Operational Review
Annual Report 1998
aINGENUITY AT WORK
ABB is a global $ 30 billion engineering and technology Group servingcustomers in electrical power generation, transmission and distribution;automation; oil, gas and petrochemicals; industrial products andcontracting; and financial services. The Group employs 200,000 peoplein over 100 countries.
ABB AB (Sweden) and ABB AG (Switzerland) are the two sole owners in equal parts of ABB Asea Brown
Boveri Ltd, Zurich (Switzerland), which is the holding company of the ABB Group with approximately
1,000 companies around the world. The two parent companies each provide a transparent vehicle for
investing in ABB as virtually all of their income and stockholders’ equity comes from their respective
50-percent shares of the ABB Group income and equity.
The complete ABB Group and Parent Companies Annual Report 1998 consists of this Operational Review
and a Financial Review. For a copy of the Financial Review, please contact ABB Investor Relations at the
address printed on the back of this report.
The ABB Group publishes its annual report in English, German and Swedish. The English-language version
is binding. It also issues quarterly financial results in April, July and October. All figures shown for the
ABB Group are in U.S. dollars. In addition, separate annnual reports are published by some ABB national
and business entities. ABB also publishes annual environmental and technology reports.
ABB AB VästeråsSweden
ABB AGBaden
Switzerland
ABB Asea Brown Boveri LtdZurich
Switzerland
ABB Group1,000 Companies
33 Business Areas Organized into7 Business Segments
ABB AB Shareholders
50% 50%
ABB AG Shareholders
Key figures
(US$ in millions, unless otherwise stated) 1998 1997 1996 1995
Orders received 31,462 34,803 33,884 35,163
Revenues 30,872 31,265 33,767 32,751
Operating earnings after depreciation 2,111 1,137 2,113 2,181
Income before taxes 1,865 853 1,901 2,003
Net income 1,305 572 1,233 1,315
Stockholders’ equity 5,959 5,283 5,875 5,243
Total assets 32,383 29,784 30,896 32,076
Capital expenditure for tangible fixed assets 865 1,093 1,168 1,171
Capital expenditure for acquisitions 274 302 333 315
Expenditure for research and development 2,463 2,657 2,638 2,627
Operating earnings after depreciation/revenues (%) 6.8 3.6 6.3 6.7
Return on capital employed (%) 21.1 12.2 19.9 21.8
Return on equity (%) 23.2 10.3 22.2 28.4
Number of employees 199,232 213,057 214,894 209,637
Net income per share
ABB AB A shares (in SEK) 5.52 2.32 4.42 4.99
ABB AB B shares (in SEK) 5.52 2.32 4.42 4.99
ABB AG bearer shares (in CHF) 103.30 46.80 85.40 90.20
ABB AG registered shares (in CHF) 20.66 9.36 17.08 18.04
Dividend per share1
ABB AB A shares (in SEK)2 2.18 2.10 1.75 1.60
ABB AB B shares (in SEK)2 2.18 2.10 1.75 1.60
ABB AG bearer shares (in CHF) 41.00 40.00 38.00 30.00
ABB AG registered shares (in CHF) 8.20 8.00 7.60 6.00
1 1998 proposed.2 Per-share data 1995 to 1996 have been adjusted for the 10 :1 stock split in ABB AB shares effective as of April 21, 1997.
Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share inAdtranz in 1998 except for the operating results up to the third quarter.
Revenues per Region 1998
Employees per Region 1998
EuropeThe AmericasAsiaMiddle East and Africa
EuropeThe AmericasAsiaMiddle East and Africa
54%
22%
14%
10%
64%
16%
14%
6%
ABB Asea Brown Boveri LtdInvestor RelationsP. O. Box 8131CH-8050 ZurichSwitzerland Phone +41 (0)1 317 7111Telefax +41 (0)1 311 9817
ABB Asea Brown Boveri LtdEnvironmental AffairsV. Esplanaden 9a 4 F1SE-35231 VäxjöSwedenPhone +46 (0)470 22 005Telefax +46 (0)470 22 002
ABB Asea Brown Boveri LtdCorporate CommunicationsP. O. Box 8131CH-8050 ZurichSwitzerland Phone +41 (0)1 317 7111Telefax +41 (0)1 311 7958
Internet addresshttp://www.abb.com
a
1
Key Figures Contents
Revenues per Segment 1998(US$ in millions)
94 95 96 97 98
10,000
20,000
30,000
40,000
Group Orders Received (US$ in millions)
94 95 96 97 98
10,000
20,000
30,000
40,000
Group Revenues(US$ in millions)
94 95 96 97 98
1,000
2,000
3,000
4,000
Group Operating Earnings(US$ in millions)
Power Generation
Power Transmission
Power Distribution
Automation
Oil, Gas and Petrochemicals
Products and Contracting
Financial Services
*50% of Adtranz –operating earnings only
291
374
179
521
175
419 403
–69*
2 Highlights of 1998
3 Letter from the Chairman
4 President’s Comments
8 ABB Group Organization
10 Power Generation
12 Power Transmission
14 Power Distribution
16 Automation
18 Oil, Gas and Petrochemicals
20 Products and Contracting
22 Financial Services
24 Research and Development
25 Preparing for the Millennium
26 Environment
27 Group Information and Financial Summary
28 ABB Board of Directors
29 Management
32 Consolidated Financial Statements
35 Country Statistics
36 ABB Group Statistical Data
Operating Earnings after Depreciationper Segment 1998(US$ in millions)
8,530
4,038
2,607
7,036
2,860
6,385
860
Orders Received per Segment 1998(US$ in millions)
8,260
4,428
2,672
7,015
3,324
6,464
860
As per September 1, 1998, ABB changed its Group management structure. Prior years’ business data hasbeen restated to reflect the reclassification of certain business areas. ABB Group data in total remainsunaffected.
The statements in this review relating to matters that are not historical facts are forward-looking statementsthat are not guarantees of future performance and involve risks and uncertainties, including but not limitedto: future global economic conditions; foreign exchange rates; regulatory approvals; market conditions; theactions of competitors and other factors beyond the control of the company.
2
Orders received in 1998 fell 10 percent to $ 31.5 bil-
lion. Adjusted for acquisitions and divestitures and
expressed in local currencies, orders were 1 percent
lower. Revenues were 1 percent lower at $ 30.1 bil-
lion, and 8 percent higher on a comparable scope
and in local currencies. Return on capital employed
was 21.1 percent.
Earnings were substantially higher in Power
Generation as the restructuring announced in 1997
improved costs and as revenues rose in the service
and retrofit business. Power Transmission and Power
Distribution also reported higher earnings, reflecting
higher invoicing in several deregulated markets and
productivity improvements.
Oil, Gas and Petrochemicals and Products and
Contracting also saw higher earnings. Earnings were
lower in Automation, due to cyclical shifts in de-
mand in some key industries, project overruns and
costs associated with addressing the Year 2000 issue.
Financial Services recorded its best year ever.
ABB took a number of significant steps in 1998 for
improved growth. ABB acquired Elsag Bailey to
position itself as a leader in the global industrial
automation market. It was the biggest acquisition in
ABB’s history. The company made a number of other
strategic acquisitions, and in early 1999 completed
the divestiture of its 50-percent share in Adtranz, its
rail transportation joint venture with DaimlerChrysler.
Also, the industrial segments were realigned to
better match changing market conditions and the re-
gional management layer was dissolved to adapt
to the globalized business environment and increase
efficency. The restructuring announced in late 1997
was more than 90 percent completed in 1998.
The downturn in Asia delayed large projects, espe-
cially in the area of steam power plants. This was
offset to some extent by projects in other emerging
markets, such as the $ 835-million oil-fired power
plant in Saudi Arabia, and in the U.S., where ABB
won a $ 600-million contract to build a major petro-
chemical facility in Port Arthur, Texas.
ABB’s Year 2000 Task Force continued to work with
customers and ABB companies to prepare informa-
tion technology systems for the Year 2000 transition.
The company continued to open new markets with
technology innovations in all of its core businesses.
ABB spent 8 percent of revenues, or $ 2.5 billion, on
research and development in 1998.
Highlights of 1998
3
Letter from the Chairman
Percy BarnevikChairman of the Board of Directors
Percy Barnevik
Chairman of the Board of Directors
ABB’s fundamental approach to business is to make
its customers more successful by providing them
with the strengths of a globalized company, deliv-
ered by local people who really understand what
our customers need. Combined with a commitment
to entrepreneurial values – speed, flexibility, front-
line management responsibility – ABB also aims to
move early, anticipating change instead of just
reacting to it. These are the keys to ABB’s long-term
growth and profitability.
ABB took several bold steps in 1998 in pursuit
of these goals. The company created new industrial
segments that will allow it to better meet the
challenges of fast-changing markets with good
growth potential. In one of those markets, industrial
automation, ABB made its biggest-ever acquisition,
Elsag Bailey Process Automation NV. The addition of
this global player reinforces ABB’s position as a
world leader in this high-growth and technology-
intense market. The divestiture of ABB’s 50-percent
share in the Adtranz rail joint venture with
DaimlerChrysler announced at the beginning of 1999
reconfirms the company’s strategy to lessen its
dependence on heavy asset businesses with mod-
erate growth rates.
ABB also dissolved the regional management level,
which had successfully fulfilled its mandate to firmly
establish ABB in all parts of the world, and rein-
forced its efforts to achieve global synergies. These
changes make the company faster and more efficient,
and they mean that ABB gets more out of its strong
decentralized organization.
ABB continued to build its head start in emerging
markets and in Central and Eastern Europe. In
the short-term, our strong position in Latin America
and in the Middle East and Africa has largely offset
the impact of the short-term downturn in Asia. In the
long-term, these markets will clearly be the world’s
primary drivers of economic growth, and ABB will
be there to support that process with clean, efficient
and cost-effective solutions. Just as important,
ABB and all of its stakeholders derive an enormous
benefit from the talent, creativity and enthusiasm
of its people in these regions. Despite the economic
turbulence of 1998, I am confident that this regional
growth strategy will continue to bring rewards well
into the next century.
While having a good strategy is important, success
is about execution – getting it done. That, in turn,
boils down to the people and here I would like to
thank, on behalf of the Board and shareholders,
ABB’s people for their energy and initiative, for
putting their customers first, for their dedication to
the company, its values and goals.
Even against the background of rapid change seen
in the 11 years since the creation of ABB, 1998
can safely be called a watershed year. But amid the
challenges, 1998 offered opportunities for companies
able to respond early to the shifting global business
environment.
Our response to the challenges of 1998 and beyond
is as simple as it is ground-breaking: ensuring
increased value-orientation through a rekindled focus
on our strengths – knowledge, technology and inno-
vation.
The knowledge focus and our moves to ensure
more market transparency underpinned the realign-
ment of ABB’s Group segment structure. That
move sharpens our business focus by better matching
the segments to their markets and underscores
ABB’s commitment to respond faster to the needs of
customers, employees and other stakeholders.
The acquisition of Elsag Bailey Process Automation
and the divestiture of our 50-percent share in the
Adtranz rail joint venture with DaimlerChrysler also
show that we intend to deliver on our promises to
expand into knowledge- and service-intensive areas
and to lessen our dependence on heavy asset-based
businesses.
“Ingenuity at Work”
On the cover of this report, in newspaper and tele-
vision advertising, and on billboards at the world’s
major airports, you can read ABB’s slogan: “Ingenuity
4
at Work.” The slogan stands for what we do, pro-
viding new and useful advances in technology and
engineering for sustainable economic growth. But
it also stands for how we do it, working in an atmo-
sphere of innovation, action-orientation and entre-
preneurship. An unbureaucratic and decentralized
culture encourages ABB people everywhere to
make the most of a strong local presence coupled
with global resources in technology, production
and financing.
ABB also stands for sustainability, for a sense of
corporate responsibility that serves the long-term
interest of the company and our owners, the
shareholders. We achieve that by helping build
the bedrock for economic development; by making
the environment a priority; by transferring know-
how and technology into the countries where
we are active; and through dialogue with those who
take an interest in what we do – governments,
communities, non-governmental organizations and
the media.
One of the major challenges facing global companies
is the attraction, retention and management of talent.
We rely on managers who understand the forces that
shape our global and local business environment –
and how to harness the enormous creative potential
of the people in our diversified, multicultural Group.
Putting that combined ingenuity to work is our
future.
And in the watershed year of 1998, our people
rose to the challenges before us. My colleagues on
President’s Comments
5
Göran LindahlPresident and Chief Executive Officer
the Group Executive Committee and I would like
to thank them for their tireless efforts in making this
difficult year a success.
Focus on research and technology
Building value through knowledge and applying
ingenuity also involves directly tapping the resources
of our 20,000 engineers and scientists. To ensure
that we can continue to add intelligence to products,
solutions and services, ABB spent $ 2.5 billion on
Research and Development (R&D) in 1998.
We link ABB’s R&D network closely to the global
hubs of technological innovation, with leading
universities, research institutions and other centers
of excellence. At the same time, 80 percent of our
R&D is carried out in ABB’s local businesses close
to our customers.
A large portion of our product portfolio has been
developed in the last five years, which helps explain
why ABB has become one of top three companies
in each of our core industries. Our dedication to
results-oriented R&D is, to my mind, truly “Ingenuity
at Work”. And new products are steadily intro-
duced as a result, also in 1998. We saw the first
commercial order for ABB’s Powerformer, a break-
through in generator technology that eliminates
the need for transformer equipment and saves as
much as 30 percent in total lifecycle cost of a
power plant. A new ABB application for silicon car-
bide will allow electrical equipment to carry
10 times more power than before. Our products to
monitor and control underwater oil and gas pipeline
systems can reduce offshore development costs by
30 percent. These and similar innovations form the
basis for future growth.
ABB and the environment
In ABB, we welcome the increasing concern for
the environment and growing commitment to sus-
tainable development. Industry has a vital role to
play through technology improvements and higher
efficiencies. By sharing our technological know-
how around the world, ABB is making a special
contribution to sustainability. Inside ABB, we are
implementing an environmental management system
according to the ISO 14001 standard.
Setting concrete goals is always the key. On the
issue of greenhouse gas reductions, I proposed a
major pilot project in an address to the World
Energy Congress in Houston last year. I feel we
should aim to cut carbon dioxide emissions by
1 gigaton, a quarter of the United Nations goal,
across the energy chain. This project, as we envisage
it, should be a cooperation between business,
government, multilateral institutions, universities
and other organizations.
To ensure constructive engagement, I work on
behalf of ABB and industry as one of eleven
commissioners in the World Commission on Dams,
whose goal it is to find a balanced way to assess
the impacts of large hydro dams.
6
Financial review
Volatile financial markets reflecting considerable
uncertainty in 1998 resulted in reduced customer
spending in some of ABB’s key markets. The
downturn in Asia that began in 1997 continued and
spread to Russia during 1998, as well as parts of
Latin America at the beginning of 1999.
As a result of these trends, overall demand fell during
the year and 1998 orders received were $ 31,462
million. Adjusted for acquisitions and divestitures, in
particular the sale of our stake in Adtranz, and
expressed in local currencies, orders decreased by
1 percent.
In addition, our earnings were burdened by costs
associated with the Year 2000 issue and by provisions
to cover a potential $ 84-million fine from the
European Commission in connection with an anti-
trust ruling in the European district heating business.
However, our early efforts to adjust our cost base
through restructuring and to expand into higher
growth industries through acquisitions, divestitures
began to yield significant benefits in 1998. As a
result, operating earnings increased 5 percent to
$ 2.1 billion (excluding the 1997 restructuring charge).
As a percent of revenues, personnel expenses
decreased to 29.4 percent from last year’s low level
of 30.2 percent and material expenses declined to
44.3 percent from 45.3 percent.
Our ongoing efforts to reduce working capital have
continued to benefit our net cash position which,
despite the significant cash outflows related to our
restructuring program, remained at $ 1.6 billion,
the same level as at year-end 1997. Return on equity
in 1998 was 23.2 percent (1997: 10.3 percent) and
return on capital employed was 21.1 percent (1997:
12.2 percent). Excluding the 1997 restructuring
charge from 1997 net income, 1998 return on equity
and return on capital employed increased.
Outlook for 1999 and beyond
The growth in Power Generation’s gas-fired
related activities will continue, particularly in North
America. Orders and earnings in 1999 are expected
to exceed the 1998 level. Orders and earnings
are also expected to increase in Power Transmission
and Power Distribution. Power Transmission ex-
pects steady, moderate growth in demand with an
increasing focus on systems and comprehensive
solutions. Power Distribution markets are expected
to show high growth in an increasingly deregu-
lated environment. In Products and Contracting,
demand for standardized low-voltage products is
expected to remain stable, but growth will be
above-average in service and in some specialized
contracting activities. Orders and earnings are ex-
pected to exceed the 1998 level.
Cyclical demand variations will continue for Auto-
mation during 1999. Overall, orders are expected to
increase and, excluding the effect of the Elsag Bailey
integration, earnings are expected to increase as
well. The integration of Elsag Bailey will somewhat
dilute earnings for the next two years. Demand for
7
Göran Lindahl
President and Chief Executive Officer
Oil, Gas and Petrochemicals is expected to grow at
a lower rate as a consequence of low oil prices. With
the segment’s focus on areas such as deepwater
and subsea activities, as well as upgrades and expan-
sion of refineries, orders are expected to exceed
and earnings to reach about the same level as 1998.
Financial Services will continue its expansion into
areas requiring financial structuring solutions often
combined with industrial projects, and operating
earnings are not expected to reach the same level as
in 1998.
In a difficult economic environment, orders and
revenues for ABB Group are expected to grow.
The 1999 net cash position will not reach the same
level as at the end of 1998, primarily because of
cash outlays for the Elsag Bailey acquisition.
Net income in 1999 is expected to exceed the level
of 1998.
