantee the
performance of a third party's product or service according to the terms of the
contract. Such guarantees may include guarantees that a project will be
completed within a specified time. If the third party does not fulfill the
obligation, we will compensate the guaranteed party in cash or in kind.
Performance guarantees include surety bonds, advance payment guarantees and
performance standby letters of credit.
COMMITMENTS RELATING TO DISPOSED BUSINESSES
We retained obligations for guarantees related to the power generation
business contributed to the ABB ALSTOM POWER joint venture. The guarantees
primarily consist of performance guarantees, advance payment guarantees, product
warranty guarantees and other miscellaneous guarantees under certain contracts
such as indemnification for personal and property injuries, taxes and compliance
with labor laws, environmental laws and patents. The guarantees have maturity
dates ranging from one to ten years and in some cases have no definite expiry.
ALSTOM and its subsidiaries have primary responsibility for performing the
obligations that are the subject of the guarantees. In connection with the sale
to ALSTOM of our interest in the joint venture in May 2000, ALSTOM, the parent
company, and ALSTOM POWER have undertaken jointly and severally to fully
indemnify us and hold us harmless against any claims arising under such
guarantees. Due to the nature of product warranty guarantees and the
miscellaneous guarantees, we are unable to develop an estimate of the maximum
potential amount of future payments for these guarantees issued on behalf of the
former power generation business. Our best estimate of the total maximum
potential exposure of all quantifiable guarantees we issued on behalf of our
former Power Generation business was approximately $2,200 million as of
December 31, 2002. The maximum potential exposure is based on the original
guarantee or contract amount and does not reflect the completion status of the
project. As of December 31, 2002, no losses have been recognized relating to
guarantees issued on behalf of the former power generation business. We believe
that it is not probable that we will incur a loss under these guarantees and
therefore, in accordance with SFAS 5, a provision has not been recorded as of
December 31, 2002.
In connection with the sale of our nuclear technology business to BNFL in
2000, one of our subsidiaries retained obligations under surety bonds relating
to the performance by the nuclear technology business under certain contracts
entered into prior to the sale to BNFL. The surety bonds have maturity dates
ranging from one to nine years. Pursuant to the purchase agreement under which
the nuclear technology business was sold, BNFL is required to indemnify us and
hold us harmless against any claims arising under such bonds. Our maximum
potential exposure under these bonds at December 31, 2002 was approximately
$640 million. The maximum potential exposure is based on the original guarantee
or contract amount and does not reflect the completion status of the project. As
of December 31, 2002, no losses have been recognized relating to the surety
bonds. We believe that it is not probable that we will incur a loss under these
guarantees and therefore, in accordance with SFAS 5, a provision has not been
recorded as of December 31, 2002.
In connection with the sale of most of our Structured Finance business to GE
Capital in November 2002, we provided to GE Capital several cash-collateralized
letters of credit for a total amount of $202 million as security for certain
performance-related obligations we retained in connection with the sale.
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COMMITMENTS RELATING TO OUR REMAINING STRUCTURED FINANCE BUSINESS
In the course of its commercial lending activities, our remaining Structured
Finance business has guaranteed the obligations of certain third parties in
return for a commission. These financial guarantees represent irrevocable
assurances that we will make payment in the event that the third party fails to
fulfill its obligations under the relevant loan agreement and the beneficiary
under the guarantee records a loss under the terms of the guarantee agreement.
We generally benefit from the collateral and security arrangements under the
guaranteed loan. We recognize the commissions collected as income over the life
of the guarantee and we record a provision when we become aware of an event of
default or a potential event of default occurs.
At December 31, 2002, we had issued approximately $207 million of financial
guarantees with maturity dates ranging from one to eighteen years. The issued
guarantees have the same maturity dates as the related debt. The maximum
potential amount of future payments we could be required to make under such
guarantees at December 31, 2002 is $207 million, of which $8 million is included
in Other liabilities in our Consolidated Balance Sheet at December 31, 2002. We
do not expect to incur significant losses under these contracts.
Also in the normal course of its commercial lending activities, our
remaining Structured Finance business has outstanding credit commitments, which
have not yet been drawn down by customers. The unused amount at December 31,
2002 was $41 million.
OTHER COMMITMENTS
At December 31, 2002, we had $211 million of financial guarantees
outstanding that were unrelated to the remaining Structured Finance business. Of
that amount, $206 million were issued on behalf of companies in which we
currently have or formerly had an equity position. The guarantees have maturity
dates ranging from one to fourteen years. We believe that it is not probable
that we will incur a loss under these guarantees and therefore, in accordance
with SFAS 5, a provision has not been recorded as of December 31, 2002.
On behalf of companies in which we have an equity position, we have granted
lines of credit and have committed to provide additional capital. At
December 31, 2002, the total unused lines of credit amounted to $22 million and
the capital commitments amounted to $64 million.
GUARANTEES RELATING TO ABB PERFORMANCE
In accordance with industry practice we also issue letters of credit, surety
bonds and other performance guarantees on major projects, including long-term
operation and maintenance contracts, which guarantee our own performance. Such
guarantees may include guarantees that a project will be completed or that a
project or particular equipment will achieve defined performance criteria. If we
fail to attain the defined criteria, we must make payments in cash or in kind.
We record provisions in the Consolidated Financial Statements at the time it
becomes probable that we will incur losses pursuant to a performance guarantee.
We do not expect to incur significant losses under these guarantees in excess of
our provisions. However, such losses, if incurred, could have a material impact
on our consolidated financial position, liquidity or results of operations.
When we guarantee our own performance, some customers will require that the
guarantee be issued by a financial institution. If we cannot obtain the
guarantee from a financial institution, we could be prevented from bidding on or
obtaining the contract. Financial institutions will consider our credit ratings
in the guarantee approval process. Our current credit rating does not prevent us
from obtaining guarantees from financial institutions, but can make the process
more difficult or expensive. If we cannot obtain guarantees from financial
institutions in the future, there could be a material impact on our consolidated
financial position, liquidity or results of operations.
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RELATED AND CERTAIN OTHER PARTIES
We have participations in joint ventures and affiliated companies, which are
accounted for using the equity method. Many of these entities have been
established to perform specific functions, such as constructing, operating and
maintaining a power plant. In addition to our investment, we may provide
products to the project, may act as contractor of the project and may operate
the finished product. We may also grant lines of credit to these entities and
guarantee their obligations, as discussed under "--Contractual Obligations and
Commercial Commitments--Commercial Commitments." The entity created generally
would receive revenues either from the sale of the final product or from selling
the output generated by the product. The revenue usually is defined by a
long-term contract with the end user of the output.
Our risk with respect to these entities is substantially limited to the
carrying value of the companies on our Consolidated Balance Sheet. The carrying
value for the equity accounted companies at December 31, 2002 and 2001 was
$730 million and $615 million, respectively.
Our 2002 Consolidated Financial Statements include the following aggregate
amounts related to transactions with related and certain other parties:
($ IN MILLIONS)
Revenues.................................................... 77
Receivables................................................. 81
Other current assets........................................ 58
Financing receivable (non-current).......................... 110
Payables.................................................... 74
Borrowings (current)........................................ 40
Other current liabilities................................... 22
CAPITAL EXPENDITURES
We estimate that, as of December 31, 2002, less than $50 million was
committed for future capital expenditures for property, plant and equipment.
RESEARCH AND DEVELOPMENT
For a discussion of our research and development activities, see "Item 4.
Information on the Company--Research and Development."
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CONTINGENCIES AND RETAINED LIABILITIES
ENVIRONMENTAL
All of our operations, but particularly our manufacturing operations, are
subject to comprehensive environmental laws and regulations. Violations of these
laws could result in fines, injunctions (including orders to cease the violating
operations and to improve the condition of the environment in the affected area
or to pay for such improvements) or other penalties. In addition, environmental
permits are required for our manufacturing facilities (for example, with respect
to air emissions and wastewater discharges). In most countries in which we
operate, environmental permits must be renewed on a regular basis and we must
submit reports to environmental authorities. These permits may be revoked,
renewed or modified by the issuing authorities at their discretion and in
compliance with applicable laws. We have implemented formal environmental
management systems at nearly all of our manufacturing sites in accordance with
the international environmental management standard ISO 14001, and we believe
that we are in substantial compliance with environmental laws, regulations and
permits in the various jurisdictions in which we operate, except for such
instances of non-compliance that, in the aggregate, are not reasonably likely to
be material.
In a number of jurisdictions, including the United States, we may be liable
for environmental contamination at our present or former facilities or at other
sites where wastes generated from our present or former facilities were disposed
of. In the United States, the Environmental Protection Agency and various state
agencies are responsible for regulating environmental matters. These agencies
have identified various current and former U.S.-based ABB Group companies as
potentially responsible parties in respect of a number of such sites under the
Comprehensive Environmental Response, Compensation, and Liability Act, the
Resource Conservation and Recovery Act and other federal and state environmental
laws. As a potentially responsible party we may be liable for a share of the
costs associated with cleaning up these sites. As of December 31, 2002, there
were approximately 25 sites at which ABB Group companies have, or may be
potentially responsible for, environmental clean up costs. These 25 sites
include several of our current or former facilities where we have undertaken
voluntary corrective actions. The clean up of these sites involves primarily
soil and groundwater contamination. We do not believe that our aggregate
liability in connection with these sites will be material.
Generally, our liability with regard to any specific site will depend on the
number of potentially responsible parties, their relative contributions of
hazardous substances or wastes to the site and their financial viability, as
well as on the nature and extent of the contamination. Nevertheless, such laws
commonly impose liability that is strict, joint and several, so that any one
party may be liable for the entire cost of cleaning up a contaminated site.
In addition, we retained liability for certain specific environmental
remediation costs at two sites in the U.S. that were operated by our nuclear
business, which we sold to BNFL in 2000. Pursuant to the purchase agreement with
BNFL, we retained all of the environmental liabilities associated with our
Combustion Engineering subsidiary's Windsor, Connecticut facility and a portion
of the environmental liabilities associated with our ABB C-E Nuclear Power
subsidiary's Hematite, Missouri facility. The primary environmental liabilities
associated with these sites relate to the costs of remediating radiological and
chemical contamination at these facilities. Such costs are not payable until a
facility is taken out of use and generally are incurred over a number of years.
Although it is difficult to predict with accuracy the amount of time it may take
to remediate radiological contamination upon decommissioning, based on
information that BNFL has made publicly available, we believe that it may take
until 2013 to remediate the Hematite site. With respect to the Windsor site, we
believe the remediation may take until 2008. At the Windsor site, we believe
that a significant portion of such remediation costs will be the responsibility
of the U.S. government pursuant to the Atomic Energy Act and the Formerly Used
Site Environmental Remediation Action Program because such costs relate to
materials used by Combustion Engineering in its research and development work
on, and fabrication of, nuclear fuel for the United States Navy. As a result of
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the sale of the nuclear technology business in April 2000, we established a
reserve of $300 million in connection with estimated remediation costs related
to these facilities. Expenditures charged to the remediation reserve were
$12 million and $6 million during 2002 and 2001, respectively. In connection
with the pre-packaged Chapter 11 filing by Combustion Engineering discussed
below, we will retain all environmental liabilities associated with the Windsor
site.
Estimates of the future costs of environmental compliance and liabilities
are imprecise due to numerous uncertainties. Such costs are affected by the
enactment of new laws and regulations, the development and application of new
technologies, the identification of new sites for which we may have remediation
responsibility and the apportionment of remediation costs among, and the
financial viability of, responsible parties. In particular, the exact amount of
the responsibility of the U.S. government for the Windsor site cannot reasonably
be estimated. It is possible that final resolution of environmental matters may
require us to make expenditures in excess of our expectations, over an extended
period of time and in a range of amounts that cannot be reasonably estimated.
Although final resolution of such matters could have a material effect on our
consolidated results of operations in a particular reporting period in which the
expenditure is incurred, we believe that these expenditures should not have a
material adverse effect on our consolidated financial position.
PRODUCT AND ORDER RELATED CONTINGENCIES
In 1998, we entered into an engineering, procurement and project management
contract with a customer for a refinery in India with a contract value of
approximately $860 million. The project, which is subject to a reimbursable cost
agreement, is approximately 60% complete and has been stalled for the past few
years due to complications encountered by the customers in obtaining additional
necessary financing. As of December 31, 2002, we had accounts and notes
receivable of $68 million, sales in excess of invoicing of $159 million and
off-balance sheet exposure of $43 million relating to the project. The customer
and the banks involved have informed us that they are committed to restarting
this project and that they have submitted a refinancing plan to the Corporate
Debt Restructuring Committee (the "CDR"), established by the Indian government
to process debt restructuring on a fast track basis. The customer and the banks
have informed us that the plan is expected to be reviewed by the CDR in
July 2003 and that, assuming the plan is approved, they expect the project to be
restarted during the second half of 2003. We have recorded provisions of
$140 million, which we believe adequately provide for our exposure related to
this project. If the customer cannot obtain the required financing and the
project is not restarted, we will not be able to recover our remaining
investment in the project and will be subject to contingent liabilities to third
parties, resulting in a write-off for our remaining investment in 2003.
ASBESTOS CLAIMS
OVERVIEW
When we sold our 50% interest in the ABB ALSTOM POWER joint venture to
ALSTOM in May 2000, we retained ownership of Combustion Engineering, a
subsidiary that had conducted part of our discontinued power generation business
and that now owns commercial real estate that it leases to third parties.
Combustion Engineering is a co-defendant, together with other third parties, in
numerous lawsuits in the United States in which the plaintiffs claim damages for
personal injury arising from exposure to asbestos in equipment or materials that
Combustion Engineering allegedly supplied or was responsible for, primarily
during the early 1970s and before. Other ABB Group entities have sometimes been
named as defendants in asbestos claims. These entities include ABB Lummus
Global Inc. (which is part of our Oil, Gas and Petrochemicals business and was
formerly a subsidiary of Combustion Engineering) and Basic Incorporated (which
is currently a subsidiary of Asea Brown Boveri Inc. and was formerly a
subsidiary of Combustion Engineering). These claims, however, have been less
significant than the Combustion Engineering claims and have not had a material
impact on our Consolidated Balance Sheet or Consolidated Income Statement.
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Since 1989 through December 31, 2002, approximately 409,000 asbestos-related
claims have been filed against Combustion Engineering. As of December 31, 2002,
there were approximately 138,000 asbestos-related personal injury claims and
five asbestos-related property damage claims pending (2001: 94,000 and five,
respectively) against Combustion Engineering, which amount includes 81,269
claims that we have treated as settled (including those settled under the Master
Settlement Agreement described below) but under which there are continuing
payments (2001: 15,000). Approximately 79,000 new claims were made in 2002
(2001: 55,000) and approximately 34,500 claims were resolved in 2002 (2001:
27,000). As of December 31, 2002, there were approximately 10,900 claims pending
against Basic and Lummus. Additionally, at that date, there were 253 cases
(involving approximately 6,500 claims) against ABB entities other than
Combustion Engineering, Lummus and Basic.
As of December 31, 2002, 2001 and 2000, provisions of $1,118 million, $940
million and $590 million, respectively, were recorded on a consolidated basis in
respect of the ABB Group's asbestos claims and related defense costs. We
determined the amounts to be provided in 2001 and 2000 by estimating the
expected cost of future claim settlements over a period of several years. The
ultimate cost of asbestos claims is difficult to estimate with any degree of
certainty due to the nature and number of variables associated with these
claims. Some of the factors affecting the reliability of estimating the
potential cost of claims are the rate at which new claims are filed, the impact
of court rulings and legislative action, the extent of the claimants'
association with Combustion Engineering's or other defendants' products,
equipment or operations, the type and severity of the disease suffered by the
claimant, the method of resolution of such cases, the financial condition of
other defendants and the availability of insurance to recover the costs, until
the policy limits are exhausted. In 2002, the provision was based on our
obligations under Combustion Engineering's Chapter 11 plan of reorganization, as
described below, and assumed the confirmation and effectiveness of the
pre-packaged plan. These provisions do not reflect probable insurance recoveries
on those claims. We recorded receivables of approximately $241 million, $263
million and $251 million at December 31, 2002, 2001 and 2000, respectively, for
probable insurance recoveries, which were established with respect to asbestos
claims. During 2002 and 2001, Combustion Engineering experienced a significant
increase in the level of new claims and higher total and per-claim settlement
costs as compared to prior years. Cash payments, before insurance recoveries, to
resolve Combustion Engineering's asbestos claims were $236 million (including
$30 million contributed into the CE Settlement Trust described below),
$136 million and $125 million in 2002, 2001 and 2000, respectively.
Administration and defense costs were $32 million (including a significant
portion related to negotiations and preparations for the CE Settlement Trust and
the potential Combustion Engineering bankruptcy filing), $13 million and
$7 million in 2002, 2001 and 2000, respectively.
Our cash payments to resolve claims against entities other than Combustion
Engineering, Lummus and Basic have been immaterial to date, totalling less than
$250,000 in the aggregate. We have not maintained a reserve for the claims
pending against such entities. Of the claims outstanding as of December 31,
2002, approximately 2,250 were brought in Mississippi in 2002 in a single case
that names hundreds of co-defendants and makes no specific allegations of any
relationship between any ABB entity and the plaintiffs. Approximately 3,400 have
been brought in Ohio by claimants represented by a single law firm in cases that
typically name 50 to 60 co-defendants and do not allege any specific linkage
between the plaintiffs and any ABB entity. The remaining claims are pending in
various jurisdictions. We generally seek dismissals from claims where there is
no apparent linkage between the plaintiffs and any ABB entity. As these claims
are unrelated to Combustion Engineering, Lummus or Basic, they will not be
resolved pursuant to the pre-packaged bankruptcy plan of Combustion Engineering
described below. Our experience resolving these claims to date indicates that
they have not had a material impact on our financial condition, results of
operations or cash flows.
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NEGOTIATIONS WITH REPRESENTATIVES OF ASBESTOS CLAIMANTS AND PRE-PACKAGED CHAPTER
11 FILING
In October 2002, we and Combustion Engineering determined that it was likely
that the expected asbestos-related costs of Combustion Engineering would exceed
the value of its assets ($812 million at September 30, 2002 and $828 million at
December 31, 2002) if its historical settlement policies continued into the
future. At that time, we and Combustion Engineering were actively considering
various options for resolving Combustion Engineering's asbestos liabilities,
including the possible reorganization of Combustion Engineering under
Chapter 11 of the U.S. Bankruptcy Code. In that context, we believed that
estimating Combustion Engineering's asbestos liabilities based on historical
settlement practices was no longer appropriate. Subsequently, we and Combustion
Engineering determined to resolve the asbestos liability of Combustion
Engineering and its affiliates by reorganizing Combustion Engineering under
Chapter 11, the principal business reorganization chapter of the U.S. Bankruptcy
Code. We and Combustion Engineering determined to structure the Chapter 11
reorganization as a "pre-packaged plan," in which acceptances of the plan would
be solicited prior to the filing of the Chapter 11 case, thus reducing the
duration and expense of the bankruptcy proceedings.
Beginning in October 2002, we and Combustion Engineering conducted extensive
negotiations with representatives of certain asbestos claimants with respect to
a pre-packaged plan. On November 22, 2002, Combustion Engineering and the
asbestos claimants' representatives entered into a Master Settlement Agreement
for settling open asbestos-related personal injury claims that had been filed
against Combustion Engineering prior to November 15, 2002. Combustion
Engineering also agreed, pursuant to the Master Settlement Agreement, to form
and fund the CE Settlement Trust to fund and administer the payment of
asbestos-related personal injury claims settled under the Master Settlement
Agreement. Under the terms of the Master Settlement Agreement, eligible
claimants who met all criteria to qualify for payment were entitled to receive a
percentage of the value of their claim from the CE Settlement Trust and retain a
claim against Combustion Engineering for the unpaid balance. The Master
Settlement Agreement divides claims into three categories based on the status of
the claim at November 14, 2002, the status of the documentation relating to the
claim, and whether or not the documentation establishes a valid claim eligible
for settlement and payment by Combustion Engineering. The Master Settlement
Agreement was supplemented in January 2003 to clarify the rights of certain
claimants whose right to participate in a particular payment category was
disputed. The Master Settlement Agreement, as supplemented, settled
approximately 80,000 open asbestos-related personal injury claims that had been
lodged against Combustion Engineering.
Pursuant to the Master Settlement Agreement, the CE Settlement Trust was to
be funded by:
- cash contributions from Combustion Engineering in the amount of
$5 million at inception;
- cash contributions from ABB Inc., a subsidiary of ABB Ltd, in the amount
of $30 million by December 31, 2003;
- a promissory note from Combustion Engineering in the principal amount of
approximately $101 million (guaranteed by Asea Brown Boveri Inc.); and
- an assignment by Combustion Engineering of the $311 million unpaid balance
of principal and interest due to Combustion Engineering from Asea Brown
Boveri Inc. under a loan agreement dated May 12, 2000 (guaranteed by ABB
Ltd).
On January 17, 2003, we announced that we and Combustion Engineering had
reached an agreement on a proposed Pre-Packaged Plan of Reorganization for
Combustion Engineering under Chapter 11 of the U.S. Bankruptcy Code (the
"Plan"). The agreement was reached both with certain representatives of asbestos
claimants with existing asbestos-related personal injury claims against
Combustion Engineering (encompassing claimants who had lodged claims prior to
November 15, 2002 and claimants who had filed claims after that date and were
not eligible to participate in the
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Master Settlement Agreement) and with the proposed representative of persons who
may be entitled to bring asbestos-related personal injury claims in the future.
The Plan provides for the creation of an independent trust (the "Asbestos PI
Trust") which is separate and distinct from the CE Settlement Trust and
addresses "Asbestos PI Trust Claims," which consist of present and future
asbestos-related personal injury claims (including the claims previously settled
pursuant to the Master Settlement Agreement only to the extent of any unpaid
portions thereof) that arise directly or indirectly from any act, omission,
products or operations of Combustion Engineering, Lummus or Basic. If the Plan
is confirmed and ultimately becomes effective, a channelling injunction would be
issued under the U.S. Bankruptcy Code pursuant to which the Asbestos PI Trust
Claims against ABB Ltd and its affiliates (including Combustion Engineering,
Lummus and Basic) would be channelled to the Asbestos PI Trust. This would mean
that the sole recourse of a holder of an Asbestos PI Trust Claim would be to the
Asbestos PI Trust and such holder would have no right to assert such a claim
against ABB Ltd and its affiliates (including Combustion Engineering, Lummus and
Basic). The trust would be funded with cash and other assets valued at
approximately $800 million.
The Plan sets forth distribution procedures for the allocation of funds to
the claimants. The Plan provides that the unpaid portion of claims that were
settled pursuant to the Master Settlement Agreement will also be entitled to
distributions from the Asbestos PI Trust. On the effective date of the Plan, the
Asbestos PI Trust will be funded as follows:
- a $20 million 5% term note with a maximum term of ten years from the
effective date of the Plan, secured by Combustion Engineering's Windsor,
Connecticut real estate and real estate leases (under certain specified
contingencies, the Asbestos PI Trust may have the right to convert the
term note into ownership of 80% of the voting securities of the
reorganized Combustion Engineering);
- excess cash held by Combustion Engineering on the effective date of the
Plan;
- a promissory note, guaranteed by ABB Ltd and/or certain of its
subsidiaries, in aggregate amount of $250 million payable in equal
quarterly instalments commencing in 2004, with $50 million to be paid
during 2004, $100 million to be paid during 2005 and $100 million to be
paid during 2006, and further providing for contingent payments of an
additional aggregate amount of $100 million in equal instalments between
2006 and 2010 if ABB Ltd meets certain financial performance standards
(EBIT margin of 8% for the first two instalments and 12% for the last two
instalments);
- a non-interest bearing promissory note on behalf of Lummus in the amount
of $28 million payable in relatively equal annual instalments over 12
years;
- a non-interest bearing promissory note on behalf of Basic in the aggregate
amount of $10 million payable in relatively equal annual instalments over
12 years;
- 30,298,913 ABB Ltd shares, which had a fair value at December 31, 2002 of
$86 million. Our obligation to deliver these shares will continue to be
marked to market, with changes in the fair value of the shares reflected
in earnings until such shares are contributed to the Asbestos PI Trust;
- we will execute and deliver a nuclear and environmental indemnity with
regard to obligations arising out of Combustion Engineering's Windsor,
Connecticut site for the benefit of Combustion Engineering;
- Combustion Engineering, Lummus and Basic will assign to the Asbestos PI
Trust any proceeds under certain insurance policies and insurance
settlement agreements. Aggregate unexhausted product liability limits are
approximately $200 million for Combustion Engineering, approximately
$43 million for Lummus and approximately $28 million for Basic, although
amounts ultimately recovered by the Asbestos PI Trust under these policies
may be substantially less than the policy limits. In addition, Combustion
Engineering will assign to the
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Asbestos PI Trust scheduled payments under certain of its insurance
settlement agreements (approximately $90 million as of December 31, 2002);
and
- if Lummus is sold within 18 months after the effective date of the Plan,
ABB Inc. will contribute $5 million to the CE Settlement Trust and
$5 million to the Asbestos PI Trust. If the CE Settlement Trust has ceased
to exist at that time, both $5 million payments will be made to the
Asbestos PI Trust, but in no event will this contribution exceed the net
proceeds of the sale of Lummus.
NEXT STEPS IN THE CHAPTER 11 PROCESS
The solicitation of votes to approve the Plan began on January 19, 2003, and
Combustion Engineering filed for Chapter 11 in the U.S. Bankruptcy Court in
Delaware on February 17, 2003 based on the previously negotiated Plan. The
voting period closed on February 19, 2003, and approximately 97% of qualified
ballots voted to approve the Plan. A confirmation hearing and related hearings
commenced on April 7, 2003 and continued from time to time through early
June 2003. On June 23, 2003, the U.S. Bankruptcy Court issued its Order
Approving the Disclosure Statement but Recommending Withholding of Confirmation
of the Plan of Reorganization for Combustion Engineering for Ten Days and
related findings of fact (the "Ruling"). The Ruling approved the disclosure
statement that was the document used as the basis for soliciting approval of the
Plan from asbestos claimants and verified the voting results that approved the
Plan. Although the Ruling did not confirm the Plan, it indicates that the U.S.
Bankruptcy Court will recommend that the Plan be confirmed if we and Combustion
Engineering can establish to the court's satisfaction the following two matters:
- that adequate efforts were made to identify, notify and solicit votes on
the Plan from creditors with claims only against Lummus and only against
Basic that were not related to claims against Combustion Engineering; and
- that there are segregated funds available and a mechanism to pay only such
creditors of Lummus and Basic as evidenced by documents setting forth
payment procedures in this regard.
The Ruling provides us and Combustion Engineering an opportunity to submit
additional information to the U.S. Bankruptcy Court by July 3, 2003 to establish
these matters to the court's satisfaction. We have submitted the additional
information for the court's consideration prior to the deadline. We believe that
the submitted information will be sufficient to satisfy the U.S. Bankruptcy
Court. If, however, we and Combustion Engineering cannot provide information
addressing these matters to the court's satisfaction, we expect that we and
Combustion Engineering would have to take additional action (possibly including
soliciting votes from creditors of Lummus and Basic) to establish for the U.S.
Bankruptcy Court that these requirements are satisfied before the U.S.
Bankruptcy Court would recommend confirmation of, or confirm, the Plan. We
cannot be certain that we and Combustion Engineering would be able to satisfy
the U.S. Bankruptcy Court with respect to these requirements or that the court
would recommend confirmation of, or confirm, the Plan.
The Plan, including the channelling order, will become effective when the
U.S. Bankruptcy Court recommends the issuance of, or issues, a confirmation
order, the confirmation order is issued or affirmed, as the case may be, by the
U.S. District Court and has become a final order that is not subject to appeal,
and the other conditions to the effectiveness of the Plan have been satisfied.
So long as the effectiveness of the Plan has not been stayed, the Plan may
become effective at such earlier date as the parties to the Chapter 11 case
agree if a confirmation order has been issued. Following the Bankruptcy Court's
order recommending issuance of, or issuing, a confirmation order, interested
parties have a ten-day period during which they may file with the U.S. District
Court notice of their intent to appeal the order. Potential appellants include,
among others, a small number of asbestos claimants and certain insurance
companies which historically have provided insurance coverage to Combustion
Engineering, Basic and Lummus. The U.S. District Court rules
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on these appeals as part of determining whether to issue or affirm the
confirmation order. However, even if the U.S. District Court issues or affirms
the confirmation order, the U.S. District Court's order is itself subject to
appeal. Objectors filing such appeals may seek to stay the effectiveness of the
channelling injunction pending the outcome of their appeals. We cannot be
certain that a confirmation order will be issued or, if issued, whether or not
it will be appealed. We also cannot be certain of the duration or outcome of any
appeal process. Regardless of whether or not the pre-packaged plan becomes
effective, the Master Settlement Agreement remains effective and has settled
approximately 80,000 asbestos-related personal injury claims that had been
lodged against Combustion Engineering.
If the U.S. Bankruptcy Court recommends confirmation of, or confirms, the
Plan, based on the proceedings to date, we would expect that the most likely
objections that appellants would raise in the appeal process may include the
following:
- arguments that Combustion Engineering is not permitted to obtain a
channelling injunction that protects Combustion Engineering's affiliates
with respect to claims against Combustion Engineering;
- arguments that asbestos claims against Lummus and Basic cannot be made
subject to a channelling injunction;
- arguments that the disclosure provided in connection with the solicitation
of acceptances of the pre-packaged plan did not satisfy the required
standards;
- arguments that claimants covered by the Plan would fare better outside the
Plan;
- arguments that the Plan improperly affects the rights and obligations of
insurance carriers who have continuing obligations to provide insurance
coverage with respect to Combustion Engineering's asbestos liabilities;
and
- arguments that the Plan fails to address properly the indemnification
rights of certain insurers.
If any of these objections are made in the appeal process, we and Combustion
Engineering will vigorously contest them, but we cannot assure you that we and
Combustion Engineering will succeed.
EFFECT OF THE PLAN ON OUR FINANCIAL POSITION
We recorded a charge of $420 million in income (loss) from discontinued
operations, net of tax, for 2002, which amount was determined based upon the
proposed settlement amounts contained in the Plan. In prior years, the
Consolidated Financial Statements reflected charges to earnings based on
Combustion Engineering's forecasts of the expected cost of future claim
settlements over a period of several years and estimates of the amounts
recoverable from insurance when the claims were settled. This resulted in a
charge to earnings of $470 million and $70 million in 2001 and 2000,
respectively, which is included in income (loss) from discontinued operations,
net of tax.
Based on expected implementation of the Plan, we estimated that the ultimate
liability for the resolution of asbestos-related personal injury claims against
Combustion Engineering, Lummus and Basic as of December 31, 2002 will be
$1,118 million and is included in accrued liabilities and other in the
Consolidated Balance Sheet. If the Plan is confirmed, certain amounts will be
reclassified as of the effective date to other long-term liabilities based on
the scheduled cash payments. Future earnings will be affected by mark-to-market
adjustments for changes in the fair value of ABB Ltd stock, as well as
contingent payments when they become determinable. In the event the Plan is not
confirmed or the confirmation order is later overturned, our ultimate liability
for the resolution of asbestos-related personal injury claims and our reserves
related thereto might change in a manner that would be uncertain and could have
a material adverse impact on our financial position, results of operations and
liquidity.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
BOARD OF DIRECTORS
Our board of directors 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
management and representation of ABB. The internal organizational structure and
the definition of the areas of responsibility of our board of directors, as well
as the information and control instruments vis-a-vis the executive committee,
are set forth in the regulations of the board of directors. We have been granted
an exception by the Federal Office of Justice of Switzerland (BUNDESAMT FUR
JUSTIZ) to the rule that a majority of the members of the board of directors of
ABB must be citizens of Switzerland with residence in Switzerland according to
Article 708 para 1 of the Swiss Code of Obligations.
Our articles of incorporation stipulate that the board of directors must
consist of not fewer than seven and no more than 13 members at any time. Swiss
law and our articles of incorporation also provide that each director must be a
shareholder of ABB. Directors are elected for terms of one year by the
shareholders in a shareholders' meeting. Members of the board of directors whose
terms of office have expired are immediately eligible for re-election. Our
articles of incorporation do not provide for the retirement or non-retirement of
directors under an age-limit requirement. Our internal regulations provide that
a director shall resign at the annual general meeting of shareholders taking
place in the year of his or her 70th birthday.
The board of directors appoints its Chairman and one or more Vice Chairmen,
as well as the persons entrusted with our management and representation, whom
the board of directors is also responsible for removing.
The following table sets forth the names and the years of birth of our
directors and their current positions with ABB.
NAME BORN CURRENT POSITION
---- -------- ----------------
Jurgen Dormann......................... 1940 President, Chairman and Chief Executive Officer
Roger Agnelli.......................... 1958 Director
Louis R. Hughes........................ 1949 Director
Hans Ulrich Marki...................... 1946 Director
Michel de Rosen........................ 1951 Director
Michael Treschow....................... 1943 Director
Dr. Bernd W. Voss...................... 1939 Director
Jacob Wallenberg....................... 1956 Director
ABB Ltd became the ultimate holding company of the ABB Group on June 28,
1999. The biographies of Messrs. Dormann and Wallenberg also note the years of
service they provided to ABB Asea Brown Boveri Ltd, the former parent company of
the ABB Group.
JURGEN DORMANN has been the Chairman of ABB's board of directors since
November 2001 and has been ABB's President and Chief Executive Officer since
September 2002. He has been a member of ABB's board of directors since June 28,
1999. From 1998 to 1999, he served as a member of the board of directors of ABB
Asea Brown Boveri Ltd. He is the chairman of the supervisory board of Aventis
and the chairman of the board of directors of Lion Bioscience. Mr. Dormann is
also a member of the boards of directors of Allianz and IBM Corporation.
Mr. Dormann is a German citizen.
ROGER AGNELLI was elected to ABB's board of directors at the annual general
meeting of shareholders on March 12, 2002. He is the President and Chief
Executive Officer of Companhia Vale do Rio Doce. He is also a member of the
boards of directors of Valepar, Companhia Paulista
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de Forca e Luz, Companhia Siderurgica Nacional, LATASA, VBC Energia, Brasmotor,
Mahle Metal Leve, Rio Grande Energia and Serra da Mesa Energia. Mr. Agnelli is a
Brazilian citizen.
LOUIS R. HUGHES was elected to ABB's board of directors at the annual
general meeting of shareholders on May 16, 2003. Mr. Hughes is the chairman of
the board of directors of Maxager Technology, Inc. and is a member of the boards
of directors of British Telecom, AB Electrolux and Sulzer AG. Mr. Hughes was the
president and chief operating officer of Lockheed Martin Corp. in 2000 and was
an executive vice president of General Motors Corp. from 1992 to 2000. He was
also the acting chief executive officer of Wavecrest Laboratories LLC from 2002
to 2003. Mr. Hughes is a United States citizen.
HANS ULRICH MARKI was elected to ABB's board of directors at the annual
general meeting of shareholders on March 12, 2002. He is the chairman of IBM
Europe/Middle East/Africa and a member of the board of directors of
Mettler-Toledo International, Inc. Mr. Marki is a Swiss citizen.
MICHEL DE ROSEN was elected to ABB's board of directors at the annual
general meeting of shareholders on March 12, 2002. He is the president, chief
executive officer and chairman of ViroPharma, Inc. He is the chairman of the
board of directors of Paul Capital Partners Royalty Fund, and a member of the
boards of directors of Innaphase and Ursinus College. Mr. de Rosen is a French
citizen.
MICHAEL TRESCHOW was elected to ABB's board of directors at the annual
general meeting of shareholders on May 16, 2003. He is the chairman of the board
of directors of Ericsson AB and a member of the board of directors of Electrolux
AB. He is the vice chairman of the Federation of Swedish Enterprise. From 1997
to 2002, he was the president and chief executive officer of the Electrolux
Group. Prior to 1997, he was the president and chief executive officer of Atlas
Copco AB. Mr. Treschow is a Swedish citizen.
DR. BERND W. VOSS was elected to ABB's board of directors at the annual
general meeting of shareholders on March 12, 2002. He is a member of the
supervisory board of Dresdner Bank AG. He is also a member of the boards of
directors of Allianz Leben AG, Continental AG, KarstadtQuelle AG, Quelle AG,
TUI AG, Wacker Chemie GmbH and Osram GmbH. Dr. Voss is a German citizen.
JACOB WALLENBERG has been a member of ABB's board of directors since
June 28, 1999. From March 1999 to June 1999, he served as a member of the board
of directors of ABB Asea Brown Boveri Ltd. He is the chairman of the board of
directors of SEB Skandinaviska Enskilda Banken and W Capital Management. He is
also vice-chairman of Investor AB, the Knut and Alice Wallenberg Foundation,
Atlas Copco, SAS AB and Electrolux, and a member of the boards of directors of
the Confederation of Swedish Enterprise and the Nobel Foundation.
Mr. Wallenberg is a Swedish citizen.
SENIOR MANAGEMENT
EXECUTIVE COMMITTEE
Our board of directors has delegated the executive management of ABB to the
chief executive officer and the other members of the executive committee. The
chief executive officer, and under his direction the other members of the
executive committee, are responsible for our overall business and affairs and
day-to-day management. The chief executive officer reports to the board
regularly, and whenever extraordinary circumstances so require, on the course of
our business and financial performance and on all organizational and personnel
matters, transactions and other issues relevant to the group.
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Upon proposal by the nomination and compensation committee, the executive
committee is appointed and discharged by the board and consists of the chief
executive officer, the chief financial officer and the other executive vice
presidents.
The following table sets forth the names and the years of birth of the
members of the executive committee, their current positions with us and the
dates of their initial appointment to their current positions.
YEAR OF
NAME BORN CURRENT POSITION APPOINTMENT
---- -------- ---------------- -----------
Jurgen Dormann.......... 1940 President, Chairman and Chief Executive Officer 2002
Peter Voser............. 1958 Chief Financial Officer 2002
Dinesh C. Paliwal....... 1957 Head of Automation Technologies Division 2003
Peter Smits............. 1951 Head of Power Technologies Division 2003
Gary Steel.............. 1952 Head of Human Resources 2003
JURGEN DORMANN. For Mr. Dormann's biography, see above under "--Board of
Directors."
PETER VOSER has been our Chief Financial Officer since March 2002.
Mr. Voser was Chief Financial Officer of Shell Europe Oil Products from 1999
until early 2001, when he became Chief Financial Officer of Shell Oil Products.
Mr. Voser is a Swiss citizen.
DINESH C. PALIWAL has been the Head of our Automation Technologies division
since January 2003. From April 2002 to January 2003, he was our Executive Vice
President responsible for our Industries Division. Between January 1, 2001 and
March 2002, he was our Executive Vice President responsible for our Process
Industries division. From 1999 to 2001, he was responsible for our worldwide
activities in the Automation Segment for the paper, printing, metals, mining and
cement industries. From 1998 to 1999, he was responsible for our worldwide
activities in the Automation Segment for the pulp, paper and printing
industries. From 1994 to 1998, he was Vice President responsible for our
automation activities in process industries in China and Northeast Asia. From
1990 to 1994, he was Director of Marketing and Sales for our automation
activities for the paper industry in Asia. Prior to 1990, he held several
positions in sales and project management. Mr. Paliwal is an Indian citizen.