ABB’s longer-term targets remain unchanged. The
Group’s strategic shift during the last two years will
continue with a clear focus on expanding in knowl-
edge- and service-based sectors as well as reducing
our dependence on heavy asset businesses. This
strategic shift will continue to result in a reduction of
the capital needed. Further improved efficiency in
our resource utilization will remain a priority. We
also expect continued improvement of key financial
ratios. Annual growth of at least 6 percent on
average over the business cycle, considerable reduc-
tion of working capital in relation to revenues and
an increase in net income margin from 4.2 percent in
1998 to the 6–7 percent level within 3 years remain
major objectives for the Group.
8
Renato Fassbind
Chief Financial Officer
Accounting
Controlling
Consolidation
Insurance
Mergers & Acquisitions
Risk Management
Real Estate
Reporting
Taxes and Finance
Executive Committee
Business Segment
Business Areas/Functions
Alexis Fries
Power Generation
Gas and Combi-Cycles
Steam Power Plants
Power Plant Systems
Nuclear Systems
Environmental Systems
Power Plant Service
Sune Karlsson
Power Transmission
Cables
High-Voltage Products and Substations
Power Lines
Power Systems
Power Transformers
T&D Service and Support
Senior Corporate Officers Markus Bayegan Group R&D
Tomas Ericsson Corporate Projects / Finance & Administration
Göran Lindahl
President and CEO
Audit
Corporate Communications
Environmental Affairs
Global Processes
International Consulting
Investor Relations
Legal Affairs
Management Resources
ABB Group Organization
9
Gorm Gundersen
Oil, Gas andPetrochemicals
Oil, Gas andPetrochemicals
Armin Meyer
Products andContracting
Contracting
Low-Voltage Productsand Systems
Air Handling Equipment
Service
Jan Roxendal
Financial Services
Treasury Centers
Leasing and Financing
Insurance
Structured Finance
Energy Ventures
Sune Karlsson
Power Distribution
Distribution Systems
Distribution Transformers
Medium-Voltage Equipment
Jörgen Centerman
Automation
Automation PowerProducts
Instrumentation andControl Products
Flexible Automation
Marine andTurbochargers
Metals and Minerals
Petroleum, Chemical andConsumer Industries
Pulp and Paper
Utilities
Executive Committee
From left to right:Alexis FriesSune KarlssonRenato FassbindGöran LindahlGorm GundersenJörgen CentermanArmin MeyerJan Roxendal
10
ABB continues to play an important role in
the challenging, fast-changing power genera-
tion market. Higher demand in the U.S. and
the Middle East helped offset the downturn in
Asia, where project delays reduced our order
intake. We continued to build market position
for our advanced gas turbine technology
around the world. The restructuring announced
in late 1997 is ahead of schedule, while we
continued to improve our project selection
process to secure our margins. As a result,
earnings improved substantially.
Technology is key
Customer requirements continued to shift in
response to ongoing privatization and deregu-
lation. In a more competitive environment,
our customers are looking for high fuel effi-
ciency and reliability, low emissions, and
full-scope suppliers who can deliver complete
projects anywhere in the world. That includes
financing, complete after-sales service, opera-
tion and maintenance, and cost-effective retro-
fit to get more out of existing assets.
Technology continued to play a key role in
our ability to meet these changing demands.
ABB won orders for several combined-cycle
power plants equipped with our sequential
combustion GT24/GT26 gas turbines. This
technology has proven especially attractive in
deregulating markets where its very high effi-
ciency and low emissions help customers
reduce costs while producing cleaner power.
Major orders in 1998 included plants in the
U.K., the U.S., Taiwan and Mexico, bringing to
50 the total number of GT24/GT26 turbines
ordered to date worldwide.
ABB also won the first order for its new
GTX100 gas turbine from a municipal utility in
Sweden. The GTX100 provides large turbine
efficiency and emission performance in the
low- to mid-output power range and is well
suited to the growing small-scale power mar-
ket. ABB also saw the first commercial order
for its new generator technology, called the
Powerformer, with an order for a district heat-
ing power plant. By eliminating the need
for step-up transformer equipment, the Power-
former decreases the total lifecycle cost of a
power plant.
Another market development is the growth
in distributed power, where small power plants
provide energy or heat to localized areas or
even individual factories and buildings. When
plants produce both electricity and heat
(Combined Heat and Power), they achieve
much higher efficiencies. These plants
Power Generation
“Technology is key
to delivering greater
value to our customers
and maintaining a com-
petitive edge.”
Alexis Fries, Power
Generation segment
head
1 2
11
Orders Received1, 2
(US$ in millions)
Operating Earnings1
(US$ in millions)
98 8,260
97 9,465
96 8,861
95 9,287
94 8,854
Revenues1
(US$ in millions)
98 8,530
97 7,646
96 8,561
95 8,903
94 7,756
98 291
97 105
96 112
95 324
94 297
can be an economically and environmentally
attractive option for our customers in deregu-
lated markets, and the U.S. has recently
announced a goal to double the use of such
plants. ABB is meeting this demand with a
modular turnkey design that includes remote
control systems, full service, and financing.
Emerging markets
Steam turbines and boilers are the main com-
ponents of coal- and oil-fired power plants
and coal is the primary fuel for power genera-
tion in much of Asia. As a result, the project
delays in Asia caused by financial uncertainty
have had a corresponding impact on our steam
power plant business. However, the outlook
shows continued demand in India and China,
where important domestic coal reserves will
be used. In 1998, orders in other parts of the
world have offset the Asian delays. Key among
those was the turnkey 1,100-megawatt oil-fired
Shoaiba steam power plant in Saudi Arabia.
Increasing service revenues is an important
strategic goal for ABB. To help achieve that
goal, we have as of 1999 created a global
business area dedicated solely to the service
needs of its customers. The six-year extension
of a major service contract at the Midland
Power Plant in the U.S. and a 10-year opera-
tion and maintenance contract at a large plant
in Argentina are examples of the business
opportunities that lie ahead in this important
sector.
Looking forward, we expect growth in the
demand for gas-fired power plants and for
smaller distributed power plants. Large power
plants will continue to be built in the emerging
markets to sustain continued industrialization,
although no major turnaround is expected in
Asia in 1999. Deregulation will further drive
growth in the service and revamp market,
especially in Europe and North America. ABB
has the technology, the people and the geo-
graphic scope to meet all of these demands
well into the future.
Business Areas in the Power Generation Segment
Orders Received 1998 1997(US$ in millions)
Gas and Combi-Cycles 3,134 2,917
Steam Power Plants 2,575 3,076
Power Plant Systems 1,602 2,127
Nuclear Systems 404 742
Environmental Systems 525 760
Power Plant Service (new in 1999) – –
Other(not assigned to specific Business Area) 80 93
Intra-Segment transactions – 60 – 250
Total 8,260 9,465
Segment Activities:
Gas turbine and combined-cycle power plants
Turnkey fossil-fuelled powerplants and components
Air pollution and control sys-tems
Clean coal systems
Combined heat and power,district heating
Hydro and diesel power plants
Complete service, mainte-nance and retrofit
Advanced light-water reactorsand fuel
1. GTX100 gas turbine 2. Lumut power station, Malaysia3. Midland heat and power plant, USA 4. Powerformer high-voltage generator
3 4
12
ABB reinforced its position as the world’s
leading power transmission company in 1998,
keeping up orders received and increasing
revenues and earnings in a very competitive
market. Ongoing deregulation led to higher
demand for turnkey system solutions, espe-
cially in the Americas, the Middle East and
Europe. The economic downturn in Asia
dampened growth but that was offset by order
growth in other regions. Continued improve-
ments in our cost structure also contributed to
our better results for the year, and the new
stand-alone segment is now focused on build-
ing its leading position.
Latin America continued to be one of the most
progressive regions for privatization and de-
regulation. ABB will link Brazil’s northern and
southern power grids and deliver a 1,000-mega-
watt power transmission system connecting
the electricity networks of Brazil and Argentina.
Sharing power makes better use of existing
resources and significantly improves overall
efficiency, a key cost factor in deregulated
markets. ABB is working with power transmis-
sion customers in Latin America to find ways
to transmit more power through existing lines.
In Europe, ABB is linking the electricity net-
works of Guernsey and Jersey Islands in the
English Channel to the European Grid via
France. ABB will supply high-voltage systems
and equipment for the planned High-Voltage
Direct Current (HVDC) power link between
Italy and Greece, the first electricity infrastruc-
ture project financed under the European
Union’s Trans European Networks (TENs) plan.
Thanks to our strong local presence in the
Middle East and Africa, we won several orders
there in 1998, including a turnkey 255-kilo-
meter transmission line joining northern and
central Saudi Arabia and a 220-kilovolt gas-
insulated substation, also in Saudi Arabia. ABB
is completing a regional grid to link several
countries in southern Africa, and is building a
large air-insulated substation at a power plant
in Kenya.
Some orders in Asia have been postponed
because of financial uncertainty, but ABB still
won large substation contracts in Malaysia
and China. ABB continued to position itself
for future growth in the region.
Technology leadership
As always, technology played a key role in our
performance in 1998. For example, we sup-
plied several projects with our advanced high-
voltage cable technology using cross-linked
Power Transmission
“We will meet these
challenges . . . develop-
ing innovative ways to
tap the many new busi-
ness opportunities
emerging around the
world.”
Sune Karlsson, Power
Transmission segment
head
1 2
13
polyethylene (XLPE) insulation. ABB cables
are key to our new Powerformer technology,
allowing this radically new generator to pro-
duce much higher voltages than conventional
technology.
ABB continued to build its new HVDC Light
technology, with projects in Australia and
Denmark. HVDC Light allows interconnection
of grids and also allows small-scale power
generation, such as wind power, to be con-
nected to large power networks, making
both applications more economically feasible.
ABB has also developed a new version
of its static var compensation (SVC) system,
called SVC Light, that increases power
quality.
Service and retrofit is another growth area as
cost-conscious customers invest more in main-
taining and upgrading existing systems. ABB’s
innovative Plug and Switch System (PASS®)
allows customers to easily retrofit or install
new substations using modular components
that simply plug into existing systems. The
most important order for a PASS system in
1998 was for a substation in Brisbane,
Australia. We also help customers become
more competitive by upgrading products or
providing new grid management concepts.
Cost management is another key to profitabil-
ity. ABB has standardized designs, products
and manufacturing processes at 27 power
transformer production plants worldwide. The
economies of scale achieved will reduce costs
and boost quality even further.
Deregulation and privatization will continue
and in many cases accelerate. Competitive
pressures will grow for our customers and for
us. Demand for turnkey solutions, service
and retrofit and more technology-rich solutions
will continue to rise. ABB will meet these
challenges through cost and technology lead-
ership, and by developing innovative ways
to tap the many new business opportunities
emerging around the world.
1. Transformer manufacturing, China 2. GIS substation, Taiwan3. HVDC Light, Sweden 4. High-voltage equipment service, Switzerland5. 400 kV XLPE cables, Germany
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
98 4,428
97 4,354
96 3,873
95 4,393
94 4,405
98 4,038
97 3,739
96 4,470
95 4,292
94 3,961
98 374
97 316
96 364
95 366
94 396
Business Areas in the Power Transmission Segment
Orders Received 1998 1997(US$ in millions)
Cables 525 752
High-Voltage Products and Substations 1,154 1,409
Power Lines 719 864
Power Systems 845 381
Power Transformers 1,057 1,079
T & D Service and Support 295 119
Other(not assigned to specific Business Area) 150 147
Intra-Segment transactions – 317 – 397
Total 4,428 4,354
Segment Activities:
Products and solutions forpower cables
Air- and gas-insulatedswitchgear products, solutionsand high-current systems
Products and solutions foroverhead lines
High-voltage direct currentsystems, reactive power com-pensation and capacitors
Power transformers, reactors,components and insulatingmaterial.
Retrofit, maintenance,operations, consultancy andproject development
4 5
14
The newly created Power Distribution Segment
improved orders received and earnings in
1998. Demand was stable or higher in most
regions, with the exception of Asia, where
investment in infrastructure remains low.
However, growth opportunities are being cre-
ated worldwide by ongoing deregulation and
privatization and ABB is well positioned to
expand its share of this dynamic market. By
creating a separate Power Distribution seg-
ment, ABB intends to take full advantage of
these growth opportunities now and in the
future.
Power Distribution focuses on the products,
solutions and services to distribute electricity
locally to end users. Our service offering
also includes business management software
to operate electricity trading systems. Our
customers are the utilities that “manage the
wires,” commercial institutions and industrial
customers, such as chemical, automotive
and pulp and paper companies. They are local
communities, building contractors, big and
small customers, global and local.
But despite their differences, they want the
same things – innovative technology with
more functionality and built-in intelligence,
flexible turnkey solutions, global quality stan-
dards, and a competitive cost. ABB strives to
meet these demands quickly in all of its
markets. For example, ABB won a long-term
contract to supply electricity to the London
underground, a traffic system that carries more
than 700 million passengers a year. In the
Cayman Islands, ABB has entered into a seven-
year strategic alliance with the local utility to
expand the local electricity distribution system,
including the design and installation of sub-
stations and related systems. In Mexico, ABB
is delivering a distribution substation to the
Mexican Petroleum Company (PEMEX) on
a turnkey basis at its Dos Bocas sea terminal
on the Gulf of Mexico.
Deregulation in the power sector means allow-
ing consumers to choose from whom they
want to buy electricity, and under what condi-
tions. That opens opportunities for power
companies to trade electricity like a commod-
ity in an open market. ABB is at the forefront
of this development, supplying the business
management software that allows power gen-
erators to feed data on electricity availability
and price into a central exchange system.
Power consumers can then choose from whom
they wish to purchase their electricity. ABB
has delivered electricity trading systems to the
U.S. state of California as well as to customers
Power Distribution
“We work together with
our customers to help
them meet the chal-
lenges of fast-changing
privatized and deregu-
lated markets.”
Sune Karlsson,
Power Distribution
segment head
1 2
15
in Singapore and Australia, and played a key
role in the system recently launched in the
U.K. It’s a market with good growth potential.
As competition increases, power grid cus-
tomers need precise information about how
cost-effectively their networks are functioning.
They need to find and correct problems
quickly, reliably and at competitive costs. They
need software that integrates operational in-
formation into a management system that cov-
ers all aspects of their business, from outage
control to billing. At the same time, more cus-
tomers are outsourcing operations such as
engineering, construction, service and retrofit.
As a result, when they place an order, they
want suppliers who can put together a com-
plete package, including financing and
business consulting services. The creation of
new business areas called T&D Service and
Support (part of the Power Transmission seg-
ment but serving both the Transmission and
Distribution segments) and Distribution
Systems is aimed at tapping these new oppor-
tunities.
Looking ahead, ABB is determined to expand
its position in the electrical distribution busi-
ness. We offer the wide range of system solu-
tions that competitive customers are looking
1. Single-phase distribution transformers, USA 2. New medium-voltage switchboard3. Power distribution, London Underground, UK 4. Rural electrification, Americas
for, both in new equipment and upgrading and
servicing existing installations. We have
economies of scale in technology and product
development that allow us to expand that
product line and bring more innovative prod-
ucts to market quickly. Our global presence
means we can deliver products, solutions and
services to both global and local customers,
no matter where they are.
Most importantly, we work together with our
customers to help them meet the challenges of
fast-changing privatized and deregulated mar-
kets. We can help them anticipate change and
shape their new roles in the markets of the
future.
Business Areas in the Power Distribution Segment
Orders Received1 1998 1997(US$ in millions)
Distribution Systems 753 716
Distribution Transformers 845 887
Medium-Voltage Equipment 1,154 1,141
Other(not assigned to specific Business Area) – –
Intra-Segment transactions – 80 – 80
Total 2,672 2,664
Segment Activities:
Solutions and systems fordistributing energy to rural,urban and industrial cus-tomers as well as for airportinstallations
Distribution transformers
Products for distributionof electrical energy includingmedium-voltage switch-boards, apparatus and pre-fabricated factoryassemblies
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
98 2,672
97 2,664
96 2,932
95 2,933
94 1,933
98 2,607
97 2,647
96 2,847
95 2,419
94 1,882
98 179
97 159
96 163
95 107
94 82
3 4
16
Automation
With the creation of a new Automation
Segment and the acquisition of Elsag Bailey,
ABB is now signalling its ambition to further
strengthen its leading global position in this
growth business.
In Automation we serve customers in almost
every industrial sector and country in the
world. Our results in 1998 reflect this mix of
business cycles and regional development.
Demand was lower in many industries as com-
modity prices fell, but was stable or higher in
oil, gas and petrochemicals and in the marine
sector. Demand was mixed in Europe and
lower in the Americas. Industrial investments
in Asia stabilized at a low level. Overall, orders
and earnings were lower.
Managing in real time
The backbone of our process automation
business is the Advant® OCS (Open Control
System). Advant monitors and controls a
wide range of industrial processes, such as the
milling of pulp and paper, steel or textiles;
oil, gas and chemical refining; food processing;
manufacturing of products from pharma-
ceuticals to automobiles; and the production,
transmission and distribution of electricity.
Advant also allows customers to integrate their
production systems with their enterprise,
resource and planning (ERP) systems, provid-
ing a link to ordering, billing and shipping. By
linking the Advant OCS with ABB instrumenta-
tion and measurement systems and a full range
of drives – devices that control the speed of
industrial motors – customers can manage the
entire manufacturing and business process in
real time, thereby improving productivity and
quality.
We demonstrated our full system capabilities
in 1998 with an order to deliver automation
platforms and drive systems to the world’s
largest paper mill, the US$ 1 billion Asia Pulp
and Paper facility near Shanghai, China.