PETER SMITS has been the Head of our Power Technologies division since
January 2003. From 2001 to January 2003, he was Executive Vice President
responsible for the Power Technology Products division. From 1998 to 2001, he
was Senior Vice President, Business Area Manager Distribution Transformers, at
ABB T&D Ltd. From 1994 to 1998, he was President and Country Manager at Asea
Brown Boveri SA. From 1990 to 1994, he served as President at Pfleiderer
Verkehrstechnik GmbH. From 1988 to 1990, he held several positions at Asea Brown
Boveri AG, was Vice-President at ABB Schaltanlagen GmbH and was Business Unit
Manager for worldwide substations activities in the our High-Voltage Switchgear
business area. From 1980 to 1988, he held several positions at Asea
Lepper GmbH. From 1979 to 1980, he served as Divisional Export Sales Manager at
Vossen GmbH. From 1978 to 1979, he served as Assistant Accountant in Auditing at
Peat, Marwick, Mitchell & Co. (KPMG). Mr. Smits is a German citizen.
GARY STEEL was appointed our Head of Human Resources in January 2003. In
2002, he was the Human Resources Director, Group Finance at Shell. Between 1976
and 2002, he held several human resources and employee relations positions at
Shell. Mr. Steel is a Scottish citizen.
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SENIOR OFFICERS
The following table sets forth the names of our senior officers, their
current positions with us and the dates of their initial appointment to their
current positions.
YEAR OF
NAME CURRENT POSITION APPOINTMENT
---- ---------------- -----------
Markus Bayegan................. Chief Technology Officer 2001
Erik Fougner................... Interim Head of Oil, Gas and Petrochemicals 2002
Business
John Scriven................... General Counsel, Head of Group Function Legal 2003
and Compliance
Alfred Storck.................. Deputy Chief Financial Officer, Head of Group 2003
Function Corporate Finance and Taxes
MARKUS BAYEGAN has been our Chief Technology Officer since January 2001.
From 2000 until our realignment in January 2001, he was Executive Vice President
responsible for our research and development activities worldwide. From 1998 to
2000, he served as Senior Corporate Officer for our group research and
development activities worldwide. From 1994 to 1998, he served as Senior Vice
President of Technology for our Building Technologies Segment. From 1987 to
1998, he served as president of ABB Corporate Research, A/S, a Norwegian
subsidiary. From 1985 to 1998, he was Professor in Electronics Manufacturing at
the Norwegian Institute of Technology. Prior to joining us, he was employed by
EB Corporation, a Norwegian electromechanical and telecommunication company that
we acquired. Mr. Bayegan is a Norwegian citizen.
ERIK FOUGNER has been Interim Head of our Oil, Gas and Petrochemicals
business since July 2002. He has been our Business Area Manager, Upstream of the
Oil, Gas and Petrochemicals division since 2001. Between 1991 and 2001, he held
several positions in the ABB Group. From 1986 to 1991, he was a management
consultant at McKinsey & Co. in Norway and from 1983 to 1985, he served at the
Norwegian Ministry of Finance. Mr. Fougner is a Norwegian citizen.
JOHN SCRIVEN joined ABB Ltd in May 2003 and has assumed the positions of
General Counsel, Head of Group Function Legal and Compliance and Secretary to
the ABB Ltd board of directors. From 2001 to 2003, he was "of Counsel" at the
Homburger Rechtsanwalte law firm in Zurich, Switzerland. From 1975 to 2000, he
held various executive positions within the legal department of The Dow Chemical
Company at both its corporate headquarters in the United States and Switzerland.
From 1994 to 2000, he held the position of Vice President, General Counsel and
Secretary at The Dow Chemical Company, Midland, Michigan, USA. Mr. Scriven holds
both British and Swiss citizenship.
ALFRED STORCK has been our Deputy Chief Financial Officer since
February 2003 and has been our Head of Group Function Corporate Finance and
Taxes since January 2001. From 1997 to 2001, he was the head of Corporate Staff,
Corporate Finance and Taxes. From 1988 (when BBC Brown Boveri AG and Asea AB
merged) to 1997, he was our Group Tax Officer. Mr. Storck is a German citizen.
CORPORATE GOVERNANCE
We are committed to the highest international standards of corporate
governance, and we support 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 ABB shares are listed: the SWX Swiss Exchange and exchanges in
London, Stockholm, Frankfurt and New York.
In addition to the provisions of the Swiss Code of Obligations, our
principles and rules on corporate governance are laid down in our articles of
incorporation, our board regulations, our standards for corporate governance,
the charters of our board committees, the board membership
119
guidelines, several internal directives (such as the directive on insider
information) and the code on business ethics. It is the duty of our board of
directors 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.
DUTIES OF DIRECTORS AND OFFICERS
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 in
Swiss doctrine 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 may not take any actions that may be
harmful to the corporation.
EXERCISE OF POWERS
Directors as well as other persons authorized to act on behalf of a Swiss
corporation may perform all legal acts on behalf of the corporation which the
business purpose as set forth in the articles of incorporation of the
corporation may entail. Pursuant to court practice, such directors and officers
can take any action that is not outright excluded by the business purpose of the
corporation. In so doing, however, the directors and officers must still pursue
the duty of due care and the duty of loyalty described above and must extend
equal treatment to its shareholders in like circumstances. Our articles of
incorporation do not contain provisions concerning a director's power, in the
absence of an independent quorum, to vote on the compensation to themselves or
any members of their body.
CONFLICTS OF INTEREST
Swiss law does not have a general provision on conflicts of interest and our
articles of incorporation do not limit our directors' power to vote on a
proposal, arrangement or contract in which the director or officer is materially
interested. However, the Swiss Code of Obligations requires directors and
officers to safeguard the interests of the corporation and, in this connection,
imposes a duty of care and loyalty on directors and officers. This rule is
generally understood and so recommended by the Swiss Code of Best Practice for
Corporate Governance as disqualifying directors and officers from participating
in decisions, other than in the shareholders' meeting, that directly affect
them. In addition, our board of directors has decided to create the new position
of lead director who will intervene and lead proceedings, where the chairman of
the board, as a result of his executive role as chief executive officer, would
be exposed to conflicting interests. See "--Board Practices."
CONFIDENTIALITY
Confidential information obtained by directors and officers of a Swiss
corporation acting in such capacity must be kept confidential during and after
their term of office.
SANCTIONS
If directors and officers transact on behalf of the corporation with BONA
FIDE third parties in violation of their statutory duties, the transaction is
nevertheless valid as long as it is not outright excluded by the corporation's
business purpose as set forth in its articles of incorporation. Directors and
officers acting in violation of their statutory duties--whether transacting with
BONA FIDE third parties or performing any other acts on behalf of the
company--may, however, become liable to the
120
corporation, its shareholders and its creditors for damages. The liability is
joint and several, but the courts may apportion the liability among the
directors and officers in accordance with their degree of culpability.
In addition, Swiss law contains a provision under which payments made to a
shareholder or a director or any person(s) associated therewith other than at
arm's length must be repaid to the company if the shareholder or director or any
person associated therewith was acting in bad faith.
If the board of directors has lawfully delegated the power to carry out
day-to-day management to a different corporate body, E.G., the executive
committee, it is not liable for the acts of the members of that different
corporate body. Instead, the directors can only be held liable for their failure
to properly select, instruct and supervise the members of that different
corporate body.
BOARD PRACTICES
Board meetings are convened by the chairman or upon request by a director or
the chief executive officer. During 2002, eight board meetings were held.
Written 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 the member
time to study the covered matters prior to the meetings. Decisions made at the
board meetings are recorded in written minutes of the meetings.
Our board membership guidelines require that the board of directors be
comprised of a substantial majority of independent directors. Currently all
board members, with the exception of Mr. Dormann, our chairman and chief
executive officer, are independent, non-executive directors. In order to address
situations of conflicting interests between the chairman of the board and board
members, the board, at its meeting of February 10, 2003, decided to create the
new position of lead director. The additional tasks of the lead director will be
to act as counselor to the chairman and facilitate the dialogue between the
members of the board and the chairman. The lead director will have the ability
to call special meetings without the chairman's presence where the chairman's
role and performance will be discussed. The board of directors intends to
appoint Jacob Wallenberg as the lead director at its next regular meeting, which
is expected to be held in July 2003.
Our board of directors has appointed from among its members two board
committees, the finance and audit committee and the nomination and compensation
committee. A new strategy committee will be constituted at the next meeting of
the board of directors. The duties and objectives of the board committees are
set forth in charters issued or approved by the board of directors. These
committees assist the board in its tasks and report regularly to the board.
The finance and audit committee oversees the financial reporting processes
and accounting practices, evaluates the independence, objectivity and
effectiveness of external and internal auditors, reviews audit results, monitors
compliance with the laws and regulations governing the preparation of our
financial statements and assesses the processes relating to our risk management
and internal control systems. The finance and audit committee is required to be
composed of three or more independent directors who have a thorough
understanding of finance and accounting. The chief financial officer and, as
determined by the committee's chairman for matters related to their respective
functions, the head of internal audit, as well as the external auditors may
participate in the finance and audit committee meetings. Mr. Voss is the
chairman of the finance and audit committee, and Messrs. Wallenberg and Agnelli
are members. The committee met five times in 2002.
The nomination and compensation committee determines the selection of
candidates for the board of directors and its committees, plans for the
succession of directors and ensures that newly elected directors receive the
appropriate introduction and orientation and that all directors receive adequate
continuing education and training to fulfill their obligations. The nomination
and compensation committee determines the remuneration of the members of the
executive committee.
121
The nomination and compensation committee is required to be composed of three or
more independent directors. Upon invitation by the committee's chairman, the
chief executive officer or other members of the group executive committee may
participate in the committee meetings, provided that any potential conflict of
interest is avoided and confidentiality of the discussions is maintained.
Mr. Marki is the chairman of the nomination and compensation committee, and
Messrs. Wallenberg and de Rosen are members. The committee met seven times in
2002.
COMPENSATION
BOARD OF DIRECTORS
For the period from the annual general meeting of shareholders in 2002 to
the annual general meeting of shareholders in 2003, board members' compensation
was fixed as follows:
- Chairman: CHF 1,000,000 (approximately $722,900 at December 31, 2002);
- Member: CHF 250,000 (approximately $180,700 at December 31, 2002);
- Committee chairman: CHF 50,000 (approximately $36,100 at December 31,
2002); and
- Committee member: CHF 20,000 (approximately $14,500 at December 31, 2002).
Payments to board members are made for each term of a member in May and November
of each year. Due to changes in the composition of the board of committees,
certain board members received a pro rata portion of the annual committee
compensation.
Board members receive at least 50% (and may elect to receive a higher ratio)
of their net compensation (I.E., after deduction of social security costs and
withholding tax), in ABB shares, which they are entitled to receive at a
discount of 10%. The gross compensation paid to board members in shares and cash
with respect to 2002 amounted to CHF 2,680,000 ($1,937,396 at December 31,
2002).
Our current board members received the following compensation with respect
to 2002:
TOTAL ANNUAL AMOUNT
COMPENSATION RECEIVED IN CASH NUMBER OF
(GROSS) (NET) SHARES RECEIVED
------------ ---------------- ---------------
(CHF)
Jurgen Dormann(1)................................ 1,025,000 -- 140,447
Roger Agnelli.................................... 270,000 -- 28,984
Hans Ulrich Marki................................ 285,000 -- 43,216
Michel de Rosen.................................. 260,000 89,371 14,215
Bernd W. Voss.................................... 300,000 103,330 16,130
Jacob Wallenberg................................. 280,000 -- 30,611
--------- ------- -------
TOTAL............................................ 2,420,000 192,701 273,603
========= ======= =======
------------------------------
(1) Jurgen Dormann received this compensation in addition to his compensation as
chief executive officer (see below).
122
Board members who resigned during 2002 received the following compensation
with respect to 2002:
TOTAL ANNUAL AMOUNT
COMPENSATION RECEIVED IN CASH NUMBER OF
(GROSS) (NET) SHARES RECEIVED
------------ ---------------- ---------------
(CHF)
Jorgen Centerman(1).............................. 125,000 -- 9,536
Martin Ebner(2).................................. 135,000 -- 10,185
------- ----- ------
TOTAL............................................ 260,000 -- 19,721
======= ===== ======
------------------------------
(1) Jorgen Centerman received this compensation in addition to his compensation
as chief executive officer. He resigned from the board of directors on
September 5, 2002.
(2) Martin Ebner resigned from the board of directors on October 14, 2002.
With the exception of Jurgen Dormann in his function as chief executive
officer, board members do not receive pension benefits and are not eligible to
participate in our management incentive plan.
EXECUTIVE COMMITTEE
Members of the executive committee receive annual base compensation. In
addition, they are eligible for annual bonus compensation, which depends on the
performance of the individual area of responsibility of each executive committee
member and of the ABB Group and, in certain cases, on a qualitative appreciation
of a member's achievements.
In addition to receiving annual base and bonus compensation, members of the
executive committee may participate in a management incentive plan, which is
described in detail below under "--Management Incentive Plan." Members of the
executive committee did not receive warrants or warrant appreciation rights in
2002. See "--Share Ownership."
Executive committee members also enjoy pension benefits in accordance with
Swiss and foreign social security legislation and, depending on seniority,
certain additional benefits under supplementary benefit programs. More than 75%
of our pension obligations with respect to executive committee members are
funded, and we have provisions for the remaining obligations on our balance
sheet. On average, yearly pension payments to members of the executive committee
do not exceed 50% of their remuneration when retiring from their position with
ABB at pension age. In 2002, we incurred costs for pension contributions of
CHF 6,147,987 ($4,444,435 at December 31, 2002) with respect to pension benefits
for executive committee members, including executive committee members who
departed during 2002.
Executive committee members receive customary additional benefits such as a
company car and health insurance compensation, which are not material in the
aggregate.
We believe that the compensation and pension levels of our current ABB Group
executives comply with prevailing European practices. It is the task of the
Nomination and Compensation Committee to monitor our compensation practices. See
"--Duties of Directors and Officers--Board Practices."
123
In 2002, the following gross payments were made to the members of the
executive committee, which includes bonuses that are based on 2001 business
performance (except for Peter Voser, as noted below):
SALARY PAID IN BONUS 2001 ADDITIONAL TOTAL ANNUAL
2002 RECEIVED COMPENSATION COMPENSATION
-------------- ---------- ------------ ------------
(CHF)
Jurgen Dormann(1)........................ 1,078,336 -- -- 1,078,336
Dinesh Paliwal(2)........................ 819,000 702,000 312,000 1,833,000
Peter Smits.............................. 650,000 675,000 -- 1,325,000
Peter Voser(3)........................... 556,674 -- 940,000 1,496,674
--------- --------- --------- ---------
TOTAL.................................... 3,104,010 1,377,000 1,252,000 5,733,010
========= ========= ========= =========
------------------------------
(1) All figures are for the period September 1 to December 31, 2002. This
compensation as chief executive officer is in addition to the compensation
received as chairman of the board.
(2) Dinesh Paliwal was awarded a one-off special bonus in 2002.
(3) All figures are for the period March 11 to December 31, 2002. Peter Voser's
additional compensation includes a pro rata guaranteed bonus of CHF 290,000
for 2002 which was paid in December 2002, as well as a compensation of CHF
650,000 for shares and options due to change of employment.
None of the members of the executive committee has received ABB shares as
compensation, except for Jurgen Dormann in his function as chairman of the
board. For a description of options held by members of the executive committee,
see "--Share Ownership."
In March 2002, our board of directors completed a reassessment of certain
pension and other benefits of former chief executive officers Percy Barnevik and
Goran Lindahl. Mr. Barnevik received approximately CHF 148 million
(approximately $88 million) of pension benefits following his resignation as
chief executive officer in 1996, and Mr. Lindahl was to receive approximately
CHF 85 million (approximately $51 million) of pension and other benefits
following his resignation as chief executive officer in 2000. The board's
reassessment followed a detailed review of these payments by the board of
directors in which it was determined that the approval procedures for these
benefits were unsatisfactory and that restitution should be sought of amounts
paid in excess of our obligations. In March 2002, we reached agreements with
Mr. Barnevik, who agreed to return CHF 90 million (approximately $54 million) to
us, and with Mr. Lindahl, who agreed that his pension and other benefits would
be reduced by CHF 47 million (approximately $28 million). These amounts have
been recorded in our earnings for the year ended December 31, 2002 and were
determined through actuarial calculations, external benchmarking of European
chief executive officer compensation and negotiations. In this paragraph,
amounts in Swiss francs have been translated into U.S. dollars at a rate of
$1.00 = CHF 1.6743, the average of the noon buying rates for Swiss francs in
March 2002.
In 2002, we made a total payment of CHF 20,975,000 ($15,163,015 at
December 31, 2002) to nine members of the executive committee who departed
during the calendar year 2002. This figure is composed of salary payments while
on duty or during contractual notice periods and severance payments made in lieu
of continuing salary payments. The aforementioned sum includes an aggregate
amount of CHF 7,375,000 ($5,331,454 at December 31, 2002), which our former
president and chief executive officer Jorgen Centerman received in the year
2002, including the final settlement of the employment relationship.
In the year 2003, we will have to make additional payments to four departed
members of the executive committee in the aggregate amount of CHF 5,200,000
gross ($3,759,127 at December 31, 2002) based on existing contractual
obligations.
124
PERFORMANCE ALIGNMENT
For 2003, we have introduced a structure for aligning the performance
expectations of senior managers. Executive committee members, corporate staff
and country managers of the 19 largest countries receive targets and are
measured on ABB Group results rather than on the basis of individual businesses.
Business area managers and local country division managers receive targets and
are measured on ABB Group results (60%) and on their business area or divisional
results (40%). At least 20% of this "scorecard" must be made up of qualitative
measurements, such as order growth with key customers, performance appraisal
systems and financial gearing. In addition to this group of senior managers, all
other participating managers are measured with a minimum of 25% on ABB Group
results. Resulting bonuses are paid in March each year after full-year results
are announced.
EMPLOYMENT CONTRACTS
None of our board members, executive committee members or members of senior
management benefits from a "golden parachute" clause which would become
effective upon a change of control. Employment contracts normally contain notice
periods of 12 months for executive committee members and three to six months for
members of senior management, during which they are entitled to salaries and
bonuses. No director has a contract with us providing for further benefits upon
termination of his board membership, other than pursuant to applicable
employment agreements in case of simultaneous termination of their employment.
MANAGEMENT INCENTIVE PLAN
We have a management incentive plan under which approximately 900 key
employees received warrants and warrant appreciation rights for no consideration
over the course of six launches from 1998 to 2001. The warrants are exercisable
for shares at a predetermined price, not less than the fair market value as of
the date of grant. Participants may also sell the warrants rather than exercise
the right to purchase shares. Equivalent warrants are listed on the SWX Swiss
Exchange, which facilitates valuation and transferability of warrants granted
under the management incentive plan.
Each warrant appreciation right entitles the holder to an amount in cash
equal to the market price of one equivalent warrant on the SWX Swiss Exchange on
the date of exercise of the warrant appreciation right. Warrant appreciation
rights are not transferable. Participants may exercise or sell warrants or
exercise warrant appreciation rights only during the 30 days immediately
following publication of our interim or annual results. No exercise or sale is
permitted until after the vesting period, which is three years from date of
grant, although vesting restrictions can be waived in the event of death,
disability or divorce. All warrants and warrant appreciation rights expire six
years from the date of grant.
As of May 31, 2003, the warrants outstanding represented the future rights
to acquire 18,211,951 of our shares (representing less than 2% of our total
outstanding shares), including the future right of the current members of our
executive committee to acquire an aggregate of 370,000 shares. Also on that
date, the warrant appreciation rights represented the future rights to receive
the cash equivalent to the market price of 96,979,240 warrants, including the
future right of the current members of our executive committee to receive the
cash equivalent to the market price of 1,880,000 warrants. In order to meet our
obligations under outstanding and exercisable warrants, we held 76,920 shares in
treasury as of May 31, 2003. In addition, the board of directors has allocated
40,000,000 contingent shares in support of the management incentive plan. We
generally hold sufficient cash-settled call options to meet our obligations
under outstanding warrant appreciation rights. We held 96,979,240 cash-settled
call options as of May 31, 2003, in connection with the exercise of warrant
appreciation rights outstanding under the management incentive plan. See
Note 21 to the Consolidated Financial Statements.
125
The amounts of warrants outstanding include those instruments held by
employees of ABB ALSTOM POWER joint venture, a discontinued operation. Under the
terms and conditions of the management incentive program, employees of ABB
ALSTOM POWER joint venture retain their entitlements in the management incentive
plan.
As of May 31, 2003, 29,751,060 warrants representing the right to purchase
10,675,451 shares (representing less than 1% of our total outstanding shares)
were exercisable and 26,929,240 warrant appreciation rights were exercisable.
The following table sets forth the number of warrants outstanding under the
management incentive plan as of May 31, 2003.
NUMBER OF SHARES
WARRANTS EXERCISE RATIO UNDERLYING EXERCISE
LAUNCH (YEAR) OUTSTANDING (WARRANTS:SHARES) WARRANTS PRICE (CHF) EXPIRATION DATE
------------- ----------- ----------------- ---------------- ----------- ---------------
1 (1998) 4,743,000(1) 1:0.6484 3,075,361(1) 30.89 01/15/04
2 (1998) 5,795,000(1) 1:0.6484 3,757,478(1) 25.54 12/10/04
3 (1999) 4,648,060(1) 1:0.2000 929,612(1) 37.50 06/10/05
4 (1999) 14,565,000(1) 1:0.2000 2,913,000(1) 41.25 11/11/05
5 (2000) 19,670,000 1:0.2000 3,934,000 53.00 06/13/06
6 (2001) 18,012,500 1:0.2000 3,602,500 17.00 12/10/07
------------------------------
(1) All of the warrants from Launches 1, 2, 3 and 4, representing the right to
purchase an aggregate of 10,675,451 shares, are currently exercisable.
The following table sets forth the number of warrant appreciation rights
outstanding under the management incentive plan as of May 31, 2003.
LAUNCH (YEAR) WARRANTS APPRECIATION RIGHTS OUTSTANDING(1) EXPIRATION DATE
------------- ------------------------------------------- ---------------
1 (1998) 3,482,000 01/14/04
2 (1998) 4,803,000 12/09/04
3 (1999) 444,240 06/09/05
4 (1999) 18,200,000 11/10/05
5 (2000) 32,715,000 06/12/06
6 (2001) 37,335,000 12/09/07
------------------------------
(1) Each warrant appreciation right represents a future right to receive the
cash equivalent of the equivalent market price of warrants exercisable at
the following exercise ratios and prices:
LAUNCH (YEAR) EXERCISE RATIO (WARRANTS:SHARES) EXERCISE PRICE (CHF)
------------- -------------------------------- --------------------
1 (1998) 1:0.6484 30.89
2 (1998) 1:0.6484 25.54
3 (1999) 1:0.2000 37.50
4 (1999) 1:0.2000 41.25
5 (2000) 1:0.2000 53.00
6 (2001) 1:0.2000 17.00
SHARE OWNERSHIP
Under our management incentive plan, certain members of the executive
committee have received options in the years 1998 to 2001. The details of the
various grants are as follows:
ALLOTMENT YEAR TERM LIFE SUBSCRIPTION RATIO EXERCISE PRICE (CHF)
-------------- --------- ------------------ --------------------
1998 6 years 1.54 25.54
1999 6 years 5 41.25
2000 6 years 5 53.00
2001 6 years 5 17.00
126
As of May 1, 2003 the current members of the board of directors and
executive committee held the following numbers of shares and options:
NUMBER OF OPTIONS GRANTED UNDER MANAGEMENT INCENTIVE PLAN
-----------------------------------------------------------------
NUMBER OF ALLOTMENT YEAR ALLOTMENT YEAR ALLOTMENT YEAR ALLOTMENT YEAR
SHARES 1998 1999 2000 2001
--------- -------------- -------------- -------------- --------------
Jurgen Dormann............ 185,473 -- -- -- --
Roger Agnelli............. 28,984 -- -- -- --
Louis R. Hughes........... -- -- -- -- --
Hans Ulrich Marki......... 47,216 -- -- -- --
Michel de Rosen........... 14,215 -- -- -- --
Michael Treschow.......... -- -- -- -- --
Bernd W. Voss............. 16,130 -- -- -- --
Jacob Wallenberg.......... 49,581 -- -- -- --
Dinesh Paliwal............ 62,500 30,000 100,000 250,000 1,000,000
Peter Smits............... 30,000 -- 100,000 250,000 1,000,000
Gary Steel................ -- -- -- -- --
Peter Voser............... 10,000 -- -- -- 1,000,000
------- ------- ------- ------- ---------
TOTAL..................... 444,099 30,000 200,000 500,000 3,000,000
======= ======= ======= ======= =========
The current members of our board of directors and executive committee owned
less than 1% of our total shares outstanding as of May 1, 2003.
No person closely linked to any member of the executive committee holds any
shares of ABB or options in ABB shares.
Share amounts provided in this section do not include the shares
beneficially owned by Investor AB, of which Mr. Wallenberg is vice-chairman. See
"Item 7. Major Shareholders and Related Party Transactions--Major Shareholders."
EMPLOYEES
A breakdown of our employees by geographic region for the years ended
December 31, 2002, 2001 and 2000 is as follows:
REGION 2002 2001 2000
------ -------- -------- --------
Europe...................................................... 91,000 102,500 105,500
The Americas................................................ 24,500 27,000 27,500
Asia........................................................ 16,000 16,500 17,500
Middle East and Africa...................................... 7,500 10,500 10,500
------- ------- -------
Total....................................................... 139,000 156,500 161,000
======= ======= =======
As of March 31, 2003, we employed approximately 135,000 people. We
anticipate that, as a result of the Step Change Program, the number of employees
will be further reduced. See "Item 4. Information on the
Company--Introduction--Step Change Program."
The proportion of our employees that are represented by labor unions or are
the subject of collective bargaining agreements varies based on the labor
practices of each country in which we operate. In Switzerland, Germany, Italy,
Finland, Norway and Sweden, almost all of our employees are covered by
collective bargaining agreements. In the United Kingdom and the United States,
less than 25% of our employees are covered by collective bargaining agreements.
We estimate that approximately 43% of all ABB Group employees are covered by
collective bargaining agreements. We believe that our employee relations are
good.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
To our knowledge, as of June 25, 2003, the following persons held 5% or more
of our total share capital:
TOTAL PERCENTAGE OF
NAME AMOUNT OWNED SHARE CAPITAL
---- ------------ -------------------
Investor AB(1).............................................. 120,067,731 10.0%
The Capital Group Companies, Inc.(2)........................ 64,043,388 5.3%
------------------------------
(1) Mr. Wallenberg, a member of our board of directors, is the vice-chairman of
Investor AB. The number of shares indicated above does not include 49,581
shares owned by Mr. Wallenberg as an individual and earned as compensation
for services as a member of our board of directors. See "Item 6. Directors,
Senior Management and Employees--Compensation."
(2) The Capital Group Companies, Inc. informed ABB that its holdings of ABB
shares exceeded the 5% level on March 11, 2003.
Under our articles of incorporation, each registered share represents one
vote. Major 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.
Under the Swiss Stock Exchange Act, shareholders and groups of shareholders
acting in concert who reach, exceed or fall below the thresholds of 5%, 10%,
20%, 33 1/3%, 50% or 66 2/3% of the voting rights of a Swiss listed corporation
must notify the corporation and the exchange(s) in Switzerland on which such
shares are listed of such holdings in writing within four trading days, whether
or not the voting rights can be exercised. Following receipt of such a
notification, the corporation must inform the public within two trading days.
An additional disclosure requirement exists under the Swiss Federal Code of
Obligations, according to which we must disclose individual shareholders and
groups of shareholders and their shareholdings if they hold more than 5% of all
voting rights and we know or have reason to know of such major shareholders.
Such disclosures must be made once a year in the notes to the financial
statements as published in our annual report.
At April 30, 2003, we had approximately 274,000 shareholders. Approximately
5,300 were U.S. holders, of which approximately 600 were record holders. Based
on the share register, U.S. record holders (including holders of ADSs) held
approximately 2% of the total number of shares issued, including treasury
shares, at that date.
RELATED PARTY TRANSACTIONS
In the normal course of our industrial activities, we sell products and
derive certain other revenues from companies in which we hold an equity
interest. The revenues derived from these transactions are not material for
ABB Ltd. In addition, in the normal course of our industrial activities, we
purchase products from companies in which we hold an equity interest. The
amounts involved in these transactions are not material for ABB Ltd. Also, in
the normal course of our industrial activities, 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.
ABB Ltd had granted loans to unconsolidated related parties amounting to
approximately $124 million as of December 31, 2002 and $86 million as of
March 31, 2003. At March 31, 2003, we had a note receivable of $41 million from
Termobarranquilla S.A. Empresa de Servicios Publicos, Colombia, an
equity-accounted company in which we hold a 29% interest. All other loans to
related parties amounted to less than $25 million as of March 31, 2003.
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In June 2000, we entered into a share subscription agreement to acquire a
42% interest in b-business partners B.V., a venture capital fund formed to
invest in and develop business-to-business e-commerce companies across Europe.
Pursuant to the terms of the agreement, we committed to invest a total of
$278 million, of which $69 million was paid in 2000 and $134 million was paid
during the first half of 2001. In December 2001, Investor AB, another founding
shareholder of the fund, acquired 90% of our investment and capital commitments
for approximately book value, or $166 million in cash. After these transactions,
b-business partners repurchased 50% of its outstanding shares, which resulted in
a return of capital to us of $10 million. After these transactions, we retain a
4% investment in b-business partners and we are committed to provide additional
capital to it of approximately $4 million (a euro-denominated commitment that
may fluctuate with exchange rates). Further, b-business partners retains a put
right to cause us to repurchase 150,000 shares of b-business partners at a cost
of approximately $16 million (a euro-denominated commitment that may fluctuate
with exchange rates). At the time of these transactions, Percy Barnevik, the
former chairman of the board of directors of ABB, was the chairman of Investor
AB and Jacob Wallenberg, a member of the board of directors of ABB, was the
vice-chairman of Investor AB.
In December 2001, we entered into, and, in April 2002, we amended and
restated, a $3,000 million 364-day revolving credit facility. Skandinaviska
Enskilda Banken was one of the lenders under the credit facility with a
$155 million commitment representing approximately 5% of the total commitment
available to us under the credit facility. In December 2002, we replaced that
credit facility with a $1.5 billion 364-day revolving credit facility that has a
further one-year term-out feature. Skandinaviska Enskilda Banken is also a
lender under our new credit facility, with a $145 million commitment,
representing approximately 9.6% of the total commitment available to us.
Mr. Jacob Wallenberg, a member of our board of directors, is the chairman of the
board of directors of Skandinaviska Enskilda Banken. In addition, Dresdner Bank
Luxembourg S.A. is a lender under the new credit facility, with a $97 million
commitment, representing approximately 6.5% of the total commitment available to
us. Mr. Bernd Voss is a member of the supervisory board of Dresdner Bank AG.
We consider our relationships with Skandinaviska Enskilda Banken and
Dresdner Bank to be among our primary banking relationships. In addition to
participating in the credit facilities described above, each of these banks has
from time to time provided commercial banking, lending, investment banking and
financial advisory services to us and our affiliates in the ordinary course of
business. They have received customary fees and/or commissions for such
services. We expect to continue to conduct transactions with them in the future
on an arm's length basis.
We are party to several contracts with Companhia Vale do Rio Doce ("CVRD"),
a Brazilian company with operations in mining, logistics (railways and ports)
and power generation, and its subsidiaries. These contracts relate to ordinary
course activities such as technical service and maintenance, engineering
services, automation of systems, commissioning, testing or installation of
systems, physical and chemical analysis and equipment supply. These contracts
are not material to ABB in the aggregate. Mr. Roger Agnelli, a member of our
board of directors, is the chief executive officer of CVRD.
There are no cross-shareholdings in excess of 5% of the share capital or the
voting rights between ABB and another company.
As of the date of this annual report, we do not have any loans outstanding
to members of the board of directors or the executive committee and we have not
granted any guarantees or other security in their favor. Furthermore, there are
no interests of members of the board of directors or the executive committee or
of senior officers in transactions effected by us which are or were unusual in
their nature or conditions or are or were not on terms we consider to be at
arm's length.
For further information, see "Item 5. Operating and Financial Review and
Prospects--Related and Certain Other Parties."
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ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 18. Financial Statements" for a list of financial statements
contained in this annual report.
LEGAL PROCEEDINGS
We are involved in legal proceedings from time to time incidental to the
ordinary conduct of our business. These proceedings principally involve matters
relating to warranties, personal injury, damage to property, environmental
liabilities and intellectual property rights.
ABB Barranquilla Inc. ("ABB Barranquilla"), a subsidiary of our ABB Equity
Ventures Inc. ("ABB Equity Ventures") subsidiary, is an equity investor in
Termobarranquilla S.A., Empresa de Servicios Publicos ("TEBSA"), which owns a
Colombian independent power generation project known as Termobarranquilla. One
of the other shareholders of TEBSA is Corporacion Electrica de la Costa
Atlantica ("CORELCA"), a government-owned Colombian electric utility. CORELCA
also purchases the electricity produced from the Termobarranquilla project. In
addition to our equity investment, our former power generation business was EPC
contractor for Termobarranquilla. The project was awarded to us and another
company, as joint bidders, after a competitive bidding process in 1994. The
co-bidder manages the operation and maintenance of the facility. We entered into
certain side agreements with the co-bidder for a sharing and reallocation of a
portion of the amounts paid to us and to the co-bidder under the EPC contracts
and the operation and maintenance contract. These side agreements were not
disclosed at the time they were entered into to TEBSA or CORELCA. They also were
not disclosed to the lenders who provided financing to TEBSA for the project,
including U.S. Overseas Private Investment Corporation and U.S. Export Import
Bank, at the time of the closing of such financing, as required pursuant to the
lending documents.
On June 28, 2002, ABB Barranquilla, ABB Equity Ventures, the co-bidder,
TEBSA and CORELCA settled all claims and potential claims by TEBSA and CORELCA
arising out of the entry into or performance of the side agreements. CORELCA and
TEBSA released and discharged ABB and its affiliates from any claims that TEBSA
and CORELCA had, may have or may thereafter claim to have, arising on or before
June 28, 2002 (the effective date of the settlement) and whether or not
previously asserted, which in any way may arise out of or relate to the entry
into or the performance of any of the side agreements. As consideration, we
terminated the side agreements, paid $13 million to CORELCA, and reimbursed
CORELCA for its legal expenses. We also agreed to indemnify (i) TEBSA for any
and all penalties, fines and interest, if any, incurred by TEBSA arising out of
or in connection with the entry into or performance of the side agreements and
(ii) CORELCA for liabilities, costs or expenses related to certain taxes payable
by CORELCA as a result of the settlement. On June 28, 2002, TEBSA's project
lenders consented to the terms of the settlement and waived all defaults under
the project lending documents arising out of the entry into or performance of
the side agreements. As consideration for the lenders' consent and waiver, ABB
Switzerland Holding Ltd. and the co-bidder agreed to indemnify the project
lenders from and against (i) any investigation, litigation or proceeding related
to the entry into or performance of the side agreements and (ii) any other
exposure as a consequence of, or which might be asserted against any of the
project lenders by virtue of, the failure of ABB or the co-bidder to disclose
the side agreements. The indemnification obligation is joint but not several and
is limited to the credit exposure of the project lenders. On December 31, 2002,
the outstanding balance owed by TEBSA to the project lenders was approximately
$254 million.
On February 3, 2003, ABB Ltd, ABB Holding Inc. and ABB Equity Ventures
entered into a compliance agreement with U.S. Export-Import Bank. The compliance
agreement, among other
130
things, requires us to adopt and maintain additional compliance procedures and
allow U.S. Export-Import Bank to audit our compliance.
In response to information apparently provided by our employees, during 2002
we undertook an investigation of potentially improper business conduct within
our Oil, Gas and Petrochemical division. The investigation was undertaken by a
team of internal auditors and independent special counsel. As a result of the
investigation, we learned that some employees of subsidiaries in this division
apparently were involved in making unauthorized payments of approximately
$1.1 million, and promises of additional payments, from 1997 through 2002. The
payments were made in order to obtain from local officials in a West African
country confidential information and favorable consideration with respect to
contracts upon which we were bidding. The payments violated our internal
policies on business ethics.
We have voluntarily reported our findings to the U.S. Department of Justice
and the U.S. Securities and Exchange Commission and have pledged to them our
full cooperation. If the Department of Justice or the Securities and Exchange
Commission determine that violations of law have occurred, they could seek civil
or, in the case of the Department of Justice, criminal sanctions, including
monetary penalties against us. Neither the Department of Justice nor the
Securities and Exchange Commission has informed us about what action, if any,
they will take in response to our voluntary disclosure. We have also taken the
following voluntary remedial actions: we terminated the improper payments; we
have terminated contracts with an individual and companies believed to have been
involved in the improper payments; we replaced senior management at the relevant
subsidiary; we disciplined the responsible employees with a range of sanctions
including severance of employment, loss of compensation and title, formal
reprimands and ethics counseling and training; we hired outside experts to
assist in the correction of our books and records to properly record the
payments; and we have provided and will be providing additional ethics and
compliance training.
For a description of our involvement in asbestos litigation, see "Item 3.
Risk Factors--We are subject to ongoing litigation and substantial liabilities
arising out of asbestos claims from discontinued operations" and "Item 5.
Operating and Financial Review and Prospects--Contingencies and Retained
Liabilities--Asbestos Claims."
DIVIDENDS AND DIVIDEND POLICY
See "Item 3. Key Information--Dividends and Dividend Policy."
SIGNIFICANT CHANGES
Except as otherwise described in this annual report, there has been no
significant change in our financial position since December 31, 2002.
ITEM 9. THE OFFER AND LISTING
MARKETS
The shares of ABB Ltd are principally traded on virt-x (under the symbol
"ABBN") and on the Stockholm Stock Exchange (under the symbol "ABB"). The shares
are also traded on the London Stock Exchange and the Frankfurt Stock Exchange.
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 a deposit
agreement with Citibank, N.A. as depositary. Each ADS represents one share.
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TRADING HISTORY
The table below sets forth, for the periods indicated, the reported high and
low closing sale prices for the shares on virt-x and the Stockholm Exchange and
for the ADSs on the New York Stock Exchange.
STOCKHOLM NEW YORK STOCK
VIRT-X(1) EXCHANGE EXCHANGE
------------- --------------- --------------------
HIGH LOW HIGH LOW HIGH LOW
----- ----- ------ ------ ------- -------
(CHF) (SEK) ($)
ANNUAL HIGHS AND LOWS
1999 (from June 28, 1999)............................... 48.69 33.94 259.25 187.50
2000.................................................... 54.50 37.94 288.50 215.00
2001.................................................... 44.38 10.00 259.00 65.50 18.95(2) 6.48(2)
2002.................................................... 18.30 1.63 113.50 10.30 11.11 1.14
QUARTERLY HIGHS AND LOWS
2001 First Quarter.............. 44.38 28.63 259.00 173.00
Second Quarter............. 33.10 25.00 196.00 152.00 18.95(2) 14.20(2)
Third Quarter.............. 27.60 10.20 167.00 70.50 15.33 6.91
Fourth Quarter............. 19.05 10.00 122.00 65.50 11.45 6.48
2002 First Quarter.............. 18.30 11.00 113.50 68.00 11.11 6.60
Second Quarter............. 15.75 12.15 98.50 75.50 9.77 7.85
Third Quarter.............. 13.70 4.87 85.00 30.50 9.07 3.40
Fourth Quarter............. 5.37 1.63 33.00 10.30 3.54 1.14
2003 First Quarter.............. 4.72 2.55 29.90 15.90 3.51 1.95
Second Quarter
(through June 25)......... 5.10 3.23 29.80 20.20 3.95 2.43
MONTHLY HIGHS AND LOWS
2002 December................... 5.27 3.93 32.00 24.90 3.54 2.72
2003 January.................... 4.72 3.93 29.90 24.50 3.51 2.85
February................... 4.09 2.55 25.70 15.90 3.00 1.95
March...................... 3.90 2.83 24.20 17.90 2.88 2.15
April...................... 4.17 3.23 25.10 20.20 3.05 2.43
May........................ 4.64 3.93 27.90 23.50 3.48 3.06
June (through June 25)..... 5.10 4.07 29.80 24.10 3.95 3.16
------------------------------
(1) Until June 25, 2001, the shares were traded on the SWX Swiss Exchange.
(2) From April 6, 2001.
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THE SWX SWISS EXCHANGE AND VIRT-X
ABB Ltd's shares are listed on the main board of the SWX Swiss Exchange and
are included in the Swiss Market Index, a capitalization-weighted index of the
shares of 27 large Swiss corporations currently traded on virt-x. ABB Ltd is
subject to the regulations and listing rules of the SWX Swiss Exchange.
The SWX Swiss Exchange was founded in 1993 as the successor to the local
stock exchanges of Zurich, Basel and Geneva. Trading in foreign equities and
derivatives began in December 1995. In August 1996, the SWX Swiss Exchange
introduced full electronic trading in Swiss equities, derivatives and bonds. The
aggregate value of trading activity of Swiss shares, investment funds, warrants,
and bonds as well as other non-Swiss shares, warrants and bonds on the SWX Swiss
Exchange was in excess of CHF 1,000 billion in 2002. As of December 31, 2002,
the equity securities of 398 corporations, including 140 foreign corporations,
were listed and traded on the SWX Swiss Exchange.
In 2001, virt-x Exchange Limited (formerly Tradepoint Financial Networks
plc), a pan-European blue chip trading platform based in London, was created as
a collaboration among the SWX
Swiss Exchange, the U.K.-based securities exchange TradepointFinancial Networks
plc and a consortium of internationally active investment banks and financial
services companies (called the TP Consortium) to provide an efficient and cost
effective pan-European equities market. virt-x is a Recognized Investment
Exchange supervised by the Financial Services Authority in the United Kingdom.
On February 2, 2003, the SWX Swiss Exchange announced that as of January 31,
2003, it controls 94.8% of the equity capital and voting rights of virt-x
following a successful public tender offer.
All trading in the 27 stocks included in the Swiss Market Index, including
ABB, was transferred to virt-x on June 25, 2001. The trading of these stocks is
conducted in Swiss francs. virt-x uses the SWX Swiss Exchange trading platform
and network under a facilities management agreement. Most of the systems
operation and development capability is outsourced to the SWX Swiss Exchange in
Switzerland.
Trading begins each business day at 9:00 a.m. (CET) and continues until
5:30 p.m. (CET). At 5:20 p.m. (CET) the exchange moves into "Closing Auction"
status. The closing auction stops at 5:30 p.m. (CET). Orders can be placed up to
10:00 p.m. (CET) and again from 6:00 a.m. (CET) onwards.
Members register incoming orders from their customers in their trading
system. These orders are forwarded to the relevant trader and checked, or fed
directly into the trading system by the trader. From here they are submitted to
the central exchange system of virt-x, which acknowledges receipt of the order,
assigns a time stamp to it and verifies its formal correctness.
Depending on the type of transaction, the orders are also transmitted to
data vendors (such as Reuters, Bloomberg and Telekurs). In the fully automated
exchange system in use at virt-x, buy and sell orders are matched according to
clearly defined matching rules.
Regardless of their size or origin, incoming orders are executed in the
order of price (first priority) and time received (second priority).
Transactions take place through the automatic matching of orders. Each valid
order of at least one share is entered and listed according to its price. In
general, orders placed at the best price (known as "market orders") are executed
first followed by orders placed with a price limit (known as "limit orders"). If
several orders are listed at the same price, they are executed in the order of
the time they were entered.
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Any transaction executed under the rules of virt-x must be reported. Order
book executions are automatically and immediately reported by the trading
system. There are separate provisions for the delayed reporting of certain
qualifying trades. Individual elements of portfolio trades must be reported
within one hour, while block trades and enlarged risk trades must be reported
when the business is substantially (80%) completed, or by 5:30 p.m. (CET) on the
day of trade, unless the trade is agreed after 4:30 p.m. (CET), in which case
the trade must be reported by 5:30 p.m. (CET) the following business day. Block
trades and enlarged risk trades are subject to minimum trade size criteria. All
other transactions must be reported within three minutes, except when the
transaction is conducted in a SWX Swiss Exchange listed security, in which case
the trade must be reported within 30 minutes.
virt-x trades can be settled by CRESTCo, SIS SegaInterSettle AG or Euroclear
Bank S.A./N.V. Members may employ one, two or a combination of all three
depositories to settle their virt-x transactions. Each depository maintains its
own unique service offering and facilitates settlements with the other
depositories by real-time links. Exchange transactions are usually settled on a
T+3 basis, meaning that delivery against payment of exchange transactions occurs
three days after the trade date. Where any settlement is due to take place on a
day on which the central bank for the currency in which the transaction is
conducted is closed, the settlement due date is adjusted to be the next business
day after the currency holiday.
The traded prices of all securities are constantly monitored. As soon as the
difference between two successive trade prices is greater than a specific
predefined value, a brief trading suspension, called "stop trading," is
automatically triggered. The triggering parameters and length of a stop trading
differ according to the security.
THE SWEDISH SECURITIES MARKET
ABB Ltd's shares are listed on the A-list (consisting of the largest
companies in Sweden) on the Stockholm Exchange and are included in the OMX
Index, which mirrors the total price changes in the 30 most traded shares on the
Stockholm Exchange. ABB Ltd is subject to the regulations and listing rules of
the Stockholm Exchange.
TRADING SYSTEM
Trading on the Stockholm Exchange is conducted on behalf of clients by banks
and brokers. While banks and brokers are permitted to act as principal in
trading both on and off the Stockholm Exchange, they generally engage in
transactions as agents. There are no market maker or specialist systems on the
Stockholm Exchange.
Each trading day on the Stockholm Exchange begins with an open morning call
and ends with an open closing call. At 9:15 a.m. (CET) an open call procedure
begins for all shares simultaneously, preceding the commencement of trading at
9:30 a.m. (CET), when the first share is assigned its opening price, and then
becomes subject to continuous trading. After approximately 8 minutes, at
9:38 a.m. (CET), the opening prices for all the shares have been established and
trading continues at prices based on market demand until 5:20 p.m. (CET) when
the closing call is initiated. The closing call ends at 5:30 p.m. (CET), which
is the Stockholm Exchange's closing time. Buy and sell orders are registered on
the Stockholm Automated Exchange System, or SAXESS, a computerized
order-matching system, in round lots, typically of 100 shares, and odd lots are
matched separately at the last price for round lots.
The Stockholm Exchange is a fully electronic marketplace. Trading on the
SAXESS comprises all Swedish stocks traded on the Stockholm Exchange and the new
paperless account-based security system, administered by the VPC, was introduced
full scale. Member firms of the Stockholm Exchange are able to operate from an
optional geographic location via advanced data communications. The brokers'
representatives are able to trade via network stations that have been developed
by the Stockholm Exchange or via their own electronic data processing systems
which are linked to SAXESS.
134
In addition to official trading on the Stockholm Exchange, there is also
trading off the Stockholm Exchange during and after official trading hours.
Trades in excess of 20 round lots can be effected off the Stockholm Exchange if
the transaction price lies within the spread then appearing on SAXESS. Trades in
excess of 500 round lots (for shares on the "Most Traded Shares" list of the
Stockholm Exchange) or 250 round lots (for all other shares), however, may be
effected off the Stockholm Exchange without regard to that spread. Trades after
official trading hours of the Stockholm Exchange must normally be effected at a
transaction price that lies within the spread appearing on SAXESS at the time of
the closing. If there are no orders in SAXESS at that time, the trade may be
effected at a price that otherwise reflects the market situation at that time.
If the market situation changes after the closing of SAXESS, trades may be
effected outside the spread, provided that it can be shown that the transaction
price reflected the market situation prevailing at the time of the trade.
Trading on the Stockholm Exchange tends to involve a higher percentage of retail
clients, while trading off the Stockholm Exchange, whether through
intermediaries or directly, often involves larger Swedish institutions, banks
arbitraging between the Swedish market and foreign markets and foreign buyers
and sellers purchasing shares from or selling shares to Swedish institutions.
The Stockholm Exchange is an authorized stock exchange in accordance with
the Swedish Stock Exchange and Clearing House Act (LAG 1992:543 OM BORS OCH
CLEARINGVERKSAMHET) and is subject to regulation by the Swedish Financial
Supervisory Authority. The Swedish Stock Exchange and Clearing House Act
provides for the regulation and supervision of the Swedish securities markets
and market participants and the Swedish Financial Supervisory Authority
implements this regulation and supervision.
The regulatory system governing trading on and off the Stockholm Exchange is
intended to achieve transparency and equality of treatment. All trades on the
Stockholm Exchange are made through SAXESS to the Stockholm Exchange, which
records information as to the banks and the brokers involved, the issuer, the
number of shares and the price and the time of the transaction. Each bank or
broker is required to maintain records indicating trades carried out as agent
or, in the case of banks, as principal. All trades off the Stockholm Exchange by
or through members of the Stockholm Exchange must also be reported to the
Stockholm Exchange within 5 minutes, unless they are effected after 5:30 p.m.
(CET). Trades after 5:30 p.m. (CET) must be reported no later than 15 minutes
prior to the opening of the next trading day. All trading information reported
on the Stockholm Exchange is publicly available. The Stockholm Exchange also
maintains a Market Supervision Unit that reviews trading during the day on a
"real time" basis, as described below.
Under the Act on Reporting Obligations for Certain Holdings of Financial
Instruments (LAG (2000:1087) OM ANMALNINGSSKYLDIGHET FOR VISSA INNEHAV AV
FINANSIELLA INSTRUMENT), certain natural persons may have an obligation to
report their shareholdings and changes in shareholdings to the Swedish Financial
Supervisory Authority. The persons covered by this obligation are persons who
through their position or mandate normally obtain non-public information which
can be presumed to affect the price of the listed securities (so called "insider
information"), such as members of the board of directors of the listed Swedish
company in question, the CEO or deputy CEO. The Swedish Financial Supervisory
Authority keeps an insider register containing such reported information, which
is publicly available.
The Swedish Insider Penal Act (INSIDERSTRAFFLAGEN 2000:1086) provides
sanctions against insider trading. The insider trading rules are policed by the
Swedish Financial Supervisory Authority and the Market Supervision Unit of the
Stockholm Exchange reviews trading data for indications of unusual market
activity or trading behavior.
The Market Supervision Unit also continually examines information
disseminated by listed companies. Accordingly, information such as earnings
reports, acquisition and other investment
135
plans and changes in ownership structure, is reviewed on a daily basis. When the
Market Supervision Unit becomes aware of non-public price sensitive information,
it monitors trading in the shares concerned to ensure that if unusual trading
activity develops which evidences that persons may be trading on that
information, the information is made public as soon as possible.
Certain types of agreements in connection with financial instruments
trading, such as fictitious transactions or transactions aiming to withdraw
financial instruments from public trading, if entered into with the intention of
improperly influencing the market price of these instruments, constitutes a
criminal offense under the Insider Penal Act. Similarly, other measures taken
with a view to improperly influencing the market price constitute a criminal
offense. Market manipulation may also constitute fraud or swindlery under
Swedish law. However, as previously described, trading data is recorded as to
all securities and derivative transactions relating to listed securities and
data related to trading activity is subject to supervisory review by the Swedish
Financial Supervisory Authority. This provides an enforcement mechanism for
reducing market manipulation. The Swedish Financial Supervisory Authority may
cause the operating license of a bank or broker to be revoked if the bank or
broker has engaged in improper conduct. Improper conduct could include behavior
constituting market manipulation.
REGISTRATION PROCESS
The shares of ABB are registered in the account-based security system of
VPC, and the register of shareholders of ABB is kept by VPC. VPC is an
authorized central securities depository under the Swedish Act on Registration
of Financial Instruments (LAG 1998:1479 OM KONTOFORING AV FINANSIELLA
INSTRUMENT) and carries out, among other things, the duties of registrar for
Swedish companies listed on the Stockholm Exchange.
The VPC keeps a paperless share registration system. Share certificates in
ABB are not issued. Title to shares is ensured only through registration with
VPC.
In accordance with Swedish law and practice and the regulations of VPC:
- Only one person is normally registered as the holder of a share. Joint
holders are not usually recorded on the VPC register. Shareholders may be
entered on the register in the name of the beneficial owner or in the name
of the person designated as nominee for the beneficial owner. In the
latter case, a note is made in the register to the effect that the nominee
is holding the share(s) in such capacity. There is also a separate
register maintained by VPC for the recording of persons who have other
interests in respect of shares, such as the interest of a pledgee.
- Where the registered holder is a nominee, the nominee receives, for the
account of the beneficial owner, dividends and, on capital increases,
shares as well as rights in respect of shares such as in relation to a
rights issue or a bonus issue. Dividends are remitted in a single payment
to the nominee. That nominee is then responsible for the distribution of
these dividends to the beneficial owner. A similar procedure is used for
share issues.
- Specific authority to act as a nominee must be given by VPC.
- A nominee is required to file a report with VPC with regard to any holding
on behalf of a single beneficial owner in excess of 500 shares in one
company. A list containing this information must be open to public
inspection. Such a list must reveal the name of the beneficial owner but
need not reveal the name of the nominee in whose name the shares have been
registered. The beneficial owner would need to reveal its name if it
wishes to vote at a shareholders' meeting, since a holder must re-register
nominee-held shares in the name of such beneficial holder no later than
ten calendar days prior to the shareholders' meeting (the record day).
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- The rights attaching to shares that are eligible for dividends, rights
issues or bonus issues, accrue to those persons whose names are recorded
in the register of shareholders on a particular day (the record day).
Dividends are paid to an account designated by the shareholder or, in the
absence of an account, sent to the shareholder at the address registered
with VPC.
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 Federal 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 with the
U.S. Securities and Exchange Commission and the commercial registry of the
Canton of Zurich (Switzerland), and by Swiss statutory law.
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 registry number is CH-020.3.021.615-2.
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 area 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.
OUR SHARES
ABB Ltd's shares are registered shares (NAMENAKTIEN) with a par value of CHF
2.50 each. The shares are fully paid and non-assessable. The shares rank PARI
PASSU in all respects with each other, including in respect of entitlements to
dividends, to a share of the liquidation proceeds in the case of a liquidation
of ABB Ltd, and to preemptive rights.
Each share carries one vote in ABB Ltd's general shareholders' meeting.
Voting rights may be exercised only after a shareholder has been recorded in
ABB Ltd's share register (AKTIENBUCH) as a shareholder with voting rights, or
with VPC in Sweden, which maintains a subregister of ABB Ltd's share register.
Registration with voting rights is subject to the restrictions described in
"--Transfer of Shares."
The shares are not issued in certificated form and are held in collective
custody at SIS SegaInterSettle AG. Shareholders do not have the right to request
printing and delivery of share certificates (AUFGEHOBENER TITELDRUCK), but may
at any time request ABB Ltd to issue a confirmation of the number of registered
shares held.
THE SHARE SPLIT
In 2001, the Swiss Federal Code of Obligations was amended to enable Swiss
corporations to reduce the former minimal par value of shares from CHF 10 to CHF
0.01. At ABB Ltd's annual general meeting held on March 20, 2001, its
shareholders approved a share split in a four-for-one ratio to reduce the par
value of the shares from CHF 10 each to CHF 2.50 each. The share split was
registered in the Commercial Register effective May 11, 2001.
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CAPITAL STRUCTURE
ISSUED SHARES
ABB Ltd was incorporated with an initial share capital of CHF 100,000
divided into 10,000 fully paid registered shares with a par value of CHF 10
each. With effect as of June 28, 1999, ABB Ltd's share capital was increased to
CHF 3,000,023,580 by the issuance of additional 299,992,358 registered shares
with a par value of CHF 10 each. In accordance with the requirements of the
Swiss Federal Code of Obligations, the following information was recorded in the
commercial register in connection with the capital increase:
(i) that 145,807,329 of the newly issued registered shares with par value
of CHF 10 each were issued against contribution in kind of 5,453,500 registered
shares with a par value of CHF 10 each and 7,904,200 bearer shares with a par
value of CHF 50 each of ABB Participation AG (formerly ABB AG) in Baden,
Switzerland, as per a contribution agreement of June 26, 1999;
(ii) that 142,830,293 registered shares with par value of CHF 10 each were
issued against contribution in kind of 651,818,826 A shares and 241,261,761 B
shares of ABB Participation AB (formerly ABB AB) in Vasteras, Sweden, as per a
contribution agreement of June 26, 1999;
(iii) that pursuant to an acquisition agreement of June 26, 1999, ABB Ltd
acquired 16,383,744 A shares and 28,453,689 B shares of ABB Participation AB
(formerly ABB AB) in Vasteras, Sweden, for the price of CHF 71,708,860; and
(iv) that ABB Ltd intended to acquire, after the capital increase, all
shares of ABB Participation AG (formerly ABB AG) in Baden, Switzerland, which
were not tendered to ABB Ltd in connection with the exchange offer of March 26,
1999 from the public shareholders or pursuant to the cancellation procedures in
accordance with Article 33 of the Swiss Stock Exchange Act. See "Item 4.
Information on the Company--Introduction--History of the ABB Group."
With effect as of May 11, 2001, by way of a share split (see "--The Share
Split") each registered share with par value of CHF 10 was split into four
registered shares with par value of CHF 2.50 each. The share split had no effect
on the total amount of ABB Ltd's share capital.
The following table sets forth the changes in the issued share capital of
ABB Ltd since ABB Ltd's incorporation in 1999:
CHANGE OF CHANGE IN TOTAL NO. OF TOTAL SHARE NOMINAL
YEAR TRANSACTION NO. IN SHARES SHARE CAPITAL SHARES CAPITAL VALUE
---- ------------------- ------------- ------------- ------------- ------------- --------
(CHF) (CHF) (CHF)
1999 Capital increase 299,992,358 2,999,923,580 300,002,358 3,000,023,580 10.00
2001 Share split 900,007,074 -- 1,200,009,432 3,000,023,580 2.50
The current issued share capital of ABB Ltd (including treasury shares), as
registered in the commercial register, is CHF 3,000,023,580 divided into
1,200,009,432 fully paid registered shares, with a par value of CHF 2.50 per
share.
CONDITIONAL CAPITAL
ABB Ltd's share capital may be increased in an amount not to exceed CHF
550,000,000 through the issuance of up to 220,000,000 fully paid registered
shares with a par value of CHF 2.50 per share (a) up to the amount of CHF
525,000,000 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 by ABB Ltd
or one of its group companies and (b) up to the amount of CHF 25,000,000 through
the exercise of warrant rights granted to its shareholders by ABB Ltd or by one
of its group companies. ABB Ltd's board of
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directors may grant warrant rights not taken up by shareholders for other
purposes in the interest of ABB Ltd. The preemptive rights of the shareholders
will be 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 the new shares. The conditions of the
conversion rights and/or warrants will be determined by the board of directors
of ABB Ltd.
The acquisition of shares through the exercise of conversion rights and/or
warrants and each subsequent transfer of the shares will be subject to the
transfer restrictions of ABB Ltd's articles of incorporation. See "--Transfer of
Shares."
In connection with the issuance by ABB Ltd or one of its group companies of
convertible or warrant-bearing bonds or other financial market instruments, the
board of directors will be 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 of directors
denies advance subscription rights, the convertible 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.
ABB Ltd's share capital may be increased in an amount not to exceed CHF
200,000,000 through the issuance of up to 80,000,000 fully paid registered
shares with a par value of CHF 2.50 per share by the issuance of new shares to
employees of ABB Ltd and its group companies. The preemptive and advance
subscription rights of ABB Ltd's shareholders will be 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 of directors, taking into account
performance, functions, levels of responsibility and profitability criteria.
ABB Ltd may issue shares or subscription rights to employees at a price lower
than that quoted on the 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 transfer restrictions of ABB Ltd's articles of
incorporation. See "--Transfer of Shares."
The relevant provision in the articles of incorporation was approved by the
shareholders' meeting on May 16, 2003. In accordance with mandatory Swiss
statutory law (art. 706 Swiss Code of Obligations) the shareholders' resolution
can be challenged until July 16, 2003.
AUTHORIZED CAPITAL
The board of directors of ABB Ltd is authorized to increase ABB Ltd's share
capital in an amount not to exceed CHF 250,000,000 through the issuance of up to
100,000,000 fully paid registered shares with a par value of CHF 2.50 per share
by not later than May 19, 2005. Increases in partial amounts shall be permitted.
The subscription and acquisition of the new shares, as well as each
subsequent transfer of the shares, will be subject to the transfer restrictions
of ABB Ltd's articles of incorporation. See "--Transfer of Shares."
The board of directors will determine the issue price, the type of payment,
the date of issue of new shares, the conditions for the exercise of pre-emptive
rights, and the beginning date for any dividend entitlement. In this regard, the
board of directors may issue new shares by means of a firm underwriting through
a banking institution, a syndicate or another third party and a subsequent offer
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of these shares to current shareholders. ABB Ltd's board of directors may permit
pre-emptive rights that have not been exercised to expire or 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 ABB Ltd's
interest.
The board of directors is further authorized to restrict or deny the
pre-emptive rights of the shareholders and to allocate such rights to third
parties if the shares are to be used (a) for the acquisition of an enterprise,
parts of an enterprise, participations or for new investments, or, in case of a
share placement, for the financing or refinancing of such transactions, (b) for
the purpose of broadening ABB Ltd's shareholder constituency in connection with
a listing of shares on domestic or foreign stock exchanges, (c) for employee
participation plans or (d) for purposes of fulfilling ABB Ltd's obligations
under the "ABB and Non-Debtor Affiliate Settlement Agreement" in connection with
the Chapter 11 plan of reorganization of Combustion Engineering in a number not
exceeding 30,298,913 shares. For more information regarding the Chapter 11
filing, see "Item 5. Operating and Financial Review and Prospects--Contingencies
and Retained Liabilities--Asbestos Claims."
The relevant provision in the articles of incorporation was approved by the
shareholders' meeting on May 16, 2003. In accordance with mandatory Swiss
statutory law (art. 706 Swiss Code of Obligations) the shareholders' resolution
can be challenged until July 16, 2003.
TRANSFER OF SHARES
The transfer of shares is effected by corresponding entry in the books of a
bank or depository institution following an assignment in writing by the selling
shareholder and notification of such assignment to ABB Ltd by the bank or
depository institution. The transfer of shares also requires that the purchaser
file a share registration form in order to be registered in ABB Ltd's share
register (AKTIENBUCH) as a shareholder with voting rights. Failing such
registration, the purchaser may not be able to participate in or vote at
shareholders' meetings, but will be entitled to dividends and liquidation
proceeds. Shares and associated pecuniary rights may only be pledged to the
depository institution that administers the book entries of those shares for the
account of the shareholder.
A purchaser of shares will be recorded in ABB Ltd's share register with
voting rights upon disclosure of its name and address. However, ABB Ltd may
decline a registration with voting rights if the 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. If persons fail to expressly declare in their
registration application that they hold the shares for their own accounts
("nominees"), the board of directors may still enter such persons in the share
register with the right to vote, provided that the nominee has entered into an
agreement with the board of directors concerning his status, and further
provided the nominee is subject to recognized bank or financial market
supervision.
After having given the registered shareholder or nominee the right to be
heard, the board of directors may cancel registrations in the share register
retroactive to the date of registration if such registrations were made on the
basis of incorrect information. The relevant shareholder or nominee will be
informed immediately as to the cancellation. The board of directors will
regulate the details and issue the instructions necessary for compliance with
the preceding regulations. In special cases, it may grant exemptions from the
rule concerning nominees.
Acquirors of registered shares who have chosen to have their shares
registered in the share register with VPC do not have to present any written
assignment from the selling shareholder nor may they be requested to file a
share registration form or declare that they have acquired the shares in their
own name and for their own account in order to be registered as a shareholder
with
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voting rights. However, in order to be entitled to vote at a shareholders'
meeting those acquirors need to be entered in the VPC share register in their
own name no later than ten calendar days prior to the shareholders' meeting.
Uncertificated shares registered with VPC may be pledged in accordance with
Swedish law.
SHAREHOLDERS' MEETINGS
Under Swiss law, the annual general meeting of shareholders must be held
within six 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% of ABB Ltd's nominal 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. Holders of VPC-registered shares are able to attend shareholders'
meetings in respect of such shares. Notices of shareholders' meetings are
published in at least three national Swedish daily newspapers, as well as on
ABB Ltd's Internet website. Such notices contain information as to procedures to
be followed by shareholders in order to participated and exercise voting rights
at the shareholders' meetings.
One or more shareholders whose combined holdings represent an aggregate par
value of at least CHF 1,000,000 may request in writing 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 auditors, the group
auditors and the special auditors referred to below;
- approval of the annual 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;
- 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 the 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 candidate is standing for election, the
presiding officer will order a second ballot in which a relative majority shall
be decisive.
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A resolution passed with a qualified majority of 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 preemptive rights;
- a transfer of ABB Ltd's place of incorporation; and
- ABB Ltd's dissolution without liquidation.
In addition, the introduction or abolition of any provision in the articles
of incorporation providing for a qualified majority must be resolved in
accordance with such qualified majority voting requirements.
At shareholders' meetings, shareholders can be represented by proxy, but
only by their legal representative, another shareholder with the right to vote,
a corporate body (ORGANVERTRETER), an independent proxy (UNABHANGIGER
STIMMRECHTSVERTRETER) or a depository institution (DEPOTVERTRETER). 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. See "--Transfer of
Shares." For practical reasons, shareholders must be registered in the share
register with the right to vote no later than ten calendar days prior to a
shareholders' meeting in order to be entitled to participate and vote at such
shareholders' meeting.
Holders of VPC-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 VPC
system in the name of a nominee, such information is to be provided by the
nominee.
NET PROFITS AND DIVIDENDS
Swiss law requires that ABB Ltd retain at least 5% of its annual net profits
as general reserves for so long as these reserves amount to less than 20% of
ABB Ltd's nominal 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 pay dividends only if it has sufficient
distributable profits from previous business years, or if its reserves are
sufficient to allow distribution of a dividend. In either event, dividends may
be paid out only after approval by the shareholders' meeting. The board of
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directors may propose that a dividend be paid out, but cannot itself set the
dividend. The auditors must confirm that the dividend proposal of the board of
directors conforms with statutory law. In practice, the shareholders' meeting
usually approves the dividend proposal of the board of directors.
Dividends are usually due and payable after the shareholders' resolution
relating to the allocation of profits has been passed by the shareholders'
meeting. Under Swiss law, the statute of limitations in respect of dividend
payments is five years. Dividends not collected within five years after their
due date accrue to ABB Ltd and will be allocated to ABB Ltd's general reserves.
Payment of dividends on VPC-registered shares is administered by VPC and
paid out to the holder that is registered with VPC on the record date. Through
the dividend access facility, shareholders with tax residence in Sweden will be
entitled to receive, through the VPC system, a dividend in Swedish krona
equivalent to the dividend paid in Swiss francs without deduction of Swiss
withholding tax. For further information, see "--Taxation."
PREEMPTIVE RIGHTS
Shareholders of a Swiss corporation have certain preemptive rights to
subscribe for new shares issued in connection with capital increases in
proportion to the nominal amount of their shares held. A resolution adopted at a
shareholders' meeting with a supermajority of two-thirds of the shares
represented may, however, repeal, limit or suspend (or authorize the board of
directors to repeal, limit or suspend) preemptive rights for cause. Cause
includes an acquisition of a business or a part thereof, an acquisition of a
participation in a company or the grant of shares to employees.
ADVANCE SUBSCRIPTION RIGHTS
Shareholders of a Swiss corporation may have an advance subscription right
with respect to bonds and other instruments issued in connection with options or
conversion rights for shares if such option or conversion rights are based on
the corporation's conditional capital. However, the shareholders' meeting can,
with a supermajority of two-thirds of the shares represented at the meeting,
exclude or restrict (or authorize the board of directors to exclude or restrict)
such advance subscription rights for cause. See "--Capital
Structure--Conditional Capital."
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. The articles of
incorporation of ABB Ltd do not contain provisions concerning borrowing powers
exercisable by its directors or how such borrowings could be varied.
REPURCHASE OF SHARES
Swiss law limits a corporation's ability to repurchase or hold its own
shares. ABB Ltd and its subsidiaries may only repurchase shares if ABB Ltd has
sufficient freely distributable reserves to pay the purchase price, and if the
aggregate par value of such shares does not exceed 10% of ABB Ltd's nominal
share capital. Furthermore, ABB Ltd must create a special reserve on its balance
sheet in the amount of the purchase price of the acquired shares. Such shares
held by ABB Ltd or its subsidiaries do not carry any rights to vote at
shareholders' meetings, but are entitled to the economic benefits applicable to
the shares generally and are considered to be "outstanding" under Swiss law.
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At the annual general meeting of ABB Ltd held on March 20, 2001, the
shareholders approved a share repurchase in the amount of CHF 60,000,000,
corresponding to 6,000,000 shares (24,000,000 shares after implementation of the
share split), which represents approximately 2% of ABB Ltd's nominal share
capital. This share repurchase took place exclusively on the SWX Swiss Exchange
and was completed in May 2001. At the annual general meeting of ABB Ltd held on
March 12, 2002, the shareholders took notice that such shares would not be
cancelled and would become treasury shares. ABB Ltd sold 80 million treasury
shares in the first quarter of 2003.
ABB Ltd may make additional purchases of shares for treasury from time to
time in the future. Treasury shares are available for issuance to satisfy
obligations under the management incentive plan and for other corporate
purposes.
NOTICES
Written communication by ABB Ltd to its shareholders will be sent by
ordinary mail to the last address of the shareholder or authorized recipient
entered in the share register. To the extent that personal notification is not
mandated by law, all communications to the shareholders are validly made by
publication in the Swiss Official Gazette of Commerce (SCHWEIZERISCHES
HANDELSAMTSBLATT).
Notices required under the Listing Rules of the SWX Swiss Exchange will be
published in two Swiss newspapers in German and French. ABB Ltd or the SWX Swiss
Exchange may also disseminate the relevant information on the online exchange
information systems. Notices required under the Listing Rules of the Stockholm
Exchange will be published in three national daily Swedish newspapers, as well
as on ABB Ltd's website.
DURATION, LIQUIDATION AND MERGER
The duration of ABB Ltd as a legal entity is unlimited. It may be dissolved
at any time by a shareholders' resolution which must be approved by (1) an
absolute majority of the shares represented at the general meeting of
shareholders in the event it is to be dissolved by way of liquidation or (2) a
supermajority of two-thirds of the shares represented at the general meeting of
shareholders in other events (E.G., in a merger where it is not the surviving
entity). Dissolution by court order is possible if it becomes bankrupt or if
shareholders holding at least 10% of the share capital can establish cause for
dissolution.
Under Swiss law, any surplus arising out of a liquidation of a corporation
(after the settlement of all claims of all creditors) is distributed to the
shareholders in proportion to the paid-up par value of shares held but this
surplus is subject to Swiss withholding tax of 35% (see "--Taxation").
DISCLOSURE OF MAJOR SHAREHOLDERS
Under the Swiss Stock Exchange Act, shareholders and groups of shareholders
acting in concert who reach, exceed or fall below the thresholds of 5%, 10%,
20%, 33 1/3%, 50% or 66 2/3% of the voting rights of a Swiss listed corporation
must notify the corporation and the exchange(s) in Switzerland on which such
shares are listed of such holdings in writing within four trading days, whether
or not the voting rights can be exercised. Following receipt of such a
notification, the corporation must inform the public within two trading days.
An additional disclosure requirement exists under the Swiss Federal Code of
Obligations, according to which ABB Ltd must disclose individual shareholders
and groups of shareholders acting in concert and their shareholdings if they
hold more than 5% of all voting rights and ABB Ltd knows or has reason to know
of such major shareholders. Such disclosures must be made once a year in the
notes to the financial statements as published in its annual report.
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MANDATORY OFFERING RULES
Under the Swiss Stock Exchange Act, shareholders and groups of shareholders
acting in concert who acquire more than 33 1/3% of the voting rights (whether
exercisable or not) of a listed Swiss company have to submit a takeover bid to
all remaining shareholders unless the articles of incorporation of the company
provide for an alteration of this obligation. ABB Ltd's articles of
incorporation do not provide for any alterations of the bidder's obligations
under the Swiss Stock Exchange Act. The mandatory offer obligation may be waived
under certain circumstances, for example if another shareholder owns a higher
percentage of voting rights than the acquiror. A waiver from the mandatory bid
rules may be granted by the Swiss Takeover Board or the Swiss Federal Banking
Commission. If no waiver is granted, the mandatory takeover bid must be made
pursuant to the procedural rules set forth in the Swiss Stock Exchange Act and
the implementing ordinances.
The recommendation concerning public offers for the acquisition of shares by
the Swedish Industry and Commerce Stock Exchange Committee in 2003 (the "NBK
Recommendation"), which through incorporation by reference is part of ABB Ltd's
Listing Agreement of the Stockholm Exchange, contains rules on mandatory offers.
In principle, if a shareholder that owns shares representing less than 40% of
the votes in the target company acquires additional shares in the target company
so that such shareholders' total shareholding represents 40% or more of the
votes, the NBK Recommendation stipulates that a public offer (a mandatory
takeover bid) must be made to acquire all the remaining shares issued by the
target company. A waiver from the mandatory bid rules may, under limited
circumstances, be granted by the Swedish Securities Council (SW.
AKTIEMARKNADSNAMNDEN). If no waiver is granted, the mandatory takeover bid must
be made pursuant to the procedural rules set forth in the NBK Recommendation.
CANCELLATION OF REMAINING EQUITY SECURITIES
Under Swiss law, any offeror who has made a tender offer for the shares of a
Swiss target company and who, as a result of such offer, holds more than 98% of
the voting rights of the target company, may petition the court to cancel the
remaining equity securities. The corresponding petition must be filed against
the target company within three months after the lapse of the exchange offer
period. The remaining shareholders may join in the proceedings. If the court
orders cancellation of the remaining equity securities, the target company will
reissue the equity securities and deliver such securities to the offeror against
performance of the offer for the benefit of the holders of the cancelled equity
securities.
DIRECTORS AND OFFICERS
For further information regarding the material provisions of ABB Ltd's
articles of incorporation and the Swiss Federal Code of Obligations regarding
directors and officers, see "Item 6. Directors, Senior Management and
Employees--Corporate Governance--Duties of Directors and Officers."
AUDITORS
The auditors are subject to confirmation by the shareholders at the annual
general meeting on an annual basis. Ernst & Young AG, Zurich and KPMG Klynveld
Peat Marwick Goerdeler SA, Zurich were appointed jointly as independent auditors
of ABB Ltd and the ABB Group for the years ended December 31, 1999 and 2000. At
the annual general meeting of ABB Ltd held on March 20, 2001, its shareholders
elected Ernst & Young AG as independent auditors of ABB Ltd and the ABB Group
for the year ended December 31, 2001. At the annual general meetings held on
March 12, 2002 and May 16, 2003, the shareholders re-elected Ernst & Young AG as
auditors of ABB Ltd and the ABB Group.
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In addition, at the annual general meetings held in 2001, 2002 and 2003, the
shareholders of ABB Ltd elected OBT AG as special auditors to issue special
review reports required in connection with capital increases (if any). The
special auditors are subject to confirmation by the shareholders at the annual
general meeting on an annual basis.
Ernst & Young AG assumed the existing auditing mandate as auditor of the ABB
Group in 1994. The head auditor responsible for the mandate, Charles Barone,
began serving in this function in May 2003.
The audit fees paid by ABB Ltd in 2002 to Ernst & Young for the legally
prescribed audit amounted to $12 million in 2002. Audit services are defined as
the standard audit work performed each fiscal year necessary to allow the
auditor to issue an opinion on ABB Ltd's consolidated financial statements and
to issue an opinion on the local statutory financial statements. ABB Ltd paid
$11 million to Ernst & Young for audit-related services performed during 2002.
Audit-related services include special-purpose audits and other attest services,
as well as accounting and advisory services. ABB Ltd also paid $6 million to
Ernst & Young for non-audit services performed during 2002. Non-audit services
primarily include transaction support services, special purpose projects and tax
services.
Ernst & Young AG is informed regularly of issues and deliberations of board
meetings. Ernst & Young AG is present at all finance and audit committee
meetings where audit planning is discussed and the results of internal and
external audit work are presented. The finance and audit committee will
introduce processes for the review of audit and non-audit services to be
performed by the auditors.
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.
$1.5 BILLION REVOLVING CREDIT FACILITY
On December 17, 2002, ABB Ltd and certain of our subsidiaries entered into a
$1,500 million multicurrency revolving facilities agreement with Barclays
Capital, Bayerische Hypo-Und Vereinsbank AG, Credit Suisse First Boston and
Salomon Brothers International Limited as arrangers, Credit Suisse First Boston
as facility agent and security trustee and certain other financial institutions
named therein as lenders. The agreement was amended in June 2003.
For a description of the facility, see "Item 5. Operating and Financial
Review and Prospects--Liquidity and Capital Resources--Credit Facilities" and
Note 14 to the Consolidated Financial Statements. See also Exhibits 4.3 and 4.4
to this annual report.
SALE AGREEMENT FOR STRUCTURED FINANCE BUSINESS
Pursuant to an agreement dated September 4, 2002 between ABB Financial
Services B.V., General Electric Capital Corporation ("GE Capital") and ABB Ltd,
as amended and restated by an agreement dated November 29, 2002, we sold most of
our structured finance business, including project finance, export and trade
finance and leasing and similar businesses. The cash consideration for the sale
was approximately $2,000 million.
The business was sold with the benefit of customary warranties, covenants
and indemnities in addition to those described herein. We agreed to indemnify GE
Capital with respect to certain intra-group guarantees granted by ABB entities
for the benefit of certain businesses sold to GE Capital,
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and this indemnity is supported by letters of credit provided by one or more
banks. As of May 31, 2003, the aggregate outstanding value of these letters of
credit totaled approximately $126 million.
With respect to certain specified receivables (with a value of approximately
$20 million as of November 30, 2002) sold in the transaction, GE Capital agreed
to make payments to us if the amount recovered by GE Capital in respect of those
receivables exceeded the recovery amount projected by GE Capital. In addition,
certain other designated assets were acquired by GE Capital with the
understanding that third-party purchasers would be sought for such assets. Upon
the occurrence of certain events and prior to February 1, 2004, GE Capital may
require us to repurchase some or all of these designated assets. Our obligation
to repurchase is supported by letters of credit provided by one or more banks.
As of May 31, 2003, the aggregate outstanding value of these letters of credit
totaled approximately $75 million. As of December 31, 2002, we recorded a
liability of $38 million as our estimate of the fair value of GE Capital's right
to require us to repurchase such designated assets.
See Exhibits 4.5 and 4.6 to this annual report and Note 3 to our
Consolidated Financial Statements.