The delivery includes a total of more than 150
operator and process stations, electrification
and drives for three paper machines, and
an ABB Smart AdvisorTM system that monitors
the paper-making process – at 4,500 different
points in one paper machine – and automati-
cally advises machine operators of potential
problems and how to correct them.
ABB is the world’s largest supplier of AC
(alternating current) drives, which control the
speed of electrical motors. We continued to
introduce new products in 1998 to help cus-
tomers improve energy efficiency and reduce
operating costs. There are significant growth
“Economies of scale
from our broad product
range and global scope
will mean greater value
to our customers and
shareholders.”
Jörgen Centerman,
Automation segment
head
1 2
17
opportunities, especially in the microdrives
used to control small motors, which are used
almost universally in industry to run pumps
and fans. Some 30 million small motors
are sold each year without any form of speed
control. ABB has targeted that market with
a full line of microdrives that make small
motor speed control economically more attrac-
tive.
ABB is also the world’s largest supplier of
flexible automation and industrial robotics
systems. With an established presence in the
global automotive market, ABB has now
broadened its customer base into the food
processing and pharmaceutical industries.
New products in 1998 supported that expan-
sion. One is the FlexPicker robot used in
so-called “pick-and-place” processes, such as
sorting and packaging foods, medical or
hygiene products. Operating at high speed
and programmable to handle a variety of dif-
ferent products, the FlexPicker provides cus-
tomers with huge improvements in flexibility,
operating costs and plant safety.
The acquisition of Elsag Bailey was the biggest
in ABB’s history and positions the company as
the world leader in every major market. ABB
also acquired U.K.-based August Systems, and
Alfa Laval Automation, headquartered in
Sweden.
A major focus of our new Automation segment
will be to gain the full economies of scale
offered by our broad product range and our
global scope. Synergies in product develop-
ment, supply management, production and
distribution will allow us to expand our tech-
nology lead, manage costs even better, deliver
higher quality and, in the end, greater value
to our customers and our shareholders.
1. Azipod marine propulsion system 2. Alpha Stars meter installation, USA3. Panipat refinery, India 4. Interstand dimension control system, Sweden5. FlexPicker pick and place robot
Orders Received1
(US$ in millions)
98 7,015
97 7,338
96 7,482
95 7,469
94 6,200
Revenues1
(US$ in millions)
98 7,036
97 7,344
96 7,550
95 6,987
94 5,901
Operating Earnings1
(US$ in millions)
98 521
97 646
96 674
95 496
94 382
Business Areas in the Automation Segment
Orders Received 1998 1997(US$ in millions)
Automation Power Products 1,738 1,792
Instrumentation and Control Products 1,265 1,304
Flexible Automation 1,365 1,437
Marine and Turbochargers 663 582
Metals and Minerals 603 689
Petroleum, Chemical andConsumer Industries 314 392
Pulp and Paper 471 605
Utilities 1,150 1,154
Other(not assigned to specific Business Area) 112 80
Intra-Segment transactions – 666 – 697
Total 7,015 7,338
Segment Activities:
Automation power productssuch as drives, motors andpower electronics
Instrumentation and controlproducts such as fielddevices for sensing, control-ling and actuating; analyzers;metering equipment; controland information systems
Flexible automation androbotics products andsystems
Diesel engine superchargers
Application expertise, projectmanagement, and integratedsystem deliveries to marketssuch as electrical and waterutilities, the petrochemical,chemical and consumerindustries, metals and min-ing, pulp and paper, marineand automotive
53 4
18
ABB’s Oil, Gas and Petrochemicals business
enjoyed another year of good growth in 1998.
We saw double-digit growth in operating
earnings, and a significant increase in the order
backlog. We achieved this despite a slow-
down in overall investment by many of our
customers in the face of falling oil prices.
Our technology leadership played a key role
in this result.
For example, ABB has long focused on deep-
water exploration and production technolo-
gies. These make it possible to develop oil and
gas resources in even deeper water than
previously possible. Because of the long-term
nature of many of these developments, they
are less vulnerable to short-term fluctuations in
oil prices.
In the first half of 1999, ABB will complete the
installation of the world’s first commercial
subsea separation and injection system, called
SUBSIS. Located in the North Sea, about 60
kilometers (37 miles) west of Bergen, Norway,
and at a depth of 340 meters (1,130 feet), the
system will separate water from the oil stream,
clean it, and re-inject it into the well to provide
additional pressure used to pump more oil.
By moving the separation plant from a platform
to the seabed, ABB’s solution reduces costs,
improves safety, and enhances oil recovery.
ABB also launched enhancements to its MS-
700TM well-head family to meet the extreme
performance requirements of deep and ultra-
deep waters down to 3,000 meters (9,750 feet).
We are further supporting offshore well
development with a new line of control buoys,
fully equipped with communications systems
to control subsea systems remotely and to
relay operating information back to a central
control base.
On the downstream side – where oil and gas
are refined and processed into other products
– ABB won a US$ 600-million order from a
joint venture between German chemicals com-
pany BASF and Belgian oil and petrochemical
group Petrofina to build the world’s largest
“cracker,” a catalytic chemical reactor used, in
this case, to produce ethylene and propylene –
almost two billion pounds of each per year.
Other large petrochemicals orders included
a 700,000-metric-ton per year ethylene plant
in Saudi Arabia. ABB is also building its
position as a supplier of process technology
to producers of reformulated gasoline, used
to reduce harmful exhaust emissions. Through
a joint venture with Chemical Research &
Licensing Company of the U.S., called Catalytic
Oil, Gas and Petrochemicals
“We intend to build our
technology leadership
and further strengthen
our position in this
dynamic and high-
potential market.”
Gorm Gundersen,
Oil, Gas and Petro-
chemicals segment
head
1 2 3
19
Distillation Technologies, ABB is supplying
technologies to a gasoline desulfurization
unit in Louisiana and a number of gasoline
refineries in Mexico operated by PEMEX, the
state-owned oil company.
Building partnerships
Strategic partnerships are an important way to
ensure growth in this technology-intensive
global business. ABB established other long-
term partnerships to develop, license and
market various petrochemical processes with
U.S. oil and gas company Exxon, the Royal
Dutch/Shell Group, and Criterion Catalyst Co.
of the U.S. We also entered into a long-term
partnership with Russian oil and gas group
Gazprom. The agreement covers the manufac-
ture of systems and equipment in natural gas
exploration, recovery, oil and gas processing,
transport and storage, including technology
transfer. It also involves the joint development
of oil and gas projects, both in Russia and in
other countries, such as the US$ 170-million
order to build compressor stations in Poland
for the Yamal gas pipeline running from Russia
to Germany.
ABB aims to meet its growth targets in the oil,
gas and petrochemicals business through a
combination of organic growth and targeted
acquisitions. ABB has made a number of
strategic acquisitions in this area in recent
years and continued the trend in 1998 with the
purchase of the deep water division of U.S.-
based Han Padron Associates, a world leader
in floating systems technology for deep water.
In 1999, ABB expects overall growth in the oil,
gas and petrochemicals markets to slow from
very high levels as customers continue to adjust
to oil prices near 25-year lows. However,
significant growth opportunities remain, espe-
cially where our technologies can help cus-
tomers improve their profitability. We intend to
build our technology leadership and further
strengthen our position in this dynamic and
high-potential market.
1. High integrity pipeline protection system 2. Horizontal Tree, UK3. Ethylene plant, Indonesia 4. Subsea separation and injection system5. Petrochemical refinery, China
Business Areas in the Oil, Gas and Petrochemicals Segment
Orders Received 1998 1997(US$ in millions)
Oil, Gas and Petrochemicals 3,324 3,126
Other(not assigned to specific Business Area) – –
Intra-Segment transactions – –
Total 3,324 3,126
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
98 3,324
97 3,126
96 2,596
95 1,952
94 1,553
98 2,860
97 2,396
96 2,045
95 1,470
94 1,233
98 175
97 123
96 114
95 50
94 15
Segment Activities:
Refineries and petrochemical plants
Subsea production systems
Floating production systems
Pressure-containing equipment
Maintenance and modification of offshore andonshore facilities
4 5
20
ABB’s Products and Contracting Segment de-
signs, manufactures and installs a wide range
of electrical and mechanical products and
systems used in industrial and commercial
facilities, from light switches, push buttons,
heating and air conditioning to self-regulating
indoor environmental controls, security and
energy management systems, even facility
management. Our contracting activities focus
on buildings, industrial plants and certain
outdoor installations, such as telecommunica-
tions networks and airports. In addition, we
provide full service, maintenance and repair
programs to customers in most industrial
sectors. We work very closely together with
our customers – on any given day, an average
of more than 20,000 of our people are on site
with our customers.
We improved our results in 1998 in a mixed
market. Although growth slowed somewhat in
some of our products and contracting markets,
overall demand was higher than the year
before in Western Europe, the Middle East and
Africa. In the Americas, demand was slightly
lower. Orders were also down in Asia, in line
with the economic situation in the region.
Contracting is often a very local business
with many relatively small local or regional
players. That opens an opportunity for ABB,
with both a strong local presence and access
to a very wide product scope and global
economies of scale. For example, we com-
pleted work on the new Gardermoen airport
in Oslo, Norway, in 1998, where we were
responsible for supplying and installing the
electrical and ventilation systems, lighting,
the control system for baggage handling, secu-
rity and a waste disposal system. ABB is also
handling the airport’s longer-term service and
maintenance.
Intelligent systems
In their highly competitive businesses, our cus-
tomers expect suppliers to deliver products
that can do more than ever, with built-in intel-
ligence, self-regulating, extremely energy
efficient. That makes the product side of this
business technology intensive. ABB met this
challenge in 1998 and consolidated its position
as a market leader with the launch of a num-
ber of new products, such as INSUM, an intel-
ligent motor protection, monitoring and
communication system. INSUM uses advanced
electronic sensoring and feedback systems to
control power distribution to industrial motors,
ensuring they run at optimal efficiency and
minimizing downtime. Customers for this and
similar systems in 1998 included a pulp and
Products and Contracting
1 2
“We strive to offer
superior value to our
customers and a
challenging and inno-
vative environment for
our people.”
Armin Meyer, Products
and Contracting
segment head
21
paper mill in France and a coal-fired power
plant near Leipzig, Germany.
ABB has also developed a high-performance
fan for mines and tunnels. The fan blades are
made of a special high-strength material that
can withstand the very high speeds required to
maintain efficient air circulation in such
demanding environments. The first significant
orders were taken in the U.K. and Singapore.
ABB has pioneered the Full Service partner-
ship concept, a long-term agreement in which
ABB takes over design, execution and manage-
ment of all of our customer’s service and
maintenance activities, often including supply
of new equipment. In fact, the goal of these
partnerships is to significantly improve the effi-
ciency and productivity of our customers’
processes. ABB now has 2,500 service experts
working with more than 100 major full-service
customers in different industries around the
world. New customers include Krems Chemie
in Austria and Hoechst in Germany. Krems
Chemie is one of Austria’s biggest chemical
companies, specialized in the production of
natural and artificial resins. Krems transferred
its entire service team into a new 50-50 joint
venture company with ABB, using ABB man-
agement and service expertise.
1. Electric overload relay 2. Oslo (Gardermoen) Airport, Norway3. Full service partnership with Hoechst, Germany 4. Natural History Museum, UK
Investments were made to enhance our opera-
tions in key areas. We set up a fully automated
line for fan manufacturing in Finland and
started a production line for air handling units
in Taiwan. The strategy to expand the global
network of service workshops continues, with
acquisitions during 1998 in Australia, Thailand
and Zimbabwe.
By taking advantage of our global sales and
distribution network, strong local presence in
key markets and our technological leader-
ship, we strive to offer superior value to our
customers and a challenging and innovative
work environment for our people.
Business Areas in the Products and Contracting Segment
Orders Received1 1998 1997(US$ in millions)
Contracting 3,023 3,059
Low-Voltage Products and Systems 2,131 2,142
Air Handling Equipment 514 545
Service 777 751
Other(not assigned to specific Business Area) 232 203
Intra-Segment transactions – 213 – 212
Total 6,464 6,488
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
98 6,464
97 6,488
96 7,069
95 6,949
94 6,082
98 6,385
97 6,381
96 6,969
95 6,861
94 5,903
98 419
97 399
96 370
95 422
94 263
Segment Activities:
Design, installation andmaintenance of electricaland ventilation systems
Complete infrastructuresystems for industrial andcommercial buildings
Low-voltage products andsystems to protect, switchand control. Electrical instal-lation material
Industrial fans and ventilationproducts and systems
Service, repair of industrialequipment and maintenancemanagement
3 4
22
The volatility of world financial markets in
1998 provided both challenges and opportuni-
ties for ABB’s Financial Services segment,
whose business focuses on supporting sales
and providing financing and risk management
tools for the Group’s industrial segments. On
balance, the segment was able to improve
its results and reported a record income before
taxes.
The challenges resulted from the financial
turmoil in Southeast Asia and Russia and con-
cerns that it could spread to other emerging
markets. That delayed investments in some
large infrastructure projects as customers
adapted to the financial uncertainty. It also
made it harder to find partners willing to
share financial risks.
New Opportunities
At the same time, it opened opportunities for
suppliers like ABB who can show their cus-
tomers how to overcome the financial hurdles.
Continued privatization and deregulation
and the corresponding growth of independent
power producers (IPPs) increased demand for
innovative financing even further. ABB
Financial Services met these challenges and
helped secure a number of large projects
in 1998, both in emerging and mature markets.
The biggest single order of the year for ABB
was the 1,100-megawatt oil-fired power
plant at Shoaiba, Saudi Arabia, valued at more
than US$ 800 million. ABB structured the
13-year financing package, which was the
biggest financing of its type ever done in
the Saudi electricity sector. The package
included a deferred payment scheme for the
customer.
ABB also arranged flexible financing for the
288-megawatt gas-fired Azito power plant in
Ivory Coast, Africa. Our financing partners
included the International Finance Corporation
of the U.S., the U.K.-based Commonwealth
Development Corporation, the World Bank’s
International Development Agency, the African
Development Bank, bi-lateral lenders in the
Netherlands and Germany, and a commercial
lender from France.
ABB arranged or contributed to the financing
of a number of major projects in Latin America
in 1998. In Mexico, ABB was one of the first
companies to use a bond issued in the U.S. for
a project in an emerging market to help
finance a 484-megawatt gas-fired combined-
cycle power plant at Monterrey. Also in
Mexico, ABB provided debt financing to
secure a project to build or expand 22 substa-
Financial Services
“The need for private
sector financing
will continue to grow
worldwide.”
Jan Roxendal,
Financial Services
segment head
1 2
23
1. Trading room, Sweden 2. Azito power plant, Ivory Coast3. Jorf Lasfar power plant, Morocco 4. Regional Treasury Center, Singapore
Operating Earnings(US$ in millions)
98 403
97 297
96 323
95 257
94 214
Business Areas in the Financial Services Segment
Income before Taxes 1998 1997(US$ in millions)
Treasury Centers 113 63
Leasing and Financing 56 56
Insurance 110 113
Structured Finance 20 19
Energy Ventures 54 46
Investment Management – 1
Holding Activities & Eliminations* 50 – 1
Total 403 297
* 1998 figure reflects the sale of the Investment Management operations.
tions for the Mexican state electrical utility.
Furthermore, ABB contributed to financing
power projects in Chile, Brazil and Argentina.
Growing new markets
Our financial expertise supports ABB’s expan-
sion into promising new markets. In power
generation, ABB can lease small power plants
to individual factories or commercial buildings,
allowing the customer to avoid large upfront
capital investment. In a deregulated environ-
ment, such solutions can be an economically
attractive alternative to buying power from
a utility. In the Automation segment, we will
offer more comprehensive lease structures to
our robotics customers. We expect to increase
our financing activities in this segment and
in Oil, Gas and Petrochemicals to reflect their
good growth potential.
The volatility of financial markets in 1998 also
provided trading opportunities and resulted
in higher earnings for our treasury centers in
Sweden, Switzerland, Norway and the U.S.
The new regional Treasury Center Asia Pacific
opened in Singapore and will serve our
companies in Asia and provide ABB with
complete coverage of financial markets in all
time zones. The insurance business, mean-
while, expanded its presence in Switzerland
to focus on political risk insurance, often a
key element of financing emerging market
projects.
While we expect no substantial economic
rebound in Southeast Asia in 1999, the need
for private sector financing will continue to
grow worldwide. India and China remain very
important markets in this regard. After some
years of stagnation, IPPs in the United States
have emerged as a growth market. Latin
America will also continue to offer good op-
portunities for private financing. With its
global scope and broad expertise in so many
different businesses, Financial Services will
continue to make the most of the many growth
opportunities in the years ahead.
Segment Activities:
Management of Group liquidassets and borrowings,positions on foreignexchange and money mar-kets within predefined risklimits
Financial consulting services
Asset backed financing,large financial packages,financing for investmentsand financial advisoryservices
Traditional reinsurance,financial insurance/reinsur-ance and insurance broker-age
Project and export financeadvisory services, andcountertrade
Project underwriting anddebt financing
Project development and equity financing of IPPprojects
3 4
24
Technology is a main driver of growth and
profitability at ABB. Innovations allow us to
deliver more value to our customers, open
up new growth markets and, by improving the
efficiency and environmental performance
of our products, to contribute to sustainable
development on a global level and help our
customers become more competitive.
With some 20,000 scientists and engineers
around the world, and R&D expenditures of
US$ 2.5 billion a year – about 8 percent of
revenues – ABB is committed to building and
maintaining its technology leadership.
A few highlights show the span of our innova-
tion and some of our achievements in 1998:
■ The first commercial application of our high-
voltage generator, the POWERFORMER®,
that generates electricity at any level needed
without a step-up transformer. It was
successfully taken into operation in Porjus,
northern Sweden in 1998. We continue
to spread this technology into many other
areas of our business.
■ By using the most advanced high-power
semiconductor devices, electricity can
be supplied with the right quality and lowest
possible losses. In 1998, ABB inaugurated
a state-of-the-art production line for these
devices in Lenzburg, Switzerland. Intensive
research will continue in the emerging area
of silicon carbide technology.
■ Our strong growth in the application of
robots in flexible automation continued in
1998 with the introduction of our high-
speed FlexPicker® robot, able to carry out
100 operations a minute, one of the fastest
robots on the market today.
Part of our strength lies in our ability to
bring together people from around the globe
to focus on the technology needs of our
customers. Our scientists and engineers work
together in virtual teams linked through our
global computer network, or in one of our nine
corporate research labs in the U.S. and
Europe, or together with our customers.
Partnerships with suppliers and with outside
institutions, such as universities, also play
a key role in our ability to take ideas from the
drawing board to the market quickly.
We aim to be among the leading knowledge-
based companies of the future, building on
the depth and breadth of our expertise and the
diversity of our people to deliver products,
systems and complete solutions that make our
customers more successful.
Research and Development 1. Efficient cooling in gas turbines2. Useful products from waste3. Light waves detect voltage and current
For more information about
R&D at ABB, please see our
1998 Technology Report,
available from ABB Corporate
Communications (please
see back cover for contact
information).
1 2 3
25
Preparing for the Millennium
Because ABB serves a wide range of cus-
tomers using software products to control
many aspects of their operations, we take
active steps to ensure that our products are
either “Year 2000 compliant” or that their
impact on our customers is minimized.
The “Four Pillars” Concept
The ABB “Four Pillars” Concept is based on a
close partnership with our customers and ABB
has about 1,000 people working on the Year
2000 (Y2k) question at customer plants around
the world. The concept consists of four impor-
tant steps to support a smooth transition into
the year 2000:
Investigation: We study the Y2k behavior of
the products and systems where problems
could occur in our customers’ plants and
develop methods to improve their Y2k readi-
ness.
Inventory: We carry out an inventory of our
customers’ products, both from ABB and from
other suppliers, to get a view of potential
problems.
Developing remediation methods: We set up
pilot projects based on different kinds of
plants, such as paper mills or power plants, to
test their Y2k compliance and to develop ways
to correct problems that arise. By applying
tested solutions to similar plants, we speed up
the remediation process.
Training: We train large numbers of our cus-
tomers’ personnel and our own in the remedi-
ation methods developed during the pilot
projects. This know-how is quickly cascaded
out into our customers’ businesses to support
efforts to meet their Y2k deadlines.
With respect to products, systems and
processes in operation within ABB we are
applying the same systematic approach to
make sure we can continue serving customers
and maintaining reliable administrative,
accounting and reporting systems over the Y2k
transition period.
ABB’s assessment is that the Y2k issue and
our related efforts will not adversely affect our
production, sales or other activities nor our
ability to provide the information needed by
our various stakeholders.
The “Y2k Problem” or “Millennium Bug” refers to a characteristic of older software-based products that use calendar datesdesignated by only two digits, such as “98” rather than “1998.” As a result, at the turn of the century such software mayread “00” not as “2000” but as “1900.” The Millennium Bug can affect not only high-tech applications but also basic infra-structure such as manufacturing, inventory maintenance, communications, and any other date-specific functions. It canbe corrected by re-programming or replacing the relevant systems.
What is the Millennium Bug?
26
ABB delivers power and industrial infrastruc-
ture all over the world. Our engineering is at
the heart of almost every industrial activity.
ABB systems control resource consumption in
office towers, schools and factories. So if
we can make things more efficient, and more
efficiently, and apply those improvements
around the world by sharing technology, we
can make a real contribution to sustainable
development.
Much of our research and development is
related to improving the environmental impact
of our products and systems:
■ Gas treatment systems that capture carbon
dioxide, a major greenhouse gas, and then
recycle it for other uses.
■ Microdrives that reduce the electricity
consumption of small industrial motors by
up to 60 percent.
■ High-efficiency, low-emission gas turbines.
Because of their widespread use, cutting
emissions and improving efficiency by even
a single percentage point can have a signifi-
cant impact on the global environment.
ABB has integrated environmental goals into
the strategic planning of its global business
areas. They will make an Environmental Decla-
ration by the end of 1999, identifying goals to
improve for their environmental performance.
ABB also has an ambitious program to
improve its own environmental performance.
We are implementing an environmental man-
agement system according to ISO 14001 in our
more than 700 facilities worldwide. As of the
end of 1998, 449 sites had implemented this
standard. The remainder aim to reach that goal
during 1999.
Sustainable development will never be
achieved unless we all work together. ABB
participates in a number of international
partnerships, such as the World Commission
on Dams, whose goal is to find a balanced
way to assess the impacts of large hydro dams.
ABB continued to support the Massachusetts
Institute of Technology (MIT) joint program
on science and policy of global change, the
Alliance for Global Sustainability and its pro-
grams in China, and the one gigaton CO2
reduction program of the World Energy
Congress.
ABB fully recognizes its responsibility to work
towards sustainable development and is com-
mitted to using its global presence, technologi-
cal know-how and the creativity of its people
to take on that challenge.
Environment
ISO 14001 Implementation
98 449
97 150
96 50
95 15
For more information about
ABB’s environmental per-
formance in 1998, please
see our Environmental
Management Report, avail-
able from ABB Corporate
Communications (please
see back cover for contact
information).
27
Group Information and Financial Summary
ABB Asea Brown Boveri Group1,000 Companies
33 Business Areas organized into7 Business Segments
ABB Asea Brown Boveri Ltd
Zurich
Switzerland
ABB AGBaden
Switzerland
50%
ABB ABVästeråsSweden
50%
ABB AB Shareholders ABB AG Shareholders The complete ABB Group and Parent
Companies Annual Report 1998 consists of
this Operational Review and a Financial
Review. Copies of the Financial Review may
be obtained from ABB Investor Relations
at the address printed on the back cover of
this report.
ABB companies throughout the world report
their financial results in local currencies,
which are then translated to U.S. dollars to
establish the ABB Group’s consolidated
accounts.
28
ABB Board of Directors
Percy N. Barnevik (born 1941) Chairman
Chairman: ABB AB, Investor, Sandvik
Board Member: General Motors
Robert A. Jeker (born 1935) Vice-Chairman
Chairman: ABB AG, Batigroup, Feldschlösschen-HürlimannGeorg Fischer, Messe Basel, Stratec, Swiss Steel
Board Member: Neue Zürcher Zeitung
Former President: Credit Suisse
Gerhard Cromme (born 1943)
CEO: Fried. Krupp AG Hoesch-Krupp
Board Member: ABB AG, Allianz, Suez Lyonnaise des Eaux,Veba, Volkswagen
Jürgen Dormann (born 1940)
CEO: Hoechst
Board Member: ABB AG, Allianz, IBM Corporation
Yotaro Kobayashi (born 1933)
Chairman and Co-CEO: Fuji XEROX
Board Member: Xerox Corporation
Japanese Chairman: The Trilateral Commission
Vice Chairman: International University of Japan, Keizai Doyokai (Japan Association of Corporate Executives)
Donald H. Rumsfeld (born 1932)
Chairman: Gilead Sciences
Board Member: ABB AB, Gulfstream Aerospace, Kellogg,Tribune Company
Former U.S. Ambassador to NATO, U.S. Secretary of Defense, CEO of G.D. Searle & Co., and CEO of General Instrument Corp.
Agostino Rocca (born 1945)
President and CEO: Techint Group
Chairman: Siderar, Techint S.A., Techint Engineering Co.,Tecpetrol
Deputy Chairman: Siderca
Advisory Member: New York Stock Exchange (NYSE), Praxair, Santander Group
Edwin Somm (born 1933)
President: The Association of Swiss Engineering Employers, The Swiss Association of Machinery Manufacturers
Board Member: ABB AG, Georg Fischer, SIG, Swiss Steel
Peter D. Sutherland (born 1946)
Chairman and Managing Director: GoldmanSachs International
Co-Chairman: BP Amoco
Board Member: ABB AB, Ericsson, Investor
Former Director-General GATT and WTO, Former EU Commissioner
Björn Svedberg (born 1937)
Board Member: ABB AB, Gambro, Investor, SAAB, SAGA Petroleum
Lodewijk C. van Wachem (born 1931)
Chairman: Royal Dutch Petroleum
Board Member: Akzo Nobel, ATCO, Bayer, BMW, IBM, Philips, Zurich Financial Services
Former President and CEO: Royal Dutch/Shell
Beat Hess, Secretary to the Board
Auditors
KPMG Klynveld Peat Marwick Goerdeler SAZurich
Ernst & Young AGZurich
Proposed Changes in the ABB Board of Directors
Messrs. Björn Svedberg and Lodewijk C. vanWachem will resign from the ABB Group Board ofDirectors at the Annual General Meeting on March 18,1999. The Board thanks them for their outstandingcontributions to the company.
The Board intends to propose to the shareholders onMarch 18, 1999 to newly elect to the ABB Group BoardMr. Martin Ebner, Chairman of BZ Group Holding andPresident of BZ Bank, Switzerland and Mr. JacobWallenberg, Chairman of Skandinaviska Enskilda Bankenand member of the management group of Investor AB,Sweden. In addition, the President and CEO of the ABBGroup, Mr. Göran Lindahl is proposed to join the Board.
Further, the remaining members will be proposed forreelection to the ABB Group Board.
The ABB Group has also declared its intention to reelectMr. Percy N. Barnevik as Chairman of the ABB GroupBoard and Mr. Robert A. Jeker as Vice-Chairman.
29
Group Executive Committee
Göran Lindahl (born 1945) President and Chief Executive OfficerCorporate Staffs and Functions: Audit, Corporate Communications,
Environmental Affairs, Global Processes, International Consulting, Investor Relations, Legal Affairs, Management Resources
Jörgen Centerman (born 1951) Executive Vice PresidentBusiness Segment: Automation
Renato Fassbind (born 1955) Executive Vice PresidentBusiness Function: Chief Financial OfficerCorporate Staffs: Accounting, Mergers and Acquisitions,
Real Estate, Reporting and Control,Risk Management and Insurance,Taxes and Finance
Alexis Fries (born 1955) Executive Vice PresidentBusiness Segment: Power Generation
Gorm Gundersen (born 1944) Executive Vice PresidentBusiness Segment: Oil, Gas and Petrochemicals
Sune Karlsson (born 1946) Executive Vice PresidentBusiness Segments: Power Transmission, Power Distribution
Armin Meyer (born 1949) Executive Vice PresidentBusiness Segment: Products and Contracting
Jan Roxendal (born 1953) Executive Vice PresidentBusiness Segment: Financial Services
Senior Corporate Officers
Markus Bayegan (born 1944) Research and Development, Technology Evaluation
Tomas Ericsson (born 1935) Corporate Projects/Finance and Administration
Management
30
Corporate Staffs and Functions
Accounting, Reporting and Control Jimmy Yap
Audit Adelheid Schilliger
Corporate Communications Björn Edlund
Government Affairs andMultilateral Banks Richard O’Toole
Environmental Affairs Jan Strömblad
Global Processes Eric Elzvik
International Consulting Bengt Skantze
Investor Relations Manfred Ebling
Legal Affairs Beat Hess
Management Resources Arne Olsson
Mergers and Acquisitions Eric Lint
Real Estate Walter Stücklin
Risk Management and Insurance Charles Salek
Taxes and Finance Alfred Storck
Corporate Research & Development
– in Finland Juhani Pylkkänen
– in Germany Kurt-Volker Boos
– in Italy Giandomenico Testi
– in Norway Jan Bugge
– in Sweden Harry Frank
– in Switzerland Maurice Campagna
– Corporate Programs Gernot Gessinger
Business Area Managers
Power Generation
Gas and Combi-Cycles John Gaskell
Steam Power Plants Howard Pierce
Environmental Systems Howard Pierce
Power Plant Systems Leif Nilsson
Power Plant Service Walter Gränicher
Nuclear Systems Michael F. Barnoski
Power Segment Manufacturing Franz Killer
Power Transmission
High-Voltage Products and Substations Josef Dürr
Power Transformers François Gabella
Cables Petter Arvidson
Power Lines Bo-Göran Persson
Power Systems Bo Normark
T&D Service and Support Joachim Schneider
Power Distribution
Distribution Systems Kurt Håkansson
Distribution Transformers Peter Smits
Medium-Voltage Equipment Andrew Eriksson
Automation
Automation Power Products Jouko Karvinen
Instrumentation andControl Products Richard McAllister
Flexible Automation Per Otto Dyb
Marine and Turbochargers Andreas Fokkens
Metals and Minerals Jonny Axelsson
Petroleum, Chemicals and Consumer Industries Chester Mroz
Pulp and Paper Dinesh Paliwal
Utilities Michael Hirth
Oil, Gas and Petrochemicals
Oil, Gas and Petrochemicals Gorm Gundersen
Products and Contracting
Low-Voltage Products and Systems Tom Sjökvist
Contracting Rolf Karg
Service Jan Coene
Air Handling Equipment Ulf Bennet
Financial Services
Energy Ventures Peter Giller
Insurance Göran Thorstensson
Leasing & Financing Johan Löwenhielm
Structured Finance Lennart Blecher
Treasury Centers
– in Northern Region Peter Carlsson
– in Southern Region Thomas Meyer
31
Country Managers
Europe
Austria Rudolf Petsche
Benelux Countries Jacques de Raad
Czech Republic Frank Duggan
Denmark S. A. Koch-Christensen
Estonia Bo Henriksson
Finland Matti Ilmari
France Max Abitbol
Germany Horst Dietz
Greece Costas Cosmadakis
Hungary Peter Hegedüs
Ireland Diarmuid O’Sullivan
Italy Umberto Di Capua
Latvia Rolf A. Hellström
Lithuania Vytautas Niedvaras
Norway Øivind Lund
Poland Miroslaw Gryszka
Portugal Carlos Dias
Romania Peter Simon
Russia Michel Tchesnakoff
Slovak Republic Bernhard Koehler
Spain Fernando Conte
Sweden Anders Narvinger
Switzerland Alois Sonnenmoser
Turkey Alfred Barth
Ukraine Åke Davidsson
United Kingdom Eric Drewery
Middle East and Africa
Dubai/UAE Ulf G. Strömbäck
Egypt Gian Francesco Imperiali
Israel Jacob Shani
Ivory Coast Koen Beckers
Morocco Jean-Claude Lanzi
Nigeria Wolfgang Pfeiffer
Saudi Arabia Bengt Andersson
South Africa Carlos Poñe
Tanzania Bo Erik Lansryd
Zimbabwe Vittorio Semilia
Americas
Argentina Ulises de la Orden
Bolivia Nelson Izquierdo
Brazil Cedric Lewis
Canada Paul Kefalas
Chile Victor Ballivian
Colombia Napoleao Olmedo
Ecuador Julio Barriga
Mexico Benny Olsson
Peru Eduardo Soldano
USA Peter S. Janson
Venezuela Oswald Weinreich
Asia
Australia Tommie Bergman
China/Hong Kong SAR Rolf Schaumann
India Kumar Kaura Kuldip
Japan Lave Lindberg
Korea Håkan Borin
Malaysia Zubir Zainal Abidin
New Zealand Tommie Bergman
Philippines Thomas Ng
Singapore Paul Ziegler
Taiwan Felix Vest
Thailand Terawat Thisabhiramya
Vietnam Erik Nylund
32
Consolidated Financial Statements
Year ended December 31 (US$ in millions) Notes 1998 1997
Revenues 30,872 31,265
Material expenses – 13,606 – 14,232
Personnel expenses – 9,044 – 9,498
Other expenses – 5,085 – 4,973
Changes in work in progress and finished goods – 132 180
Depreciation of fixed assets – 926 – 997
Unusual items 32 – 608
Operating Earnings after Depreciation 2,111 1,137
Earnings from equity accounted companies 0 2
Dividend income 25 10
Interest income 462 325
Interest expense – 734 – 616
Exchange differences 1 – 5
Income before Taxes 1,865 853
Income Taxes – 543 – 258
Net Income before Minority Interests 1,322 595
Minority interests – 17 – 23
Net Income 1,305 572
Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998except for the operating results up to the third quarter.
Main exchange rates used in the translation of the Financial Statements
ISO Average Year-end Average Year-endCodes 1998 / US$ 1998 / US$ 1997/ US$ 1997/ US$
Australian Dollar AUD 1.58 1.63 1.35 1.53
Canadian Dollar CAD 1.48 1.55 1.39 1.43
Chinese Yuan Renminbi CNY 8.28 8.28 8.29 8.28
Danish Krone DKK 6.70 6.38 6.56 6.82
Finnish Markka FIM 5.35 5.09 5.16 5.42
French Franc FRF 5.90 5.62 5.79 5.99
German Mark DEM 1.76 1.68 1.72 1.79
Indian Rupee IDR 41.13 42.50 36.39 39.21
Italian Lira ITL 1,736.11 1,658.37 1,694.92 1,760.56
Norwegian Krone NOK 7.54 7.61 7.03 7.35
Polish Zloty PLN 3.50 3.50 3.26 3.51
Pound Sterling GBP 0.60 0.60 0.61 0.60
Spanish Peseta ESP 149.43 142.67 145.58 151.68
Swedish Krona SEK 7.95 8.13 7.61 7.90
Swiss Franc CHF 1.45 1.38 1.44 1.45
European Currency Unit (ECU) XEU 0.89 0.86 0.88 0.91
Income Statement
33
Consolidated Financial Statements
December 31 (US$ in millions) 1998 1997
Assets
Current Assets
Cash and cash equivalents 7,790 5,790
Trade receivables 6,173 5,656
Inventories 4,444 4,907
Other current assets 4,463 4,283
Total Current Assets 22,870 20,636
Fixed Assets
Financing receivables 2,145 1,815
Shares and participations 750 385
Intangible assets 1,927 1,981
Construction in progress 173 242
Machinery and equipment 2,428 2,479
Land and buildings 2,090 2,246
Total Fixed Assets 9,513 9,148
Total Assets 32,383 29,784
Liabilities and Equity
Current Liabilities
Trade payables 5,225 4,566
Provisions 4,286 5,233
Other current liabilities 4,963 5,006
Short-term loans 3,409 1,715
Total Current Liabilities 17,883 16,520
Non-Current Liabilities
Advances from customers 2,646 2,612
Medium- and long-term loans 2,808 2,511
Pension liabilities 1,771 1,748
Deferred taxes 1,001 790
Total Non-Current Liabilities 8,226 7,661
Minority Interests 315 320
Stockholders’ Equity
Share capital 2,087 2,087
Restricted reserves 1,103 965
Other reserves and retained earnings 1,464 1,659
Net income 1,305 572
Total Stockholders’ Equity 5,959 5,283
Total Liabilities and Equity 32,383 29,784
Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998except for the operating results up to the third quarter.