ALSTOM SETTLEMENT
Pursuant to a Share Purchase and Settlement Agreement, dated as of
March 31, 2000, among ABB Ltd, ALSTOM and ABB ALSTOM POWER, as amended by the
Amendment to Share Purchase and Settlement Agreement, dated as of May 11, 2000
(which we refer to collectively as the Settlement Agreement), ALSTOM purchased
our 50% interest in the joint venture ABB ALSTOM POWER for a cash payment of
E1.25 billion. The Settlement Agreement provided for the termination of various
joint venture agreements, the execution of various releases, the settlement of
certain disputed items in relation to the joint venture, the unwinding of
various financial arrangements between ABB ALSTOM POWER and the ABB Group, the
prospective transfer to the joint venture of various assets and liabilities
required to have been transferred to the joint venture under the original joint
venture agreements, the transfer to us of certain subsidiaries of the joint
venture, various payments among members of the ALSTOM group and the ABB Group in
connection with the foregoing transactions (separate from the purchase price
mentioned above), indemnification and the execution of various ancillary
documents. The transaction was consummated on May 11, 2000. See Exhibit 4.1 to
this annual report.
SALE AGREEMENT FOR NUCLEAR BUSINESS
On December 21, 1999, our subsidiary, ABB Handels-Und Verwaltungs AG,
entered into an agreement to sell our nuclear business to BNFL for
$485 million. Under the agreement, we have undertaken not to compete with the
divested business during a seven-year period ending April 28, 2007. We have
agreed to indemnify BNFL against, among other things, certain environmental and
other liabilities arising from specific sites operated by the nuclear business
and certain tax liabilities of the nuclear business. These potential liabilities
are described under "Item 3. Key Information--Risk Factors." The transaction was
consummated on April 28, 2000. See Exhibit 4.2 to this annual report.
EXCHANGE CONTROLS
Other than in connection with government sanctions imposed on Iraq,
Yugoslavia, Myanmar, Libya (currently suspended), Zimbabwe, Sierra Leone,
Liberia and persons and organizations with connections to Osama bin Laden, the
"al Qaeda" group or the Taliban, there are currently no government laws, decrees
or regulations in Switzerland that restrict the export or import of capital,
including, but not limited to, Swiss foreign exchange controls on payments of
dividends, interest or
147
liquidation procedures, if any, to non-resident holders of shares. In addition,
there are no limitations imposed by Swiss law or our articles of incorporation
on the right of non-residents or non-citizens of Switzerland to hold or vote our
shares.
TAXATION
The following is a summary of the material Swiss and United States federal
income tax consequences of the purchase, ownership and disposition of our shares
or ADSs.
SWISS TAXES
WITHHOLDING TAX ON DIVIDENDS AND 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) are subject to a Swiss federal withholding tax at a rate of 35%. 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 United States of America and the Swiss
Confederation for the Avoidance of Double Taxation with Respect to Taxes on
Income, which entered into force on December 19, 1997 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 on
dividends in respect of our shares or ADSs. U.S. resident individuals and U.S.
corporations holding less than 10% 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% of the gross dividend. U.S. corporations holding 10% 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% of the gross dividend.
Claims for refunds must be filed with the Swiss Federal Tax Administration,
Eigerstrasse 65, 3003 Bern, Switzerland. The form used for obtaining a refund is
Swiss Tax Form 82 (82C for companies; 82E for other entities; 82I for
individuals). This form may be obtained from any Swiss Consulate General in the
United States or from the Swiss Federal Tax Administration at the address above.
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 accompanied
by evidence of the deduction of withholding tax withheld at the source.
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%
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 SWX Swiss Exchange may be subject to a stock exchange levy equal to 0.02%.
UNITED STATES TAXES
The following is a summary of the material U.S. federal income tax
consequences of the ownership 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 holders
are initial purchasers of shares or ADSs and will hold shares or ADSs as capital
assets. This summary does not address tax considerations applicable to holders
that may be subject to special tax rules, such as dealers or traders in
securities or currencies,
148
partnerships owning shares or ADSs, tax-exempt entities, banks, insurance
companies, holders that own (or are deemed to own) at least 10% or more (by
voting power or value) of the stock of ABB, investors whose functional currency
is not the U.S. dollar, and 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. 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 (1) 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 (2) 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
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 resident of the United States;
- a corporation 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 (1) a U.S. court can exercise
primary supervision over its administration and (2) one or more U.S.
persons have the authority to control all of its substantial decisions.
A non-U.S. holder is a beneficial owner of shares or ADSs that is not a U.S.
holder.
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.
OWNERSHIP OF ADSS IN GENERAL
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.
The U.S. Treasury Department has expressed concern that depositaries for
American depositary receipts, or other intermediaries between the holders of
shares of an issuer and the issuer, may be taking actions that are inconsistent
with the claiming of U.S. foreign tax credits by U.S. holders of those receipts
or shares. Accordingly, the analysis regarding the availability of a U.S.
foreign tax credit for Swiss taxes and sourcing rules described below could be
affected by future actions that may be taken by the U.S. Treasury Department.
DISTRIBUTIONS
If you are a U.S. holder, 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 to the extent of ABB's current
and accumulated earnings and profits (as determined under U.S. federal income
tax principles), and will be included in your gross income as ordinary income.
Individuals who are U.S.
149
holders will be taxed on such distributions at the lower rates applicable to
long-term capital gains with respect to taxable years of the holder that begin
after 2002. These dividends will not be eligible for the dividends received
deduction generally allowed to corporate U.S. holders. If 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, the excess 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 would be treated as capital gain. ABB does
not maintain calculations of its earnings and profits under U.S. federal income
tax principles.
If you are a U.S. holder, 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, you generally should not be required to recognize
foreign currency gain or loss with respect to the conversion, if you are a U.S.
holder. 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, if you are a U.S. holder.
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, you will have a basis in any Swiss francs received
as a refund of Swiss withholding taxes equal to a U.S. dollar amount calculated
by reference to the exchange rate in effect on the date of receipt of the
dividend on which the tax was withheld. (See "Obtaining a Refund of Swiss
Withholding Tax for U.S. Residents" above.)
If you are a U.S. holder, 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. 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, or, in the case of certain U.S. holders, financial services
income. The rules relating to the determination of the U.S. foreign tax credit
are complex, and, if you are a U.S. holder, you should consult your tax advisor
to determine whether and to what extent you would be entitled to this credit.
Alternatively, if you are a U.S. holder, you may elect to claim a U.S. tax
deduction, instead of a foreign tax credit, for such Swiss tax, but only for a
year in which you elect to do so with respect to all foreign income taxes.
Subject to the discussion below under "Backup Withholding and Information
Reporting," if you are a non-U.S. holder of shares or ADSs, you generally will
not be subject to U.S. federal income or withholding tax on dividends received
on shares or ADSs, unless the dividends are effectively connected with the
conduct by you of a trade or business in the United States, or the dividends are
attributable to a permanent establishment or fixed base that is maintained in
the United States if that is required by an applicable income tax treaty as a
condition for subjecting a non-U.S. holder to U.S. taxation on a net income
basis. In such cases, you will be taxed in the same manner as a U.S. holder.
Moreover, if you are a corporate non-U.S. holder, you may be subject, under
certain circumstances, to an additional branch profits tax on any effectively
connected dividends at a 30% rate, or at a lower rate if you are eligible for
the benefits of an income tax treaty that provides for a lower rate.
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SALE OR EXCHANGE OF SHARES OR ADSS
If you are a U.S. holder that holds shares or ADSs as capital assets, you
generally will recognize capital gain or loss for U.S. federal income tax
purposes upon a sale or exchange 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 noncorporate U.S. holder, the
maximum marginal U.S. federal income tax rate applicable to the gain will be
lower than the maximum marginal U.S. federal income tax rate applicable to
ordinary income (other than, with respect to taxable years of the holder that
begin after 2002, certain dividends) if your holding period for the shares or
ADSs exceeds one year. If you are a U.S. holder, 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. Certain limitations exist
on the deductibility of capital losses for U.S. federal income tax purposes.
If you are a U.S. holder and you receive any foreign currency on the sale of
shares or ADSs, you may recognize U.S. source ordinary income or loss as a
result of currency fluctuations between the date of the sale of the shares or
ADS, as the case may be, and the date the sales proceeds are converted into U.S.
dollars.
Subject to the discussion below under "Backup Withholding and Information
Reporting," if you are a non-U.S. holder of shares or ADSs, you generally will
not be subject to U.S. federal income or withholding tax on gain realized on the
sale or exchange of your shares or ADSs unless (1) the gain is effectively
connected with the conduct by you of a trade or business in the United States,
or the gain is attributable to a permanent establishment or fixed base that is
maintained in the United States if that is required by an applicable income tax
treaty as a condition for subjecting a non-U.S. holder to U.S. taxation on a net
income basis, or (2) if you are an individual non-U.S. holder, you are present
in the United States for 183 days or more in the taxable year of the sale or
exchange and certain other conditions are met. Moreover, if you are a corporate
non-U.S. holder, you may be subject, under certain circumstances, to an
additional branch profits tax on any effectively connected gains at a 30% rate,
or at a lower rate if you are eligible for the benefits of an income tax treaty
that provides for a lower rate.
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. backup withholding tax and information reporting requirements generally
apply to certain payments to certain noncorporate 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 a non-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 or
otherwise fail to establish an exception from backup withholding. The amount of
any backup withholding from a payment to you will 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 to the U.S. Internal Revenue Service.
The backup withholding tax rate was 30% for the year 2002 and is 28% for years
2003 through 2010.
In the case of payments made within the United States to a foreign simple
trust, foreign grantor trust, or foreign partnership (other than payments to a
foreign simple trust, foreign grantor trust, or foreign partnership that
qualifies as a withholding foreign trust or withholding foreign partnership
151
within the meaning of the income tax regulations and payments to a foreign
simple trust, foreign grantor trust, or foreign partnership that are effectively
connected with the conduct of a trade or business in the United States), the
beneficiaries of the foreign simple trust, the persons treated as the owners of
the foreign grantor trust or the partners of the foreign partnership, as the
case may be, will be required to provide the certification discussed above in
order to establish an exemption from backup withholding tax and information
reporting requirements. Moreover, if you are a non-U.S. holder, a payor may rely
on a certification provided by you only if the payor does not have actual
knowledge or a reason to know that any information or certification stated in
the certificate is incorrect.
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 Securities Exchange
Act of 1934, as amended. In accordance with these requirements, we file reports
and other information with the Securities and Exchange Commission. These
materials, including this annual report and the exhibits thereto, may be
inspected and copied at prescribed rates at the Commission's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. Further information on
the operation of the public reference room may be obtained by calling the
Commission at 1-800-SEC-0330. The Commission also maintains a web site at
http://www.sec.gov that contains reports and other information regarding
registrants that file electronically with the Commission. Our annual reports and
some of the other information we submit to the Commission 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 20 Broad 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
firm-wide basis. To efficiently aggregate and manage financial risk that could
impact our financial performance, we operate a system of Treasury Services units
(formerly called Treasury Centers). Our Treasury Services units provide an
efficient source of liquidity, financing, risk management, and other global
financial services to our industrial companies. Prior to ceasing proprietary
trading activities in June 2002, the former Treasury Centers had the authority
to accept a limited degree of market risk in order to benefit from favorable
market price movements. Any acceptance of market risk by the former Treasury
Centers was subject to clearly defined exposure and risk limits that we
monitored in real-time and documented in written policies approved by senior
management of ABB Ltd. The Group no longer permits proprietary trading
activities. The market risk management activities are focused on mitigating
material financial risks resulting from our global operating and financing
activities.
The Treasury Services units maintain 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. Such exposures
are governed by written policies. Financial risks are monitored using a number
of analytical techniques including market value, sensitivity analysis, and
Value-at-Risk. The following quantitative analyses are based on sensitivity
analysis tests, which assume parallel shifts of interest rate yield curves and
foreign exchange rates.
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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 Treasury Services units.
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 Sweden, Switzerland and Germany. In addition, the Group is 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 hedge contracts with the
Treasury Services units, where legally possible, or external transactions to
hedge this risk. The intercompany transactions have the effect of transferring
the operating companies' currency risk to the Treasury Services units, but
create no additional market risk to our consolidated results. The Treasury
Services units then manage this risk by entering into offsetting transactions
with third party financial institutions. According to our policy, material net
currency exposures are hedged. Exposures 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. The
Treasury Services units also hedge currency risks associated with their
financing of other ABB companies.
As of December 31, 2002 and December 31, 2001, the net fair value of
financial instruments with exposure to foreign currency rate movements was
$205 million and $497 million, respectively. The potential loss in fair value of
such financial instruments from a hypothetical 10% move in foreign exchange
rates against our position would be approximately $179 million and $416 million
for December 31, 2002 and December 21, 2001, 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. This represents a material limitation of the
quantitative risk 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 Treasury Services units 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 the Treasury Services units. The
Treasury Services units adjust 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. As of December 31, 2002
and December 31, 2001, the net fair value of interest rate instruments was
$(2,430) million and
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$(2,801) million, respectively. The potential loss in fair value for such
financial instruments from a hypothetical 100 basis point parallel shift in
interest rates against ABB's position (or a multiple of 100 basis points where
100 basis points is less than 10% of the applicable interest rate) would be
approximately $49 million and $30 million for December 31, 2002 and
December 31, 2001, respectively.
Leases are not included as part of the sensitivity analysis. This represents
a limitation of the analysis. While sensitivity analysis includes the interest
rate sensitivity of the funding of the lease portfolio, a corresponding change
in the lease portfolio was not considered in the sensitivity model. However, the
volume of leasing activities has significantly reduced during 2002 due to the
ABB Group's divestment of its Structured Finance business.
TRADING ACTIVITIES
Prior to June 2002, our financial policies permitted our former Treasury
Centers to engage in a limited degree of proprietary trading activities. The
former Treasury Centers had the authority to accept a controlled level of market
risk subject to clearly defined risk management policies and trading limits. Our
policies no longer permit proprietary trading activities.
As of December 31, 2002 there were no material proprietary trading
positions. For informational purposes, the table below details the net fair
value of market risk sensitive instruments, as well as the potential loss in
fair value for such financial instruments from a hypothetical 10% adverse change
in market rates as of December 31, 2001. As of December 2002, there were no
material proprietary trading positions:
DECEMBER 31, 2002 DECEMBER 31, 2001
---------------------------- ----------------------------
LOSS FROM 10% LOSS FROM 10%
NET FAIR ADVERSE CHANGE IN NET FAIR ADVERSE CHANGE IN
VALUE MARKET PRICES VALUE MARKET PRICES
-------- ----------------- -------- -----------------
($ IN MILLIONS) ($ IN MILLIONS)
Foreign exchange......................... N/A N/A 126.7 3.8
Interest rates........................... N/A N/A 135.6 25.5
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, ABB performed an evaluation
of the effectiveness of the design and operation of its disclosure controls and
procedures. Disclosure controls and procedures are designed to ensure that the
material financial controls and non-financial information required to be
disclosed in Form 20-F and filed with the Securities and Exchange Commission are
recorded, processed, summarized and reported timely. The evaluation was
performed with the participation of our key corporate senior management,
management of all key Group functions, and under the supervision of the Chief
Executive Officer, Jurgen Dormann, and the Chief Financial Officer, Peter Voser.
In designing and evaluating the disclosure controls and procedures, management
recognized that any controls or procedures, no matter how well designed and
operated, can provide only reasonable, rather than absolute, assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the foregoing, the ABB Group
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that ABB's disclosure controls and procedures were effective. There
have been no significant changes in the Groups' internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation, and no corrective action has been taken or considered
necessary.
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ITEM 16. [RESERVED]
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-77 and pages S-1 to S-3, which are incorporated herein by
reference.
(a) Independent Auditors' Reports.
(b) Consolidated Income Statements for the years ended December 31, 2002,
2001 and 2000.
(c) Consolidated Balance Sheets as of December 31, 2002 and 2001.
(d) Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
(e) Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2002, 2001 (restated) and 2000.
(f) Notes to Consolidated Financial Statements.
(g) Independent Auditors' Reports on Financial Statement Schedule.
(h) Schedule II--Valuation and Qualifying Accounts.
The financial statements of Swedish Export Credit Corporation, attached as
Exhibit 99.1 to this annual report, and of Jorf Lasfar Energy Company S.C.A.,
attached as Exhibit 99.2 to this annual report, are incorporated herein by
reference.
ITEM 19. EXHIBITS
1.1 Articles of Incorporation of ABB Ltd as amended to date.
2.1 Form of Amended and Restated Deposit Agreement, by and among
ABB Ltd, Citibank, N.A., as Depositary, and the holders and
beneficial owners from time to time of the American
Depositary Shares issued thereunder (including as an exhibit
the form of American Depositary Receipt). Incorporated by
reference to Exhibit (a)(i) to Post-Effective Amendment
No. 1 on Form F-6 (File No. 333-13346) filed by ABB Ltd on
May 7, 2001.
2.2 Form of American Depositary Receipt (included in
Exhibit 2.1).
2.3 EMTN Amended and Restated Fiscal Agency Agreement, dated
May 30, 2001, between ABB International Finance Limited, ABB
Finance Inc., ABB Capital B.V., Banque Generale du
Luxembourg S.A., The Chase Manhattan Bank and Banque
Generale du Luxembourg (Suisse) S.A. Incorporated by
reference to Exhibit 2.3 to the Annual Report on Form 20-F
filed by ABB Ltd on June 27, 2002.
2.4 EMTN Deed of Covenant, dated March 10, 1993 by ABB
International Finance N.V. Incorporated by reference to
Exhibit 2.4 to the Annual Report on Form 20-F filed by
ABB Ltd on June 27, 2002.
155
2.5 EMTN Deed of Covenant, dated March 10, 1993 by ABB
Finance Inc. Incorporated by reference to Exhibit 2.5 to the
Annual Report on Form 20-F filed by ABB Ltd on June 27,
2002.
2.6 EMTN Deed of Covenant, dated March 10, 1993 by ABB Capital
B.V. Incorporated by reference to Exhibit 2.6 to the Annual
Report on Form 20-F filed by ABB Ltd on June 27, 2002.
THE TOTAL AMOUNT OF LONG-TERM DEBT SECURITIES OF ABB LTD
AUTHORIZED UNDER ANY OTHER INSTRUMENT DOES NOT EXCEED 10% OF
THE TOTAL ASSETS OF THE ABB GROUP ON A CONSOLIDATED BASIS.
ABB LTD HEREBY AGREES TO FURNISH TO THE COMMISSION, UPON ITS
REQUEST, A COPY OF ANY INSTRUMENT DEFINING THE RIGHTS OF
HOLDERS OF LONG-TERM DEBT OF ABB LTD OR OF ITS SUBSIDIARIES
FOR WHICH CONSOLIDATED OR UNCONSOLIDATED FINANCIAL
STATEMENTS ARE REQUIRED TO BE FILED.
4.1 Share Purchase and Settlement Agreement dated as of
March 31, 2000 among ABB Ltd, ALSTOM and ABB ALSTOM POWER
N.V., as amended. Incorporated by reference to Exhibit 4.1
to the Annual Report on Form 20-F filed by ABB Ltd on
June 27, 2002.
4.2 Purchase Agreement, dated as of December 21, 1999, between
ABB Handels-Und Verwaltungs AG, as Seller, and British
Nuclear Fuels plc, as Purchaser, as amended. Incorporated by
reference to Exhibit 4.2 to the Annual Report on Form 20-F
filed by ABB Ltd on June 27, 2002.
4.3 $1,500,000 Multicurrency Revolving Facilities Agreement
dated 17 December 2002 for ABB Ltd and Certain Subsidiaries
of ABB Ltd, as Borrowers and Guarantors, arranged by
Barclays Capital, Bayerische Hypo-und Vereinsbank AG, Credit
Suisse First Boston and Salomon Brothers International
Limited, with Credit Suisse First Boston acting as Facility
Agent and Trustee.
4.4 Amendment Agreement, dated 23 June 2003, relating to a
Facility Agreement dated 17 December 2002, between ABB Ltd
as Borrower and Obligor Agent and Credit Suisse First Boston
as Facility Agent and Trustee.
4.5 Sale and Purchase Agreement, dated 4 September 2002, between
ABB Financial Services B.V., General Electric Capital
Corporation and ABB Ltd.
4.6 Amendment Agreement, dated 29 November 2002, between ABB
Financial Services B.V., General Electric Capital
Corporation and ABB Ltd.
4.7 Employment Agreement of Jurgen Dormann, dated December 5,
2002.
4.8 Employment Agreement of Peter Voser, dated November 21,
2001.
4.9 Employment Agreement of Dinesh Paliwal, dated as of
February 21, 2003.
4.10 Employment Agreement of Peter Smits, dated November 1, 2001.
4.11 Employment Agreement of Gary Steel, dated August 27, 2002.
8.1 Subsidiaries of ABB Ltd as of December 31, 2002.
10.1 Certification by the chief executive officer of ABB Ltd
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
10.2 Certification by the chief financial officer of ABB Ltd
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
99.1 Financial statements of Swedish Export Credit Corporation.
156
99.2 Financial statements of Jorf Lasfar Energy Company S.C.A.
------------------------
* This document is being furnished in accordance with SEC Release Nos. 33-8212
and 34-74551.
* This document is being furnished in accordance with SEC Release Nos. 33-8212
and 34-74551.
157
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/ PETER VOSER
-----------------------------------------
Name: Peter Voser
Title: Executive Vice President
and Chief Financial Officer
By: /s/ HANS ENHORNING
-----------------------------------------
Name: Hans Enhorning
Title: Group Vice President
Date: June 30, 2003
CERTIFICATIONS
I, Jurgen Dormann, certify that:
1. I have reviewed this annual report on Form 20-F of ABB Ltd;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 30, 2003
/s/ JURGEN DORMANN
--------------------------------------------
Jurgen Dormann
Chief Executive Officer
CERTIFICATIONS
I, Peter Voser, certify that:
1. I have reviewed this annual report on Form 20-F of ABB Ltd;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 30, 2003
/s/ PETER VOSER
--------------------------------------------
Peter Voser
Chief Financial Officer
ABB LTD
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Reports............................... F-2
Consolidated Income Statements for the years ended December
31, 2002, 2001 and 2000................................... F-7
Consolidated Balance Sheets as of December 31, 2002 and
2001...................................................... F-8
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.......................... F-9
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2002, 2001 (restated) and
2000...................................................... F-10
Notes to the Consolidated Financial Statements.............. F-11
FINANCIAL STATEMENT SCHEDULE:
Independent Auditors' Reports............................... S-1
Schedule II--Valuation and Qualifying Accounts.............. S-3
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of ABB Ltd:
We have audited the accompanying consolidated balance sheets of ABB Ltd as
of December 31, 2002 and 2001, and the related consolidated income statements,
statements of cash flows and statement of changes in stockholders' equity for
each of the two years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The accompanying consolidated income statement, statement of cash
flows and statement of changes in stockholders' equity of ABB Ltd for the year
ended December 31, 2000, before reclassifications for operations discontinued in
2002, were audited jointly by us with KPMG Klynveld Peat Marwick Goerdeler SA.
We did not audit the consolidated financial statements of ABB Holdings Inc., a
wholly-owned subsidiary, which statements reflect total assets constituting 15%
in 2002 and 16% in 2001 and total revenues constituting 14% in 2002 and 11% in
2001 of the related consolidated totals; we did not audit the financial
statements of Jorf Lasfar Energy Company, a corporation in which the Company has
a 50% interest (the Company's equity in Jorf Lasfar Energy Company's net income
is stated at $66 million in 2002 and $81 million in 2001); we did not audit the
consolidated financial statements of Swedish Export Credit Corporation, a
corporation in which the Company has a 35% interest (the Company's equity in
Swedish Export Credit Corporation's consolidated net income (loss) is stated at
$89 million in 2002 and $(11) million in 2001); and we did not audit the 2001
financial statements of Scandinavian Reinsurance Company Limited, a wholly-owned
subsidiary, which statements reflect total assets constituting 7% and total
revenues constituting 2% of the related consolidated totals for 2001. Those
statements were audited by other auditors whose reports have been furnished to
us. The auditors' report on the 2002 consolidated financial statements of
Swedish Export Credit Corporation includes an explanatory paragraph that
describes a restatement to previously reported amounts for the year ended
December 31, 2001. Our opinion, insofar as it relates to amounts included for
those companies and their subsidiaries, is based solely on the reports of the
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for the relevant periods, the
reports of other auditors, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ABB Ltd at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming that
ABB Ltd will continue as a going concern. As more fully described in Notes 1 and
17, Combustion Engineering, a wholly-owned consolidated subsidiary of ABB Ltd,
experienced a greater-than-anticipated increase in the number of and amounts
demanded to settle certain asbestos-related claims. As a result, on
February 17, 2003, Combustion Engineering filed for reorganization under Chapter
11 of the United States Bankruptcy Code ("the Code"). After that date,
Combustion Engineering's financial results will be deconsolidated and ABB Ltd
will begin reporting its investment in Combustion Engineering using the cost
method. Combustion Engineering represents 4% of
F-2
ABB Ltd's consolidated liabilities and less than 1% of ABB Ltd's consolidated
assets and consolidated revenues at December 31, 2002, and for the year then
ended. Some claimants have named ABB Ltd or other subsidiaries of ABB Ltd in
connection with claims against Combustion Engineering, but there has been no
adjudication that any such entity has liability for such claims. Until
Combustion Engineering receives an approved Plan of Reorganization in order to
emerge from Chapter 11, and injunctive relief afforded under the Code has been
provided to bar future claims from being made against ABB Ltd and its
subsidiaries, the ultimate settlement amount of asbestos-related claims and the
potential exposure of ABB Ltd and its other subsidiaries to liability for
Combustion Engineering's asbestos-related claims remains uncertain. In addition,
as described in Notes 1 and 14, on December 17, 2002, the Company entered into a
364-day $1.5 billion credit facility to fund day-to-day operations and, in
connection with this agreement, the Company must meet strict financial and
performance covenants and dispose of significant assets to meet its scheduled
debt repayments in 2003. Recent credit rating downgrades of the Company's
borrowings and net losses reported on a consolidated basis in 2001 and 2002,
with a resulting decrease in the Company's consolidated stockholders' equity,
may impact the Company's ability to refinance existing obligations in 2003.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
As discussed in Note 13 to the consolidated financial statements, the
Company restated the consolidated financial statements as of December 31, 2001,
and for the year then ended, for the effect of Swedish Export Credit
Corporation's restatement to its consolidated financial statements to correct an
error in its accounting for the fair value of certain financial instruments.
As discussed in Note 2 to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivative financial instruments.
As also discussed in Note 2, in 2002 the Company changed its method of
accounting for goodwill acquired in business combinations and its criteria for
classification of items accounted for as discontinued operations, resulting in
reclassifications to all periods presented for items meeting the criteria after
January 1, 2002.
We also audited the adjustments that were applied to reclassify amounts
related to operations discontinued in 2002 reflected in the consolidated
financial statements for the year ended December 31, 2000 as described in Notes
2 and 3. In our opinion, such adjustments were appropriate and have been
properly classified.
/s/ ERNST & YOUNG AG
Zurich, Switzerland
April 4, 2003,
except for Note 26, as to which the date is May 16, 2003
F-3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ABB Holdings Inc.:
We have audited the accompanying consolidated balance sheets of ABB
Holdings Inc. and subsidiaries (a direct wholly-owned subsidiary of ABB Asea
Brown Boveri Ltd) as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholder's equity, and cash flows for the years
then ended (not presented separately herein). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ABB Holdings Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company is dependent on the
financial support of ABB Ltd, its ultimate parent company. ABB Ltd has suffered
recurring net losses in 2002 and 2001, and has a highly leveraged balance sheet.
These factors raise substantial doubt about ABB Ltd's ability to continue as a
going concern which consequently raises substantial doubt about the Company's
ability to continue as a going concern. ABB Ltd's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 2 to the consolidated financial statements (not
presented separately herein), the Company adopted SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS, as of January 1, 2002.
/s/ KPMG LLP
April 21, 2003
Stamford, Connecticut
F-4
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Scandinavian Reinsurance Company Limited:
We have audited the accompanying balance sheet of Scandinavian Reinsurance
Company Limited at December 31, 2001 and the related statements of loss and
comprehensive loss, changes in shareholder's deficit and cash flows for the year
then ended (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Scandinavian Reinsurance
Company Limited at December 31, 2001 and the results of its operations and cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
The Company restated retained earnings at the beginning of the current year to
reflect the change discussed in Note 2(d) to the financial statements (not
presented separately herein).
/s/ KPMG
Chartered Accountants
Hamilton, Bermuda
January 31, 2002
F-5
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of ABB Ltd:
We have audited the accompanying consolidated income statement, statement of
cash flows and statement of changes in stockholders' equity of ABB Ltd for the
year ended December 31, 2000, before reclassifications for operations
discontinued in 2002 as described in Notes 2 and 3 to the consolidated financial
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements before reclassifications for operations
discontinued in 2002, referred to above present fairly, in all material
respects, the consolidated results of operations and cash flows of ABB Ltd for
the year ended December 31, 2000 in conformity with United States generally
accepted accounting principles.
/s/ KPMG Klynveld Peat /s/ Ernst & Young AG
Marwick Goerdeler SA
Zurich, February 11, 2001 Zurich, February 11, 2001
F-6
ABB LTD
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
YEAR ENDED DECEMBER 31,
--------------------------------------
2001
2002 (RESTATED) 2000
-------- ---------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues................................................... $ 18,295 $ 19,382 $ 19,355
Cost of sales.............................................. (13,769) (14,877) (14,198)
-------- -------- --------
Gross profit............................................... 4,526 4,505 5,157
Selling, general and administrative expenses............... (4,033) (3,993) (4,055)
Amortization expense....................................... (41) (195) (190)
Other income (expense), net................................ (58) (160) 261
-------- -------- --------
Earnings before interest and taxes......................... 394 157 1,173
Interest and dividend income............................... 193 381 387
Interest and other finance expense......................... (336) (604) (454)
-------- -------- --------
Income (loss) from continuing operations before taxes and
minority interest........................................ 251 (66) 1,106
Provision for taxes........................................ (83) (63) (300)
Minority interest.......................................... (71) (36) (40)
-------- -------- --------
Income (loss) from continuing operations................... 97 (165) 766
Income (loss) from discontinued operations, net of tax..... (880) (501) 677
Cumulative effect of change in accounting principles
(SFAS 133), net of tax................................... -- (63) --
-------- -------- --------
Net income (loss).......................................... $ (783) $ (729) $ 1,443
======== ======== ========
Basic earnings (loss) per share:
Income (loss) from continuing operations................. $ 0.09 $ (0.15) $ 0.65
Net income (loss)........................................ $ (0.70) $ (0.64) $ 1.22
Diluted earnings (loss) per share:
Income (loss) from continuing operations................. $ (0.08) $ (0.15) $ 0.65
Net income (loss)........................................ $ (0.83) $ (0.64) $ 1.22
See accompanying Notes to the Consolidated Financial Statements.
F-7
ABB LTD
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
DECEMBER 31,
---------------------
2001
2002 (RESTATED)
-------- ----------
(IN MILLIONS,
EXCEPT SHARE DATA)
Cash and equivalents........................................ $ 2,478 $ 2,442
Marketable securities....................................... 2,135 2,924
Receivables, net............................................ 7,175 6,692
Inventories, net............................................ 2,377 2,568
Prepaid expenses and other.................................. 2,695 2,122
Assets in discontinued operations........................... 3,095 5,912
------- -------
Total current assets........................................ 19,955 22,660
Financing receivables, non-current.......................... 1,802 2,086
Property, plant and equipment, net.......................... 2,792 2,753
Goodwill.................................................... 2,321 2,188
Other intangible assets, net................................ 591 587
Prepaid pension and other related benefits.................. 557 387
Investments and other....................................... 1,515 1,644
------- -------
Total assets................................................ $29,533 $32,305
======= =======
Accounts payable, trade..................................... $ 2,961 $ 2,506
Accounts payable, other..................................... 2,174 2,517
Short-term borrowings and current maturities of long-term
borrowings................................................ 2,576 4,701
Accrued liabilities and other............................... 8,319 7,100
Liabilities in discontinued operations...................... 2,384 3,342
------- -------
Total current liabilities................................... 18,414 20,166
Long-term borrowings........................................ 5,376 5,003
Pension and other related benefits.......................... 1,659 1,617
Deferred taxes.............................................. 1,166 1,049
Other liabilities........................................... 1,647 2,280
------- -------
Total liabilities........................................... 28,262 30,115
Minority interest........................................... 258 215
Stockholders' equity:
Capital stock and additional paid-in capital, par value
CHF 2.50, 1,280,009,432 shares authorized,
1,200,009,432 shares issued............................. 2,027 2,028
Retained earnings......................................... 2,614 3,397
Accumulated other comprehensive loss...................... (1,878) (1,700)
Less: Treasury stock, at cost (86,830,312 and 86,875,616
shares at December 31, 2002 and 2001, respectively)..... (1,750) (1,750)
------- -------
Total stockholders' equity.................................. 1,013 1,975
------- -------
Total liabilities and stockholders' equity.................. $29,533 $32,305
======= =======
See accompanying Notes to the Consolidated Financial Statements.
F-8
ABB LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
YEAR ENDED DECEMBER 31,
--------------------------------
2001
2002 (RESTATED) 2000
-------- ---------- --------
(IN MILLIONS)
OPERATING ACTIVITIES
Net income (loss)........................................... $ (783) $ (729) $ 1,443
ADJUSTMENTS TO RECONCILE INCOME (LOSS) TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation and amortization............................. 611 787 836
Provisions................................................ (131) 1,146 (123)
Pension and post-retirement benefits...................... 37 1 (57)
Deferred taxes............................................ (140) (89) 102
Net gain from sale of property, plant and equipment....... (23) (23) (247)
Loss (gain) on sale of discontinued operations............ 194 -- (1,030)
Other..................................................... (164) 135 (41)
Changes in operating assets and liabilities:
Marketable securities (trading)......................... 498 72 10
Trade receivables....................................... 627 65 77
Inventories............................................. 367 (106) (136)
Trade payables.......................................... 79 736 266
Other assets and liabilities, net....................... (1,153) (12) (353)
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 19 1,983 747
-------- ------- -------
INVESTING ACTIVITIES
Changes in financing receivables............................ 264 (907) (833)
Purchases of marketable securities (other than trading)..... (4,377) (3,280) (2,239)
Purchases of property, plant and equipment.................. (602) (761) (553)
Acquisitions of businesses (net of cash acquired)........... (144) (578) (893)
Proceeds from sales of marketable securities (other than
trading).................................................. 4,525 3,873 2,292
Proceeds from sales of property, plant and equipment........ 476 152 238
Proceeds from sales of businesses (net of cash disposed).... 2,509 283 1,499
-------- ------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 2,651 (1,218) (489)
-------- ------- -------
FINANCING ACTIVITIES
Changes in borrowings with maturities of 90 days or less.... (1,677) (69) 609
Increases in other borrowings............................... 9,050 9,357 3,626
Repayment of other borrowings............................... (10,188) (6,649) (4,279)
Treasury and capital stock transactions..................... -- (1,393) 244
Dividends paid.............................................. -- (502) (531)
Other....................................................... 3 (67) (61)
-------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... (2,812) 677 (392)
-------- ------- -------
Effects of exchange rate changes on cash and equivalents.... 141 (72) (84)
Adjustment for the net change in cash and equivalents in
discontinued operations................................... 37 (172) (24)
-------- ------- -------
NET CHANGE IN CASH AND EQUIVALENTS--CONTINUING OPERATIONS... 36 1,198 (242)
Cash and equivalents beginning of year...................... 2,442 1,244 1,486
-------- ------- -------
Cash and equivalents end of year............................ $ 2,478 $ 2,442 $ 1,244
======== ======= =======
Interest paid............................................... $ 482 $ 702 $ 647
Taxes paid.................................................. $ 298 $ 273 $ 273
See accompanying Notes to the Consolidated Financial Statements.
F-9
ABB LTD
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 (RESTATED) AND 2000
ACCUMULATED OTHER COMPREHENSIVE LOSS
---------------------------------------
CAPITAL UNREALIZED
STOCK GAIN (LOSS)
AND FOREIGN ON MINIMUM
ADDITIONAL CURRENCY AVAILABLE- PENSION
PAID-IN RETAINED TRANSLATION FOR-SALE LIABILITY
CAPITAL EARNINGS ADJUSTMENT SECURITIES ADJUSTMENT
---------- -------- ----------- ----------- -----------
(IN MILLIONS)
Balance at January 1, 2000............ $2,071 $3,716 $(1,005) $ 67 $ (93)
Comprehensive income:
Net income.......................... 1,443
Foreign currency translation
adjustments....................... (152)
Effect of change in fair value of
available-for-sale securities, net
of tax of $7...................... 20
Minimum pension liability
adjustments, net of tax of $21.... 41
Total comprehensive income..........
Dividends paid........................ (531)
Purchase of treasury stock............
Sale of treasury stock and put
options............................. 11
------ ------ ------- ----- -----
Balance at December 31, 2000.......... 2,082 4,628 (1,157) 87 (52)
Comprehensive loss:
Net loss(1)......................... (729)
Foreign currency translation
adjustments(1).................... (366)
Effect of change in fair value of
available-for-sale securities, net
of tax of $16..................... (128)
Minimum pension liability
adjustments, net of tax of $1..... 3
Cumulative effect of change in
accounting principles, net of tax
of $17............................
Change in derivatives qualifying as
cash flow hedges, net of tax of
$18...............................
Total comprehensive loss(1)...........
Dividends paid........................ (502)
Purchase of treasury stock............
Sale of treasury stock................ (101)
Call options.......................... 47
------ ------ ------- ----- -----
Balance at December 31, 2001(1)....... 2,028 3,397 (1,523) (41) (49)
COMPREHENSIVE LOSS:
NET LOSS............................ (783)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS....................... (295)
ACCUMULATED FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS ALLOCATED
TO DIVESTMENTS OF BUSINESSES...... 90
EFFECT OF CHANGE IN FAIR VALUE OF
AVAILABLE-FOR-SALE SECURITIES, NET
OF TAX OF $1...................... 3
MINIMUM PENSION LIABILITY
ADJUSTMENTS, NET OF TAX OF $30.... (107)
CHANGE IN DERIVATIVES QUALIFYING AS
CASH FLOW HEDGES, NET OF TAX
OF $52............................
TOTAL COMPREHENSIVE LOSS............
OTHER................................. (1)
------ ------ ------- ----- -----
BALANCE AT DECEMBER 31, 2002.......... $2,027 $2,614 $(1,728) $ (38) $(156)
====== ====== ======= ===== =====
ACCUMULATED OTHER COMPREHENSIVE LOSS
--------------------------------
UNREALIZED
GAIN (LOSS) TOTAL
OF CASH ACCUMULATED
FLOW OTHER TOTAL
HEDGE COMPREHENSIVE TREASURY STOCKHOLDERS'
DERIVATIVES LOSS STOCK EQUITY
- ----------- -------------- -------- -------------
(IN MILLIONS)
Balance at January 1, 2000............ $ -- $(1,031) $ (485) $ 4,271
Comprehensive income:
Net income.......................... 1,443
Foreign currency translation
adjustments....................... (152) (152)
Effect of change in fair value of
available-for-sale securities, net
of tax of $7...................... 20 20
Minimum pension liability
adjustments, net of tax of $21.... 41 41
-------
Total comprehensive income.......... 1,352
Dividends paid........................ (531)
Purchase of treasury stock............ (400) (400)
Sale of treasury stock and put
options............................. 468 479
---- ------- ------- -------
Balance at December 31, 2000.......... -- (1,122) (417) 5,171
Comprehensive loss:
Net loss(1)......................... (729)
Foreign currency translation
adjustments(1).................... (366) (366)
Effect of change in fair value of
available-for-sale securities, net
of tax of $16..................... (128) (128)
Minimum pension liability
adjustments, net of tax of $1..... 3 3
Cumulative effect of change in
accounting principles, net of tax
of $17............................ (41) (41) (41)
Change in derivatives qualifying as
cash flow hedges, net of tax of
$18............................... (46) (46) (46)
-------
Total comprehensive loss(1)........... (1,307)
Dividends paid........................ (502)
Purchase of treasury stock............ (1,615) (1,615)
Sale of treasury stock................ 282 181
Call options.......................... 47
---- ------- ------- -------
Balance at December 31, 2001(1)....... (87) (1,700) (1,750) 1,975
COMPREHENSIVE LOSS:
NET LOSS............................ (783)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS....................... (295) (295)
ACCUMULATED FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS ALLOCATED
TO DIVESTMENTS OF BUSINESSES...... 90 90
EFFECT OF CHANGE IN FAIR VALUE OF
AVAILABLE-FOR-SALE SECURITIES, NET
OF TAX OF $1...................... 3 3
MINIMUM PENSION LIABILITY
ADJUSTMENTS, NET OF TAX OF $30.... (107) (107)
CHANGE IN DERIVATIVES QUALIFYING AS
CASH FLOW HEDGES, NET OF TAX
OF $52............................ 131 131 131
-------
TOTAL COMPREHENSIVE LOSS............ (961)
OTHER................................. (1)
---- ------- ------- -------
BALANCE AT DECEMBER 31, 2002.......... $ 44 $(1,878) $(1,750) $ 1,013
==== ======= ======= =======
----------------------------------
(1) Restated.
See accompanying Notes to the Consolidated Financial Statements.
F-10
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 THE COMPANY AND MANAGEMENT OVERVIEW
ABB Ltd is a leading global company in power and automation technologies
organized in four core business divisions: Utilities, Industries, Power
Technology Products and Automation Technology Products. In addition, ABB Ltd has
grouped certain of its other businesses into Non-Core Activities. In
October 2002, to further sharpen its focus on power and automation technologies
for utility and industry customers, ABB Ltd announced a simplified structure,
effective January 1, 2003, consisting of two new core divisions: Power
Technologies and Automation Technologies (see Note 25 to the Consolidated
Financial Statements).
MANAGEMENT OVERVIEW
ABB Ltd's exposure to asbestos claims and its high debt levels have weighed
heavily on ABB Ltd during recent years and have forced management to focus
intensely on ensuring ABB Ltd's ability to continue on a going concern basis.
In 2001 and 2002, ABB Ltd incurred significant net losses, partly as a
result of a greater-than-anticipated increase in the number of and amounts
demanded to settle certain asbestos-related claims against its subsidiary,
Combustion Engineering (see Note 17), as well as the weak performance of the
businesses that are now classified as non-core activities and discontinued
operations and an overall weakening of global markets. These operating losses,
combined with the effect of a repurchase of ABB Ltd shares in 2001 and other
factors, have decreased ABB Ltd's consolidated stockholders' equity from
$5.2 billion at December 31, 2000 to $1.0 billion at December 31, 2002.
ABB Ltd's low equity base, high debt levels and the uncertainty with respect to
the timing of the resolution to the asbestos issue have impacted ABB Ltd's
ability to finance its core and non-core operations and to repay maturing debt.
With respect to the asbestos issue, based on current information, ABB Ltd
expects that the initiated proceedings will provide an adequate resolution to
the issue as discussed in more detail in Note 17. However, until Combustion
Engineering's pre-packaged Chapter 11 plan of reorganization is finally approved
and injunctive relief has been provided to bar future claims from being made,
the ultimate settlement amount of asbestos-related claims and the potential
exposure to liability for Combustion Engineering's asbestos-related claims
remain uncertain.
In late 2001 and during 2002, the commercial paper market, on which ABB Ltd
had significantly relied in the past, largely diminished as a funding source and
ABB Ltd's credit rating fell below investment grade. As a consequence, ABB Ltd
has faced challenges to replace or repay maturing short-term debt during 2002.
On December 17, 2002, as a replacement of credit facilities obtained in
December 2001 and during 2002, ABB Ltd entered into a 364-day $1.5 billion
credit facility to fund on-going liquidity requirements. Details of the credit
facility as well as the maturing short-term debt in 2003 are more fully
discussed in Note 14.
Given ABB Ltd's financial position, the weak performance in
non-core/discontinued activities and the overall status of the international
financial markets, ABB Ltd had to accept a number of stringent covenants in the
new facility agreement (see Note 14), including requirements to meet asset
divestment proceeds targets, the fulfillment of which is a condition to the
continued availability of funding under the terms of the facility. ABB Ltd also
had to provide security for the facility.
F-11
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 THE COMPANY AND MANAGEMENT OVERVIEW (CONTINUED)
Management believes that the important steps taken in 2002, including the
divestment of a large portion of the Structured Finance business (see Note 3),
significant debt reduction and refinancing of short-term debt to extend the
maturity profile of ABB Ltd's debt (see Note 14), introduction of a simplified
organizational structure, and continuous strong performance of core businesses,
as well as its plans for 2003, should ensure continued availability of the
credit facility during 2003 (maximum of $1.5 billion).
However, because of the stringent nature of the covenants in the credit
facility, management believes that it is prudent to plan for possible adverse
developments that may jeopardize ABB Ltd's ability to rely on continued funding
under the credit facility. Therefore, ABB Ltd's Board of Directors proposes to
the annual shareholders' meeting that the shareholders approve an amendment to
the existing provisions in the Articles of Incorporation on contingent share
capital as to (i) a substantial increase of the contingent capital which would
consequently allow the issuance of new ABB Ltd shares, and (ii) an extension of
the use of the contingent capital for new financial instruments (such as
convertible bonds).
Management's principal plans for 2003 include intensified operational
improvements of the core businesses, for example, through the "Step change"
program (see Note 24). Management's plans also include continued large
divestments that it estimates will contribute proceeds in excess of $2 billion
(in particular ABB Ltd's Oil, Gas and Petrochemical division, Buildings Systems
business, remaining parts of the Structured Finance business and the Equity
Ventures business), the closing of non-core activities and the reduction of
total debt by applying the proceeds received from these divestments.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of these Consolidated Financial Statements.
BASIS OF PRESENTATION
The Consolidated Financial Statements are prepared on the basis of United
States (U.S.) generally accepted accounting principles (GAAP) and are presented
in U.S. dollars ($) unless otherwise stated. Par value of capital stock is
denominated in Swiss francs (CHF).
The number of shares and earnings per share data in the Consolidated
Financial Statements have been presented as if the four-for-one split of
ABB Ltd shares in May 2001 had occurred as of the earliest period presented.
SCOPE OF CONSOLIDATION
The Consolidated Financial Statements include 100 percent of the assets,
liabilities, revenues, expenses, income, loss and cash flows of ABB Ltd and
companies in which ABB Ltd has a controlling interest (subsidiaries), as if
ABB Ltd and its subsidiaries (collectively, the "Company") were a single
company. Significant intercompany accounts and transactions have been
eliminated. Minority interest is calculated for entities fully consolidated but
not wholly owned. The components
F-12
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of net income and equity attributable to the minority shareholders are presented
in the minority interest line items included in the Consolidated Income
Statement and Consolidated Balance Sheet.
Investments in joint ventures and affiliated companies in which the Company
has significant influence, but less than a controlling voting interest, are
accounted for using the equity method. This is generally presumed to exist when
the Company owns between 20 percent and 50 percent of the investee. In certain
circumstances, the Company's ownership of an investee exceeds 50 percent but it
accounts for the investment using the equity method because it does not have a
controlling interest due to certain rights of minority shareholders which allow
them to participate in significant day-to-day operating and financial decisions
of the investee.
Under the equity method, the Company's investment in and amounts due to and
from an equity investee are included in the Consolidated Balance Sheet; the
Company's share of an investee's earnings is included in the Consolidated Income
Statement; and the dividends, cash distributions, loans or other cash received
from the investee, additional cash investments, loan repayments or other cash
paid to the investee, are included in the Consolidated Balance Sheet and the
Consolidated Statement of Cash Flows. Additionally, the carrying value of
investments accounted for using the equity method of accounting are adjusted
downward to reflect any other-than-temporary declines in value.
Investments in non-public companies in which the Company does not have a
controlling interest, or an ownership and voting interest sufficiently large to
exert significant influence, are accounted for at cost. Dividends and other
distributions of earnings from these investments are included in income when
received.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ from those
estimates.
RECLASSIFICATIONS AND RESTATEMENTS
Amounts reported for prior years in these Consolidated Financial Statements
and Notes have been reclassified to conform to the current year's presentation.
As more fully described in Note 13 to the Consolidated Financial Statements,
the Company has restated its 2001 Consolidated Financial Statements and Notes
thereto to reflect changes in the Company's share of the earnings (losses) of an
equity-accounted investee that restated its 2001 earnings to correct an error in
accounting for the fair value of certain financial instruments.
CONCENTRATIONS OF CREDIT RISK
The Company sells a broad range of products, systems and services to a wide
range of industrial and commercial customers throughout the world.
Concentrations of credit risk with respect to trade receivables are limited due
to a large number of customers comprising the Company's customer base. Ongoing
credit evaluations of customers' financial position are performed and,
generally, no collateral is required.
F-13
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Subsequent to the sale of a significant portion of the Structured Finance
business during 2002, the Financial Services activities of the Company are
substantially reduced. As a consequence of this divestment, the concentration of
credit risk in the Company's remaining lease and loan portfolio has increased.
To control the remaining credit risks, the Company continues to apply specific
policies and procedures, including those for the identification, evaluation and
mitigation of credit risks. Such policies and procedures include measurements to
develop and ensure the maintenance of a diversified portfolio through the active
monitoring of counterparty, country and industry exposure.
The Company maintains reserves for potential credit losses and such losses,
in the aggregate, have not exceeded management's expectations.
It is Company policy to invest cash in deposits with banks throughout the
world and in other high quality, liquid marketable securities (such as
commercial paper, government agency notes and asset-backed securities). The
Company actively monitors its credit risk by routinely reviewing the credit
worthiness of the investments held and by maintaining such investments in
deposits or liquid securities. 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 a counterparty will fail to meet its obligations. To reduce this
risk, the Company has credit policies which require the establishment and review
of credit limits for individual counterparties. In addition, close-out netting
agreements have been entered into with most counterparties. Close-out netting
agreements are agreements which 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.
CASH AND EQUIVALENTS
Cash and equivalents include highly liquid investments with original
maturities of three months or less.
MARKETABLE SECURITIES
Debt and equity securities are classified as either trading or
available-for-sale at the time of purchase and are carried at fair value. Debt
and equity securities that are bought and held principally for the purpose of
sale in the near term are classified as trading securities and unrealized gains
and losses are included in the determination of net income. Unrealized gains and
losses on available-for-sale securities are excluded from the determination of
net income and are accumulated as a component of other comprehensive loss until
realized. Realized gains and losses on available-for-sale securities are
computed based upon historical cost of these securities applied using the
specific identification method. Declines in fair values of available-for-sale
investments that are other-than-temporary are included in the determination of
net income.
The Company analyzes its available-for-sale securities for impairment when
the fair values of individual securities have been below their cost basis for a
period exceeding nine months or when other events indicate the need for
assessment. The Company records an impairment charge through current period
earnings and adjusts the cost basis for such other-than-temporary declines
F-14
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in fair value when the fair value is not anticipated to recover above cost
within a three-month period after the measurement date unless there are
mitigating factors that indicate an impairment charge through earnings may not
be required. If an impairment charge is recorded, subsequent recoveries in fair
value are not reflected in earnings until sale of the security.
REVENUE RECOGNITION
The Company recognizes revenues in accordance with the United States
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 (SAB
101), REVENUE RECOGNITION IN FINANCIAL STATEMENTS. The Company recognizes
substantially all revenues from the sale of manufactured products upon transfer
of title including the risks and rewards of ownership to the customer which
generally occurs upon shipment of products. On contracts for sale of
manufactured products requiring installation which can only be performed by the
Company, revenues are deferred until installation of the products is complete.
Revenues from short-term fixed-price contracts to deliver services are
recognized upon completion of required services to the customer. Revenues from
contracts which contain customer acceptance provisions are deferred until
customer acceptance occurs or the contractual acceptance period has lapsed.
Sales under long-term fixed-price contracts are recognized using the
percentage-of-completion method of accounting. The Company principally uses the
cost-to-cost or delivery events method to measure progress towards completion on
contracts. Management determines the method to be used for each contract based
on its judgment as to which method best measures actual progress towards
completion.
Anticipated costs for warranties on products are accrued upon sales
recognition on the related contracts. Losses on fixed-price contracts are
recognized in the period when they are identified and are based upon the
anticipated excess of contract costs over the related contract sales.
Sales under cost-reimbursement contracts are recognized as costs are
incurred. Shipping and handling costs are recorded as a component of cost of
sales.
RECEIVABLES
The Company accounts for the securitization of trade receivables in
accordance with Statement of Financial Accounting Standards No. 140 (SFAS 140),
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES. SFAS 140 requires an entity to recognize the financial and
servicing assets it controls and the liabilities it has incurred and to
derecognize financial assets when control has been surrendered as evaluated in
accordance with the criteria provided in SFAS 140.
The Company accounts for the transfer of its receivables to Qualifying
Special Purpose Entities (QSPEs) as a sale of those receivables to the extent
that consideration other than beneficial interests in the transferred accounts
receivable is received. The Company does not recognize the transfer as a sale
unless the receivables have been put presumptively beyond the reach of the
Company and its creditors, even in bankruptcy or other receivership. In
addition, the QSPEs must obtain the right to pledge or exchange the transferred
receivables, and the Company cannot retain the ability or obligation to
repurchase or redeem the transferred receivables.
F-15
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At the time the receivables are sold, the balances are removed from trade
receivables and a retained interest or deferred purchase price component is
recorded in other receivables. The retained interest is recorded at its
estimated fair value. Costs associated with the sale of receivables are included
in the determination of current earnings.
From time to time, the Company may, in its normal course of business, sell
receivables outside the securitization programs with or without recourse. Sales
and transfers that do not meet the requirements of SFAS 140 are accounted for as
secured borrowings.
INVENTORIES
Inventories are stated at the lower of cost (determined using either the
first-in, first-out or the weighted average cost method) or market. Inventoried
costs relating to percentage-of-completion contracts are stated at actual
production costs, including overhead incurred to date, reduced by amounts
identified with sales recognized.
IMPAIRMENT OF LONG-LIVED ASSETS AND ACCOUNTING FOR DISCONTINUED OPERATIONS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 (SFAS 144), ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which superceded Statement of Financial
Accounting Standards No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, yet retained the
fundamental provisions of SFAS 121 related to the recognition and measurement of
the impairment of long-lived assets (i.e., property, plant, and equipment and
identifiable intangibles) to be "held and used". When events or circumstances
indicate the carrying amount of a long-lived asset that is being held and used
may not be recoverable, the Company assesses impairment by comparing an asset's
net undiscounted cash flows expected to be generated over its remaining useful
life to the asset's net carrying value. If impairment is indicated, the carrying
amount of the asset is reduced to its estimated fair value.
In accordance with SFAS 144, the Company segregates on its Consolidated
Balance Sheet the assets (or groups of assets and related liabilities) that
during 2002 met certain restrictive criteria regarding the Company's commitment
to plans for disposal. Depreciation and amortization cease when the asset meets
the criteria to be classified as held for sale. If (1) a planned or completed
disposal involves a component of the Company whose operations and cash flows can
be distinguished operationally and for financial reporting purposes; (2) such
operations and cash flows will be (or have been) eliminated from the Company's
ongoing operations; and (3) the Company will not have any significant continuing
involvement in the component, then the component's results of operations are
presented as discontinued operations for all periods. Operating losses from
discontinued operations are recognized in the period in which they occur.
Interest expense is allocated to discontinued operations in accordance with
Emerging Issues Task Force No. 87-24, ALLOCATION OF INTEREST TO DISCONTINUED
OPERATIONS. Long-lived assets (or groups of assets and related liabilities)
classified as held for sale or as discontinued operations are measured at the
lower of carrying amount or fair value less cost to sell.
In connection with the adoption of SFAS 144, the Company elected to cease
presenting cash flows from discontinued operations as a single line and instead
present the relevant amounts within
F-16
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
cash flows from operating and investing activities. Accordingly, the cash flows
associated with disposals in 2000 have been reclassified to conform to the
current year's presentation.
Prior to adoption of SFAS 144, the Company accounted for discontinued
operations in accordance with APB Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, in
which only the results of operations of a segment or major line of business that
has been sold, abandoned, or otherwise disposed of, or is the subject of a
formal plan for disposal, could be classified as discontinued operations.
Segments or major lines of business classified as discontinued operations were
measured at the lower of carrying amount or net realizable value, including an
estimate of future operating losses expected to be incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of cost over the fair value of net assets of acquired businesses
is recorded as goodwill. The Company accounts for its goodwill in accordance
with Statement of Financial Accounting Standards No. 142 (SFAS 142), GOODWILL
AND OTHER INTANGIBLE ASSETS. Under SFAS 142 goodwill from acquisitions completed
after June 30, 2001, has not been amortized. The total amount of goodwill
recognized on acquisitions completed after June 30, 2001, was not significant.
Beginning from January 1, 2002, goodwill has not been amortized. For years prior
to January 1, 2002, the goodwill had been amortized on a straight-line basis
over periods ranging from 3 to 20 years. In accordance with SFAS 142, goodwill
is tested annually for impairment on October 1st and also upon the occurrence of
significant events. The Company uses a discounted cash flow model to determine
the fair value of reporting units containing goodwill to measure the potential
impairment of such goodwill.
The cost of acquired intangibles is amortized on a straight-line basis over
their estimated useful lives, typically ranging from 3 to 10 years. Intangible
assets are tested for impairment upon the occurrence of certain triggering
events.
CAPITALIZED SOFTWARE COSTS
The Company expenses costs incurred in the preliminary project stage, and
thereafter capitalizes costs incurred in developing or obtaining software.
Capitalized costs of software for internal use are accounted for in accordance
with Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE, and are amortized on a straight-line
basis over the estimated useful life of the software, typically ranging from 3
to 5 years. Capitalized costs of a software product to be sold are accounted for
in accordance with Statement of Financial Accounting Standards No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE
MARKETED, and are carried at the lower of unamortized cost or net realizable
value until the product is released to customers, at which time capitalization
ceases and costs are amortized on a straight-line basis over the estimated life
of the product.
F-17
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, less accumulated
depreciation, using the straight-line method over the estimated useful lives of
the assets as follows: 10 to 50 years for buildings and leasehold improvements
and 3 to 15 years for machinery and equipment.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage interest rate
and currency exposures, and to a lesser extent commodity exposures, arising from
its global operating, financing and investing activities. The Company's policies
require that the industrial entities economically hedge all contracted foreign
exposures, as well as at least fifty percent of the anticipated sales volume of
standard products over the next twelve months. In addition, derivative financial
instruments were also used for proprietary trading purposes within the Company's
former Financial Services division and within limits determined by the Company's
Board of Directors until June 2002, when the Company ceased entering into new
positions.
CHANGE IN ACCOUNTING PRINCIPLES
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
as subsequently amended (SFAS 133). SFAS 133 requires the Company to recognize
all derivatives, other than certain derivatives indexed to the Company's own
stock, on the Consolidated Balance Sheet at fair value. Derivatives that are not
designated as hedges must be adjusted to fair value through income. 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 assets, liabilities, or firm commitments
through earnings or recognized in accumulated other comprehensive loss until the
hedged item is recognized in earnings. The ineffective portion of a derivative's
change in fair value is immediately recognized in earnings.
The Company accounted for the adoption of SFAS 133 as a change in accounting
principle. Based on the Company's outstanding derivatives at January 1, 2001,
the Company recognized the cumulative effect of the accounting change as a loss
in the Consolidated Income Statement of approximately $63 million, net of tax,
(basic and diluted loss per share of $0.06) and a reduction to equity of
$41 million, net of tax, in accumulated other comprehensive loss.
Forward foreign exchange contracts are the primary instrument used to manage
foreign exchange risk. Where forward foreign exchange contracts are designated
as cash flow hedges under SFAS 133, changes in their fair value are recorded in
the accumulated other comprehensive loss component of stockholders' equity, net
of tax, until the hedged item is recognized in earnings. The Company also enters
into forward foreign exchange contracts that serve as economic hedges of
existing assets and liabilities. These are not designated as accounting hedges
under SFAS 133 and, consequently, changes in their fair value are reported in
earnings where they offset the gain or loss on the foreign currency denominated
asset or liability.
To reduce its interest rate and currency exposure arising from its funding
activities and to hedge specific assets, the Company uses interest rate and
currency swaps. Where interest rate
F-18
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
swaps are designated as fair value hedges, the changes in value of the swaps are
recognized in earnings, as are the changes in the value of the underlying assets
or liabilities. Where such interest rate swaps do not qualify for the short cut
method as defined under SFAS 133, any ineffectiveness is included in earnings.
Where interest rate swaps are designated as cash flow hedges, their change in
value is recognized in the accumulated other comprehensive loss component of
stockholders' equity, net of tax, until the hedged item is recognized in
earnings.
All other swaps, futures, options and forwards which are designated as
effective hedges of specific assets, liabilities or committed or forecasted
transactions are recognized in earnings consistent with the effects of hedged
transactions.
If an underlying hedged transaction is terminated early, the hedging
derivative financial instrument is treated as if terminated simultaneously, with
any gain or loss on termination of the derivative immediately recognized in
earnings. Where derivative financial instruments have been designated as hedges
of forecasted transactions, and such forecasted transactions no longer become
probable of occurring, hedge accounting ceases and any derivative gain or loss
previously included in the accumulated other comprehensive loss component of
stockholders' equity is reclassified into earnings.
Certain commercial contracts may grant rights to the Company or other
counterparties, or contain other provisions considered to be derivatives under
SFAS 133. Such embedded derivatives are assessed at inception of the contract
and depending on their characteristics accounted for as separate derivative
instruments pursuant to SFAS 133.
PRIOR TO IMPLEMENTATION OF SFAS 133--YEAR 2000
Prior to January 1, 2001, instruments which were used as hedges had to be
effective at reducing the risk associated with the exposure being hedged and had
to be designated as a hedge at the inception of the contract. Accordingly,
changes in market values of hedge instruments had to be highly correlated with
changes in the market values of the underlying hedged items, both at inception
of the hedge and over the life of the hedge contract. Any derivative that was
not designated as a hedge, or was so designated but was ineffective, or was in
connection with anticipated transactions, was marked to market and recognized in
earnings.
Gains and losses on foreign currency hedges of existing assets or
liabilities were recognized in income consistent with the hedged item. Gains and
losses on foreign currency hedges of firm commitments were deferred and
recognized in income as part of the hedged transaction. Other foreign exchange
contracts were marked to market and recognized in earnings.
Interest rate and currency swaps that were designated as hedges of
borrowings or specific assets were accounted for on an accrual basis and were
recorded as an adjustment to the interest income or expense of the underlying
asset or liability over its life.
All other swaps, futures, options and forwards which were designated as
effective hedges of specific assets, liabilities, or committed transactions,
were recognized consistent with the effects of hedged transactions.
F-19
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If the underlying hedged transaction was terminated early, the hedging
derivative financial instrument was terminated simultaneously, with any gains or
losses recognized immediately. Gains or losses arising from early termination of
a derivative financial instrument of an effective hedge were accounted for as
adjustments to the basis of the hedged transaction.
Derivative financial instruments used in the Company's trading activities
were marked to market and recognized in earnings.
INSURANCE
The following accounting policies apply specifically to the Insurance
business area.
PREMIUMS AND ACQUISITION COSTS
Premiums are generally earned pro rata over the period coverage is provided
and are reflected in revenues in the Consolidated Income Statement. Premiums
earned include estimates of certain premiums due, including adjustments on
retrospectively rated contracts. Premium receivables include premiums relating
to retrospectively rated contracts that represent the estimate of the difference
between provisional premiums received and the ultimate premiums due. Unearned
premiums represent the portion of premiums written that is applicable to the
unexpired terms of reinsurance contracts or certificates in force. These
unearned premiums are calculated by the monthly pro rata method or are based on
reports from ceding companies. Acquisition costs are costs related to the
acquisition of new business and renewals. These costs are deferred and charged
against earnings ratably over the terms of the related policy.
PROFIT COMMISSION
Certain contracts carry terms and conditions that result in the payment of
profit commissions. Estimates of profit commissions are reviewed based on
underwriting experience to date and, as adjustments become necessary, such
adjustments are reflected in current operations.
LOSS AND LOSS ADJUSTMENT EXPENSES
Loss and loss adjustment expenses are charged to operations as incurred and
are reflected in cost of sales in the Consolidated Income Statement. The
liabilities for unpaid loss and loss adjustment expenses, reflected in accrued
liabilities, other, are determined on the basis of reports from ceding companies
and underwriting associations, as well as estimates by management and in-house
actuaries, including those for incurred but not reported losses, salvage and
subrogation recoveries. Inherent in the estimates of losses are expected trends
of frequency, severity and other factors that could vary significantly as claims
are settled. The Company estimates expected trends using actuarial methods
widely used in the insurance industry, such as the Bornhuetter-Ferguson method,
utilizing the Company's historically paid and incurred losses. Accordingly,
ultimate losses could vary from the amounts provided for in these Consolidated
Financial Statements.
F-20
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEES
Contracts that neither result in the transfer of insurance risk nor the
reasonable possibility of significant loss to the reinsurer are accounted for as
financing arrangements rather than reinsurance. Consideration received for such
contracts is reflected as accounts payable, other, and are amortized on a pro
rata basis over the life of the contract.
FUNDS WITHHELD
Under the terms of certain reinsurance agreements, the ceding reinsurer
retains a portion of the premium to provide security for expected loss payments.
The funds withheld are generally invested by the ceding reinsurer and earn an
investment return that becomes additional funds withheld.
REINSURANCE
The Company seeks to reduce the loss that may arise from catastrophes and
other events that may cause unfavorable underwriting results by reinsuring
certain levels of risks with other insurance enterprises or reinsurers.
Reinsurance contracts are accounted for by reducing premiums earned by amounts
paid to the reinsurers. Recoverable amounts are established for paid and unpaid
losses and loss adjustment expense ceded to the reinsurer. Amounts recoverable
from the reinsurer are estimated in a manner consistent with the claim liability
associated with the reinsurance policy. Contracts where it is not reasonably
possible that the reinsurer may realize a significant loss and assume
significant risk from the insurance contract generally do not meet the
conditions for reinsurance accounting and are recorded as deposits. The Company
assesses probability of risks transferred and significant loss realization based
on the terms in the reinsurance contract that impact the timing and amount of
reimbursement under the contract and the present value of all cash flows without
regard to how cash flows are characterized, in accordance with Statement of
Financial Accounting Standards No. 113, ACCOUNTING AND REPORTING FOR REINSURANCE
OF SHORT DURATION AND LONG DURATION CONTRACTS.
TRANSLATION OF FOREIGN CURRENCIES AND FOREIGN EXCHANGE TRANSACTIONS
The functional currency for most of the Company's operations 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 rates of exchange prevailing during the
year. The resulting translation adjustments are excluded from the determination
of net income and are accumulated as a component of other comprehensive loss
until the entity is sold or substantially liquidated.
Foreign currency transactions, such as those resulting from the settlement
of foreign currency denominated receivables or payables, are included in the
determination of net income, except as they relate to intra-Company loans that
are equity-like in nature with no reasonable expectation of repayment which are
accumulated as a component of other comprehensive loss.
F-21
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In highly inflationary countries, monetary balance sheet positions in local
currencies are converted into U.S. dollars at the year-end rate. Fixed assets
are kept at historical U.S. dollar values from acquisition dates. Sales and
expenses are converted at the exchange rates prevailing upon the date of the
transaction. All translation gains and losses from restatement of balance sheet
positions are included in the determination of net 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 taxes and liabilities are measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that the deferred tax
assets will be realizable.
Generally, deferred taxes are not provided on the unremitted earnings of
subsidiaries as it is expected that these earnings are permanently reinvested.
Such earnings may become taxable upon the sale or liquidation of these
subsidiaries or upon the remittance of dividends. Deferred taxes are provided in
situations where the Company's subsidiaries plan to make future dividend
distributions.
RESEARCH AND DEVELOPMENT
Research and development expense was $550 million, $593 million and
$660 million in 2002, 2001 and 2000, respectively. These costs are included in
selling, general and administrative expenses.
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 and that any proceeds from such exercises were used to
acquire shares of the Company's stock at the average market price during the
year or the period the securities were outstanding, if shorter. Potentially
dilutive securities comprise: outstanding written call options, if dilutive; the
securities issued under the Company's management incentive plan, to the extent
the average market price of the Company's stock exceeded the exercise prices of
such instruments; shares issuable in relation to outstanding convertible bonds,
if dilutive; and outstanding written put options, for which net share settlement
at average market price of the Company's stock was assumed, if dilutive (see
Notes 21 and 23).
STOCK-BASED COMPENSATION
The Company has a management incentive plan under which it offers stock
warrants to key employees, for no consideration. The plan is described more
fully in Note 21. The Company accounts for the warrants using the intrinsic
value method of APB Opinion No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, as permitted by Statement of Financial Accounting Standards No. 123
(SFAS 123), ACCOUNTING FOR STOCK BASED COMPENSATION. All warrants were
F-22
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
issued with exercise prices greater than the market prices of the stock on the
dates of grant. Accordingly, the Company has recorded no compensation expense
related to the warrants, except in circumstances when a participant ceases to be
employed by a consolidated subsidiary, such as after a divestment by the
Company. The following table illustrates the effect on net income and earnings
per share (see Note 23) if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation. Fair value of the
warrants was determined on the date of grant by using the Binomial option model
(see Note 21).
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Net income (loss), as reported..................... $ (783) $ (729) $1,443
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects....... (22) (22) (20)
------ ------ ------
PRO FORMA NET INCOME (LOSS)........................ $ (805) $ (751) $1,423
====== ====== ======
Earnings per share:
Basic--as reported............................... $(0.70) $(0.64) $ 1.22
Basic--pro forma................................. $(0.72) $(0.66) $ 1.21
Diluted--as reported............................. $(0.83) $(0.64) $ 1.22
Diluted--pro forma............................... $(0.85) $(0.66) $ 1.20
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and Statement of
Financial Accounting Standards No. 142 (SFAS 142), GOODWILL AND OTHER INTANGIBLE
ASSETS, which modified the accounting for business combinations, goodwill and
identifiable intangible assets. All business combinations initiated after
June 30, 2001, must be accounted for by the purchase method. Goodwill from
acquisitions completed after that date is not amortized, but charged to
operations when specified tests indicate that the goodwill is impaired, that is,
when the goodwill's fair value is lower than its carrying value. Certain
intangible assets are recognized separately from goodwill, and are amortized
over their useful lives. During 2002, all goodwill was required to be tested for
impairment as of January 1, 2002, with a transition adjustment recognized for
any impairment found. The Company determined that no impairment of goodwill
existed at January 1, 2002. All goodwill amortization also ceased at that date.
The Company recognized goodwill amortization expense in continuing operations of
$155 million and $152 million in 2001 and 2000, respectively, and goodwill
amortization expense in discontinued operations of $36 million and $22 million
in 2001 and 2000, respectively. Accordingly, loss from continuing operations in
2001 and income from continuing operations in 2000 would have been $10 million
($0.01 per share) and $918 million ($0.77 per share), respectively, and net loss
in 2001 and net income in 2000 would have been $538 million ($0.48 per share)
and $1,617 million ($1.36 per share), respectively, if the Company had not
recognized amortization expense for goodwill that is no longer being amortized
in accordance with SFAS 142.
F-23
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 143 (SFAS 143), ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS, which is effective for fiscal years beginning after June 15, 2002,
and requires that the fair value of a legal obligation associated with the
retirement of tangible long-lived assets be recognized in the period in which it
is incurred. The associated asset retirement costs are capitalized as part of
the carrying amount of the asset and allocated to expense over its useful life.
The Company adopted SFAS 143 effective January 1, 2003. The adoption of
SFAS 143 did not have a material impact on its results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 (SFAS 144), ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, while retaining
many of its requirements regarding impairment loss recognition and measurement.
In addition, the new Statement broadens the presentation of discontinued
operations to include more sold and abandoned businesses. The Company adopted
this statement effective January 1, 2002, and, as a result, reflected the
assets, liabilities and results of operations of several businesses and groups
of assets as discontinued operations for all periods presented to the extent
these businesses and groups of assets met the new criteria during 2002.
Disposals and abandonments in previous years were not re-evaluated or
reclassified.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44
AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, which
rescinds previous requirements to reflect all gains and losses from debt
extinguishment as extraordinary. The Company elected to early adopt the new
standard effective April 1, 2002, and, as a result, the gains from
extinguishment of debt of $12 million recorded as extraordinary items in 2001,
are no longer reflected in extraordinary items.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES, which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. The standard is effective January 1, 2003 and is to be applied to
restructuring plans initiated after that date.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 (FIN 45), GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS. FIN 45 requires the guarantor to recognize a liability for the
non-contingent component of a guarantee; that is the obligation to stand ready
to perform in the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of the guarantee at
its inception. The recognition of the liability is required even if it is not
probable that payments will occur under the guarantee or if the guarantee was
issued with a premium payment or as part of a transaction with multiple
elements. FIN 45 also requires additional disclosures related to guarantees. The
recognition measurement provisions of FIN 45 are effective for all guarantees
entered into or modified after December 31, 2002. The Company has adopted the
disclosure requirements of FIN 45 as of December 31, 2002.
F-24
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148 (SFAS 148), ACCOUNTING FOR STOCK-BASED
COMPENSATION--TRANSITION AND DISCLOSURE. AN AMENDMENT OF FASB STATEMENT
NO. 123. The Company has elected to continue with its current practice of
applying the recognition and measurement principles of APB No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. The Company has adopted the disclosure
requirements of SFAS 148 as of December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN
46 requires existing unconsolidated variable interest entities (VIEs) to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. FIN 46 applies immediately to VIEs
created after January 31, 2003 and to VIEs in which an enterprise obtains an
interest after that date. For VIEs in which an enterprise holds a variable
interest that was acquired before February 1, 2003, FIN 46 applies for periods
beginning after June 15, 2003. The Company has substantially completed its
assessment of the effects of the adoption of FIN 46 for all VIEs created before
January 31, 2003, and does not expect such effects to be material to its
Consolidated Financial Statements.
In November 2002, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued Emerging Issues Task Force No. 00-21 (EITF 00-21),
ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES, which was
amended in January 2003 and requires that (a) revenue should be recognized
separately for separate units of accounting in multiple deliverables
arrangement, (b) revenue for a separate unit of accounting should be recognized
only when the arrangement consideration is reliably measurable and the earnings
process is substantially complete, and (c) consideration should be allocated
among the separate units of accounting based on their relative fair value. EITF
00-21 is applicable to transactions entered into after January 1, 2004. The
Company believes that EITF 00-21 will not result in a significant change in its
practice of accounting for arrangements involving delivery or performance of
multiple products and services.
NOTE 3 DISCONTINUED OPERATIONS
During 2000, the Company disposed of its Power Generation segment, which
included its investment in ABB ALSTOM POWER NV (the "Joint Venture") and its
nuclear technology business. The Company sold its nuclear technology business to
British Nuclear Fuels PLC in April 2000 and its 50 percent interest in the Joint
Venture to ALSTOM SA (ALSTOM) in May 2000.
In connection with the sale of its 50 percent interest in the Joint Venture
to ALSTOM in May 2000, the Company received cash proceeds of $1,197 million and
recognized a gain of $734 million ($713 million, net of tax), which includes
$136 million of accumulated foreign currency translation losses. In connection
with the sale of the nuclear technology business to British Nuclear Fuels PLC in
April 2000, the Company received cash proceeds of $485 million and recognized a
gain of $55 million ($17 million, net of tax). The net gain from the sale of the
nuclear technology business reflects a $300 million provision for estimated
environmental remediation. These gains were also offset by operating losses
associated with these businesses.
In November 2002, the Company sold most of its Structured Finance business
to GE Commercial Finance and received cash proceeds of approximately
$2,000 million including a
F-25
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 DISCONTINUED OPERATIONS (CONTINUED)
contingent payment of $20 million to be released to ABB Ltd in the future based
on amounts ultimately collected by GE Commercial Finance. The sale and purchase
agreement provides GE Commercial Finance the option to require the Company to
repurchase certain designated assets transferred to GE Commercial Finance upon
the occurrence of certain events, but in any event no later than February 1,
2004. The Company provided to GE Commercial Finance several cash collateralized
letters of credit for a total amount of $202 million as security for certain
performance-related obligations retained by the Company in connection with the
sale. The net loss from the sale of the Structured Finance business amounted to
$146 million including accumulated foreign currency translation losses of
$54 million, and the fair value of $38 million for GE Commercial Finance's right
to require the Company to repurchase certain designated assets. The net loss is
included in income (loss) from discontinued operations, net of tax.
In December 2002, the Company sold its Metering business to Ruhrgas
Industries GmbH of Essen, Germany, for $223 million, including payment of
$15 million into an escrow account until final completion of the transaction.
Water and electricity metering was no longer a core business and its divestment
was part of the Company's divestment strategy. The net loss from the disposal of
the Metering business was $48 million including currency translation losses of
$35 million. The net loss is included in income (loss) from discontinued
operations, net of tax. The net loss also includes a $65 million write-off of
goodwill that occurred at the time of the sale. The goodwill associated with
that business was included in the carrying amount of the business when
determining the gain or loss on disposal. The amount of goodwill included in
that carrying amount was based on the relative fair values of the business to be
disposed of and the portion of the business that was retained. The Metering
business represented a significant part of the Instrumentation and Metering
business area of the Automation Technology Products segment. Under SFAS 142, no
goodwill impairment was identified prior or subsequent to the sale of the
Metering business.
In December 2002, the Company's Board of Directors approved management's
plans to sell the Oil, Gas and Petrochemical business. The planned disposal is
in line with the Company's strategy to focus on power and automation
technologies for utility and industry customers. Management anticipates
divesting the business in a series of stock and asset sales in 2003.
Accordingly, the results of the business are presented as discontinued
operations for all periods presented. Revenues of $3,854 million,
$3,478 million and $2,774 million in 2002, 2001 and 2000, respectively, in the
summary, below, is attributable to the Oil, Gas and Petrochemical business.
Income (loss) from discontinued operations, net of tax, attributable to the Oil,
Gas and Petrochemical business includes $(121) million, $8 million and
$105 million in 2002, 2001 and 2000, respectively.
Income (loss) from discontinued operations, net of tax, also includes other
abandoned and sold assets, with net losses of $101 million, $21 million and
$2 million in 2002, 2001 and 2000, respectively.
Income (loss) from discontinued operations, net of tax, also includes losses
related to the Company's U.S. subsidiary, Combustion Engineering Inc.
(Combustion Engineering), of approximately $420 million, $470 million and
$70 million in asbestos-related provisions in 2002, 2001 and 2000, respectively
(see Note 17).