Balance Sheet
34
Statement of Cash Flows
Consolidated Financial Statements
Year ended December 31 (US$ in millions) 1998 1997
Cash Flow from Operating Activities
Income before taxes1 1,865 853
Adjustments for depreciation of fixed assets 926 997
Adjustments for changes in provisions – 551 546
Adjustments for changes in pension liabilities 35 11
Other adjustments – 149 – 328
2,126 2,079
Changes in operating assets and liabilities:
Changes in trade receivables – 631 – 264
Changes in other current assets – 686 – 754
Changes in inventories 168 – 293
Changes in trade payables 744 650
Changes in other current liabilities (excl. income taxes due) – 46 279
Changes in advances from customers 857 498
406 116
Income Taxes Paid – 428 – 404
Net Cash Flow from Operating Activities 2,104 1,791
Cash Flow Related to Investing Activities
Changes in financing receivables – 300 – 232
Acquisitions (net of cash acquired)2 – 274 – 288
Capital expenditure for tangible fixed assets – 865 – 1,093
Proceeds from divestitures (net of cash disposed)2 60 738
Proceeds from disposal of tangible fixed assets 288 153
Net Cash Flow Related to Investing Activities2 – 1,091 – 722
Cash Flow Related to Financing Activities2
Changes in short-term loans 1,672 – 640
Changes in medium- and long-term loans 286 734
Dividends paid – 507 – 446
Other items2 – 509 – 69
Net Cash Flow Related to Financing Activities2 942 – 421
Effects of Translation Differences on Cash and Cash Equivalents 45 – 411
Net Change in Cash and Cash Equivalents 2,000 237
Cash and cash equivalents – beginning of year 5,790 5,553
Cash and cash equivalents – end of year 7,790 5,7901 Actual interest received/paid does not differ materially from “Interest Income/Expenses” as included in income before taxes, and is thus not explicitly
shown in the above presentation.2 1997 restated to reflect the net amount of cash acquired or disposed.
Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998except for the operating results up to the third quarter.
35
Country Statistics
Revenues1 (US$ in millions unless otherwise stated) Revenues Employeesand Employees
1998 1997 1998 1997
Europe 16,620 17,099 128,051 139,528
Austria 318 302 1,132 1,316
Belgium 283 282 1,364 1,393
Czech Republic 525 319 4,970 5,759
Denmark 505 530 3,608 4,035
Finland 877 845 9,635 9,241
France 574 590 2,740 2,908
Germany 3,313 3,968 23,752 29,138
Italy 1,391 1,203 7,640 8,495
Netherlands 573 467 2,632 2,197
Norway 1,144 1,116 7,603 7,209
Poland 538 526 7,971 7,738
Portugal 148 256 1,110 1,487
Russia 201 207 1,371 1,462
Spain 567 509 3,447 3,810
Sweden 2,140 2,331 24,149 24,293
Switzerland 694 826 11,661 12,483
United Kingdom 1,698 1,784 7,145 9,174
Others 1,131 1,038 6,121 7,390
The Americas 6,640 6,374 32,124 31,647
Argentina 172 177 891 684
Brazil 758 602 4,305 3,718
Canada 363 396 2,266 2,172
Mexico 310 202 2,431 1,227
USA 4,263 4,142 19,725 21,433
Others 774 855 2,506 2,413
Asia 4,474 5,427 27,313 30,912
Australia 622 791 4,731 4,748
China 663 561 4,400 4,525
India 417 511 7,901 9,630
Indonesia 228 615 1,628 1,960
Japan 663 651 940 1,138
Malaysia 225 383 663 880
Philippines 142 243 754 1,470
Singapore 142 163 885 1,071
Thailand 188 351 3,117 3,739
Others 1,184 1,158 2,294 1,751
Middle East and Africa 3,138 2,365 11,744 10,970
Egypt 220 193 2,524 1,954
Saudi Arabia 811 521 1,462 1,189
South Africa 212 253 2,627 2,703
Others 1,895 1,398 5,131 5,124
Group Total 30,872 31,265 199,232 213,057
1 Total revenues of the ABB Group from third-party customers in each region/country.
36
ABB Group Statistical Data
(US$ in millions, unless otherwise stated) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Consolidated Income Statement
Revenues 30,872 31,265 33,767 32,751 28,758 27,521 29,109 28,443 26,337 20,260
Depreciation of Fixed Assets – 926 – 997 – 1,044 – 1,021 – 893 – 844 – 901 – 819 – 750 – 549
Operating Earnings after Depreciation 2,111 1,137 2,113 2,181 1,574 1,311 1,219 1,417 1,386 918
Income before Taxes 1,865 853 1,901 2,003 1,362 520 861 997 1,052 872
Net Income before Minority Interest 1,322 595 1,242 1,361 795 72 528 633 628 628
Net Income 1,305 572 1,233 1,315 760 68 505 609 590 589
Consolidated Balance Sheet
Cash and Cash Equivalents 7,790 5,790 5,553 6,831 7,612 5,700 5,534 5,211 4,975 4,332
Other Current Assets 15,080 14,846 15,606 15,437 12,348 10,672 11,432 12,688 12,848 10,470
Fixed Assets 9,513 9,148 9,737 9,808 9,095 8,532 8,983 10,157 10,286 7,743
Total Assets 32,383 29,784 30,896 32,076 29,055 24,904 25,949 28,056 28,109 22,545
Current Liabilities 17,883 16,520 17,147 17,302 15,458 13,390 13,203 15,394 15,441 13,209
Advances from Customers 2,646 2,612 2,610 3,576 3,417 2,567 2,983 2,820 2,798 1,768
Medium- and Long-Term Loans 2,808 2,511 1,823 2,644 3,049 2,866 2,993 2,496 2,712 1,746
Other Long-Term Liabilities 2,772 2,538 3,094 2,971 2,732 2,244 2,384 2,547 2,442 1,447
Stockholders’ Equity incl. Minority Interest 6,274 5,603 6,222 5,583 4,399 3,837 4,386 4,799 4,715 4,375
Consolidated Statement of Cash Flows
Cash Flows from Operating Activities 2,104 1,791 834 951 2,135 1,515 1,942 2,128 1,044 1,437
Cash Flows related to Investing Activities – 1,091 – 722 – 1,118 – 402 – 501 – 839 – 373 – 316 – 1,024 – 3,951
Cash Flows related to Financing Activities 942 – 421 – 855 – 1,696 – 122 – 54 – 477 – 1,528 218 3,323
Effects of Translation Differences 45 – 411 – 139 366 400 – 456 – 769 – 48 405 27
Net Changes in Cash and Cash Equivalents 2,000 237 – 1,278 – 781 1,912 166 323 236 643 836
Other Data
Orders Received 31,462 34,803 33,884 35,163 30,827 28,644 31,153 29,209 28,938 21,348
Capital Expenditure for Tangible Fixed Assets 865 1,093 1,168 1,171 935 816 957 1,035 961 783
Capital Expenditure for Acquisitions 274 302 333 315 196 212 253 612 677 3,090
Expenditure for Research and Development 2,463 2,657 2,638 2,627 2,353 2,271 2,386 2,342 1,931 1,361
Dividends Declared Pertaining toFiscal Year (Swiss francs in millions) 740 700 650 520 370 340 340 330 300 290
Net cash/net debt position 1,573 1,564 1,204 1,997 1,686 242 – 7 – 950 – 2,110 – 1,760
Average Capital Employed 12,319 12,085 12,537 12,478 11,816 11,579 12,531 13,403 12,724 9,585
Number of Employees 199,232 213,057 214,894 209,637 207,557 206,490 213,407 214,399 215,154 189,493
Ratios
Operating Earnings after Depreciation/Revenues 6.8% 3.6% 6.3% 6.7% 5.5% 4.8% 4.2% 5.0% 5.3% 4.5%
Return on Equity 23.2% 10.3% 22.2% 28.4% 20.2% 1.8% 11.8% 13.9% 14.5% 16.8%
Return on Capital Employed 21.1% 12.2% 19.9% 21.8% 16.9% 15.4% 14.7% 14.7% 17.3% 15.1%
Financial Review
Annual Report 1998ABB Group and Parent Companies
aINGENUITY AT WORK
ABB Group
1 Outlook for 1999 and Beyond
2 Management’s Discussion and Analysis
17 Consolidated Financial Statements
20 Principles for Consolidated Financial Statements
22 Notes to the Consolidated Financial Statements
33 Auditors’ Report
34 ABB’s Global Scope and Major Subsidiaries
35 Statistical Data
36 Board of Directors
37 Financial Statements of ABB Asea Brown Boveri Ltd, Zurich
ABB AB Annual Report
42 Board of Directors, President and Auditors
45 Financial Statements
47 Notes to the Financial Statements
49 Auditors’ Report
50 Investor Information
52 Annual General Meeting
ABB AG Annual Report
53 Board of Directors and Auditors
56 Financial Statements
58 Notes to the Financial Statements
61 Auditors’ Report
62 Investor Information
64 Annual General Meeting
Contents
This Financial Review presents the consoli-
dated financial statements of the ABB Group
and the holding ABB Asea Brown Boveri
Ltd, Zurich, as well as the financial state-
ments of the parents ABB AB, Västerås,
ABB AG, Baden. This report conforms
to OECD guidelines and recommendations
concerning the publication of information.
The complete ABB Group and Parent
Companies Annual Report 1998 consists of
this Financial Review and an Operational
Review. For a copy of the Operational Review,
please contact ABB Corporate Communi-
cations at the address printed on the back
of this report.
The ABB Group publishes its annual report
in English, German and Swedish. The
English-language version is binding. It also
issues quarterly financial results in April,
July and October. All figures shown for the
ABB Group are in U.S. dollars. In addition,
separate annual reports are published by
some ABB national and business entities.
ABB also publishes annual environmental
and technology reports.
The statements in this review relating to mattersthat are not historical facts are forward-lookingstatements that are not guarantees of futureperformance and involve risks and uncertainties,including but not limited to: future global economicconditions; foreign exchange rates; regulatoryapprovals; market conditions; the actions of com-petitors and other factors beyond the control ofthe company.
ABB Asea Brown Boveri Group1,000 Companies
33 Business Areas organized into7 Business Segments
ABB Asea Brown Boveri Ltd
Zurich
Switzerland
ABB AGBaden
Switzerland
50%
ABB ABVästeråsSweden
50%
ABB AB Shareholders ABB AG Shareholders
1
Göran Lindahl
President and Chief Executive Officer
The growth in Power Generation’s gas-fired
related activities will continue, particularly
in North America. Orders and earnings in
1999 are expected to exceed the 1998 level.
Orders and earnings are also expected to
increase in Power Transmission and Power
Distribution. Power Transmission expects
steady, moderate growth in demand with an
increasing focus on systems and compre-
hensive solutions. Power Distribution mar-
kets are expected to show high growth
in an increasingly deregulated environment.
In Products and Contracting, demand for
standardized low-voltage products is ex-
pected to remain stable, but growth will be
above-average in service and in some
specialized contracting activities. Orders and
earnings are expected to exceed the 1998
level.
Cyclical demand variations will continue for
Automation during 1999. Overall, orders
are expected to increase and, excluding the
effect of the Elsag Bailey integration, earnings
are expected to increase as well. The inte-
gration of Elsag Bailey will somewhat dilute
earnings for the next two years. Demand
for Oil, Gas and Petrochemicals is expected
to grow at a lower rate as a consequence
of low oil prices. With the segment’s focus
on areas such as deepwater and subsea
activities, as well as upgrades and expansion
of refineries, orders are expected to ex-
ceed and earnings to reach about the same
level as 1998. Financial Services will continue
its expansion into areas requiring financial
structuring solutions often combined with
industrial projects, and operating earnings
are not expected to reach the same level as
in 1998.
In a difficult economic environment, orders
and revenues for ABB Group are expected
to grow. The 1999 net cash position will
not reach the same level as at the end of
1998, primarily because of cash outlays for
the Elsag Bailey acquisition.
Net income in 1999 is expected to exceed
the level of 1998.
ABB’s longer-term targets remain unchanged.
The Group’s strategic shift during the last
two years will continue with a clear focus on
expanding in knowledge- and service-based
sectors as well as reducing our dependence
on heavy asset businesses. This strategic shift
will continue to result in a reduction of the
capital needed. Further improved efficiency
in our resource utilization will remain a pri-
ority. We also expect continued improvement
of key financial ratios. Annual growth of at
least 6 percent on average over the business
cycle, considerable reduction of working
capital in relation to revenues and an in-
crease in net income margin from 4.2 per-
cent in 1998 to the 6–7 percent level within
3 years remain major objectives for the
Group.
Göran LindahlPresident and Chief Executive Officer
Outlook for 1999 and Beyond
2
Management’s Discussion –Analysis of the Group
Key Figures (US$ in millions, unless otherwise stated) Total Group
Year ended December 31 1998 1997
Orders received 31,462 34,803
Revenues 30,872 31,265
Operating earnings after depreciation 2,111 1,137
Income before taxes 1,865 853
Net income 1,305 572
Stockholders’ equity 5,959 5,283
Total assets 32,383 29,784
Capital expenditure for tangible fixed assets 865 1,093
Capital expenditure for acquisitions 274 302
Divestitures 202 748
Expenditure for research and development 2,463 2,657
Operating earnings after depreciation/revenues (%) 6.8 3.6
Return on equity (%) 23.2 10.3
Return on capital employed (%) 21.1 12.2
Interest coverage ratio 4.0 2.7
Debt/equity ratio 1.0 0.8
Net cash position 1,573 1,564
Capital turnover rate 0.99 1.03
Number of employees 199,232 213,057
Net income per share
1998 1997
ABB AB A shares (in SEK) 5.52 2.32
ABB AB B shares (in SEK) 5.52 2.32
ABB AG bearer shares (in CHF) 103.30 46.80
ABB AG registered shares (in CHF) 20.66 9.36
Dividend per share1
1998 1997
ABB AB A shares (in SEK) 2.18 2.10
ABB AB B shares (in SEK) 2.18 2.10
ABB AG bearer shares (in CHF) 41.00 40.00
ABB AG registered shares (in CHF) 8.20 8.00
1 1998 proposed.Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998 except for the operating results up to the third quarter (see Note 23).
Revenues per Region 1998
EuropeThe AmericasAsiaMiddle East and Africa
Employees per Region 1998
EuropeThe AmericasAsiaMiddle East and Africa
54%
22%
14%
10%
64%16%
6%
14%
3
Management’s Discussion –Analysis of the Group
Market Conditions
Demand trends for ABB’s broad range of
infrastructure equipment and systems varied
significantly by both business sector and
region. Uncertainties as reflected by volatile
financial markets prevailed throughout the
year and changed global demand patterns,
which resulted in delays in financial closing of
certain projects. At the same time, increased
volatility provided opportunities in the
financial markets.
Customers in many industries emerged as
truly global players with correspondingly
high expectations for suppliers who provide
complete solutions, not just individual
products. Additionally, there was a tendency
toward global pricing and the drive to improve
environmental performance continued to
be an important factor for many of ABB’s cus-
tomers. The growing demand for high-
efficiency, low-emission solutions put a premi-
um on suppliers who can deliver a steady
stream of technological innovations. Further-
more, the competition faced by customers
resulted in the need to optimize existing
assets. This has increased the demand for vari-
ous types of infrastructure service, mainte-
nance and revamping. Partly due to low com-
modity prices, the pulp and paper, steel
and chemical sectors reduced capital expen-
ditures. The automotive sector also reduced
spending during the year.
Privatization and deregulation again proved
beneficial for markets in North America,
certain European countries, Australia and
New Zealand, Latin America and Africa. After
a period of uncertainty, market participants
began positioning themselves in the competi-
tive environment with new investments.
Usually these investments continue, providing
a good business environment over an ex-
tended period of time.
ABB performs approximately three-fourths
of its business in OECD countries. Although
slower than the previous year, industrial
production in these countries continued to
grow. Europe helped to compensate for
a shortfall in demand in emerging markets,
but did not experience the expected full
recovery in demand. Economies in Northern
Europe remained strong, as well as in Switzer-
land and France, whereas Germany, Italy
and Spain showed lower growth in demand.
Economic growth in North America has
slowed compared to the high levels of recent
years with reduced investments in several
industrial sectors. Japan showed reduced
economic activity, but industrial production
in Australia and New Zealand remained
solid. In the emerging markets, the economies
of Latin America also grew at a reduced
rate. India’s economy slowed, whereas growth
in China remained at a relatively good level.
Both countries were still among the strongest
growing economies in the world. With
reduced consumption and investments, the
economies of Southeast Asia were gradually
stabilizing at a low level. Several Middle
East and African economies continued their
high rates of growth.
Orders Received and Revenues
Orders received for the ABB Group reached
$ 31,462 million, a decrease of 10 percent
(1997: $ 34,803 million). Adjusted for acquisi-
tions and divestitures and expressed in
local currencies, orders were 1 percent lower
compared to last year. A discussion of the
orders received per business segment follows
on pages 9 to 16 of this Financial Review.
Large orders declined from last year’s level,
representing some 24 percent of total orders
received. Demand for standard products was
flat compared to last year’s level as the acceler-
ation in Europe was weaker than expected.
The order backlog at the end of 1998 reached
$ 25,916 million. Advance payments from
4
customers increased as a percentage of the
order backlog.
Revenues were $ 30,872 million (1997: $ 31,265
million). Adjusted for acquisitions and dives-
titures and expressed in local currencies,
revenues increased by 8 percent, reflecting the
increased order intake in previous years for
large projects.
Personnel and Organization
At the end of 1998, ABB employed 199,232
people compared to 213,057 at year-end
1997. The total number of employees decreased
by 6 percent. On a comparable basis, number
of employees decreased by 4 percent. Employ-
ment increased in service and maintenance
related areas, Oil, Gas and Petrochemicals,
Data per Business Segment according Orders Received Revenues Operating Earningsto previous structure valid through after DepreciationAugust 31, 1998 (US$ in millions)
1998 1 1997 1998 1 1997 1998 1 1997
Power Generation 8,598 10,038 9,004 8,114 302 125
Power Transmission and Distribution 8,601 8,595 8,103 7,889 654 557
Industrial and Building Systems 16,235 16,294 15,675 15,501 1,003 1,066
Financial Services 860 828 860 828 403 297
Various Activities /Corporate 2,087 2,093 2,112 2,074 – 182 – 797
Adtranz2 – 2,095 – 1,870 – 69 – 111
Total 36,381 39,943 35,754 36,276 2,111 1,137
Intra-Group transactions – 4,919 – 5,140 – 4,882 – 5,011 n/a n/a
Net Total 31,462 34,803 30,872 31,265 2,111 1,137
1 Proforma figures.2 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz
in 1998 except for the operating results up to the third quarter (see Note 23).
Changes in ABB’s business segment/business area (BA) structure as per year-end 1998 versus year-end 1997:Power Generation
– BAs “Utility Steam Power Plants” and “Fossil CombustionSystems and Services” merged into new BA SteamPower Plants
– BAs “Power Generation Industry”, “Hydro Power Plants”and “District Heating” merged into new BA Power PlantSystems
– BA “Nuclear Power Plants” renamed Nuclear Systems
Power Transmission
– Majority of BA “High-Voltage Switchgear” renamed High-Voltage Products and Substations
– Service related businesses of various other BAs com-bined to form new BA T&D Service and Support
– Remaining Power Transmission BAs from former PowerTransmission and Distribution segment
Power Distribution
– Part of BA “High-Voltage Switchgear” renamed Distribu-tion Systems
– Remaining Power Distribution BAs from former PowerTransmission and Distribution segment
Automation
– BA “Power Plant Control” from Power Generation seg-ment
– BA “Network Control and Protection” from Power Trans-mission and Distribution segment
– BAs “Automation and Drives”, “Instrumentation, “FlexibleAutomation”, “Motors”, and “Superchargers” from formerIndustrial and Building Systems segment
Oil, Gas and Petrochemicals
– BA “Oil, Gas and Petrochemical” from former Industrialand Building Systems segment
Products and Contracting
– BAs “Installation Material”, “Low Voltage Apparatus” and“Low Voltage Systems” from former Industrial and Build-ing Systems segment merged into new BA Low VoltageProducts and Systems
– Remaining BAs within this segment from former Industrialand Building Systems segment
Financial Services
– BA “Project and Trade Finance” merged into BA Struc-tured Finance
– BA “Investment Management” divested
5
Financial Services and in certain activities
within Automation.
The adjustment of the cost base announced
in October 1997 included the closure of 12 fac-
tories, one in the U.S. and the remaining in
Europe, as well as the downsizing of several
more units particularly in Germany, Italy and
Sweden. By the end of 1998, this resulted in
an overall reduction of 12,600 employees and
another 1,000 are planned during the first
half of 1999. Accordingly, some 2,000 positions
more than originally planned under this pro-
gram will have been removed. Program costs
remained below budget with more than 90
percent of the planned reductions and costs
completed and incurred by the end of 1998.
The early and fast adjustment of the cost base
with an average payback of two years contin-
ued to enhance the Group’s competitiveness.
As a consequence of the restructuring pro-
gram to enhance competitiveness, the number
of employees decreased in Germany, Italy,
Switzerland and the U.S. Changes in the em-
ployment levels for Central and Eastern
Europe varied by country, but decreased in
total. Led by certain Latin American countries,
personnel levels in the Americas increased.
In Asia, the number of employees increased in
Taiwan and New Zealand, but decreased
overall. ABB employment increased in the
Middle East and Africa.
As per September 1, 1998, ABB changed its
Group management structure to boost busi-
ness growth areas, create new synergies
and ensure greater responsiveness in local and
globalized markets.
The former “Industrial and Building Systems”
segment was divided into three new segments
– Automation; Oil, Gas and Petrochemicals;
and Products and Contracting. The former
“Power Transmission and Distribution” segment
became two separate segments – Power
Transmission and Power Distribution. Certain
activities of the Power Generation and Power
Transmission segments were transferred to the
new Automation segment, whereas Financial
Services remained basically unchanged.
As such, prior years’ business segment data
have been restated to reflect the reclassifica-
tion of certain business areas. ABB Group data
in total remains unaffected.
Simultaneously, regional organizations were
dissolved after having fulfilled their mandate to
coordinate ABB’s expansion in Europe, the
Americas and Asia. Country organizations re-
main as before, continuing to build ABB’s
multidomestic presence in markets around
the world.
Research and Development
In 1998, ABB’s spending on R&D reached
$ 2,463 million, representing 8 percent of Group
revenues (1997: $ 2,657 million or 8.5 percent).
With a strong commitment to technology
leadership, ABB focuses on development of
core competencies and skills of strategic im-
portance for future growth. Continuous prod-
uct development and improvement in com-
bination with special high risk, high impact
projects assure a steady flow of innovative
products addressing the future needs of cus-
tomers. Through active portfolio management,
ABB maintains the right balance between short-
and long-term R&D and assures that the return
on investment is optimized. Overall efficiency
of R&D spending substantially increased as the
efforts targeted break-through projects.
Millennium Change – Year 2000 Issue
The Year 2000 issue arises from the almost
universal practice of using only two digits
in program source codes to denote the year.
ABB management has appointed a task
force and gives the Year 2000 issue top pri-
ority. The task force has created and imple-
mented strategies, priorities and action plans
6
that address Year 2000 issues in products
and systems as well as internal systems.
The ABB Four-Pillar-Concept includes prod-
uct investigation, plant inventory, metho-
dology development and training. The concept
has been implemented throughout the Group
in liaison with customers. This approach has
been confirmed by insurers, major internation-
al customers, and other impartial third parties
as representing a leading practice in a compre-
hensive Year 2000 program.
Development of software, upgrading, pro-
viding new, efficient solutions as well as tech-
nical support are the essence of ABB’s daily
business. ABB’s annual investments in product
development and information technology
infrastructure are considerable. The Year 2000
issues and related efforts are an integral part
of ABB’s business. The preparation of com-
puters and microprocessors for the millennium
change resulted in costs of $ 100 million in
1998 and costs of $ 150 million are expected in
1999. More than half of these costs relate to
customer systems and the remaining to ABB
internal preparations. More than half of the
total costs impact the Automation segment.
Acquisitions and Divestitures,
Capital Expenditures
Acquisitions during 1998 amounted to $ 274
million (1997: $ 302 million). Several ac-
quisitions were made in the fields of process
automation and chemical, oil and gas.
Besides acquiring one of Europe’s largest
suppliers of process control systems and
automation equipment, Alfa Laval Automation,
ABB also made a public offer in cash to
acquire Elsag Bailey Process Automation.
Upon receiving all of the necessary approvals,
the transaction was completed after the
end of the reporting period. The acquisition
was valued at $ 2,100 million, including debt
of about $ 600 million.
During the year, ABB acquired a leading
supplier for the development and deployment
of deepwater floating systems for the off-
shore oil and gas industry, as well as a leading
provider of industrial safety systems for
petrochemical and petroleum operations. Also
in Argentina, Hungary, Poland and the
U.K., ABB acquired companies mainly active
in the areas of service, retrofit and mainte-
nance.
During 1998, ABB decided to divest its stake
in ABB Daimler-Benz Transportation Group
(Adtranz), the rail transportation joint venture.
Subsequent to year-end, DaimlerChrysler
agreed to acquire ABB’s 50-percent share of
the joint venture for cash compensation of
$ 472 million. ABB discontinued the propor-
tionate consolidation of its 50-percent share
in Adtranz in 1998, recognizing a $ 69 million
operating loss for the first nine months and
without realizing capital gains in 1998. In 1999,
ABB will realize a net capital gain of $ 41 mil-
lion from the sale of Adtranz. In accordance
with ABB’s strategy to concentrate on growth
businesses, various non-core activities have
been divested in Japan, Sweden and the U.S.
During 1998, ABB made divestitures totaling
$ 202 million (1997: $ 748 million). In addition,
real estate with a value of $ 238 million was
sold. Successful implementation of the restruc-
turing program, improved cycle times and
consolidation of facilities created opportunities
for additional real estate sales.
Capital expenditures for tangible assets in
1998 reached $ 865 million (1997: $ 1,093
million). Of that, $ 87 million (1997: $ 133 mil-
lion) was for land and buildings, and $ 778
million for machinery and equipment (1997:
$ 960 million).
Foreign Exchange Effects
During 1998, ABB prepared for the introduc-
tion of the euro at the beginning of 1999
as the official common currency in many Euro-
pean countries. ABB will continue to express
the Group’s financial statements in U.S. dollars.
In 1998, a weakened U.S. dollar had a 2-per-
cent positive effect on ABB’s balance sheet,
where assets and liabilities are translated from
local currencies into U.S. dollars at year-end
exchange rates. Average exchange rates for the
U.S. dollar, however, strengthened compared
to most currencies. Accordingly, using average
rates to translate the consolidated income
statement from local currencies into U.S. dol-
lars, exchange rate effects reduced orders
received, revenues and result figures by about
3 percent.
ABB requires all industrial profit centers to
hedge orders and anticipated cash flows
in order to protect their local currency earn-
ings. ABB’s multidomestic strategy assures
that in all major markets where ABB gener-
ates revenues it also incurs corresponding
costs. This limits the effect of currency fluctua-
tions on the local books and maintains long-
term competitiveness. The major part of the
value added in the Group was associated
with the following currencies: the U.S. dollar,
Nordic currencies, the Deutschmark, the
Swiss franc, and the Italian lira. Global sourc-
ing initiatives within these countries strive
to maximize purchases from low-cost coun-
tries in Western and Central Europe as well
as Asia.
Cash Position and Dividends
At year-end 1998, ABB’s net cash position
(defined as cash and cash equivalents minus
short-, medium-, and long-term loans) was
$ 1,573 million, about the same as last year
(1997: $ 1,564 million), despite the funds
needed for restructuring measures in 1998
in excess of $ 400 million. Strong focus on
working capital reduction programs con-
tributed to this improvement. Accordingly, 1998
net working capital1 as a percent of revenues
improved to 8.7 percent (1997: 10.2 percent).
Net cash from operating activities increased
again from last year’s high level to $ 2,104 mil-
lion.
During 1998, ABB completed ten new bond
issues for a total of $ 748 million in the form
of public offerings or private placements.
All of these issues were documented under
ABB’s Euro Medium-Term Note (EMTN)
program. At the end of 1998, ABB long-term
senior debt continued to be rated Aa2 by
Moody’s Investors Service and was rated AA–
by Standard & Poor’s. Short-, medium- and
long-term loans increased by $ 1,991 million,
of which $ 1.2 billion relate to prefinancing
for the Elsag Bailey acquisition.
ABB’s dividend policy is to pay out between
30 and 50 percent of consolidated net income
for the year. In January 1999, the ABB Board
of Directors proposed a dividend for 1998
of CHF 740 million to its two parent compa-
nies, ABB AB and ABB AG (1997: CHF 700
million). Translated into dollars at the time of
the decision, it corresponds to 40 percent
of ABB net income for 1998 (1997: 41 percent
when excluding the restructuring charge from
1997 net income).
Earnings
Operating earnings after depreciation in 1998
amounted to $ 2,111 million (1997: $ 1,137 mil-
lion), an increase of 5 percent compared
to 1997 when excluding the 1997 restructuring
charge. A discussion of the earnings by seg-
ment follows on pages 9 to 16 in this Financial
Review.
Successful restructuring programs and global
process initiatives, such as outsourcing and
shared services, helped to reduce both
personnel and material expenses as a percent
of revenues2. Personnel expenses decreased
7
1 Net working capital includes trade and other current receiv-ables plus inventories, less trade payables, other current liabilities(excluding taxes due) and advances from customers.
2 Including changes in work in progress and finished goods.
8
further from last year’s low level to 29.4 per-
cent (1997: 30.2 percent) and material ex-
penses decreased to 44.3 percent (1997: 45.3
percent). Reflecting the increased level of
outsourcing and deconsolidation of Adtranz,
other expenses increased to 16.5 percent (1997:
15.8 percent).
Unusual items were net $ 32 million (1997:
$ –608 million). Unusual income, mostly
capital gains from divestitures and real estate
sales, amounted to $ 114 million, primarily
from the sale of non-core operations such as
ABB’s investment management business in
Financial Services. Unusual costs of $ 82 mil-
lion included costs for ongoing rationalization
activities related to several ABB companies
and additional provisions to cover the possible
outcome of a fine from the EU Commission.
On a regional basis, the largest contributors to
the Group’s operating profits were Sweden,
Norway, Finland, Switzerland, Germany and
the U.S. Europe improved the most with strong
support from Germany, Italy and Switzerland;
aided by successful restructuring, each posted
significant improvements over the previous
year. While earnings from the Nordic countries
declined from last year’s high level, these
countries continued to contribute significantly
to results. Earnings in the Americas declined
as a result of restructuring and project cost
overruns. In Australia, New Zealand and China,
profitability improved, whereas most other
Asian countries posted lower earnings. Several
large projects helped to push operating earn-
ings higher in the Middle East and Africa
and in particular, Saudi Arabia showed higher
profitability.
Regional operating margins, based on domestic
and export revenues within the respective
region, developed as follows in 1998: Europe
8.0 percent (1997: 7.8 percent); the Americas
4.1 percent (1997: 4.1 percent); Asia 2.2 percent
(1997: 4.1 percent); the Middle East and Africa
9.4 percent (1997: 8.5 percent).
Income before taxes reached $ 1,865 million
(1997: $ 853 million), an increase of 8 percent
compared to the previous year excluding the
restructuring charge.
In 1998, ABB’s income related taxes amounted
to $ 543 million (1997: $ 258 million), corre-
sponding to an overall tax rate for 1998 of 29
percent.
Net income for 1998 increased to $ 1,305 mil-
lion (1997: $ 572 million). Excluding the
previous year’s restructuring charge, net income
increased by 11 percent.
Reported return on equity in 1998 was
23.2 percent (1997: 10.3 percent, excluding
restructuring charge 21.1 percent) and return
on capital employed was 21.1 percent
(1997: 12.2 percent, excluding restructuring
charge 19.4 percent).
The outlook for 1999 can be found on page 1
of this Financial Review.
9
Management’s Discussion –Analysis of the Business Segments
Data per Business Segment Orders Received Order Backlog Revenues(US$ in millions)
1998 1997 1998 1997 1998 1997
Power Generation 8,260 9,465 12,444 13,345 8,530 7,646
Power Transmission 4,428 4,354 4,070 3,471 4,038 3,739
Power Distribution 2,672 2,664 1,409 1,487 2,607 2,647
Automation 7,015 7,338 4,013 3,907 7,036 7,344
Oil, Gas and Petrochemicals 3,324 3,126 2,845 2,534 2,860 2,396
Products and Contracting 6,464 6,488 2,231 2,192 6,385 6,381
Financial Services 860 828 – – 860 828
Various Activities /Corporate* 2,031 2,037 157 231 2,049 2,012
Adtranz1 – 2,095 – 5,161 – 1,870
Total 35,054 38,395 27,169 32,328 34,365 34,863
Intra-Group transactions – 3,592 – 3,592 – 1,253 – 1,168 – 3,493 – 3,598
Net Total 31,462 34,803 25,916 31,160 30,872 31,265
Data per Business Segment Operating Earnings Capital Expenditure Average Number of(US$ in millions) after Depreciation Capital Employed Employees
1998 1997 1998 1997 1998 1997 1998 1997
Power Generation 291 105 144 200 2,854 2,847 39,484 41,584
Power Transmission 374 316 125 139 1,723 1,786 26,927 26,319
Power Distribution 179 159 76 79 965 970 16,511 17,465
Automation 521 646 179 202 2,574 2,535 43,384 43,183
Oil, Gas and Petrochemicals 175 123 55 55 709 823 8,774 8,160
Products and Contracting 419 399 145 148 1,558 1,641 53,753 54,115
Financial Services 403 297 14 13 n/a n/a 894 885
Various Activities/Corporate* – 182 – 797 127 210 1,936 1,159 9,505 9,989
Adtranz1 – 69 – 111 – 47 – 324 – 11,357
Total 2,111 1,137 865 1,093 12,319 12,085 199,232 213,057
1 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998 except for the operating results up to the third quarter (see Note 23).