F-26
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 DISCONTINUED OPERATIONS (CONTINUED)
Operating results of the discontinued businesses are summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Revenues.................................................... $ 4,560 $ 4,344 $ 3,732
Costs and expenses, finance loss............................ (5,164) (4,772) (3,670)
Income (loss) before taxes.................................. (604) (428) 62
Tax expense................................................. (41) (39) (84)
Minority interest........................................... (41) (34) (8)
------- ------- -------
Net loss from discontinued operations....................... (686) (501) (30)
Net loss from equity accounted investments, net of tax of
$15 million............................................... -- -- (23)
Gain (loss) from dispositions(1), net of tax of $31 million
in 2002 and $59 million in 2000........................... (194) -- 730
------- ------- -------
Income (loss) from discontinued operations, net of tax...... $ (880) $ (501) $ 677
======= ======= =======
Basic earnings (loss) per share:
Income (loss) from discontinued operations, net of tax.... $ (0.79) $ (0.43) $ 0.57
Diluted earnings (loss) per share:
Income (loss) from discontinued operations, net of tax.... $ (0.75) $ (0.43) $ 0.57
------------------------
(1) The 2000 amount is net of a $300 million provision for environmental
remediation.
The portion of the Company's interest expense reclassified to income (loss)
from discontinued operations, net of tax, in accordance with Emerging Issues
Task Force No. 87-24, ALLOCATION OF INTEREST TO DISCONTINUED OPERATIONS, was
$33 million, $34 million and $42 million in 2002, 2001 and 2000, respectively.
These amounts were calculated based upon the ratio of net assets of the
discontinued business divided by the sum of total net assets and total debt (but
only that portion of debt not directly attributable to other operations of the
Company). This ratio was multiplied by the portion of total interest expense not
directly attributable to other operations of the Company to arrive at the
interest reclassified to income (loss) from discontinued operations, net of tax.
F-27
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 DISCONTINUED OPERATIONS (CONTINUED)
The components of assets and liabilities in discontinued operations are
summarized as follows:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Cash and marketable securities............................. $ 300 $ 347
Receivables, net........................................... 1,285 1,676
Inventories, net........................................... 397 507
Prepaid expenses and other................................. 152 236
Financing receivables, non-current......................... 41 2,177
Intangible assets.......................................... 561 524
Property, plant and equipment, net......................... 121 250
Other assets............................................... 238 195
------ ------
ASSETS IN DISCONTINUED OPERATIONS.......................... $3,095 $5,912
====== ======
Accounts payable........................................... $1,677 $1,678
Short-term borrowings...................................... 44 46
Accrued liabilities........................................ 404 487
Long-term borrowings....................................... -- 40
Other liabilities.......................................... 259 1,091
------ ------
LIABILITIES IN DISCONTINUED OPERATIONS..................... $2,384 $3,342
====== ======
NOTE 4 BUSINESS COMBINATIONS AND OTHER DIVESTMENTS
ENTRELEC GROUP
In June 2001, the Company completed the acquisition, through an open-market
tender, of Entrelec Group, a France-based supplier of industrial automation and
control products operating in 17 countries. The Company's Consolidated Financial
Statements include Entrelec's result of operations since June 20, 2001, the
transaction closing date.
The cash purchase price of the acquisition was approximately $284 million.
The excess of the purchase price over the fair value of the assets acquired
totaled to $294 million and has been recorded as goodwill. The transaction has
been accounted for as a purchase. Included in the purchase price allocation was
an amount of $21 million for a restructuring of the business.
B-BUSINESS PARTNERS B.V.
In June 2000, the Company entered into a share subscription agreement to
acquire 42 percent interest in b-business partners B.V. Pursuant to the terms of
the agreement, the Company committed to invest a total of $278 million, of which
$69 million was paid in 2000 and $134 million was paid during the first half of
2001. In December 2001, Investor AB (a Swedish investment company that also owns
shares of ABB Ltd) acquired 90 percent of the Company's investment in b-business
partners B.V. for approximately book value, or $166 million in cash. Immediately
after this transaction, b-business partners B.V. repurchased 50 percent of its
outstanding shares from all investors, which resulted in a return of capital to
the Company of $10 million. As of December 31,
F-28
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 4 BUSINESS COMBINATIONS AND OTHER DIVESTMENTS (CONTINUED)
2002, the Company retains a 4 percent investment in b-business partners B.V. and
is committed to provide additional capital to b-business partners B.V. of
$4 million. Further, b-business partners B.V. retains a put right to compel the
Company to repurchase 150,000 shares of b-business partners B.V. at a cost of
approximately $16 million.
OTHER ACQUISITIONS AND INVESTMENTS
During 2002, 2001, and 2000, the Company invested $154 million,
$179 million and $896 million, respectively, in 32, 60 and 61 new businesses,
joint ventures and affiliated companies. Of these transactions, 6, 10 and 24,
respectively, represented acquisitions accounted for as purchases and
accordingly, the results of operations of the acquired businesses have been
included in the Company's Consolidated Financial Statements from the respective
acquisition dates. The aggregate purchase price of these acquisitions during
2002, 2001 and 2000 was $84 million, $45 million and $416 million, respectively.
The aggregate excess of the purchase price over the fair value of the net assets
acquired totaled $93 million, $29 million and $447 million, in 2002, 2001 and
2000, respectively, and has been recorded as goodwill except for the aggregate
of purchase price over the fair value of net assets acquired that were part of
businesses whose assets and liabilities, including goodwill, are reflected as
assets and liabilities in discontinued operations for all periods presented.
Assuming these acquisitions had occurred on the first day of the year prior to
their purchase, the pro forma Consolidated Income Statement for those years
would not have materially differed from reported amounts either on an individual
or an aggregate basis.
DIVESTMENT OF AIR HANDLING BUSINESS
On January 31, 2002, the Company sold its Air Handling equipment business to
Global Air Movement (Luxembourg) SARL for proceeds of $147 million including a
vendor note of $34 million issued by the purchaser. The Company recognized a net
gain of $74 million which is included in other income (expense), net. The
Company's Air Handling equipment business supplied fan and ventilation products
for public, commercial and industrial ventilation and process applications. It
was a part of the Company's manufacturing and consumer industries division and
made up a key part of the former Flakt Group.
OTHER DIVESTITURES
In the ordinary course of business, the Company periodically divests
businesses and investments not considered by management to be aligned with its
focus on activities with high growth potential. The results of operations of the
divested businesses are included in the Company's Consolidated Income Statement
through the date of disposition. During 2002, 2001 and 2000, the Company sold
several operating units and investments for total proceeds of $209 million,
$117 million and $281 million, respectively, and recognized net gains of
$24 million, $34 million and $201 million, respectively, which are included in
other income (expense), net, except for gains or losses from the disposal of
operating units that were part of businesses whose results of operations,
including such gains and losses, are reflected in income (loss) from
discontinued operations, net of tax, for all periods presented. Net income from
these operations was not material in 2002, 2001 and 2000.
F-29
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 5 MARKETABLE SECURITIES
Marketable securities consist of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Trading.................................................... $ 48 $ 545
Available-for-sale......................................... 2,087 2,379
------ ------
TOTAL...................................................... $2,135 $2,924
====== ======
Available-for-sale securities classified as marketable securities consist of
the following:
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
At December 31, 2002:
EQUITY SECURITIES................... $ 562 $ 8 $(329) $ 241
------ --- ----- ------
Debt securities:
U.S. government obligations....... 612 13 (3) 622
European government obligations... 434 4 -- 438
Corporate......................... 265 6 -- 271
Asset-backed...................... 32 -- -- 32
Other............................. 464 19 -- 483
------ --- ----- ------
TOTAL DEBT SECURITIES............... 1,807 42 (3) 1,846
------ --- ----- ------
$2,369 $50 $(332) $2,087
====== === ===== ======
At December 31, 2001:
EQUITY SECURITIES................... $ 677 $22 $(275) $ 424
Debt securities:
U.S. government obligations....... 654 12 (12) 654
European government obligations... 437 1 (2) 436
Corporate......................... 382 4 (2) 384
Asset-backed...................... 1 -- -- 1
Other............................. 441 40 (1) 480
------ --- ----- ------
TOTAL DEBT SECURITIES............... 1,915 57 (17) 1,955
------ --- ----- ------
$2,592 $79 $(292) $2,379
====== === ===== ======
The net unrealized gain (loss) on available-for-sale securities presented
above included the unrealized gain (loss) on available-for-sale securities
accounted for as cash flow hedges in connection with the Company's management
incentive plan. The net unrealized loss on such securities is $282 million and
$216 million at December 31, 2002 and 2001, respectively.
F-30
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 5 MARKETABLE SECURITIES (CONTINUED)
At December 31, 2002, contractual maturities of the above available-for-sale
debt securities consist of the following:
FAIR
COST VALUE
-------- --------
Less than one year......................................... $ 688 $ 688
One to five years.......................................... 728 740
Six to ten years........................................... 198 203
Due after ten years........................................ 193 215
------ ------
TOTAL...................................................... $1,807 $1,846
====== ======
Gross realized gains on available-for-sale securities were $60 million,
$78 million and $39 million in 2002, 2001 and 2000, respectively. Gross realized
losses on available-for-sale securities were $34 million, $39 million and
$27 million in 2002, 2001 and 2000, respectively. Additionally, in 2002 the
Company recorded charges of $46 million related to the impairment of
available-for-sale securities. This is included in earnings before interest and
taxes. Based on the application of its accounting policies, the Company expects
further impairment losses to be recorded in 2003 related to the unrealized loss
on available-for-sale securities carried in accumulated other comprehensive
loss, if market conditions do not improve. There were no significant impairment
charges in 2001 and 2000.
At December 31, 2002, investments and other included $77 million of
available-for-sale securities, which are strategic investments. Net unrealized
losses of $42 million for these investments are included in the accumulated
other comprehensive income component of stockholders' equity.
At December 31, 2001, investments and other included $236 million of
available-for-sale securities that were pledged in connection with the Company's
pension plan in Sweden. These securities were comprised of European government
and other debt securities recorded at their fair value of $161 million
(including $3 million of unrealized gains) and equity securities recorded at
their fair value of $75 million (net of unrealized losses of $13 million).
During 2002, the Company purchased an additional $23 million of
available-for-sale securities which it also pledged in connection with this
pension plan. The entire pledged portfolio experienced further losses partially
offset by the favorable impact of the change in exchange rates during 2002. At
December 31, 2002, this entire portfolio was contributed to a pension trust at
its then fair value of $260 million and the Company recognized the related
cumulative net loss of $27 million in interest and other finance expense.
The net change in unrealized gains and losses in fair values of trading
securities was not significant in 2002, 2001 or 2000.
At December 31, 2002 and 2001, the Company pledged $673 million and
$848 million, respectively, of marketable securities as collateral for issued
letters of credit, insurance contracts or other security arrangements and, in
addition, in 2001, also as collateral for repurchase agreements.
F-31
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 FINANCIAL INSTRUMENTS
CASH FLOW HEDGES
The Company enters into forward foreign exchange contracts to manage the
foreign exchange risk of its operations. To a lesser extent the Company also
uses commodity contracts to manage its commodity risks. Where such instruments
are designated and qualify as cash flow hedges, the changes in their fair value
are recorded in the accumulated other comprehensive loss component of
stockholders' equity, until the hedged item is recognized in earnings. At such
time, the respective amount in accumulated other comprehensive loss is released
to earnings and is shown in either revenues or cost of sales consistent with the
classification of the earnings impact of the underlying transaction being
hedged. Any hedge ineffectiveness is included in revenues and cost of sales but
is not significant for 2002 or 2001.
During 2002 and 2001, the amount reclassified from accumulated other
comprehensive loss to earnings, which represented derivative financial
instrument net losses, amounted to $4 million and $130 million, respectively,
net of taxes, which includes $8 million and $31 million, net of taxes,
respectively, associated with the transition adjustment recorded at January 1,
2001. It is anticipated that during 2003, $40 million, net of taxes, of the
amount included in accumulated other comprehensive loss at December 31, 2002,
which represents gains on derivative financial instruments will be reclassified
to earnings due to the occurrence of the underlying hedged transaction.
Derivative financial instrument gains and losses reclassified to earnings offset
the losses and gains on the items being hedged.
While the Company's cash flow hedges are primarily hedges of exposures over
the next eighteen months, the amount included in accumulated other comprehensive
loss at December 31, 2002 includes hedges of certain exposures maturing up to
2007.
FAIR VALUE HEDGES
To reduce its interest rate and currency exposure arising from its funding
activities and to hedge specific assets, the Company uses interest rate and
currency swaps. Where such instruments are designated as fair value hedges, the
changes in fair value of these instruments, as well as the changes in fair value
of the underlying liabilities or assets, are recorded as offsetting gains and
losses in the determination of earnings. The amount of hedge ineffectiveness for
2002 and 2001 is not significant.
DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company uses the following methods and assumptions in estimating fair
values for financial instruments:
CASH AND EQUIVALENTS, RECEIVABLES, ACCOUNTS PAYABLE, SHORT-TERM BORROWINGS
AND CURRENT PORTION OF LONG-TERM BORROWINGS: The carrying amounts reported in
the Consolidated Balance Sheet approximate the fair values.
MARKETABLE SECURITIES (INCLUDING TRADING AND AVAILABLE-FOR-SALE
SECURITIES): Fair values are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
F-32
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 FINANCIAL INSTRUMENTS (CONTINUED)
FINANCING RECEIVABLES AND LOANS (NON-CURRENT PORTION): Fair values are
determined using discounted cash flow methodology based upon loan rates of
similar instruments. The carrying values and estimated fair values of long-term
loans granted at December 31, 2002 were $783 million and $668 million,
respectively, and at December 31, 2001 were $1,102 million and $1,118 million,
respectively.
LONG-TERM BORROWINGS (NON-CURRENT PORTION): Fair values are based on the
present value of future cash flows discounted at estimated borrowing rates for
similar debt instruments or in the case of bond or note issuances, using the
relevant borrowing rates derived from interest rate swap curves. Such swap
curves are interest rates quoted by market participants for the relevant
maturities, excluding any component associated with credit risk of
counterparties. As these bonds or note issuances reflect liabilities of the
Company, if the Company's credit rating was reflected in these discount rates,
the present value calculation would result in a lower fair value liability. The
carrying values and estimated fair values of long-term borrowings at
December 31, 2002 were $5,376 million and $5,282 million, respectively, and at
December 31, 2001 were $5,003 million and $4,969 million, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS: Fair values are the amounts at which the
contracts could be settled. These fair values are estimated by using discounted
cash flow methodology based on available market data, option pricing models or
by obtaining quotes from brokers. At December 31, 2002 and 2001, the carrying
values equal fair values. The fair values are disclosed in Notes 9 and 15.
NOTE 7 RECEIVABLES
Receivables consist of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Trade receivables........................................... $3,303 $3,487
Other receivables........................................... 3,114 2,923
Allowance................................................... (233) (246)
------ ------
6,184 6,164
Unbilled receivables, net:
Costs and estimated profits in excess of billings......... 1,691 1,504
Advance payments received................................. (700) (976)
------ ------
991 528
------ ------
$7,175 $6,692
====== ======
F-33
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 7 RECEIVABLES (CONTINUED)
Trade receivables include contractual retention amounts billed to customers
of $129 million and $128 million at December 31, 2002 and 2001, respectively.
Management expects the majority of related contracts will be completed and
substantially all of the billed amounts retained by the customer will be
collected within one year of the respective balance sheet date. Other
receivables consist of V.A.T., claims, employee and customer related advances,
the current portion of direct finance and sales-type leases and other non-trade
receivables, including the retained interest on sold receivables under the
securitization programs.
Costs and estimated profits in excess of billings represent sales earned and
recognized under the percentage-of-completion method. Amounts are expected to be
collected within one year of the respective balance sheet date.
During 2002 and 2001, the Company sold trade receivables to two separate
QSPEs, unrelated to the Company, in revolving-period securitizations. The
Company retains servicing responsibility relating to the sold receivables.
Solely for the purpose of credit enhancement from the perspective of the QSPEs,
the Company retains an interest in the sold receivables (retained interest).
These retained interests are initially measured at estimated fair values, which
the Company believes approximate historical carrying values, and are
subsequently measured based on a periodic evaluation of collections and
delinquencies.
Given the short-term, lower-risk nature of the assets securitized, market
movements in interest rates would not impact the carrying value of the Company's
retained interests. An adverse movement in foreign currency rates could have an
impact on the carrying value of these retained interests as the retained
interest is denominated in the original currencies underlying the sold
receivables. Due to the short-term nature of the receivables and economic hedges
in place relating to currency movement risk, the impact has historically not
been significant.
The Company routinely evaluates its portfolio of trade receivables for risk
of non-collection and records an allowance for doubtful debts to reflect the
carrying value of its trade receivables at estimated net realizable value.
Pursuant to the requirements of the revolving-period securitizations through
which the Company securitizes certain of its trade receivables, the Company
effectively bears the risk of potential delinquency or default associated with
trade receivables sold or interests retained. Accordingly, in the normal course
of servicing the assets sold, the Company evaluates potential collection losses
and delinquencies and updates the estimated fair value of the Company's retained
interests. An increase in delinquency rates compared to historic levels will
cause an increase in the retained interest. Ultimately, if the customer
defaults, the Company will be responsible for absorbing the amount.
Historically, such default amounts have not been significant. The fair value of
the retained interests at December 31, 2002, and December 31, 2001, was
approximately $497 million and $264 million, respectively.
In accordance with SFAS 140, the Company has not recorded a servicing asset
or liability as management believes it is not practicable to estimate this value
given that verifiable data as to the fair value of the compensation and/or cost
related to servicing the types of the assets sold is not readily obtainable nor
reliably estimable for the multiple geographic markets in which the entities
selling receivables operate.
F-34
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 7 RECEIVABLES (CONTINUED)
During 2002 and 2001, the following cash flows were received from and paid
to QSPEs:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Gross trade receivables sold to QSPEs ($524 and $347 related
to discontinued operations)............................... $ 5,972 $ 5,515
Collections made on behalf of and paid to QSPEs (($449) and
($304) related to discontinued operations)................ (6,074) (5,343)
Purchaser's, liquidity and program fees (($4) and ($2)
related to discontinued operations)....................... (37) (33)
Increase in retained interests (($80) and ($9) related to
discontinued operations).................................. (245) (53)
------- -------
Net cash (paid to) /received from QSPEs during the year
(($9) and $32 related to discontinued operations)......... $ (384) $ 86
======= =======
Cash settlement with the QSPEs in 2001, took place monthly on a net basis.
One of the securitization programs contained a credit rating trigger whereby
if the Company's rating went below both BBB (Standard & Poor's) and Baa2
(Moody's), the Company would no longer benefit from the intra-month funding. The
second securitization program also contained a credit rating trigger and similar
consequences but the rating trigger point occurred when the Company's rating
went below either BBB (Standard & Poor's) or Baa2 (Moody's).
In the case of the first program, the credit trigger occurred in early
November 2002. At the beginning of November 2002, a number of structural changes
to the program were agreed and implemented during November 2002 for credit
enhancement purposes of the QSPE. These changes included twice monthly
settlements, the sale of additional receivables as security, changes in the
eligibility criteria for receivables to be sold, and the establishment of
certain banking and collection procedures in respect of the sold receivables.
In the case of the second securitization program, the credit rating trigger
occurred in October 2002. Changes to the program were made and included net cash
settlement twice per month, daily transfers of collections of sold receivables,
as well as a fixed percentage of retained interest on the sale of new
receivables. Subsequent to 2002, further amendments to the program have been
agreed and implemented, including the return to a dynamic calculation of the
retained interest on the receivables sold rather than a fixed percentage. In
addition, under the amended terms, if the Company's rating is below BB+
(Standard & Poor's) or Ba3 (Moody's) then the QSPE would have the right to
require the collection of the sold receivables to be made directly to the
accounts of the QSPE rather than via the Company.
The sale of additional receivables as security, the increased frequency of
transfers of collections to the QSPEs and the increase in the retained interest
required by the QSPEs contributed to the cash flows with the QSPEs representing
a net cash outflow for the year 2002 rather than a net cash inflow as in 2001.
F-35
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 7 RECEIVABLES (CONTINUED)
Gross trade receivables sold represent the face value of all invoices sold
during the year to the QSPEs. As the Company services the receivables,
collection of the receivables previously sold is made on behalf of the QSPEs.
The Company records a loss on sale at the point of sale of the receivables to
the QSPEs. The Company also records the purchaser's, liquidity and program fees
at the point of sale to the QSPEs. The total cost of $37 million and
$33 million in 2002 and 2001, respectively, related to the securitization of
trade receivables is included in the determination of current earnings. Changes
in retained interests of $245 million and $53 million in 2002 and 2001,
respectively, primarily result during 2002 from the additional credit
enhancement measures taken by the QSPEs as described above and during 2001 from
increases in the volume of receivables sold during the year, as well as changes
in default and delinquency rates, offset by collections of the underlying
receivables.
The following table reconciles total gross receivables to the amounts in the
Consolidated Balance Sheet after the effects of securitization at December 31,
2002 and 2001:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Total trade receivables..................................... $4,667 $5,178
Portion derecognized........................................ (512) (789)
Retained interests included in other receivables............ (514) (269)
------ ------
Trade receivables........................................... 3,641 4,120
Less: Trade receivables included in assets in discontinued
operations................................................ (338) (633)
------ ------
Trade receivables--continuing operations.................... $3,303 $3,487
====== ======
At December 31, 2002 and 2001, of the gross trade receivables sold, the
total trade receivables for which cash has not been collected at those dates
amounted to $1,026 million ($148 million related to discontinued operations) and
$1,058 million ($72 million related to discontinued operations), respectively.
At December 31, 2002 and 2001 an amount of $96 million ($18 million related to
discontinued operations) and $65 million ($3 million related to discontinued
operations), respectively, was more than 90 days past due which is considered
delinquent pursuant to the terms of the programs.
In addition, during 2002 and 2001, the Company transferred receivables that
were appropriately accounted for under SFAS 140 that were not transferred as
part of the above described securitization programs. These transfers were sales
directly to banks and/or sales pursuant to other revolving-period programs.
Total sold receivables included in these transactions during 2002 and 2001 were
approximately $534 million ($22 million related to discontinued operations) and
$71 million, respectively. The related costs, including the associated gains and
losses, were not significant in either year.
F-36
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 8 INVENTORIES
Inventories, including inventories related to long-term contracts, consist
of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Commercial inventories, net:
Raw materials............................................. $1,027 $ 993
Work in process........................................... 1,048 1,233
Finished goods............................................ 323 306
------ ------
2,398 2,532
------ ------
Contract inventories, net:
Inventoried costs......................................... 379 273
Contract costs subject to future negotiation.............. 23 16
Advance payments received related to contracts............ (423) (253)
------ ------
(21) 36
------ ------
$2,377 $2,568
====== ======
Contract costs subject to future negotiation are deemed probable of recovery
through changes in the contract price and are deferred until the parties have
agreed on these changes.
NOTE 9 PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets consist of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Prepaid expenses............................................ $ 484 $ 444
Deferred taxes.............................................. 558 495
Advances to suppliers and contractors....................... 227 183
Derivatives................................................. 1,248 864
Other....................................................... 178 136
------ ------
$2,695 $2,122
====== ======
F-37
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 10 FINANCING RECEIVABLES
Financing receivables consist of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Third-party loans receivable................................ $ 673 $ 870
Finance leases (see Note 16)................................ 560 550
Other....................................................... 569 666
------ ------
$1,802 $2,086
====== ======
Third-party loans receivable primarily represent financing arrangements
provided to customers under long-term construction contracts as well as export
financing and other activities.
Included in finance leases at December 31, 2002 and 2001 are $7 million and
$9 million, respectively, of assets pledged as security for other liabilities.
Additionally, $212 million and $98 million of assets were pledged as security
for long-term borrowings at December 31, 2002 and 2001, respectively.
Other financing receivables at December 31, 2002 and 2001 include
$349 million and $355 million, respectively, of assets pledged as security for
other liabilities. Of these amounts, $58 million and $53 million, respectively,
are marketable securities. In addition, other financing receivables include
notes receivable from affiliates of $110 million and $232 million at
December 31, 2002 and 2001, respectively.
During 2002 and 2001, the Company sold or transferred to financial
institutions financing receivables. These transfers included sales of finance
lease receivables and sales of loan receivables. Financing receivables sold or
transferred and derecognized from the Consolidated Balance Sheet in accordance
with SFAS 140 totaled $419 million and $329 million in 2002 and 2001,
respectively. The 2001 transfers included $70 million of assets transferred to
an affiliated company, while no transfers occurred between affiliates in 2002.
Related costs of these transactions, including the associated gains and losses,
were approximately $13 million in 2002 and were not significant in 2001.
The Company, in the normal course of its commercial lending business, has
outstanding credit commitments which have not yet been drawn down by customers.
The unused amount at December 31, 2002 and 2001 was approximately $41 million
and $62 million, respectively.
F-38
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 11 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Land and buildings.......................................... $ 2,215 $ 2,231
Machinery and equipment..................................... 4,364 3,984
Construction in progress.................................... 257 178
------- -------
6,836 6,393
Accumulated depreciation.................................... (4,044) (3,640)
------- -------
$ 2,792 $ 2,753
======= =======
NOTE 12 GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following:
DECEMBER 31,
-----------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ --------
Intangible assets:
Capitalized software......... $ 590 $(278) $312 $431 $(161) $270
Other........................ 551 (272) 279 536 (219) 317
------ ----- ---- ---- ----- ----
Total........................ $1,141 $(550) $591 $967 $(380) $587
====== ===== ==== ==== ===== ====
Aggregate amortization expense:
For year ended 2001.......... $111
For year ended 2002.......... $145
Estimated amortization expense:
For year ended 2003.......... $169
For year ended 2004.......... $157
For year ended 2005.......... $143
For year ended 2006.......... $ 51
For year ended 2007.......... $ 47
The estimated amortization expense is calculated as if no future
expenditures will be made.
In 2002 and 2001, the Company did not identify any intangible assets as not
being subject to amortization with the exception of $24 million and
$14 million, respectively, related to an intangible pension asset (see
Note 20).
Other intangible assets primarily include intangibles created through
acquisitions, such as trademarks and patents.
F-39
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 12 GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
For the years ended December 31, 2002 and 2001, the Company acquired
$91 million of intangible assets ($86 million of software and $5 million of
other intangible assets) and $154 million ($135 million of software and
$19 million of other intangible assets), respectively. For items capitalized in
2002 and 2001, the weighted average amortization period for capitalized software
is 4 years and for other intangible assets is 6 years.
The Company recorded write-downs of intangible assets of $25 million and
$26 million, in 2002 and 2001, respectively, related to software developed for
internal use. The fair value of the assets was estimated using an undiscounted
cash flow model. The write-downs are included in other income (expense), net in
the Consolidated Income Statement.
The changes in the carrying amount of goodwill for the year ended
December 31, 2002, are as follows:
POWER AUTOMATION NON-
TECHNOLOGY TECHNOLOGY CORE CORPORATE/
UTILITIES INDUSTRIES PRODUCTS PRODUCTS ACTIVITIES OTHER TOTAL
--------- ---------- ---------- ---------- ---------- ---------- --------
Balance as of January 1,
2002..................... $357 $523 $44 $1,050 $176 $38 $2,188
Goodwill acquired during
the year................. 2 25 17 -- 33 16 93
Impairment losses.......... -- -- -- -- (7) (2) (9)
Goodwill written off
related to sale of
business unit............ -- -- -- (65) -- (2) (67)
Other...................... -- (19) (1) 11 15 1 7
Foreign currency
translation.............. 3 14 5 64 16 7 109
---- ---- --- ------ ---- --- ------
Balance as of December 31,
2002..................... $362 $543 $65 $1,060 $233 $58 $2,321
==== ==== === ====== ==== === ======
The changes in the carrying amount of goodwill for the year ended
December 31, 2001, are as follows:
POWER AUTOMATION NON-
TECHNOLOGY TECHNOLOGY CORE CORPORATE/
UTILITIES INDUSTRIES PRODUCTS PRODUCTS ACTIVITIES OTHER TOTAL
--------- ---------- ---------- ---------- ---------- ---------- --------
Balance as of January 1,
2001..................... $384 $545 $50 $ 818 $225 $ 62 $2,084
Goodwill acquired during
the year................. -- 23 -- 300 -- -- 323
Impairment losses.......... -- -- -- -- (40) -- (40)
Amortization expense....... (24) (41) (6) (54) (6) (24) (155)
Foreign currency
translation.............. (3) (4) -- (14) (3) -- (24)
---- ---- --- ------ ---- ---- ------
Balance as of December 31,
2001..................... $357 $523 $44 $1,050 $176 $ 38 $2,188
==== ==== === ====== ==== ==== ======
F-40
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 12 GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
As of December 31, 2002 and 2001, the goodwill in Non-Core Activities was
comprised of: Insurance ($67 million and $56 million); Building Systems
($34 million and $21 million); New Ventures ($129 million and $96 million); and
Other Non-Core Activities ($3 million and $3 million), respectively.
Of the $93 million goodwill acquired in 2002, $48 million related to the
purchase of the minority interest in certain consolidated subsidiaries of the
Company for cash consideration of $40 million. The remaining $45 million relates
to the purchase of six entities for a cost of $52 million.
The Company increased goodwill $7 million during 2002 due to adjustments of
the purchase price for certain 2001 acquisitions.
Consistent with the Company's policy of reassessing the carrying value of
acquired intangible assets, a write-down of $40 million was recorded during 2001
in relation to goodwill of one of the Company's investments.
NOTE 13 EQUITY ACCOUNTED COMPANIES
The Company recorded $211 million, $79 million and $92 million in 2002, 2001
and 2000, respectively, of earnings reflected in other income (expense), net,
representing the Company's share of the pre-tax earnings (losses) of the
investees, accounted for under the equity method of accounting. The Company has
recorded, at December 31, 2002, and 2001, $730 million and $615 million,
respectively, in investments and other, representing the Company's investment in
these equity investees. This is consistent with the Company's policy for
investments accounted for using the equity method, as described in Note 2.
Significant companies accounted for using the equity method of accounting and
the ownership percentage held by the Company included: Jorf Lasfar Energy
Company S.C.A., Morocco (owned 50 percent) and Swedish Export Credit
Corporation, Sweden (owned 35.4 percent).
THE COMPANY'S
SHARE OF THE PRE-TAX
EARNINGS (LOSSES) OF
EQUITY-ACCOUNTED
INVESTMENT INVESTMENT INVESTEES
BALANCE BALANCE ------------------------------
2002 2001 2002 2001 2000
---------- ---------- -------- -------- --------
Jorf Lasfar Energy Company S.C.A........... $336 $310 $ 73 $85 $61
Swedish Export Credit Corporation.......... 206 100 125 (16) 18
Other(1)................................... 188 205 13 10 13
---- ---- ---- --- ---
Total...................................... $730 $615 211 79 92
Less: Current income tax expense........... (49) (7) (11)
---- ---- ---- --- ---
The Company's share of earnings of equity-
accounted investees...................... $162 $72 $81
------------------------
(1) Encompasses additional investments, none of which are individually
significant.
F-41
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 13 EQUITY ACCOUNTED COMPANIES (CONTINUED)
The following table represents selected financial information for Jorf
Lasfar Energy Company S.C.A. and Swedish Export Credit Corporation and not the
Company's share in these two equity accounted companies.
JORF LASFAR ENERGY COMPANY S.C.A.
2002 2001 2000
-------- -------- --------
Total current assets...................................... $ 174 $ 190 $ 159
Total non-current assets.................................. $2,356 $2,466 $2,768
Total current liabilities................................. $ 249 $ 188 $ 134
Total non-current liabilities............................. $1,802 $1,904 $2,109
Total shareholders' equity................................ $ 479 $ 564 $ 684
Revenues.................................................. $ 364 $ 357 $ 247
Income before taxes....................................... $ 143 $ 168 $ 126
Net income................................................ $ 132 $ 161 $ 118
SWEDISH EXPORT CREDIT CORPORATION(1)
2002 2001 2000
-------- -------- --------
Total shareholders' equity.................................. $441 $526 $361
Net income (loss)........................................... $254 $(32) $ 56
------------------------
(1) Swedish Export Credit Corporation's financial statements are prepared on the
basis of Swedish GAAP and only shareholders' equity and net income are
reconciled to U.S. GAAP.
On April 7, 2003, Swedish Export Credit Corporation filed an amendment to
its annual report on Form 20-F for the fiscal year ended December 31, 2001, to
correct an error in its accounting for the fair value of certain financial
instruments. Amounts presented in these Consolidated Financial Statements
include the effect of adjustments recorded by Swedish Export Credit Corporation
in 2002 and 2001 to properly account for such instruments in accordance with
U.S. GAAP. Accordingly, the Company has restated its 2001 Consolidated Financial
Statements to reflect a $55 million ($0.05 per share) reduction in the Company's
share of Swedish Export Credit Corporation's pre-tax earnings, partially offset
by current income taxes of $17 million ($0.02 per share), and a reduction in the
Company's investment balance of $38 million.
On behalf of companies in which the Company has an equity position, the
Company has granted lines of credit and has committed to provide additional
capital. As of December 31, 2002, the total unused lines of credit amounted to
$22 million and the capital commitments amounted to $64 million.
F-42
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 13 EQUITY ACCOUNTED COMPANIES (CONTINUED)
The Company's 2002 Consolidated Financial Statements include the following
aggregate amounts related to transactions with equity accounted investees and
other related parties:
Revenues.................................................... $ 77
Receivables................................................. $ 81
Other current assets........................................ $ 58
Financing receivable (non-current).......................... $110
Payables.................................................... $ 74
Borrowings (current)........................................ $ 40
Other current liabilities................................... $ 22
NOTE 14 BORROWINGS
The Company's total borrowings at December 31, 2002 and 2001 were
$7,952 million and $9,704 million respectively.
SHORT-TERM BORROWINGS
The Company's commercial paper and short-term debt financing consist of the
following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Commercial paper
(weighted-average interest rate of 4.8% and 2.7%)......... $ 478 $3,297
Other short-term debt
(weighted-average interest rate of 5.3% and 4.5%)......... 434 941
Current portion of long-term borrowings
(weighted-average interest rate of 3.7% and 4.5%)......... 1,664 463
------ ------
$2,576 $4,701
====== ======
Other short-term debt primarily represents short-term loans from various
banks and, at December 31, 2001, includes repurchase agreements. Commercial
paper outstanding at December 31, 2002 has maturities of less than 3 months. Of
the commercial paper outstanding at December 31, 2001, $2,050 million had
maturities of less than 3 months, $913 million had maturities of 3 to 6 months
and $334 million had maturities over 6 months.
In mid December 2001, the Company entered into a syndicated $3,000 million
364-day revolving credit facility, with the option to convert up to
$1,000 million of any amounts outstanding at the end of the period into one year
term borrowings. The facility contained a clause that in the event the Company's
long-term debt rating fell below either A3 or A- from Moody's and Standard &
Poor's, respectively, the terms of the facility were to be renegotiated.
Commitment fees were paid on the unutilized portion of the facility and their
level was dependent on the credit rating of the Company's long-term debt. At
December 31, 2001, no amounts were outstanding under the facility.
F-43
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 14 BORROWINGS (CONTINUED)
In March 2002, the Company drew down $2,845 million of the $3,000 million
facility. A portion of these proceeds was used to repay commercial paper
borrowings. On March 25, 2002, the Company's long-term debt rating was reduced
to Baa2 by Moody's. This event triggered the minimum-rating clause in the
facility and required the terms of the facility to be renegotiated. In
April 2002, the $3,000 million revolving credit facility was amended.
Pursuant to the terms of the amended $3,000 million revolving credit
facility, the proceeds from the issuance of the convertible bonds, the
sterling-denominated bonds and the euro-denominated bonds, described under
long-term borrowings, below, as well as proceeds from a sale-leaseback
transaction were used to repay and reduce the amount available under the
facility to $1,000 million. This amount was repaid in December 2002 and the
facility closed.
In December 2002, the Company established a new $1,500 million 364-day
revolving credit facility. This facility includes a 364-day term-out option
whereby up to a maximum amount of $750 million may be extended for up to a
further 364 days in the form of term loans. The availability of the term-out
option is subject to certain conditions, including the Company's ability to
demonstrate, at the time of exercising the option, that including the proceeds
of the term-out option, the Company will have at least $300 million of available
cash (as defined in the facility agreement) throughout 2004. Assuming the
term-out option is fully drawn, the amounts converted into term loans will be
reduced by $150 million on July 1, 2004, $250 million on October 1, 2004, and
$350 million on December 15, 2004, being the final maturity date of the
facility.
As of December 31, 2002, nothing had been drawn under this new facility.
Subsequent to year-end 2002, amounts have been drawn under the facility within
the facility's monthly drawing limits. The maximum amount available under the
facility will reduce from $1,500 million (available to be drawn through
October 2003) to $1,200 million and $1,000 million at the beginning of
November 2003 and December 2003, respectively.
The amount available under the facility will be further reduced by all, or a
portion, of the net proceeds from the disposal of certain significant businesses
and assets. The agreement provides that proceeds from specified disposals will
not reduce the amount available under the facility until such proceeds exceed
certain thresholds. Amounts available under the facility will also be reduced by
the proceeds from the issuance of certain long-term debt, equity or
equity-linked instruments.
The new facility is secured by a package of assets with a net carrying value
of $3,500 million, including the shares of the Oil, Gas and Petrochemicals
division (which is earmarked for divestment and is included in assets and
liabilities in discontinued operations), specific stand alone businesses and
certain regional holding companies. The facility is also secured by certain
intra-group loans.
The facility also contains certain financial covenants in respect of minimum
interest coverage (the ratio of earnings before interest, taxes, depreciation
and amortization to gross interest expense), total gross debt, a maximum level
of debt in subsidiaries other than those specified as borrowers under the
facility, a minimum level of consolidated net worth, as well as specific
negative pledges. The Company must meet the requirements of the financial
covenants at each quarter-end commencing December 31, 2002. In addition, in
order to ensure the continued availability of the credit facility, the Company
must obtain minimum levels of proceeds from the disposal of specified assets and
businesses and/or equity issuances during 2003. The Company's compliance with
this
F-44
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 14 BORROWINGS (CONTINUED)
covenant is measured at intervals during 2003. In the event that, at any
measurement date, the proceeds from the scheduled disposals and/or equity
issuances are less than the required amount, the Company may elect to include
for the purposes of the covenant calculation the proceeds from other defined
discretionary sources. The extent to which these other discretionary sources of
proceeds may be included in the calculation is capped by the facility.
The facility prohibits the voluntary prepayment of any banking facility, the
prepayment or early redemption of any bonds or capital market instruments, the
repurchase of any shares of ABB Ltd, as well as the declaration or payment of
dividends as long as the facility is outstanding.
Commitment fees are paid on the unused portion of the facility. The interest
costs on borrowings under the 364-day facility are LIBOR plus 3.5 percent, or,
for any borrowing in euro, EURIBOR plus 3.5 percent. For any term loans under
the term-out option, the applicable interest rate is LIBOR plus 4 percent, or,
for any such borrowing in euro, EURIBOR plus 4 percent.
LONG-TERM BORROWINGS
The Company utilizes a variety of derivative products to modify the
characteristics of its long-term borrowings. The Company uses interest rate
swaps to effectively convert certain fixed-rate long-term borrowings into
floating rate obligations. For certain non-U.S. dollar denominated borrowings,
the Company utilizes cross-currency swaps to effectively convert the borrowings
into U.S. dollar obligations. As required by SFAS 133, borrowings which have
been designated as being hedged by fair value hedges are stated at their
respective fair values.