*Activities included under Various Activities/Corporate
This category comprises local businesses (orders received in 1998: $ 310 million) in several countries and internal services performed for ABBcompanies, including information management and processing centers, con-sulting services for operational units, corporate research and developmentand management of ABB real estate.
Data per Region Orders Received 2 Revenues2 Average Capital (US$ in millions) Capital Employed Expenditure
1998 1997 1998 1997 1998 1997 1998 1997
Europe 16,420 18,506 16,620 17,099 8,213 8,166 607 819
The Americas 7,944 7,028 6,640 6,374 2,782 2,612 169 169
Asia 3,138 6,258 4,474 5,427 1,010 1,033 66 80
Middle East and Africa 3,960 3,011 3,138 2,365 314 274 23 25
Total 31,462 34,803 30,872 31,265 12,319 12,085 865 1,093
2 Total orders received and revenues of the ABB Group from third-party customers in each region.
10
The shifting demand toward gas-fired powerplants accelerated during 1998. Particularly inthe Americas and the Middle East, the growingdemand for gas turbines and combined-cycleplants had a positive impact on orders re-ceived and helped to mitigate the slowdownresulting from project delays in Asia.
Nevertheless, orders received in 1998 slipped13 percent to $ 8,260 million (1997: $ 9,465million). Gas turbine related activities in-creased strongly in 1998 and orders receivedwere higher in Gas and Combi-Cycles.Major orders were booked in the United ArabEmirates, the U.S., Chile, Ivory Coast andMexico. Several orders also included long-termservice and retrofit contracts.
Steam Power Plants showed lower volumesin Asia and Europe. This shortfall was partlycompensated for by a major turnkey orderin Saudi Arabia. Facing mostly the same busi-ness environment as steam power plants,Environmental Systems was adversely affectedby the market situation in Asia and EasternEurope and also by the general delay of waste-to-energy power plant projects in Europe.Within Power Plant Systems, the industrialpower generation activities had better ordersreceived while orders for hydro power plantswere below the exceptionally high level of1997. In Nuclear Systems, projects focusedmainly on nuclear power service and mainte-nance in France.
Order margins continued to improve as a result of restructuring and cost reductionefforts. Selective bidding, supply manage-ment and proportionally more service volumealso helped to improve margins.
Revenues in 1998 reached $ 8,530 million, a12 percent increase compared to the previousyear (1997: $ 7,646 million). The increaseis mainly a consequence of invoicing on largenew equipment contracts for Gas and Combi-Cycles and for industrial turbines in PowerPlant Systems.
Operating earnings in 1998 increased substan-tially to $ 291 million (1997: $ 105 million). Suc-
cessful execution of the restructuring initiativestogether with higher revenues and additionalvolume in the service and retrofit business arethe main reasons for this substantial improve-ment.
Emphasis will continue on margin improve-ments through selective tendering and effi-cient project execution. ABB, with its leadingtechnologies, will benefit from increaseddemand for highly efficient system solutionsin increasingly deregulated and privatizedmarkets. Orders as well as earnings for 1999are expected to exceed the level of 1998.
Power Generation
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
Number of Employees1
AverageCapital Employed(US$ in millions)
98 8,260
97 9,465
96 8,861
95 9,287
94 8,854
98 8,530
97 7,646
96 8,561
95 8,903
94 7,756
98 39,484
97 41,584
96 42,094
95 44,344
94 39,861
98 2,854
97 2,847
96 3,149
95 2,922
94 2,234
98 291
97 105
96 112
95 324
94 297Business Areas in the Power GenerationSegment
Orders Received (US$ in millions) 1998 1997
Gas and Combi-Cycles 3,134 2,917
Steam Power Plants 2,575 3,076
Power Plant Systems 1,602 2,127
Nuclear Systems 404 742
Environmental Systems 525 760
Other(not assigned to specific Business Area) 80 93
Intra-Segment transactions – 60 – 250
Total 8,260 9,465
Significant Orders for the Power Generation Segment in 1998 (US$ in millions)
Oil-fired steam power plant Saudi Arabia 835
Gas-fired power and desalination plant U.A.E. 600
Gas-fired combined-cycle power plant U.S. 350
Gas-fired combined-cycle power plant Mexico 250
Gas-fired combined-cycle power plant Chile 170
Modernization and maintenance order for power plant U.S. 170
Compressor stations for a natural gas pipeline Poland 170
Gas-fired combined-cycle power plant Greece 160
Gas-fired combined-cycle cogenerationpower plant Canada 160
Gas-fired power plant andtransmission line Ivory Coast 150
Operation and maintenance contract for power plant Argentina 127
Orders Received per Region
EuropeThe AmericasAsiaMiddle East and Africa
38%
31%
10%
21%
11
Power Transmission
Demand in the power transmission marketsin 1998 continued to be driven by the needfor more efficient long distance transmission,a focus on enhancing and upgrading existingsystems, and a shift towards cost-optimizingsystem solutions. Ongoing deregulationand privatization, as well as further expansionof cross-border transmission links, led tocontinued demand for transmission productsand systems in Latin America, the MiddleEast and parts of Europe. Asian demand fortransmission products and systems weakeneddue to the economic situation in some keymarkets, while delayed investments impactedbusiness in India.
Orders received amounted to $ 4,428 million,2 percent above the previous year (1997:$ 4,354 million). Large orders for transmissionprojects were secured in Italy, the U.K., Saudi Arabia and Brazil by Power Lines, PowerSystems and High-Voltage Products andSubstations. Power Transformers kept ordersreceived on the same level in a competitivemarket with flat demand.
Revenues increased by 8 percent to $ 4,038million (1997: $ 3,739 million). In particular,Power Systems reported a strong increase as aresult of invoicing on large projects.
Operating earnings of $ 374 million were18 percent higher than last year (1997: $ 316million). Earnings growth in Power Linesand Power Systems, as well as further improve-ments for Power Transformers, contributed themost to the higher earnings.
To further promote higher quality and increasedproductivity, Power Transformers acceleratedthe use of common technological platforms.Power Systems continued with its successfulcommercial introduction of High-Voltage DirectCurrent Light (HVDC Light) and Static VarCompensation Light (SVC Light) technologiesfor efficient electric power transmission andimproved power quality.
Growth opportunities are expected to continuethrough 1999 as the stagnant demand in Asiais more than compensated by business in other
regions, such as the Americas, the MiddleEast and Europe. Both orders and earnings areexpected to increase in 1999.
Business Areas in the Power Transmission Segment
Orders Received (US$ in millions) 1998 1997
Cables 525 752
High-Voltage Products and Substations 1,154 1,409
Power Lines 719 864
Power Systems 845 381
Power Transformers 1,057 1,079
T & D Service and Support 295 119
Other(not assigned to specific Business Area) 150 147
Intra-Segment transactions – 317 – 397
Total 4,428 4,354
Significant Orders for the Power Transmission Segment in 1998 (US$ in millions)
Cross-border transmission link Argentina/Brazil 280
Power links for northern and southern Brazil Brazil 170
High-voltage systems Italy/Greece 100
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
Number of Employees1
AverageCapital Employed(US$ in millions)
98 4,428
97 4,354
96 3,873
95 4,393
94 4,405
98 4,038
97 3,739
96 4,470
95 4,292
94 3,961
98 26,927
97 26,319
96 25,785
95 24,469
94 26,142
98 1,723
97 1,786
96 2,100
95 1,874
94 1,743
98 374
97 316
96 364
95 366
94 396
Orders Received per Region
EuropeThe AmericasAsiaMiddle East and Africa
49%
26%
12%
13%
12
Power Distribution
Power distribution systems and productsare used to move electricity from high-voltage substations to end users. In addition,control systems enable electricity providersto monitor electricity distribution. The PowerDistribution segment, comprising about one-third of the former Power Transmissionand Distribution segment, was createdin 1998 to focus on new opportunities in thedistribution markets where deregulationand privatization are fuelling growth. Withinthis new segment, Distribution Systemswas created as a new business area to furtherconcentrate on integrated electrical distributionsystems and new solutions targeted at theneeds of utilities, industry, airports and othercommercial consumers.
Global demand for distribution systems andproducts continued to grow in 1998. Inparticular, North America was positively im-pacted by the strong U.S. economy withits high levels of residential and non-residentialhousing starts. Demand in Europe, ABB’sglobal presence and market penetration al-lowed the segment to compensate for thereduced investment activity in various Asiancountries.
Orders received of $ 2,672 million were atthe same level as last year (1997: $ 2,664million). Orders in Distribution Systems in-creased based on several significant contractawards. One, the expansion of the electricitydistribution system for the Cayman Islands,was based on a seven-year strategic alliancewith the local utility. Another contract in-volved the delivery of a turnkey distributionsubstation and control system to the MexicanPetroleum Company. With good growth inEurope and the Middle East, Medium-VoltageEquipment also reached higher ordersreceived. Distribution Transformers ordersremained somewhat below the previousyear’s level.
Revenues of $ 2,607 million were 1 percentbelow the previous year (1997: $ 2,647 million)and Medium-Voltage Equipment posted a goodincrease.
Operating earnings increased by 13 percentto $ 179 million (1997: $ 159 million) due tohigher earnings in all business areas.
ABB’s future focus will be on developingcomprehensive innovative solutions fordistribution networks. These networks willinclude the application of communicationmedia to monitor and control the networkfrom remote locations. Supported by thegrowing demand for system solutions, theintroduction of new products and thecontinued deregulation and privatization ofcertain regional electricity markets, ordersand earnings in Power Distribution are ex-pected to increase in 1999.
Business Areas in the Power Distribution Segment
Orders Received (US$ in millions) 1998 1997
Distribution Systems 753 716
Distribution Transformers 845 887
Medium-Voltage Equipment 1,154 1,141
Other(not assigned to specific Business Area) – –
Intra-Segment transactions – 80 – 80
Total 2,672 2,664
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
Number of Employees1
AverageCapital Employed(US$ in millions)
98 2,672
97 2,664
96 2,932
95 2,933
94 1,933
98 2,607
97 2,647
96 2,847
95 2,419
94 1,882
98 16,511
97 17,465
96 18,469
95 16,197
94 15,088
98 965
97 970
96 1,064
95 910
94 721
98 179
97 159
96 163
95 107
94 82
Orders Received per Region
EuropeThe AmericasAsiaMiddle East and Africa
41%
37%
14%
8%
13
Automation
With the creation of the new Automation Seg-ment, ABB has positioned itself as a leadingglobal supplier of instrumentation, control andautomation power products, systems and ser-vices. Automation serves a wide range of indus-tries such as utilities, chemicals, oil and gas,pharmaceuticals, pulp and paper, automotive,metals and minerals, marine, food and beverages.
In 1998, ABB made a number of strategicacquisitions in this segment. Key among themwas Alfa Laval Automation, a major Europeansupplier of process control systems and auto-mation equipment. U.K.-based August Systemswas also acquired, allowing ABB to substan-tially broaden its offering of industrial safetysystems in the petrochemical and other sectors.Subsequent to year-end, the acquisition ofElsag Bailey Process Automation was com-pleted with 40 manufacturing units employing11,000 people in more than 30 countries.
Low commodity prices in various industriesand uncertainty caused by volatile financialmarkets reduced customer investments incertain regions. Consequently, global demandfor automation equipment in 1998 was lowerthan in previous years. Orders received in1998 decreased by 4 percent to $ 7,015 million(1997: $ 7,338 million).
In Europe, demand for large systems developedpositively. The Americas showed signs of aslowdown in several process and manufactur-ing industries as prices for many raw materialsand bulk products continued to decrease in1998. Industrial investments in Asia stabilizedon a low level compared to previous years andorders received in that region were below lastyear’s level.
Demand for automation power products suchas variable speed drives, power electronicsystems, electrical motors and machines grewstrongly in the first half of the year, espe-cially in Europe. After a drop in demand atmid-year, orders received in AutomationPower Products recovered due to new productlaunches and customer support programs.Orders received for Utilities and Instrumenta-tion and Control Products remained flatwhile Pulp and Paper, Metals and Minerals aswell as Petroleum, Chemical and ConsumerIndustries were below last year’s level.
Flexible Automation experienced declining in-vestments in the automotive industry, whereasrecord high automobile production ratescontributed to good orders in the service busi-ness. Its focus on selected global auto-partsmakers and the increased focus on generalindustry and consumer goods contributed to asteady base order development. Investmentsin the marine, oil and gas industries remainedhigh during 1998 and in particular, Marineand Turbochargers once again increased theirorders received.
Revenues in 1998 totaled $ 7,036 million, adecrease of 4 percent (1997: $ 7,344 million).Operating earnings reached $ 521 million(1997: $ 646 million) due to exceptional projectcosts overruns in Flexible Automation andPetroleum, Chemical and Consumer Industriesand costs for the millennium change. Thenew organization will focus on further im-proving project execution, increasing customerfocus and reducing costs.
Cyclical demand variations will continue forAutomation during 1999. Orders are expectedto increase and, excluding the effect of theElsag Bailey integration, earnings are expectedto increase as well. The integration of ElsagBailey will somewhat dilute earnings duringthe next two years.
Business Areas in the Automation Segment
Orders Received (US$ in millions) 1998 1997
Automation Power Products 1,738 1,792
Instrumentation and Control Products 1,265 1,304
Flexible Automation 1,365 1,437
Marine and Turbochargers 663 582
Metals and Minerals 603 689
Petroleum, Chemical and Consumer Industries 314 392
Pulp and Paper 471 605
Utilities 1,150 1,154
Other(not assigned to specific Business Area) 112 80
Intra-Segment transactions – 666 – 697
Total 7,015 7,338
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
Number of Employees1
AverageCapital Employed(US$ in millions)
98 7,015
97 7,338
96 7,482
95 7,469
94 6,200
98 7,036
97 7,344
96 7,550
95 6,987
94 5,901
98 43,384
97 43,183
96 41,788
95 38,917
94 37,163
98 2,574
97 2,535
96 2,742
95 2,535
94 2,272
98 521
97 646
96 674
95 496
94 382
Orders Received per Region
EuropeThe AmericasAsiaMiddle East and Africa
57%
26%
12%
5%
14
Oil, Gas and Petrochemicals
ABB Oil, Gas and Petrochemicals offers a com-plete range of services, products and systemsto the global oil, gas, refinery and petrochemi-cal industries, including design and construc-tion of complete onshore and offshore plants.
The upstream market in oil and gas explo-ration as well as the downstream market withrefineries and petrochemicals developedpositively during most of 1998. Demand de-creased in certain markets toward the endof the year with reduced drilling activity as aconsequence of lower oil prices.
Orders received for 1998 increased by 6 per-cent to $ 3,324 million (1997: $ 3,126 million).In the downstream market, major ordersincluded a turnkey contract for an ethyleneand polypropylene plant in the U.S. stateof Texas, which will be the largest of its typein the world. An ABB-led consortium final-ized the turnkey contract for a gas chemicalcomplex in Uzbekistan. ABB also was awardeda turnkey contract for an ethylene plant inSaudi Arabia, confirming ABB’s strong positionin this sector. In the upstream market, ABBreceived a contract for the development of theKuito oil field off the coast of Angola, as wellas a contract for a complete subsea system tothe Snorre B development in the Norwegiansector of the North Sea. These projects confirmABB’s position as a major global player in thesubsea market.
Revenues rose 19 percent above last year at$ 2,860 million (1997: $ 2,396 million), reflectinghigh activity within all product lines.
Operating earnings amounted to $ 175 million,an increase of 42 percent (1997: $ 123 million).This positive development was the result ofefficient large project management, improvedmargins in the service market and generallyhigher volumes.
The segment’s capabilities as a full rangesupplier of deepwater subsea and floating pro-duction systems were improved with the ac-quisition of additional deepwater engineeringexpertise. ABB worked actively to broadenits process technology base in 1998 through
exclusive market agreements with partnersfor chlorine technologies and distillateprocesses. A commercial demonstration plantwas successfully started for the Bisphenol Aprocess, jointly developed with Sinopec inChina. Furthermore, ABB achieved a numberof breakthroughs in catalyst developmentsusing its broad base of chemical engineeringexpertise.
The segment will focus on those areas wherehigh investment activity is expected despitethe expectation for low oil prices in 1999. Onthe upstream side, this includes deepwaterdevelopments, subsea production and process-ing and other areas not dependent on drillingactivities. ABB will support this businesswith the launch of new products, especially inthe area of oil well monitoring and reservoircontrol, i.e. downhole technology. With respectto downstream activities, particular focus willbe placed on refinery upgrade and expansionin order to meet the demand for more environ-mentally friendly transportation fuels.
With this approach, orders are expected to ex-ceed the 1998 level and earnings for 1999 areexpected to reach about the same level as1998.
Business Areas in the Oil, Gas and Petrochemicals Segment
Orders Received (US$ in millions) 1998 1997
Oil, Gas and Petrochemicals 3,324 3,126
Other(not assigned to specific Business Area) – –
Intra-Segment transactions – –
Total 3,324 3,126
Significant Orders for the Oil, Gas and Petro-chemicals Segment in 1998 (US$ in millions)
Ethylene and polypropylene plant U.S. 600
Ethylene plant Saudi Arabia 400
Subsea production system Norway 160
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
Number of Employees1
AverageCapital Employed(US$ in millions)
98 3,324
97 3,126
96 2,596
95 1,952
94 1,553
98 2,860
97 2,396
96 2,045
95 1,470
94 1,233
98 8,774
97 8,160
96 7,379
95 6,122
94 6,253
98 709
97 823
96 912
95 778
94 462
98 175
97 123
96 114
95 50
94 15
Orders Received per Region
EuropeThe AmericasAsiaMiddle East and Africa
40%
34%
2%
24%
15
The segment Products and Contracting com-prises a comprehensive range of productsfor electrical, ventilation and air conditioningsystems, design and execution of completeinstallations for industrial and commercialbuildings, and service of industrial equipmentand processes.