The following table summarizes the Company's long-term borrowings
considering the effect of interest rate, currency and equity swaps:
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------------- -------------------------------
NOMINAL EFFECTIVE NOMINAL EFFECTIVE
BALANCE RATE RATE BALANCE RATE RATE
-------- -------- --------- -------- -------- ---------
Floating rate......................... $5,252 5.1% 3.0% $4,465 3.9% 2.7%
Fixed rate............................ 1,035 5.0% 5.0% 1,001 5.3% 5.3%
Convertible bonds..................... 753 4.6% 4.6% -- -- --
------ ------
$7,040 $5,466
Current portion of long-term
borrowings.......................... (1,664) 3.7% 1.9% (463) 4.5% 2.8%
------ ------
$5,376 $5,003
====== ======
F-45
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 14 BORROWINGS (CONTINUED)
At December 31, 2002, maturities of long-term borrowings were as follows:
Due in 2003................................................. $1,664
Due in 2004................................................. 1,330
Due in 2005................................................. 1,018
Due in 2006................................................. 545
Due in 2007................................................. 814
Thereafter.................................................. 1,669
------
$7,040
======
In May 2002, the Company issued $968 million aggregate principal amount of
convertible unsubordinated bonds due 2007. The bonds pay interest semi-annually
in arrears at a fixed annual rate of 4.625 percent and each $1,000 principal
amount of bonds is convertible into 87.7489 fully paid ordinary shares of the
Company at an initial conversion price of 18.48 Swiss francs (converted into
U.S. dollars at a fixed conversion rate of 1.6216 Swiss francs per U.S. dollar).
The conversion price is subject to adjustment provisions to protect against
dilution or change in control. The bonds are convertible at the option of the
bondholder at any time from June 26, 2002 up to and including May 2, 2007. The
Company may, at any time on or after May 16, 2005, redeem the outstanding bonds
at par plus accrued interest if, (1) for a certain number of days during a
specified period of time, the official closing price of the Company's ordinary
shares on the virt-x exceeds 130 percent of the conversion price, or (2) if at
least 85 percent in aggregate principal amount of bonds originally issued have
been exchanged, redeemed or purchased and cancelled. The Company has the option
to redeem the bonds when due in cash, ordinary shares or any combination
thereof, provided that the total number of ordinary shares used does not exceed
84,940,935. The Company's shares to be issued if the bonds are converted are
denominated in Swiss francs, while the bonds are denominated in U.S. dollars.
Under SFAS 133, as clarified in discussions between the Company and the
Securities and Exchange Commission, a component of the convertible bonds must be
accounted for as a derivative. A portion of the issuance proceeds is deemed to
relate to the value of the derivative on issuance and subsequent changes in
value of the derivative are recorded through earnings and as an adjustment to
the carrying value of the bond. The allocation of a portion of the proceeds to
the derivative creates a discount on issuance which is amortized to earnings
over the life of the bond. As a result of the decline in the Company's share
price since issuance of the bonds, the Company has recorded a gain from the
change in fair value of the derivative, partially offset by amortization of the
effective discount, resulting in a net decrease to interest and other finance
expense of $215 million, with a corresponding reduction in long-term borrowings.
Also in May 2002, the Company issued bonds due in 2009 with an aggregate
principal amount of 200 million pounds sterling, or approximately $292 million
which pay interest semi-annually in arrears at 10 percent per annum. In
addition, the Company issued in May 2002, bonds due 2008 with an aggregate
principal amount of 500 million euro, or approximately $466 million, which pay
interest annually in arrears at 9.5 percent per annum.
The 200 million pounds sterling bonds and the 500 million euro bonds contain
certain clauses linking the interest paid on the bonds to the credit rating
assigned to the bonds. If the rating
F-46
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 14 BORROWINGS (CONTINUED)
assigned to these bonds by both Moody's and Standard & Poor's remains at or
above Baa3 and BBB-, respectively, then the interest rate on the bonds remains
at the level at issuance, that is 10 percent and 9.5 percent for the sterling
and euro bonds, respectively. If the rating assigned by either Moody's or
Standard & Poor's decreases below Baa3 or BBB- respectively, then the annual
interest rate on the bonds increases by 1.5 percent per annum to 11.5 percent
and 11 percent for the sterling and euro bonds, respectively. If after such a
rating decrease, the rating assigned by both Moody's and Standard & Poor's
returns to a level at or above Baa3 and BBB-, respectively, then the interest
rates on the bonds return to the interest level at issuance. As a result of the
downgrade of the Company's long-term credit rating by Moody's to Ba2 on
October 31, 2002, this step-up clause in interest was triggered on both bonds.
The increase in interest costs is effective for interest periods beginning after
the payment of the coupon accruing at the date of the downgrade.
In line with the Company's policy of reducing its interest and currency
exposure, a cross currency swap has been used to modify the characteristics of
the 200 million pounds sterling bonds and an interest rate swap to modify the
500 million euro bonds. After considering the impact of the cross currency and
interest rate swaps, the 200 million pounds sterling bonds effectively become a
floating rate U.S. dollar obligation, while the 500 million euro bonds become a
floating rate euro obligation. In both cases the floating rate resets every
three months. Accordingly, both the GBP 200 million bonds and the EUR 500
million bonds are included as "floating rate" in the table of Long-term
borrowings above.
During early 2002 and late 2001, the Company repurchased outstanding bonds
with a face value of $109 million and $322 million, respectively. In connection
with these repurchases the Company recorded a gain on extinguishments of debt of
$3 million and $12 million, respectively. Of the repurchased bonds, in 2002, an
amount totaling a face value of $31 million was cancelled while an amount
totaling a face value of $19 million was subsequently re-issued. In 2001, the
Company re-issued a portion of the repurchased bonds with a face value of
$248 million. The re-issue price became the new cost basis of the bonds.
Almost all of the Company's publicly traded bonds contain cross-default
clauses which would allow the bondholders to demand repayment if the Company was
to default on any borrowing at or above a specified threshold.
F-47
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 15 ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Insurance reserves.......................................... $2,091 $2,175
Derivatives................................................. 1,101 791
Accrued personnel costs..................................... 715 643
Contract related reserves................................... 522 545
Provisions for warranties and contract penalties............ 450 383
Taxes payables.............................................. 423 368
Interest.................................................... 290 263
Deferred taxes.............................................. 253 190
Provisions for restructuring................................ 233 167
Other....................................................... 2,241 1,575
------ ------
$8,319 $7,100
====== ======
In 2002 and 2001 the line "Other" includes an amount of $1,118 million and
$134 million, respectively, relating to the asbestos liability. The increase in
the asbestos liability is primarily due to the reclassification of $806 million
from other liabilities in 2002 as well as an additional provision in 2002,
offset by payments to claimants (see Note 17). The remaining amount in "Other"
represents provisions for project disputes, other legal related matters and
other accrued expenses and deferred income.
The Company's insurance reserves for unpaid claims and claim adjustment
expenses are determined on the basis of reports from insurers, ceding companies,
underwriting associations and management estimates. The Company continually
reviews reserves for claims and claim adjustment expenses during the year and
changes in estimates are reflected in net income. In addition, reserves are
routinely reviewed by independent actuarial consultants. During 2001, the timing
and amount of premiums and claims payments being ceded to the Company in respect
of prior years finite risk reinsurance contracts has changed. As the amount and
timing of ceded claims payments could not be reliably determined at
December 31, 2001, the Company did not discount its loss reserves. The Company
believes that this variability in ceded loss payments will preclude the Company
from discounting its loss reserves in the future until reliably determinable
amounts and timing of these payments can be reestablished. Accordingly, as of
December 31, 2002 and 2001 the insurance reserves have not been presented on a
discounted basis. In 2001, a charge to losses and loss adjustment expenses of
$295 million for the elimination of the effect of discounting was recorded.
At December 31, 2002 the Consolidated Balance Sheet includes $60 million of
pledged cash balances primarily related to the Company's insurance operations.
F-48
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 16 LEASES
LEASE OBLIGATIONS
The Company's lease obligations primarily relate to real estate and office
equipment. In the normal course of business, management expects most leases to
be renewed or replaced by other leases. During 2002 a number of sale-leaseback
transactions were completed. This resulted in an increase in minimum rent
payments to third parties, as compared to the previous years. Minimum rent
expense under operating leases included in the net income from continuing
operations was $347 million, $217 million and $223 million in 2002, 2001 and
2000, respectively.
At December 31, 2002, future net minimum lease payments for operating leases
having initial or remaining non-cancellable lease terms in excess of one year
consist of the following:
2003........................................................ $ 329
2004........................................................ 276
2005........................................................ 206
2006........................................................ 173
2007........................................................ 153
Thereafter.................................................. 617
------
1,754
Sublease income............................................. (65)
------
$1,689
======
INVESTMENTS IN LEASES
The former Financial Services division provided sales support to the
Company's industrial entities' customers by means of lease financing and credit
arrangements, as well as other direct third-party lease financing. In
November 2002 the Company sold a significant portion of its Structured Finance
business, part of the former Financial Services division, to GE Commercial
Finance. The Structured Finance portfolio divested included global
infrastructure financing, equipment leasing and financing businesses. The
Company retained some leasing assets related to its core businesses. Retained
investments in sales-type leases, leveraged leases and direct financing leases
are included in financing receivables.
F-49
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 16 LEASES (CONTINUED)
The Company's non-current investments in direct financing, sales-type and
leveraged leases consist of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Minimum lease payments receivable........................... $ 666 $ 658
Residual values............................................. 48 63
Unearned income............................................. (146) (196)
----- -----
568 525
Leveraged leases............................................ 35 49
----- -----
603 574
Current portion............................................. (43) (24)
----- -----
$ 560 $ 550
===== =====
At December 31, 2002, minimum lease payments under direct financing and
sales-type leases are scheduled to be received as follows:
2003........................................................ $ 68
2004........................................................ 59
2005........................................................ 40
2006........................................................ 45
2007........................................................ 38
Thereafter.................................................. 416
----
$666
====
NOTE 17 COMMITMENTS AND CONTINGENCIES
GENERAL
The Company is subject to various legal proceedings and claims which have
arisen in the ordinary course of business that have not been finally
adjudicated. It is not possible at this time for the Company to predict with any
certainty the outcome of such litigation. However, except as stated below,
management is of the opinion, based upon information presently available and on
advice of external counsel, that it is unlikely that any such liability, to the
extent not provided for through insurance or otherwise, would have a material
adverse effect in relation to the Company's consolidated financial position,
liquidity or results of operations.
ENVIRONMENTAL
The Company is a participant in several legal and regulatory actions, which
result from various U.S. and other federal, state and local environmental
protection legislation as well as agreements with third parties. Provisions for
such actions are accrued when the events are probable and the related costs can
be reasonably estimated. Changes in estimates of such costs are recognized in
the period determined. While the Company cannot estimate the impact of future
regulations
F-50
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 17 COMMITMENTS AND CONTINGENCIES (CONTINUED)
affecting these actions, management believes that the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position, liquidity or results of operations.
The Company records accruals for environmental matters based on its
estimated share of costs in the accounting period in which responsibility is
established and costs can be reasonably estimated. Environmental liabilities are
recorded based on the most probable cost, if known, or on the estimated minimum
cost, determined on a site-by-site basis. Revisions to the accruals are made in
the period the estimated costs of remediation change.
Costs of future expenditures for environmental remediation obligations are
not discounted to their present value. The Company records a receivable if the
estimated recoveries from insurers or other third parties are determined to be
probable.
GUARANTEES-GENERAL
All guarantees issued before January 1, 2003, are accounted for in
accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5),
ACCOUNTING FOR CONTINGENCIES. Provisions are recorded in the Consolidated
Financial Statements at the time it becomes probable the Company will incur
losses pursuant to a guarantee.
Certain guarantees issued or modified after December 31, 2002 will be
accounted for in accordance with FASB Interpretation No. 45 (FIN 45),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES; INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. Upon issuance of certain
guarantees, a liability, equal to the fair value of the guarantee, will be
recorded.
GUARANTEES-PERFORMANCE
Performance guarantees represent obligations where the Company guarantees
the performance of a third party's product or service according to the terms of
the contract. 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.
Performance guarantees include surety bonds, advance payment guarantees, and
performance standby letters of credit.
In November 2002, the Financial Accounting Standards Board issued FIN 45,
the disclosure requirements of which are effective for financial statements
relating to periods ending after December 15, 2002. FIN 45 requires that the
Company disclose the "maximum potential exposure" of certain guarantees as well
as possible recourse provisions that may allow the Company to recover from third
parties amounts paid out under such guarantees. The "maximum potential exposure"
as defined by FIN 45 does not allow any discounting of the Company's assessment
of actual exposure under the guarantees. The information below reflects the
Company's maximum potential exposure under the guarantees, which is higher than
management's assessment of the expected exposures.
The Company retained obligations for guarantees related to the power
generation business contributed to the ABB ALSTOM POWER NV joint venture. The
guarantees primarily consist of performance guarantees, advance payment
guarantees, product warranty guarantees, and other
F-51
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 17 COMMITMENTS AND CONTINGENCIES (CONTINUED)
miscellaneous guarantees under certain contracts such as indemnification for
personal and property injuries, taxes, and compliance with labor laws,
environmental laws and patents. The guarantees have maturity dates ranging from
one to ten years and in some cases have no definite expiry. ALSTOM and its
subsidiaries have primary responsibility for performing the obligations that are
the subject of the guarantees. In connection with the sale to ALSTOM of the
Company's interest in the joint venture in May 2000, ALSTOM, the parent company,
and ALSTOM POWER have undertaken jointly and severally to fully indemnify and
hold harmless the Company against any claims arising under such guarantees. Due
to the nature of product warranty guarantees and the miscellaneous guarantees,
the Company is unable to develop an estimate of the maximum potential amount of
future payments for these guarantees issued on behalf of the former power
generation business. Management's best estimate of the total "maximum potential
exposure" of quantifiable guarantees issued by the Company on behalf of its
former power generation business was approximately $2,200 million as of
December 31, 2002. The maximum potential exposure is based on the original
guarantee or contract amount and does not reflect the completion status of the
project. As of December 31, 2002, no losses have been recognized relating to
guarantees issued on behalf of the former power generation business. Management
believes that it is not probable that the Company will incur a loss under these
guarantees and therefore, in accordance with SFAS 5, a provision has not been
recorded as of December 31, 2002.
In connection with the sale of its nuclear business to British Nuclear Fuels
(BNFL) in 2000, a subsidiary of the Company retained obligations under surety
bonds relating to the performance by the nuclear business under certain
contracts entered into prior to the sale to BNFL. The surety bonds have maturity
dates ranging from one to nine years. BNFL has primary responsibility for
performing the obligations that are the subject of the surety bonds. Pursuant to
the purchase agreement under which the nuclear business was sold, BNFL is
required to indemnify and hold harmless the Company against any claims arising
under such bonds. The Company's maximum potential exposure under these bonds at
December 31, 2002 was approximately $640 million. The maximum potential exposure
is based on the original guarantee or contract amount and does not reflect the
completion status of the project. As of December 31, 2002, no losses have been
recognized relating to the surety bonds. Management believes that it is not
probable that the Company will incur a loss under these guarantees and
therefore, in accordance with SFAS 5, a provision has not been recorded as of
December 31, 2002.
GUARANTEES-FINANCIAL
Financial guarantees represent irrevocable assurances that the Company will
make payment in the event that a third party fails to fulfill its financial
obligations and the beneficiary under the guarantee records a loss under the
terms of the guarantee agreement.
In the course of its commercial lending activities, the Company's remaining
Structured Finance business has guaranteed the obligations of certain third
parties in return for a commission. These financial guarantees represent
irrevocable assurances that the Company will make payment in the event that the
third party fails to fulfill its obligations under the relevant loan agreement
and the beneficiary under the guarantee records a loss under the terms of the
guarantee agreement. The Company generally benefits from the collateral and
security arrangements under the guaranteed loan. The Company recognizes the
commissions collected as income over the life of the guarantee
F-52
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 17 COMMITMENTS AND CONTINGENCIES (CONTINUED)
and the company records a provision when it becomes aware of an event of
default, or a potential event of default occurs.
At December 31, 2002, the Company had issued approximately $207 million of
financial guarantees with maturity dates ranging from one to eighteen years. The
issued guarantees have the same maturity dates as the related debt. The maximum
potential amount of future payments the Company could be required to make under
its guarantees at December 31, 2002 is $207 million, of which $8 million is
included in other liabilities in the Consolidated Balance Sheet at December 31,
2002. The Company does not expect to incur significant losses under these
contracts.
At December 31, 2002, the Company had $211 million of financial guarantees
outstanding that were unrelated to the remaining Structured Finance business. Of
that amount, $206 million were issued on behalf of companies in which the
Company currently has or formerly had an equity position. The guarantees have
maturity dates ranging from one to fourteen years. Management believes that it
is not probable that the Company will incur a loss under these guarantees and
therefore, in accordance with SFAS 5, a provision has not been recorded as of
December 31, 2002.
OTHER PRODUCT AND ORDER RELATED CONTINGENCIES
The provision for product warranties is calculated based on historical
claims experience and specific review of certain contracts.
Reconciliation of the provision for warranties, including guarantees of
product performance is as follows:
Balance at December 31, 2001................................ $339
Claims paid in cash or in kind.............................. (46)
Increase to provision for changes in estimates, warranties
issued, and warranties expired............................ 59
----
Balance at December 31, 2002................................ $352
====
The provision for warranties in Note 15 includes penalties due to delay in
contract fulfillment, which is not included in the above amounts.
In 1998, the Company entered into an engineering, procurement and project
management contract with a customer for a refinery in India with a contract
value of approximately $860 million. The project, which is subject to a
reimbursable cost agreement, is approximately 60 percent complete and has been
stalled for the past few years due to complications encountered by the customer
in obtaining additional necessary financing. As of December 31, 2002, the
Company has accounts and notes receivable of $68 million, sales in excess of
invoicing of $159 million, and off balance sheet exposure of $43 million
relating to the project. The customer and the banks have informed the Company
that they are committed to restarting this project and that they have submitted
a refinancing plan to the Corporate Debt Restructuring Committee (the "CDR"),
established by the Indian government to process debt restructuring on a fast
track basis. The customer and the banks have informed us that the plan is
expected to be reviewed by the CDR in July 2003 and that, assuming the plan is
approved, they expect the project to be restarted during
F-53
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 17 COMMITMENTS AND CONTINGENCIES (CONTINUED)
the second half of 2003. The Company has recorded provisions of $140 million
which it believes adequately provide for its exposure related to this project.
If the customer cannot obtain required financing and the project is not
restarted, the Company will not be able to recover its remaining investment in
the project and will be subject to contingent liabilities to third parties,
resulting in a write-off for its remaining investment in 2003.
ASBESTOS LIABILITY
OVERVIEW
When the Company sold its 50 percent interest in ABB ALSTOM POWER NV to
ALSTOM in May 2000, it retained ownership of Combustion Engineering, a
subsidiary that had conducted part of the Company's power generation business
and that now owns commercial real estate that it leases to third parties.
Combustion Engineering was named as a co-defendant, together with third parties,
in numerous lawsuits in the United States in which the plaintiffs claimed
damages for personal injury arising from exposure to or use of equipment that
contained asbestos that Combustion Engineering supplied, primarily during the
early 1970s and before. Other ABB Group entities were sometimes named as
defendants in asbestos claims. These entities include ABB Lummus Global Inc.
(Lummus) (which is part of the Company's Oil, Gas and Petrochemicals business)
and Basic Incorporated (Basic) (which is currently a subsidiary of Asea Brown
Boveri Inc. and was formerly a subsidiary of Combustion Engineering). These
claims, however, were insignificant compared to the Combustion Engineering
claims and have not had a material impact on the Company's Consolidated Balance
Sheet or Consolidated Income Statement.
As of December 31, 2002, 2001 and 2000, provisions of $1,118 million,
$940 million and $590 million, respectively, were recorded in respect of
asbestos claims and related defense costs. The Company determined the amounts to
be provided in 2001 and 2000 by estimating the expected cost of future claim
settlements over a period of several years. In 2002, the provision is based on
the Company's obligations under Combustion Engineering's Chapter 11 plan of
reorganization, as described below, and assumes the confirmation of the plan.
These provisions do not reflect probable insurance recoveries on those claims.
The Company also recorded receivables of approximately $241 million,
$263 million and $251 million at December 31, 2002, 2001 and 2000, respectively,
for probable insurance recoveries, which were established with respect to the
claims reserved against. During 2002 and 2001, Combustion Engineering
experienced a significant increase in the level of new claims and higher total
and per-claim settlement costs as compared to prior years. Cash payments, before
insurance recoveries, to resolve Combustion Engineering's asbestos claims were
$236 million (including $30 million contributed into the CE Settlement Trust,
described below), $136 million and $125 million in 2002, 2001 and 2000,
respectively. Administration and defense costs were $32 million, $13 million and
$7 million in 2002, 2001 and 2000, respectively.
NEGOTIATIONS WITH REPRESENTATIVES OF ASBESTOS CLAIMANTS AND PRE-PACKAGED CHAPTER
11 FILING
In October 2002, the Company determined that it was likely that the expected
asbestos-related costs of Combustion Engineering would exceed the value of its
assets ($812 million at September 30, 2002), if its historical settlement
policies continued into the future. The Company
F-54
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 17 COMMITMENTS AND CONTINGENCIES (CONTINUED)
and Combustion Engineering determined to resolve the asbestos liability of
Combustion Engineering and its affiliates, including ABB Ltd, by reorganizing
Combustion Engineering under Chapter 11, the principal business reorganization
chapter of the U.S. Bankruptcy Code. Under Chapter 11, a debtor is authorized to
reorganize its business for the benefit of its creditors and shareholders. In
addition to permitting rehabilitation of the debtor, Chapter 11 promotes
equality of treatment of creditors and equity security holders who hold
substantially similar claims against or interests in the debtor and its assets.
Section 524(g) of the Bankruptcy Code, which is designed for companies with
large numbers of asbestos-related claims, provides mechanisms for efficiently
channeling asbestos-related personal injury claims through a trust and increases
the likelihood that the value of an operating business can be preserved. The
Company and Combustion Engineering determined to structure the Chapter 11
reorganization as a "pre-packaged plan," in which acceptances of the plan would
be solicited prior to the filing of the Chapter 11 case, thus reducing the
duration and expense of the bankruptcy proceedings.
Beginning in October 2002, the Company and Combustion Engineering conducted
extensive negotiations with representatives of asbestos claimants with respect
to a pre-packaged plan. On November 22, 2002, Combustion Engineering and the
asbestos claimants' representatives entered into a Master Settlement Agreement
for settling open asbestos-related personal injury claims that had been lodged
against Combustion Engineering prior to November 15, 2002. At the same time,
Combustion Engineering entered into a CE Settlement Trust Agreement, which
provided the manner in which a trust (the "CE Settlement Trust") would be funded
and administered with respect to the payment of asbestos-related personal injury
claims settled under the Master Settlement Agreement. Under the terms of the
Master Settlement Agreement, eligible claimants who met all criteria to qualify
for payment were entitled to receive a percentage of the value of their claim
from the CE Settlement Trust and retain a claim against Combustion Engineering
for the unpaid balance. The Master Settlement Agreement divides claims into
three categories, based on the status of the claim at November 14, 2002, the
status of the documentation relating to the claim, and whether or not the
documentation establishes a valid claim eligible for settlement and payment by
Combustion Engineering. The Master Settlement Agreement was supplemented in
January 2003 to clarify the rights of certain claimants whose right to
participate in a particular payment category was disputed.
Pursuant to the Master Settlement Agreement the CE Settlement Trust was
funded by:
- cash contributions from Combustion Engineering in the amount of
$5 million at inception;
- cash contributions from ABB Inc., a subsidiary of ABB Ltd, on
December 31, 2003 in the amount of $30 million;
- a promissory note from Combustion Engineering in the principal amount of
approximately $101 million (guaranteed by Asea Brown Boveri Inc.); and
- an assignment by Combustion Engineering of the $311 million unpaid balance
of principal and interest due to Combustion Engineering from Asea Brown
Boveri Inc. under a loan agreement dated May 12, 2000 (guaranteed by
ABB Ltd).
On January 17, 2003, the Company announced that the Company and Combustion
Engineering had reached an agreement on a proposed Pre-Packaged Plan of
Reorganization for Combustion Engineering under Chapter 11 of the Bankruptcy
Code (the "Plan"). The agreement was reached
F-55
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 17 COMMITMENTS AND CONTINGENCIES (CONTINUED)
both with representatives of asbestos claimants with existing asbestos-related
personal injury claims against Combustion Engineering (encompassing claimants
who had lodged claims prior to November 15, 2002 and were eligible to
participate in the Master Settlement Agreement and claimants who had lodged
claims after that date and were not eligible to participate in the Master
Settlement Agreement) and with the proposed representative of persons who may be
entitled to bring asbestos-related personal injury claims in the future.
The Plan provides for the creation of an independent trust (the "Asbestos PI
Trust") in addition to the CE Settlement Trust. Under the Plan, all present and
future asbestos-related personal injury claims, including the unpaid portion of
previously settled claims, that arise directly or indirectly from any act,
omission, products or operations of Combustion Engineering, Lummus or Basic will
be channeled to the Asbestos PI Trust. The Plan contemplates that the Bankruptcy
Court will issue an injunction under Section 524(g) of the Bankruptcy Code in
connection with the confirmation of the Plan, pursuant to which ABB affiliated
companies (including ABB Ltd, Combustion Engineering, Lummus and Basic) and
certain parties unrelated to ABB will be protected from those future
asbestos-related personal injury claims. The channelling injunction is an
essential element of the Plan. Issuance of the channelling injunction requires
that at least 75 percent of the votes cast by asbestos claimants entitled to
vote on the Plan must have been cast in favor of the Plan.
The Plan sets forth distribution procedures for the allocation of funds to
the claimants. The Plan provides that, in addition to the Asbestos PI Trust
claims, the unpaid portion of claims that were settled pursuant to the Master
Settlement Agreement will be entitled to distributions from the Asbestos PI
Trust.
On the effective date of the Plan, the Asbestos PI Trust will be funded as
follows:
- a $20 million 5 percent term note with a maximum term of 10 years from the
effective date of the Plan, secured by Combustion Engineering's Windsor,
Connecticut real estate and real estate leases (under certain specified
contingencies, the Asbestos PI Trust may have the right to convert the
term note into ownership of 80 percent of the voting securities of the
reorganized Combustion Engineering);
- excess cash held by Combustion Engineering on the effective date of the
Plan;
- a promissory note, guaranteed by ABB Ltd and/or certain of its
subsidiaries, in aggregate amount of $250 million payable in equal
quarterly installments commencing in 2004, with $50 million to be paid
during 2004, $100 million to be paid during 2005 and $100 million to be
paid during 2006, and further providing for contingent payments of an
additional aggregate amount of $100 million in equal installments between
2006 and 2010 if ABB Ltd meets certain financial performance standards
(EBIT margin of 8 percent for the first two installments and 12 percent
for the last two instalments);
- a non-interest bearing promissory note on behalf of Lummus in the amount
of $28 million payable in relatively equal annual instalments over
12 years;
- a non-interest bearing promissory note on behalf of Basic in the aggregate
amount of $10 million payable in relatively equal annual installments over
12 years;
F-56
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 17 COMMITMENTS AND CONTINGENCIES (CONTINUED)
- 30,298,913 ABB Ltd shares, which had a fair value at December 31, 2002 of
$86 million. The Company's obligation to deliver these shares will
continue to be marked-to-market, with changes in the fair value of the
shares reflected in earnings until such shares are contributed to the
Asbestos PI Trust;
- Combustion Engineering, Lummus and Basic will assign to the Asbestos PI
Trust their rights under certain insurance policies and insurance
settlement agreements. Aggregate unexhausted product liability limits are
$198 million for Combustion Engineering, $43 million for Lummus and
$28 million for Basic, although amounts ultimately recovered under these
policies may be substantially less than the policy limits. In addition,
Combustion Engineering will assign to the Asbestos PI Trust $95 million of
scheduled payments under certain of its insurance settlement agreements;
- if Lummus is sold within 18 months after the effective date of the Plan,
ABB Inc. will contribute $5 million to the CE Settlement Trust and
$5 million to the Asbestos PI Trust. If the CE Settlement Trust has ceased
to exist at that time, both $5 million payments will be made to the
Asbestos PI Trust, but in no event will this contribution exceed the net
proceeds of the sale of Lummus;
- upon dissolution of the CE Settlement Trust, all funds, assets and
properties held by the CE Settlement Trust will be transferred
automatically to the Asbestos PI Trust.
NEXT STEPS IN THE CHAPTER 11 PROCESS
The solicitation of votes to approve the Plan began on January 19, 2003, and
Combustion Engineering filed for Chapter 11 in the U.S. Bankruptcy Court in
Delaware on February 17, 2003 based on the previously negotiated Plan. The
voting period closed on February 19, 2003, and, according to the preliminary
results, approximately 80 percent of those voting approved the Plan. The final
voting results are subject to verification and confirmation by the bankruptcy
court, and a confirmation hearing has been scheduled for April 24, 2003. While
it is not assured that the Bankruptcy Court will confirm the plan, the Company
has no reason to believe, based on available information, that the Plan will not
be confirmed. If the Plan is confirmed, in order to secure the benefits of the
full injunction and discharge, Combustion Engineering will seek affirmation of
the confirmation order from the U.S. District Court. The Plan will become
effective at the conclusion of all appeals unless Combustion Engineering and
other parties to the case agree on an earlier effective date. It is not assured
that the Bankruptcy Court will confirm the Plan, and, if the Plan is confirmed,
the Company cannot be certain how long the appeals process will last.
EFFECT OF THE PLAN ON OUR FINANCIAL POSITION
The Company recorded a charge of $420 million in income (loss) from
discontinued operations, net of tax, for 2002, which amount was determined based
upon the proposed settlement amounts contained in the Plan. In prior years, the
Consolidated Financial Statements reflected charges to earnings based on
Combustion Engineering's forecasts of the expected cost of future claims over a
period of several years and estimates of the amounts recoverable from insurance
when the claims were settled. This resulted in a charge to earnings of
$470 million and $70 million in 2001 and 2000, respectively, which is included
in income (loss) from discontinued operations, net of tax.
F-57
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 17 COMMITMENTS AND CONTINGENCIES (CONTINUED)
Based on expected implementation of the Plan, the expected ultimate
liability for the resolution of asbestos-related personal injury asbestos claims
against Combustion Engineering, Lummus and Basic as of December 31, 2002 is
estimated to be $1,118 million and is included in accrued liabilities and other
in the Consolidated Balance Sheet. If the Plan is confirmed, certain amounts
will be reclassified as of the effective date to other long-term liabilities
based on the scheduled cash payments. Future earnings will be affected by
mark-to-market adjustments for changes in the fair value of ABB Ltd stock as
well as contingent payments when they become determinable. In the event the Plan
is not approved by the Bankruptcy Court, the ultimate liability for the
resolution of asbestos-related personal injury claims could be substantially
revised. Such a revision could have a material impact on the Company's financial
position, results of operations and liquidity.
CONTINGENCIES RELATED TO FORMER NUCLEAR TECHNOLOGY BUSINESS
The Company retained liability for certain specific environmental
remediation costs at two sites in the U.S. that were operated by its Nuclear
technology business, which has been sold to British Nuclear Fuels (BNFL) in
2000. Pursuant to the purchase agreement with BNFL, the Company has retained all
of the environmental liabilities associated with its Combustion Engineering
subsidiary's Windsor, Connecticut facility and a portion of the environmental
liabilities associated with its ABB C-E Nuclear Power, Inc. subsidiary's
Hematite, Missouri facility. The primary environmental liabilities associated
with these sites relate to the costs of remediating radiological and chemical
contamination at these facilities. Such costs are not payable until a facility
is taken out of use and generally are incurred over a number of years. Although
it is difficult to predict with accuracy the amount of time it may take to
remediate radiological contamination upon decommissioning, based on information
that BNFL has made publicly available, the Company believes that it may take
until 2013 to remediate the Hematite site. With respect to the Windsor site, the
Company believes the remediation may take until 2008. At the Windsor site, the
Company believes that a significant portion of such remediation costs will be
the responsibility of the U.S. government pursuant to the Atomic Energy Act and
the Formerly Used Site Environmental Remediation Action Program because such
costs relate to materials used by Combustion Engineering in its research and
development work on, and fabrication of, nuclear fuel for the United States
Navy. As a result of the sale of the Nuclear technology business, in April 2000
the Company established a reserve of $300 million in connection with estimated
remediation costs related to these facilities. Expenditures charged to the
remediation reserve were $12 million and $6 million during 2002 and 2001,
respectively. In connection with the pre-packaged Chapter 11 filing by
Combustion Engineering discussed above, the Company will retain all
environmental liabilities associated with the Windsor site.
F-58
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 18 TAXES
Provision for taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
-------- -------- --------
Current taxes on income..................................... $ 258 $152 $215
Deferred taxes.............................................. (175) (89) 85
Tax expense from continuing operations...................... 83 63 300
Tax expense from discontinued operations.................... 72 39 128
----- ---- ----
$ 155 $102 $428
===== ==== ====
The Company operates in countries that have differing tax laws and rates.
Consequently, the consolidated weighted-average effective rate will vary from
year to year according to the source of earnings or losses by country.
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
-------- -------- --------
Reconciliation of taxes:
Income (loss) from continuing operations before taxes and
minority interest........................................ $251 $ (66) $1,106
Weighted-average tax rate.................................. 39.0% 37.9% 37.6%
Taxes at weighted-average tax rate......................... 98 (25) 416
Items taxed at rates other than the weighted-average tax
rate..................................................... (127) 112 (63)
Non-deductible goodwill amortization....................... -- 49 45
Changes in valuation allowance............................. 108 (31) (71)
Changes in enacted tax rates............................... 1 6 (41)
Other, net................................................. 3 (48) 14
---- ----- ------
Tax expense from continuing operations..................... $ 83 $ 63 $ 300
Effective tax rate for the year............................ 33.1% (95.5)% 27.1%
In 2001, the reconciling item "Other, net" of $48 million includes an amount
of $50 million relating to adjustments with respect to the resolution of certain
prior year tax matters.
In 2001, the income (loss) from continuing operations before taxes and
minority interest of $66 million includes a provision for insurance liabilities
in an insurance subsidiary, located in a low tax jurisdiction (see Note 15).
Furthermore, "Items taxed at rates other than the weighted-average tax rate"
includes the tax effects of this provision and the reclassification of a
$12 million gain on extinguishment of debt. The effective tax rate applicable to
income from continuing operations excluding the tax effect of these items would
be 29.2 percent.
In 2002, the income (loss) from continuing operations before taxes and
minority interest of $251 million includes additional financing related costs,
restructuring costs, and costs related to non-core activities as well as a
$215 million gain recorded from the change in the company's convertible debt
outstanding. The $215 million gain offset in part these additional costs.
F-59
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 18 TAXES (CONTINUED)
Deferred income tax assets and liabilities consist of the following:
YEAR ENDED
DECEMBER 31,
-------------------
2002 2001
-------- --------
Deferred tax liabilities:
Financing receivables..................................... $ (226) $ (194)
Property, plant and equipment............................. (421) (458)
Pension and other accrued liabilities..................... (356) (252)
Insurance reserves........................................ (230) (190)
Other..................................................... (186) (145)
------- -------
Total deferred tax liability................................ (1,419) (1,239)
------- -------
Deferred tax assets:
Investments and other..................................... 2 14
Property, plant and equipment............................. 58 185
Pension and other accrued liabilities..................... 857 952
Unused tax losses and credits............................. 1,075 697
Other..................................................... 332 238
------- -------
Total deferred tax asset.................................... 2,324 2,086
Valuation allowance......................................... (1,227) (1,145)
------- -------
Deferred tax asset, net of valuation allowance.............. 1,097 941
------- -------
Net deferred tax liability.................................. $ (322) $ (298)
======= =======
Deferred tax assets and deferred tax liabilities can be allocated between
current and non-current as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001
---------------------- ----------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
-------- ----------- -------- -----------
Deferred tax liability...................... $(253) $(1,166) $(190) $(1,049)
Deferred tax asset, net..................... 558 539 495 446
----- ------- ----- -------
Net deferred tax asset (liability).......... $ 305 $ (627) $ 305 $ (603)
===== ======= ===== =======
The non-current deferred tax asset, net, is included in investments and
other.
Certain entities have deferred tax assets related to net operating loss
carry-forwards and other items. Because recognition of these assets is
uncertain, valuation allowances of $1,227 million and $1,145 million have been
established as of December 31, 2002 and 2001, respectively.
At December 31, 2002, net operating loss carry-forwards of $2,815 million
and tax credits of $66 million are available to reduce future taxable income of
certain subsidiaries, of which $1,240 million loss carry-forwards and
$42 million tax credits expire in varying amounts through
F-60
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 18 TAXES (CONTINUED)
2022 and the remainder do not expire. These carry-forwards are predominately
related to the Company's U.S. and German operations.
NOTE 19 OTHER LIABILITIES
The Company's other liabilities amount to $1,647 million and $2,280 million
at December 31, 2002 and 2001, respectively.
Other liabilities include non-current provisions of $460 million and
$1,241 million, advances from customers relating to long-term construction
contracts of $612 million and $539 million and non-current deferred income of
$151 million and $89 million at December 31, 2002 and 2001, respectively. In
2001 non-current provisions included $806 million, which was reclassified in
2002 from other liabilities to accrued liabilities and other (see Note 17).
The Company entered into tax advantaged leasing transactions with U.S.
investors prior to 1999. Prepaid rents that have been received on these
transactions are $349 million and $355 million at December 31, 2002 and 2001,
respectively, and have been recorded as deposit liabilities. Net gains on these
transactions are being recognized over the lease terms.
NOTE 20 EMPLOYEE BENEFITS
The pension and other related benefit liability, net of the prepaid pension
and other related benefits, in the Consolidated Balance Sheet was
$1,102 million and $1,230 million at December 31, 2002 and December 31, 2001,
respectively. The decrease is primarily due to an increase in contributions
during 2002.
The Company operates several pension plans, including defined benefit,
defined contribution and termination indemnity, in accordance with local
regulations and practices. These plans cover the majority 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.
Some of these plans require employees to make contributions and enable
employees to earn matching or other contributions from the Company. The funding
policy of these plans is consistent with the local government and tax
requirements. The Company has several pension plans which are not required to be
funded pursuant to local government and tax requirements.
Defined benefit plans provide benefits primarily based on employees' years
of service, age and salary. The cost and obligations from sponsoring defined
benefit plans are determined on an actuarial basis using the projected unit
credit method. This method reflects service rendered by the employees to the
date of valuation and incorporates assumptions concerning employees' projected
salaries.
F-61
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 20 EMPLOYEE BENEFITS (CONTINUED)
For the years ended December 31, 2002, 2001 and 2000, net periodic pension
cost consists of the following:
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
Service cost....................................... $ 186 $ 177 $ 202 $ 6 $ 5 $ 5
Interest cost...................................... 318 311 314 28 26 23
Expected return on plan assets..................... (281) (291) (306) -- -- --
Amortization of transition liability............... 13 9 10 6 6 6
Amortization of prior service cost................. 15 14 34 -- -- --
Recognized net actuarial (gain) loss............... 22 4 (1) 6 3 1
Other.............................................. 9 (19) 12 -- -- --
----- ----- ----- --- --- ---
$ 282 $ 205 $ 265 $46 $40 $35
===== ===== ===== === === ===
The following tables set forth the change in benefit obligations, the change
in plan assets and the funded status recognized in the Consolidated Financial
Statements at December 31, 2002 and 2001, for the Company's principal benefit
plans:
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Benefit obligation at the beginning of year........ $ 6,005 $6,012 $ 389 $ 342
Service cost..................................... 186 177 6 5
Interest cost.................................... 318 311 28 26
Contributions from plan participants............. 43 36 4 2
Benefit payments................................. (437) (373) (34) (32)
Benefit obligations of businesses acquired....... 46 9 -- --
Benefit obligations of businesses disposed....... (14) (6) -- --
Actuarial (gain) loss............................ (60) 48 26 46
Plan amendments and other........................ (56) -- (5) 1
Exchange rate differences........................ 993 (209) -- (1)
------- ------ ----- -----
Benefit obligation at the end of year.............. 7,024 6,005 414 389
------- ------ ----- -----
Fair value of plan assets at the beginning of the
year............................................. 4,226 4,592 -- --
Actual return on plan assets..................... (84) (300) -- --
Contributions from employer...................... 717 372 30 30
Contributions from plan participants............. 43 36 4 2
Benefit payments................................. (437) (373) (34) (32)
Plan assets of businesses acquired............... 44 6 -- --
Plan assets of businesses disposed............... (3) (1) -- --
Other............................................ (50) 17 -- --
Exchange rate differences........................ 689 (123) -- --
------- ------ ----- -----
Fair value of plan assets at the end of year....... 5,145 4,226 -- --
------- ------ ----- -----
Unfunded amount(1)................................. 1,879 1,779 414 389
Unrecognized transition liability.................. (1) (9) (60) (67)
Unrecognized actuarial loss........................ (1,168) (781) (150) (131)
Unrecognized prior service cost.................... (57) (67) -- (3)
------- ------ ----- -----
Net amount recognized.............................. $ 653 $ 922 $ 204 $ 188
======= ====== ===== =====
------------------------------
(1) These amounts include $1,070 million and $863 million at December 31, 2002
and 2001, respectively for pension plans which are not required to be funded
pursuant to local government and tax requirements.
F-62
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 20 EMPLOYEE BENEFITS (CONTINUED)
The following amounts have been recognized in the Company's Consolidated
Balance Sheet at December 31, 2002 and 2001:
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Prepaid pension cost................................. $ (572) $ (389) $ -- $ --
Accrued pension cost................................. 1,428 1,380 204 188
Intangible assets.................................... (24) (14) -- --
Accumulated other comprehensive loss................. (179) (55) -- --
------ ------ ---- ----
Net amount recognized................................ $ 653 $ 922 $204 $188
====== ====== ==== ====
The pension and other related benefits liability reported in the
Consolidated Balance Sheet contains an accrual of $27 million and $49 million at
December 31, 2002 and 2001, respectively, and the prepaid pension and other
related benefits asset reported in the Consolidated Balance Sheet contains
$15 million and $2 million at December 31, 2002 and 2001, respectively, for
employee benefits that do not meet the criteria of Statement of Financial
Accounting Standards No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS (SFAS 87) or
Statement of Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.
The pension and other related benefits liability reported in the
Consolidated Balance Sheet includes $203 million and $69 million at
December 31, 2002 and 2001, respectively, to record a minimum pension liability.
The increase in the minimum pension liability from 2001 is primarily
attributable to changes in the discount rate in the German and U.S. pension
plans that do not have plan assets.
The Company has a defined benefit pension plan that covers substantially all
employees in Sweden. Effective December 31, 2002, the assets which had
previously been pledged to the plan were contributed and have been reflected as
a component of "Fair value of plan assets" as of December 31, 2002 (see
Note 5).
During 2002 and 2001, the Company contributed $188 million and
$162 million, respectively, of available-for-sale debt securities to certain of
the Company's pension plans in the United States and the United Kingdom.
The projected benefit obligation (PBO) and fair value of plan assets for
pension plans with benefit obligations in excess of plan assets were:
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------------------- --------------------------------
PBO ASSETS DIFFERENCE PBO ASSETS DIFFERENCE
-------- -------- ---------- -------- -------- ----------
PBO exceeds assets........... $6,956 $5,068 $1,888 $5,911 $4,123 $1,788
Assets exceed PBO............ 68 77 (9) 94 103 (9)
------ ------ ------ ------ ------ ------
Total........................ $7,024 $5,145 $1,879 $6,005 $4,226 $1,779
====== ====== ====== ====== ====== ======
F-63
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 20 EMPLOYEE BENEFITS (CONTINUED)
The accumulated benefit obligation and fair value of plan assets for pension
plans with accumulated benefit obligations in excess of plan assets were:
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------------------- --------------------------------
ABO ASSETS DIFFERENCE ABO ASSETS DIFFERENCE
-------- -------- ---------- -------- -------- ----------
ABO exceeds assets.................. $5,524 $4,206 $1,318 $2,330 $1,141 $1,189
Assets exceed ABO................... 911 939 (28) 2,983 3,085 (102)
------ ------ ------ ------ ------ ------
Total............................... $6,435 $5,145 $1,290 $5,313 $4,226 $1,087
====== ====== ====== ====== ====== ======
At December 31, 2002 and 2001, the assets of the plans were comprised of:
PENSION
BENEFITS
-------------------
2002 2001
-------- --------
Equity securities........................................... 33% 35%
Debt securities............................................. 51% 47%
Other....................................................... 16% 18%
At December 31, 2002 and 2001, plan assets included $3 million and
$6 million, respectively, of the Company's capital stock.
The following weighted-average assumptions were used in accounting for
defined benefit pension plans, for the years ended December 31, 2002 and 2001:
PENSION OTHER
BENEFITS BENEFITS
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Discount rate.............................................. 5.05% 5.32% 6.74% 7.24%
Expected return on plan assets............................. 6.15% 6.81% -- --
Rate of compensation increase.............................. 3.05% 3.07% -- --
The Company has multiple non-pension post-retirement benefit plans. The
Company's health care plans are generally contributory with participants'
contributions adjusted annually. The health care trend rate was assumed to be
12.92 percent for 2002, then gradually declining to 6.46 percent in 2012, and to
remain at that level thereafter.
Assumed health care cost trends have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects at December 31,
2002:
ONE-PERCENTAGE- ONE-PERCENTAGE-
POINT INCREASE POINT DECREASE
--------------- ---------------
Effect on total of service and interest cost
components......................................... $ 2 $ (2)
Effect on accumulated post-retirement benefit
obligation......................................... $26 $(22)
The Company also maintains several defined contribution plans. The expense
for these plans was $23 million, $26 million and $27 million in 2002, 2001 and
2000, respectively. The Company
F-64
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 20 EMPLOYEE BENEFITS (CONTINUED)
also contributed $141 million, $135 million and $108 million to multi-employer
plans in 2002, 2001 and 2000, respectively.
NOTE 21 MANAGEMENT INCENTIVE PLAN
The Company has a management incentive plan under which it offers stock
warrants and warrant appreciation rights (WARs) to key employees for no
consideration.
Warrants granted under this plan allow participants to purchase shares of
the Company at predetermined prices. Participants may sell the warrants rather
than exercise the right to purchase shares. Equivalent warrants are listed on
the SWX Swiss Exchange (virt-x), which facilitates valuation and transferability
of warrants granted under this plan.
Each WAR gives the participant the right to receive, in cash, the market
price of a warrant on the date of exercise of the WAR. The WARs are
non-transferable.
Participants may exercise or sell warrants and exercise WARs after the
vesting period, which is three years from the date of grant. Vesting
restrictions can be waived in the event of death, disability or divorce. All
warrants and WARs expire six years from the date of grant. The terms and
conditions of the plan allow the employees of subsidiaries that have been
divested to retain their warrants and WARs. As the primary trading market for
shares of ABB Ltd is the SWX Swiss Exchange (virt-x), the exercise prices of
warrants and the trading prices of equivalent warrants listed on the SWX Swiss
Exchange (virt-x) are denominated in Swiss Francs (CHF). Accordingly, exercise
prices are presented below in CHF. Fair values have been presented in U.S.
dollars based upon exchange rates in effect as of the applicable period.
WARRANTS
The Company accounts for the warrants using the intrinsic value method of
APB Opinion No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, as
permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123),
ACCOUNTING FOR STOCK BASED COMPENSATION. All warrants were issued with exercise
prices greater than the market prices of the stock on the dates of grant.
Accordingly, the Company has recorded no compensation expense related to the
warrants, except in circumstances when a participant ceased to be employed by a
consolidated subsidiary, such as after a divestment by the Company. In
accordance with FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION, the Company recorded compensation expense based on
the fair value of warrants retained by participants on the date their employment
ceased, with an offset to additional paid in capital. The impact of such expense
is not material.
F-65
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 21 MANAGEMENT INCENTIVE PLAN (CONTINUED)
Presented below is a summary of warrant activity for the years shown:
WEIGHTED-AVERAGE
NUMBER OF NUMBER OF EXERCISE
WARRANTS SHARES(1) PRICE (CHF)(2)
----------- ----------- ----------------
Outstanding at January 1, 2000............. 27,699,040 10,267,288 32.34
Granted(3)................................. 28,128,360 5,625,672 53.00
Forfeited.................................. (385,000) (65,789) 38.42
---------- ----------
Outstanding at December 31, 2000........... 55,442,400 15,827,171 38.75
Granted(4)................................. 23,293,750 4,658,750 17.00
Forfeited.................................. (2,240,000) (461,452) 48.53
---------- ----------
Outstanding at December 31, 2001........... 76,496,150 20,024,469 33.46
FORFEITED.................................. (8,105,090) (1,621,018) 30.29
---------- ----------
OUTSTANDING AT DECEMBER 31, 2002........... 68,391,060 18,403,451 33.74
Exercisable at December 31, 2000........... 60,000 38,904 28.22
Exercisable at December 31, 2001........... 10,538,000 6,832,839 27.95
EXERCISABLE AT DECEMBER 31, 2002........... 29,751,060 10,675,451 32.41
------------------------------
(1) All warrants granted prior to 1999 require the exercise of 100 warrants for
64.84 registered shares of ABB Ltd. All other warrants require the exercise
of five warrants for one registered share of ABB Ltd. Information presented
reflects the number of registered shares of ABB Ltd that warrant holders can
receive upon exercise.
(2) Information presented reflects the exercise price per registered share of
ABB Ltd.
(3) The aggregate fair value at date of grant of warrants issued in 2000 was
$54 million, assuming a dividend yield of 1.7 percent, expected volatility
of 33 percent, risk-free interest rate of 4.4 percent, and an expected life
of six years.
(4) The aggregate fair value at date of grant of warrants issued in 2001 was
$16 million, assuming a dividend yield of 1.25 percent, expected volatility
of 47 percent, risk-free interest rate of 3.5 percent, and an expected life
of six years.
Presented below is a summary of warrants outstanding at December 31, 2002
EXERCISE PRICE WEIGHTED-AVERAGE
(PRESENTED IN CHF)(1) NUMBER OF WARRANTS NUMBER OF SHARES(2) REMAINING LIFE
--------------------- ------------------ ------------------- ----------------
30.89 4,743,000 3,075,361 1.0 years
25.54 5,795,000 3,757,478 1.9 years
37.50 4,648,060 929,612 2.4 years
41.25 14,565,000 2,913,000 2.9 years
53.00 19,940,000 3,988,000 3.5 years
17.00 18,700,000 3,740,000 4.9 years
------------------------------
(1) Information presented reflects the exercise price per registered share of
ABB Ltd.
(2) Information presented reflects the number of registered shares of ABB Ltd
that warrant holders can receive upon exercise of warrants.
F-66
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 21 MANAGEMENT INCENTIVE PLAN (CONTINUED)
WARS
As each WAR gives the holder the right to receive cash equal to the market
price of a warrant on date of exercise, the Company is required by APB 25 to
record a liability based upon the fair value of outstanding WARs at each period
end, amortized on a straight-line basis over the three-year vesting period. In
selling, general and administrative expenses, the Company recorded income of
$14 million and $58 million for 2002 and 2001, respectively and expense of
$31 million in 2000, excluding amounts charged to income (loss) from
discontinued operations, net of tax, as a result of changes in the fair value of
the outstanding WARs and the vested portion. In June 2000, to hedge its exposure
to fluctuations in fair value of outstanding WARs, the Company purchased
cash-settled call options from a bank, which entitle the Company to receive
amounts equivalent to its obligations under the outstanding WARs. In accordance
with Emerging Issues Task Force No. 00-19 (EITF 00-19), ACCOUNTING FOR
DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN A
COMPANY'S OWN STOCK, the cash-settled call options have been recorded as assets
measured at fair value, with subsequent changes in fair value recorded through
earnings as an offset to the compensation expense recorded in connection with
the WARs. During 2002, 2001 and 2000, excluding amounts charged to income (loss)
from discontinued operations, net of tax, the Company recognized expense of
$26 million, $54 million and $4 million, respectively, in interest and other
finance expense, related to the cash-settled call options.
The aggregate fair value of outstanding WARs was $9 million and $53 million
at December 31, 2002 and 2001, respectively. Fair value of WARs was determined
based upon the trading price of equivalent warrants listed on the SWX Swiss
Exchange (virt-x).
Presented below is a summary of WAR activity for the years shown.
NUMBER OF WARS
OUTSTANDING
--------------
Outstanding at January 1, 2000.............................. 35,249,400
Granted..................................................... 30,846,640
Exercised................................................... (25,000)
Forfeited................................................... (710,000)
-----------
Outstanding at December 31, 2000............................ 65,361,040
Granted..................................................... 39,978,750
Exercised................................................... (548,000)
Forfeited................................................... (1,238,720)
-----------
Outstanding at December 31, 2001............................ 103,553,070
EXERCISED................................................... (1,455,080)
FORFEITED................................................... (3,803,750)
-----------
OUTSTANDING AT DECEMBER 31, 2002............................ 98,294,240
At December 31, 2002, and December 31, 2001, 26,974,240 and 9,087,000 of the
WARs were exercisable, respectively. No WARs were granted in 2002. The aggregate
fair value at date of grant of WARs issued in 2001 and 2000 was $28 million and
$80 million, respectively.
F-67
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 22 STOCKHOLDERS' EQUITY
At December 31, 2002, including the warrants issued under the management
incentive plan and call options sold to a bank at fair value during 2001, the
Company had outstanding obligations to deliver 40 million shares at exercise
prices ranging from CHF 17.00 to CHF 53.00. The call options expire in periods
ranging from 2004 to 2007 and were recorded as equity instruments in accordance
with EITF 00-19. Also, at December 31, 2002, the Company had obligations to
deliver 85 million shares at an exercise price of CHF 18.48 as a result of the
issuance of convertible debt in May 2002. In addition pursuant to the Plan of
reorganization of Combustion Engineering, as described in Note 17, the Company
will contribute 30 million shares to the Asbestos PI Trust.
During 2000, the Company sold 18 million shares of its treasury stock to a
bank at fair market value and sold put options which enabled the bank to sell up
to 18 million shares to the Company at exercise prices ranging from CHF 25.54 to
CHF 53.00 per share. The put options were recorded as equity instruments in
accordance with EITF 00-19, as the terms of the put options allowed the Company
to choose a net share settlement. In 2001, the Company settled the outstanding
written put options by purchasing the 18 million shares at a weighted average
exercise price of CHF 40.93 per share.
Dividends are payable to the Company's stockholders based on the
requirements of Swiss law, ABB Ltd's Articles of Incorporation, and
stockholders' equity as reflected in the unconsolidated financial statements of
ABB Ltd prepared in compliance with Swiss law. At December 31, 2002, of the CHF
6,647 million stockholders' equity recorded in such unconsolidated financial
statements, CHF 3,000 million was share capital, another CHF 3,545 million was
restricted and CHF 102 million is available for distribution.
In March 2003, the Company sold 80 million treasury shares in two
transactions for approximately $156 million.
NOTE 23 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 and that any proceeds from such exercises were used to
acquire shares of the Company's stock at the average market price during the
year or the period the securities were outstanding, if shorter. Potentially
dilutive securities comprise: outstanding written call options, if dilutive; the
securities issued under the Company's management incentive plan, to the extent
the average market price of the Company's stock exceeded the exercise prices of
such instruments; shares issuable in relation to the convertible bonds if
dilutive; and outstanding written put options, for which net share settlement at
average market price of the Company's stock was assumed, if dilutive.
The shares issuable in relation to the warrants and options outstanding in
connection with the Company's management incentive plan were excluded from the
computation of diluted earnings per share in 2002 and 2001, as their inclusion
would have been antidilutive. In 2000, only those warrants and options that were
considered dilutive have been included in the computation of
F-68
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 23 EARNINGS PER SHARE (CONTINUED)
diluted earnings per share. In 2002, the shares issuable in relation to the
convertible bonds were included in the computation of diluted earnings per share
for the period they were outstanding.
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Basic earnings per share:
Income (loss) from continuing operations................... $ 97 $ (165) $ 766
Income (loss) from discontinued operations, net of tax..... (880) (501) 677
Cumulative effect of change in accounting principles
(SFAS 133), net of tax................................... -- (63) --
------ ------ ------
NET INCOME (LOSS).......................................... $ (783) $ (729) $1,443
====== ====== ======
Weighted average number of shares outstanding (in
millions)................................................ 1,113 1,132 1,180
Earnings per share:
Income (loss) from continuing operations................... $ 0.09 $(0.15) $ 0.65
Income (loss) from discontinued operations, net of tax..... (0.79) (0.43) 0.57
Cumulative effect of change in accounting principles
(SFAS 133), net of tax................................... -- (0.06) --
------ ------ ------
NET INCOME (LOSS).......................................... $(0.70) $(0.64) $ 1.22
====== ====== ======
F-69
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 23 EARNINGS PER SHARE (CONTINUED)
YEAR ENDED DECEMBER 31,
------------------------------
DILUTED EARNINGS PER SHARE: 2002 2001 2000
--------------------------- -------- -------- --------
Income (loss) from continuing operations.................... $97 $(165) $766
Effect of dilution:
Convertible bonds, net of tax............................. (187) -- --
------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS, ADJUSTED.......... (90) (165) 766
Income (loss) from discontinued operations, net of tax...... (880) (501) 677
Cumulative effect of change in accounting principles (SFAS
133), net of tax.......................................... -- (63) --
------- ------- -------
NET INCOME (LOSS), ADJUSTED................................. $(970) $(729) $1,443
======= ======= =======
Weighted average number of shares outstanding (in
millions)................................................. 1,113 1,132 1,180
Dilutive potential shares:
Warrants and options........................................ -- -- 5
Convertible bonds........................................... 53 -- --
------- ------- -------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (IN
MILLIONS)................................................. 1,166 1,132 1,185
======= ======= =======
Earnings per share:
Income (loss) from continuing operations, adjusted.......... $(0.08) $(0.15) $0.65
Income (loss) from discontinued operations, net of tax...... (0.75) (0.43) 0.57
Cumulative effect of change in accounting principles (SFAS
133), net of tax.......................................... -- (0.06) --
------- ------- -------
NET INCOME (LOSS), ADJUSTED................................. $(0.83) $(0.64) $1.22
======= ======= =======
Warrants and options to purchase 40 million shares were not included in the
computation of diluted earnings per share for 2002 because the exercise prices
were greater than the average market price of the Company's shares during the
period the instruments were outstanding.
NOTE 24 RESTRUCTURING CHARGES
During the first quarter of 1999 and in connection with its purchase of
Elsag Bailey, the Company implemented a restructuring plan intended to
consolidate operations and gain operational efficiencies. The plan called for
workforce reductions of approximately 1,500 salaried employees primarily in
Germany and the United States (EB Restructuring). Restructuring charges and
related write downs of $192 million were included in other income (expense),
net, during 2000, of which approximately $90 million related to the continued
integration of Elsag Bailey. The EB Restructuring was substantially complete at
the end of 2000.
In July 2001, the Company announced a restructuring program (2001 Program)
anticipated to extend over 18 months. The 2001 Program was initiated in an
effort to improve productivity, reduce cost base, simplify product lines, reduce
multiple location activities and perform other downsizing in response to
weakening markets and consolidation of major customers in certain industries.
F-70
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 24 RESTRUCTURING CHARGES (CONTINUED)
In 2001 the Company recognized restructuring charges of $109 million
relating to workforce reductions and $71 million related to lease terminations
and other exit costs associated with the restructuring program. These costs are
included in other income (expense), net. Termination benefits of $32 million
were paid to approximately 2,150 employees and $31 million was paid to cover
costs associated with lease terminations and other exit costs. Workforce
reductions include production, managerial and administrative employees. At
December 31, 2001, accrued liabilities included $78 million for termination
benefits and $39 million for lease terminations and other exit costs.
In 2002 the Company recognized charges of $166 million related to workforce
reductions and charges of $38 million related to lease terminations and other
exit costs associated with the 2001 Program. These costs are included in other
income (expense), net. Based on changes in management's original estimate a
$21 million reduction in the amounts accrued for workforce reductions, lease
terminations and other exit costs have been included in other income (expense),
net. Currency fluctuations resulted in a $24 million increase in the liabilities
accrued for workforce reductions, lease terminations and other exit costs.
Termination benefits of $149 million were paid to approximately 4,000 employees
and $29 million was paid to cover costs associated with lease terminations and
other exit costs. Workforce reductions include production, managerial and
administrative employees. At December 31, 2002, accrued liabilities included
$94 million for termination benefits and $52 million for lease terminations and
other exit costs. The 2001 program was substantially completed during 2002 and
the remaining liability will be used through 2003.
As a result of the 2001 program, certain assets, inventories and property,
plant and equipment have been identified as impaired or will no longer be used
in continuing operations. The Company recorded $18 million and $41 million in
2002 and 2001, respectively, to write down these assets to fair value. These
costs are included in cost of sales and other income (expense), net.
In October 2002, the Company announced the Step change program. Detailed
project planning continues to be developed and evaluated by management. The
Company estimates that restructuring cost under the program will be
approximately $300 million and $200 million, in 2003 and 2004, respectively. The
goals of the program are to increase competitiveness of the Company's core
businesses, reduce overhead costs and streamline operations by approximately
$800 million on an annual basis by 2005. The Step change program is expected to
be completed by mid-2004.
In 2002, related to Step change program, the Company recognized
restructuring charges of $51 million related to workforce reductions and
$26 million related to lease terminations and other exit costs associated with
the restructuring program. These costs are included in other income (expense),
net. Termination benefits of $13 million were paid to approximately 200
employees and $1 million was paid to cover costs associated with lease
terminations and other exit costs. Workforce reductions include production,
managerial and administrative employees. At December 31, 2002, accrued
liabilities included $38 million for termination benefits and $25 million for
lease terminations and other exit costs.
F-71
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 24 RESTRUCTURING CHARGES (CONTINUED)
As a result of the Step change program, certain assets have been identified
as impaired or will no longer be used in continuing operations. The Company
recorded $2 million to write down these assets to fair value. These costs are
included in other income (expense), net.
2001
PROGRAM STEP CHANGE OTHER TOTAL
-------- ----------- --------- --------
Year ended December 31, 2002
Restructuring charge for workforce reduction........... $166 $51 $ -- $217
Restructuring charge for lease terminations and
other................................................ 38 26 -- 64
Write down cost........................................ 18 2 -- 20
Change in estimate..................................... (21) -- (9) (30)
---- --- --------- ----
Total restructuring charges and related asset
write-downs............................................ $201 $79 $ (9) $271
==== === ========= ====
Year ended December 31, 2001
Restructuring charge for workforce reduction........... $109 $-- $ -- $109
Restructuring charge for lease terminations and
other................................................ 71 -- -- 71
Write down cost........................................ 41 -- -- 41
Change in estimate..................................... -- -- -- --
---- --- --------- ----
Total restructuring charges and related asset
write-downs............................................ $221 $-- $ -- $221
==== === ========= ====
F-72
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 25 SEGMENT AND GEOGRAPHIC DATA
During 2001, the Company realigned its worldwide enterprise around customer
groups, replacing its former business segments with four end-user divisions, two
channel partner divisions, and a financial services division. The four end-user
divisions--Utilities, Process Industries, Manufacturing and Consumer Industries,
and Oil, Gas and Petrochemicals--served end-user customers with products,
systems and services. The two channel partner divisions--Power Technology
Products and Automation Technology Products--served external channel partners
such as wholesalers, distributors, original equipment manufacturers and system
integrators directly and end-user customers indirectly through the end-user
divisions. The Financial Services division provided services and project support
for the Company's internal as well as for the Company's external customers.
The Utilities division served electric, gas and water utilities--whether
state-owned or private, global or local, operating in liberalized or regulated
markets--with a portfolio of products, services and systems. The division's
principal customers were generators of power, owners and operators of power
transmission systems, energy traders and local distribution companies. The
Utilities division employed approximately 14,800 people as of December 31, 2002.
In April 2002, the Company merged its Process Industries division and its
Manufacturing and Consumer Industries division to form a new Industries
division. The Industries division served the automotive, cement, chemical,
distribution, electronics, food and beverage, life sciences, marine, metals,
mining, paper, petroleum, printing and telecommunications industries with
application-specific power and automation technology. The Industries division
employed approximately 23,300 people as of December 31, 2002.
The Power Technology Products division covered the entire spectrum of
technology for power transmission and power distribution including transformers,
switchgear, breakers, capacitors and cables as well as other products, platforms
and technologies for high- and medium-voltage applications. Power technology
products are used in industrial, commercial and utility applications. These
products were sold through the Company's end-user divisions as well as through
external channel partners, such as distributors, contractors and original
equipment manufacturers and system integrators. The Power Technology Products
division employed approximately 26,400 people as of December 31, 2002.
The Automation Technology Products division provided products, software and
services for the automation and optimization of industrial and commercial
processes. Key technologies include measurement and control, instrumentation,
process analysis, drives and motors, power electronics, robots, and low voltage
products. These technologies were sold to customers through the end-user
divisions as well as through external channel partners such as wholesalers,
distributors, original equipment manufacturers and system integrators. The
Automation Technology Products division employed approximately 33,300 people as
of December 31, 2002.
The Oil, Gas and Petrochemicals division supplied a comprehensive range of
products, systems and services to the global oil, gas and petrochemicals
industries, from the development of onshore and offshore exploration
technologies to the design and supply of production facilities, refineries and
petrochemicals plants. The Oil, Gas and Petrochemicals division employed
approximately 11,900 people as of December 31, 2002. The Company announced in
2002 that the Company intend to dispose of this business division (see Note 3).
F-73
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 25 SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
The Financial Services division supported the Company's businesses and
customers with financial solutions in structured finance, leasing, project
development and ownership, financial consulting, insurance and treasury
activities. In 2002 a significant part of the division's structured finance and
leasing activities were sold to GE Commercial Finance. Proprietary trading
activities in treasury centers ceased and remaining treasury activities were
integrated in Corporate. The insurance and project development and ownership
activities were transferred to the Non-Core Activities division.
Non-Core Activities includes the following:
- the Company's Insurance business area (part of the former Financial
Services division);
- The Company's Equity Ventures business area and the remaining Structured
Finance business that was not sold to GE Commercial Finance (part of the
former Financial Services division);
- the Company's Building Systems business area;
- the Company's New Ventures business area;
- the Company's Customer Service, Group Processes, Logistic Systems, and
Semiconductors business areas.
Corporate includes Headquarters, Central Research and Development, Real
Estate, as well as, beginning in 2002, Treasury Services.
Inter-division sales are conducted on an arm's length basis, with prices
determined based on market conditions and subject to terms and conditions
standard in the relevant industry. Under the pull-through pricing system used
for inter-division sales, end-user divisions are assigned the actual sales price
of the transactions treated as pull-through sales. A notional margin is added to
reflect what would have been earned if such sales had originated with the
end-user division.
The Company evaluates performance of its divisions based on earnings before
interest and taxes (EBIT), which excludes interest and dividend income, interest
expense, provision for taxes, minority interest, and income (loss) from
discontinued operations, net of tax. In accordance with Statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, the Company presents division revenues, depreciation and
amortization, amortization of goodwill in 2001 and 2000, restructuring charges
and related asset write-downs, EBIT, net operating assets and capital
expenditures, all of which have been reclassified to reflect the changes to the
Company's internal structure, including the effect of inter-division
transactions. Division revenues and EBIT are presented as if certain historical
third-party sales by subsidiaries in product-supplying divisions had been routed
through other divisions as they would have been under the customer-centric
structure. Management has reflected prior years' divisional financial
information in this way to allow analysis of trends in divisional revenues and
margins on a basis consistent with the Company's then existing structure and
transaction flow.
F-74
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 25 SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
The following tables summarize information for each reportable division:
RESTRUCTURING
DEPRECIATION CHARGE AND NET
AND AMORTIZATION RELATED ASSET OPERATING CAPITAL
2002 REVENUES(1) AMORTIZATION OF GOODWILL WRITE-DOWNS EBIT(2)(3) ASSETS(4)(7) EXPENDITURES
---- ----------- ------------ ------------ ------------- ---------- ------------ ------------
Utilities............ $4,826 $52 $-- $31 $75 $992 $20
Industries........... 4,412 56 -- 59 145 1,129 21
Power Technology
Products........... 4,355 117 -- 29 353 1,389 97
Automation Technology
Products........... 5,035 145 -- 80 373 2,278 112
Non-Core Activities:
Insurance.......... 657 2 -- -- 40 1,397 1
Equity
Ventures(5)...... 21 -- -- -- 38 1,096 --
Structured
Finance(6)....... 92 9 -- -- 116 1,346 --
Building Systems... 2,372 11 -- 22 (114) 68 9
New Ventures....... 132 13 -- 15 (68) 308 15
Other Non-Core
Activities....... 912 75 -- 15 (171) (456) 29
--------- ------- ------- -------- ------- --------- -------
TOTAL NON-CORE
ACTIVITIES......... 4,186 110 -- 52 (159) 3,759 54
Corporate / Other.... 527 76 -- 20 (317) 9,344 143
Inter-division
elimination........ (5,046) -- -- -- (76) (7,633) --
CONSOLIDATED......... $18,295 $556 $-- $271 $394 $11,258 $447
RESTRUCTURING
DEPRECIATION CHARGE AND NET
2001 AND AMORTIZATION RELATED ASSET OPERATING CAPITAL
(RESTATED) REVENUES(1) AMORTIZATION OF GOODWILL WRITE-DOWNS EBIT(2)(3)(8) ASSETS(4)(7)(8) EXPENDITURES
--------------------- ----------- ------------ ------------ ------------- ------------- --------------- ------------
Utilities............ $5,634 $49 $24 $24 $158 $790 $27
Industries........... 4,995 53 41 38 151 924 35
Power Technology
Products........... 3,961 113 6 52 234 1,283 105
Automation Technology
Products........... 4,756 145 54 43 364 2,287 109
Non-Core Activities:
Insurance............ 956 -- 6 -- (342) 1,093 1
Equity
Ventures(5)...... 35 -- -- -- 76 1,160 --
Structured
Finance(6)....... 133 10 -- -- 27 1,789 3
Building Systems... 2,568 16 -- 2 20 (23) 10
New Ventures....... 113 17 -- 6 (167) 262 34
Other Non-Core
Activities....... 1,325 68 -- 14 (66) (795) 74
--------- ------- ------- -------- ------- --------- -------
TOTAL NON-CORE
ACTIVITIES......... 5,130 111 6 22 (452) 3,486 122
Corporate / Other.... 612 62 24 42 (165) 7,320 173
Inter-division
elimination........ (5,706) -- -- -- (133) (5,346) --
CONSOLIDATED......... $19,382 $533 $155 $221 $157 $10,744 $571
F-75
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 25 SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
RESTRUCTURING
DEPRECIATION CHARGE AND NET
AND AMORTIZATION RELATED ASSET OPERATING CAPITAL
2000 REVENUES(1) AMORTIZATION OF GOODWILL WRITE-DOWNS EBIT(2)(3) ASSETS(4)(7) EXPENDITURES
---- ----------- ------------ ------------ ------------- ---------- ------------ ------------
Utilities............ $5,460 $34 $41 $39 $251 $755 $26
Industries........... 5,443 47 55 42 197 829 44
Power Technology
Products........... 3,587 114 8 38 244 1,302 105
Automation Technology
Products........... 4,671 190 36 45 445 2,436 111
Non-Core Activities:
Insurance.......... 805 1 5 -- 98 912 1
Equity
Ventures(5)...... 41 -- -- -- 70 556 --
Structured
Finance(6)....... 126 13 -- -- 47 1,309 10
Building Systems... 2,506 17 -- -- 57 57 11
New Ventures....... 108 3 -- -- (12) 60 3
Other Non-Core
Activities....... 1,236 74 1 -- (43) 583 70
--------- ------- ------- -------- ------- --------- -------
TOTAL NON-CORE
ACTIVITIES......... 4,822 108 6 -- 217 3,477 95
Corporate / Other.... 780 100 6 28 (135) 5,335 58
Inter-division
elimination........ (5,408) -- -- -- (46) (2,567) --
CONSOLIDATED......... $19,355 $593 $152 $192 $1,173 $11,567 $439
--------------------------
(1) Revenues have been reclassified for the Utilities and Industries divisions
to reflect the increase in sales that would have occurred if the Company's
2002 internal structure and transaction flow had been in place for all
periods presented. The effect of assuming that certain historical sales by
the product divisions would have been routed through other divisions before
final sale to an external customer, as they would have been if the
customer-centric structure had been in place in those prior years, was to
increase division revenues for 2002, 2001 and 2000, respectively, by
$1,363 million, $2,119 million and $2,139 million for the Utilities division
and by $276 million, $847 million and $1,039 million for the Industries
division, by $1 million, $74 million and $52 million for Building Systems
and by $0 million, $8 million and $10 million for Other Non-Core Activities.
The Company assumed that internal pricing structures for these
inter-division sales were also in place for all periods presented, resulting
in a reduction to division revenues for 2002, 2001 and 2000, respectively,
by $55 million, $99 million, and $211 million for the Power Technology
Products division; and by $84 million, $153 million and $200 million for the
Automation Technology division.
(2) Consistent with the assumptions described in (1) above, division EBIT
reflects the retroactive transfer of profits of $0 million, $41 million, and
$46 million in 2002, 2001 and 2000, respectively, from Power Technology and
Automation Technology Products, to Utilities and Industries, in order to
reflect the impact that these inter-divisional sales would have had on
historical results.
(3) EBIT, excluding amortization of goodwill in 2001 and 2000, would have been
$394 million, $312 million and $1,325 million in 2002, 2001 and 2000,
respectively.
(4) Corporate / Other includes net operating assets of $7,723 million,
$5,551 million and $4,018 million relating to the former Financial Service
Treasury Center business area in 2002, 2001 and 2000, respectively.
F-76
ABB LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 25 SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
(5) Includes the Company's investment in Jorf Lasfar Energy Company S.C.A.
(6) Includes the Company's investment in Swedish Export Credit Corporation.
(7) Net operating assets is calculated based upon total assets (excluding cash
and equivalents, marketable securities, current loans receivable, taxes and
deferred charges) less current liabilities (excluding borrowings, taxes,
provisions and pension-related liabilities).
(8) Restated, see Notes 2 and 13.
Effective January 1, 2003, in order to streamline the Company's structure
and improve operational performance, the Company has put into place two
divisions: Automation Technologies, which combines the former Automation
Technology Products and Industries divisions and employs approximately 56,600
people; and Power Technologies, which combines the former Power Technology
Products and Utilities divisions and employs approximately 41,200 people.
GEOGRAPHIC INFORMATION
REVENUES LONG-LIVED ASSETS
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------ -------------------------
2002 2001 2000 2002 2001
-------- -------- -------- -------- --------------
Europe................................ $10,265 $10,852 $12,104 $2,043 $1,947
The Americas.......................... 4,101 4,863 4,673 403 467
Asia.................................. 2,603 2,435 1,741 281 270
Middle East and Africa................ 1,326 1,232 837 65 69
------- ------- ------- ------ ------
$18,295 $19,382 $19,355 $2,792 $2,753
======= ======= ======= ====== ======
Revenues have been reflected in the regions based on the location of the
customer. Long-lived assets primarily represent property, plant and equipment,
net, and are shown by the location of the assets.
The Company does not segregate revenues derived from transactions with
external customers for each type or group of products and services. Accordingly,
it is not practicable for the Company to present revenues from external
customers by product and service type.
Management estimates that approximately 43 percent of the Company's
employees are subject to collective bargaining agreements in various countries.
These agreements are subject to various regulatory requirements and are
renegotiated on a regular basis in the normal course of business.
NOTE 26 SUBSEQUENT EVENTS
At the Company's annual general meeting held on May 16, 2003, the Company's
shareholders approved amendments to its articles of incorporation providing for
authorized share capital and an extension in contingent share capital.
The amendments include the creation of CHF 250 million in authorized share
capital, replacing CHF 100 million that expired in June 2001. This entitles the
Company's board of directors to issue up to 100 million new ABB shares, of which
some 30 million are reserved for use with the pre-packaged plan of
reorganization of the Company's U.S. subsidiary, Combustion Engineering Inc.
The amendments also include an increase of contingent capital from CHF 200
million to CHF 750 million, allowing the issue of up to a further 300 million
new ABB shares.
F-77
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders of ABB Ltd:
We have audited the consolidated financial statements of ABB Ltd as of
December 31, 2002 and 2001, and for each of the two years in the period ended
December 31, 2002, and have issued our report thereon dated April 4, 2003
(included elsewhere in this annual report on Form 20-F). Our audits also
included the financial statement schedule included in the annual report. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. We did not audit the consolidated financial statements of
ABB Holdings Inc., a wholly-owned subsidiary, which statements reflect total
assets constituting 15% in 2002 and 16% in 2001 and total revenues constituting
14% in 2002 and 11% in 2001 of the related consolidated totals; we did not audit
the financial statements of Jorf Lasfar Energy Company, a corporation in which
the Company has a 50% interest (the Company's equity in Jorf Lasfar Energy
Company's net income is stated at $66 million in 2002 and $81 million in 2001);
we did not audit the consolidated financial statements of Swedish Export Credit
Corporation, a corporation in which the Company has a 35% interest (the
Company's equity in Swedish Export Credit Corporation's consolidated net income
(loss) is stated at $89 million in 2002 and $(11) million in 2001); and we did
not audit the 2001 financial statements of Scandinavian Reinsurance Company
Limited, a wholly-owned subsidiary, which statements reflect total assets
constituting 7% and total revenues constituting 2% of the related consolidated
totals for 2001. Those statements were audited by other auditors whose reports
have been furnished to us. The 2002 auditors' report on the consolidated
financial statements of Swedish Export Credit Corporation includes an
explanatory paragraph that describes a restatement to previously reported
amounts for the year ended December 31, 2001. Our opinion, insofar as it relates
to amounts included for those companies and their subsidiaries, is based solely
on the reports of the other auditors.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein. The financial statement schedule does not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of the uncertainty regarding the Company's ability to continue as a
going concern.
Zurich, Switzerland /s/ ERNST & YOUNG AG
April 4, 2003
S-1
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders of ABB Ltd:
We have audited the consolidated income statement, statement of cash flows and
statement of changes in stockholders' equity of ABB Ltd for the year ended
December 31, 2000, before reclassifications for operations discontinued in 2002
as described in Notes 2 and 3 to the consolidated financial statements, and have
issued our report thereon dated February 11, 2001 (included elsewhere in this
annual report on Form 20-F). Our audit also included the financial statement
schedule for 2000 included in the annual report. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audit.
In our opinion, the financial statement schedule before reclassification for
operations discontinued in 2002, referred to above, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ KPMG KLYNVELD PEAT /s/ ERNST & YOUNG AG
MARWICK GOERDELER SA
Zurich, February 11, 2001 Zurich, February 11, 2001
S-2
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT THE BALANCE AT THE
DESCRIPTION BEGINNING OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
----------- ----------------- --------- ---------- --------------
($ IN MILLIONS)
Accounts Receivable--allowance for
doubtful accounts:
Year ending December 31,
2002...................................... 246 132 145 233
2001...................................... 224 106 84 246
2000...................................... 228 103 107 224
S-3