The growth in demand in Western Europeremained positive, although the building andconstruction sector, which influences approxi-mately half of the segment’s products andservices, showed signs of slowing. Industrialproduct markets weakened mainly due tolower demand from Asia. Markets in NorthAmerica remained strong throughout theyear, although signs of lower growth rates inthe U.S. are now surfacing. Demand in LatinAmerica slowed significantly in the secondpart of 1998 due to the financial turmoil in thisregion.
Orders received in 1998 totaled $ 6,464 million,basically the same level as the previous year(1997: $ 6,488 million).
Although the demand for Low-Voltage Productsand Systems slowed in the second half of1998, orders received reached the same levelas 1997. Volume growth in Western Europe andthe U.S. compensated for the order declinein Asia.
Orders for Contracting remained on a highlevel. Increased demand in Finland, Norwayand the U.K. resulted in higher orders receivedfor installation activities. Volumes in the con-struction business were lower due to a moreselective project approach and the difficultmarket situation in Asia. Activities in sectorssuch as airport installations, marine, communi-cations and building services increased.
Air Handling Equipment suffered from themarket decline in Asia where orders forfans and air conditioning products fell sub-stantially. The European market for ventilationwas stable, while products for industrialapplications reported lower volumes due toreduced demand from Asian customers incement, steel and other industries.
Service continued to grow in line with higherdemand for service, revamping and mainte-nance. The full service contract business con-tinued to increase and several new partner-ships and joint ventures with customers wereestablished. Several small acquisitions weremade in the area of workshops to repair rotat-ing machines.
Revenues in 1998 totaled $ 6,385 million(1997: $ 6,381 million). Operating earnings in1998 reached $ 419 million, an increase of5 percent compared to last year (1997: $ 399million). Earnings in Europe showed goodimprovement due to higher volumes and alower cost structure, while the results in Asiaand Latin America weakened due to thedepressed market situation. This also led topricing pressure and restructuring. The focusto reduce administration costs, increaseproductivity and restructure non-profitablebusinesses continued and mitigated dete-riorating markets.
Market growth in industrialized countries over-all is expected to be on a low level in 1999due to reduced investments in both the con-struction and industrial sectors. However,service and maintenance will remain a growtharea and new partnerships and investmentswill be pursued in this field. New products inkey areas will place the segment in a relativelystronger position. Orders and earnings in 1999are expected to exceed the level of 1998.
Products and Contracting
Business Areas in the Products and Contracting Segment
Orders Received (US$ in millions) 1998 1997
Contracting 3,023 3,059
Low-Voltage Products and Systems 2,131 2,142
Air Handling Equipment 514 545
Service 777 751
Other(not assigned to specific Business Area) 232 203
Intra-Segment transactions – 213 – 212
Total 6,464 6,488
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
Number of Employees1
AverageCapital Employed(US$ in millions)
98 6,464
97 6,488
96 7,069
95 6,949
94 6,082
98 6,385
97 6,381
96 6,969
95 6,861
94 5,903
98 53,753
97 54,115
96 54,152
95 52,733
94 52,502
98 1,558
97 1,641
96 1,722
95 1,710
94 1,460
98 419
97 399
96 370
95 422
94 263
Orders Received per Region
EuropeThe AmericasAsiaMiddle East and Africa
80%
9%
7%
4%
16
ABB Financial Services reported record earn-ings in 1998. Higher price volatility in con-nection with instability in Asia led to wideningcredit spreads and a preference for highercreditor quality. Stock markets suffered severeset-backs, but recovered again before year-end. Interest rates decreased in the U.S. andEurope as inflation rates continued to fall.In Europe, the expectation of lower inflationand the pending introduction of the europushed bond yields down further during theyear.
Income before taxes totaled $ 403 million(1997: $ 297 million).
Treasury Centers substantially increased earn-ings. The increased volatility in the financialmarkets provided good trading opportunitiesand most of the earnings were derived fromtrading in bond and money markets. Concen-tration of risk trading to a limited numberof treasury centers continued. During 1998, anew Asian treasury center was establishedin Singapore.
Earnings for Leasing and Financing in 1998were about the same level as in 1997. Signedcontract volume reached $ 549 million. The re-tail leasing activity continued its expansion inNorthern Europe. The lease arranging unitwas further strengthened and is now operatingin five locations including a newly openedentity in Singapore.
Earnings within Insurance also remained onthe same level as last year. The long-term trendof falling insurance premiums continued. Atthe same time, claims started to increase. Theimpact on the insurance sector of HurricaneMitch, one of the strongest ever to hit theAmerican continent, was limited. The under-writing result was unchanged compared tolast year and investment income increasedsomewhat compared to the high result of theprevious year.
Structured Finance was instrumental in closingseveral important projects in 1998, includingthe underwriting of debt financing for theOriental Centro transmission project in Mexico.
Financial Services
Financial agreements were arranged for a totalproject value of $ 4.7 billion, in support ofABB equipment sales totaling $ 3.6 billion. Thelargest of these was for a gas chemical com-plex in Uzbekistan. Structured Finance’s earn-ings were unchanged compared to last year.
Energy Ventures achieved higher earnings in1998. Equity holdings in the Midland andPontook power stations in the U.S. were di-vested. Several projects were being developedin 1998 and one, the Azito project in the IvoryCoast, reached financial closing.
The consolidated assets of Financial Servicesamounted to $ 20.5 billion and representedmarketable securities held by the TreasuryCenters and Insurance, financial leases heldby Leasing and Financing, equity partici-pations held by Energy Ventures, lending toABB projects by Structured Finance andlending to ABB companies by the TreasuryCenters. During 1998, ABB divested its In-vestment Management operations.
Earnings for 1999 are not expected to reachthe same level as in 1998.
Business Areas in the Financial Services Segment
Income before Taxes 1998 1997(US$ in millions)
Treasury Centers 113 63
Leasing and Financing 56 56
Insurance 110 113
Structured Finance 20 19
Energy Ventures 54 46
Investment Management – 1
Holding Activities & Eliminations* 50 – 1
Total 403 297
* 1998 figure reflects the sale of the Investment Management operations.
Orders Received1, 2
(US$ in millions)
Revenues1
(US$ in millions)
Operating Earnings1
(US$ in millions)
Number of Employees1
98 860
97 828
96 479
95 446
94 361
98 860
97 828
96 479
95 446
94 361
98 894
97 885
96 825
95 863
94 816
98 403
97 297
96 323
95 257
94 214
17
Consolidated Financial Statements
Income Statement
Year ended December 31 (US$ in millions) Notes 1998 1997
Revenues 1 30,872 31,265
Material expenses – 13,606 – 14,232
Personnel expenses – 9,044 – 9,498
Other expenses 2 – 5,085 – 4,973
Changes in work in progress and finished goods – 132 180
Depreciation of fixed assets 3 – 926 – 997
Unusual items 4 32 – 608
Operating Earnings after Depreciation 2,111 1,137
Earnings from equity accounted companies 0 2
Dividend income 25 10
Interest income 5 462 325
Interest expense 5 – 734 – 616
Exchange differences 1 – 5
Income before Taxes 1,865 853
Income Taxes 6 – 543 – 258
Net Income before Minority Interests 1,322 595
Minority interests – 17 – 23
Net Income 1,305 572
Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998 except for the operating results up to the third quarter (see Note 23).
Main exchange rates used in the translation of the Financial Statements
ISO Average Year-end Average Year-endCodes 1998 / US$ 1998 / US$ 1997/ US$ 1997/ US$
Australian Dollar AUD 1.58 1.63 1.35 1.53
Canadian Dollar CAD 1.48 1.55 1.39 1.43
Chinese Yuan Renminbi CNY 8.28 8.28 8.29 8.28
Danish Krone DKK 6.70 6.38 6.56 6.82
Finnish Markka FIM 5.35 5.09 5.16 5.42
French Franc FRF 5.90 5.62 5.79 5.99
German Mark DEM 1.76 1.68 1.72 1.79
Indian Rupee IDR 41.13 42.50 36.39 39.21
Italian Lira ITL 1,736.11 1,658.37 1,694.92 1,760.56
Norwegian Krone NOK 7.54 7.61 7.03 7.35
Polish Zloty PLN 3.50 3.50 3.26 3.51
Pound Sterling GBP 0.60 0.60 0.61 0.60
Spanish Peseta ESP 149.43 142.67 145.58 151.68
Swedish Krona SEK 7.95 8.13 7.61 7.90
Swiss Franc CHF 1.45 1.38 1.44 1.45
European Currency Unit (ECU) XEU 0.89 0.86 0.88 0.91
18
Consolidated Financial Statements
Balance Sheet
December 31 (US$ in millions) Notes 1998 1997
Assets
Current Assets
Cash and cash equivalents 7,19 7,790 5,790
Trade receivables 19 6,173 5,656
Inventories 8 4,444 4,907
Other current assets 9,19 4,463 4,283
Total Current Assets 22,870 20,636
Fixed Assets
Financing receivables 7,19 2,145 1,815
Shares and participations 10 750 385
Intangible assets 11 1,927 1,981
Construction in progress 12 173 242
Machinery and equipment 12 2,428 2,479
Land and buildings 12 2,090 2,246
Total Fixed Assets 9,513 9,148
Total Assets 18 32,383 29,784
Liabilities and Equity
Current Liabilities
Trade payables 19 5,225 4,566
Provisions 4,286 5,233
Other current liabilities 13,19 4,963 5,006
Short-term loans 7, 19 3,409 1,715
Total Current Liabilities 17,883 16,520
Non-Current Liabilities
Advances from customers 14 2,646 2,612
Medium- and long-term loans 7 2,808 2,511
Pension liabilities 21 1,771 1,748
Deferred taxes 15 1,001 790
Total Non-Current Liabilities 8,226 7,661
Minority Interests 315 320
Stockholders’ Equity
Share capital 2,087 2,087
Restricted reserves 1,103 965
Other reserves and retained earnings 1,464 1,659
Net income 1,305 572
Total Stockholders’ Equity 16 5,959 5,283
Total Liabilities and Equity 32,383 29,784
Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998 except for the operating results up to the third quarter (see Note 23).
19
Year ended December 31 (US$ in millions) Notes 1998 1997
Cash Flow from Operating Activities
Income before taxes1 1,865 853
Adjustments for depreciation of fixed assets 926 997
Adjustments for changes in provisions – 551 546
Adjustments for changes in pension liabilities 35 11
Other adjustments – 149 – 328
2,126 2,079
Changes in current operating assets and liabilities:
Changes in trade receivables – 631 – 264
Changes in other current assets – 686 – 754
Changes in inventories 168 – 293
Changes in trade payables 744 650
Changes in other current liabilities (excl. income taxes due) – 46 279
Changes in advances from customers 857 498
406 116
Income Taxes Paid – 428 – 404
Net Cash Flow from Operating Activities 2,104 1,791
Cash Flow Related to Investing Activities
Changes in financing receivables – 300 – 232
Acquisitions (net of cash acquired)2 22 – 274 – 288
Capital expenditure for tangible fixed assets – 865 – 1,093
Proceeds from divestitures (net of cash disposed)2 22 60 738
Proceeds from disposal of tangible fixed assets 288 153
Net Cash Flow Related to Investing Activities2 – 1,091 – 722
Cash Flow Related to Financing Activities
Changes in short-term loans 1,672 – 640
Changes in medium- and long-term loans 286 734
Dividends paid – 507 – 446
Other items2 – 509 – 69
Net Cash Flow Related to Financing Activities2 942 – 421
Effects of Translation Differences on Cash and Cash Equivalents 45 – 411
Net Change in Cash and Cash Equivalents 2,000 237
Cash and cash equivalents – beginning of year 5,790 5,553
Cash and cash equivalents – end of year 7,790 5,790
1 Actual interest received /paid does not differ materially from “Interest Income/Expenses” as included in income before taxes and shown in Note 5,and is thus not explicitly shown in the above presentation.
2 1997 restated to reflect the net amount of cash acquired or disposed.
Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998 except for the operating results up to the third quarter (see Note 23).
Consolidated Financial Statements
Statement of Cash Flows
20
Principles for Consolidated Financial Statements
A. GeneralThe consolidated financial statements of ABB AseaBrown Boveri Ltd and its subsidiaries have beenprepared in accordance with the accounting standardsand interpretations issued by the International Account-ing Standards Committee (IASC).
Changes resulting from newly effective IAS are de-scribed in section N below.
Because of the international nature of the Group’s activ-ities and the fact that more of its business is transactedin US$ than in any other currency, the consolidatedfinancial statements are published in that currency.
B. Principles of ConsolidationThe consolidated financial statements include ABB AseaBrown Boveri Ltd and all companies in which it has,directly or indirectly, more than 50% of the voting rightsor over which it exerts decisive influence. Companiesare contained in the consolidation as from the date ofacquisition. Earnings in divested companies are includedup to the date of sale.
Following the decision taken in 1998 to divest ABB’sshare in the ABB Daimler-Benz Transportation Group(Adtranz), the proportionate consolidation of thisbusiness is discontinued. In the year-end accounts,Adtranz is treated as a participation (for details refer toNote 23).
Material investments in companies where ABB AseaBrown Boveri Ltd, directly or indirectly, has not morethan 50% and not less than 20% of the voting rightsare accounted for by the equity method.
Goodwill from acquisitions is capitalized and amortizedover periods not exceeding 20 years.
Assets, liabilities and equity as well as income andexpenses of fully consolidated companies are reflectedin their entirety in the consolidated financial statements.The shares in net income and equity attributable tominority shareholders are stated separately in the con-solidated income statement and balance sheet.
Intercompany balances and transactions, including in-tercompany profits, are eliminated.
C. RevenuesRevenues include sales and other operating income.Sales are reported net of sales or value added tax,returned goods and trade discounts.
D. Revenue RecognitionRevenues from products and services are recognizedat the date of delivery. Revenues from constructioncontracts are recognized according to the percentage-of-completion method. Depending on the type ofbusiness, the stage of completion is determined bydelivery events, by units of delivery or by a surveyof work performed.
E. Foreign CurrenciesTranslation of financial statementsFinancial statements of Group companies expressedin currencies other than US$ are translated at year-endrates of exchange with respect to the balance sheet,and average rates of exchange for the year with respectto the income statement. Translation adjustments areincluded in stockholders’ equity and have no effect onnet income.
In high inflation countries, monetary balance sheetpositions in local currency are stated at closing valuesprior to conversion at the year-end US$ rate. Fixedassets are kept at historic US$ values from acquisitiondates. Revenues and expenses are generally convertedat the exchange rates prevailing at the date incurred.All translation gains/losses from restatements of balancesheet positions are included in net income.
Foreign currency transactionsTransactions in foreign currencies are converted at therate of exchange prevailing at the transaction date.
Foreign currency receivables and payables covered byforward contracts are stated at contracted forwardrates. Other receivables and payables in foreign curren-cies are translated at year-end market rates. Resultingexchange differences are included in net income.
F. Tangible Fixed AssetsTangible fixed assets are stated at cost, less accumu-lated depreciation using the straight-line method overtheir estimated useful lives.
The depreciation periods normally are:– production tools*, EDP-equipment 3 years– machinery and equipment 5–15 years– buildings 15–50 years* other than wear and tear tools which are expensed
G. Research and DevelopmentResearch and general development costs are expensedas incurred. Certain development costs related toproducts in early or pre-commercialization phase arecapitalized under intangible assets. Engineering anddesign costs directly related to contracts are capital-ized in work in progress.
H. Financial Assets and LiabilitiesBalance sheet positions from investing and financingactivities are normally reported at cost. Adjustments forfinancial assets are made if their carrying amountexceeds the value realizable in the foreseeable future.
Entities primarily engaged in transactions with financialinstruments carry their related financial assets andliabilities as well as their off balance sheet positions atfair values. Gains and losses from changes in the fairvalues of such positions are recognized in income asthey arise.
I. InventoriesPurchased goods are stated at the lower of cost –determined on the basis of weighted average prices orby the “first-in, first-out” method – or replacementvalue, while manufactured goods are valued at
21
the lower of manufacturing cost or net realizable value.Appropriate provisions are made for obsolescence.
J. Employee Retirement BenefitsThe cost of defined retirement benefits is determinedon an actuarial basis using accrued benefit valuationmethods which reflect service rendered by employeesto the date of valuation and incorporate assumptionsconcerning employees’ projected salaries. Currentservice costs are charged to income in the periods inwhich the services are rendered. Past service costs,experience adjustments and the effects of changes inactuarial assumptions on retirement benefit costs arecharged or credited to income systematically overa period approximating the average of the expectedremaining working lives of participating employees.
Obligations from retiree medical benefits in the U.S.incurred up to the end of 1992 are being amortized inthe net income over a period of 20 years.
K. ProvisionsProvisions provide cover for identifiable warranties,penalties, loss orders, committed costs for deliveredplant orders, country risks and restructuring measures.
L. TaxationAll taxes ultimately to be paid on income referring tothe reporting period are provided for. These taxes arecalculated in accordance with the regulations inforce in each country. Irrecoverable withholding taxeson current dividends received are included in the taxcharge for the year.
In addition, deferred taxes are recognized by applyingthe balance sheet approach for all future tax conse-quences of transactions and other events treated differ-ently in the financial statements compared to thetax returns. The future benefits of unused tax lossesand tax credits are recognized if their realization isprobable. Deferred taxes are adjusted for changes intax rates, for new taxes imposed and for changes inthe tax system in order to reflect the expected futuretax effects.
M. Orders Received and Order BacklogAmounts stated for orders received and order backlogare expressed at the price level estimated for the dateof delivery of each order.
N. Changes in the 1998 accountsIn 1998 the revised IAS12, Income Taxes, has beenintroduced in all Group companies per January 1, 1998.This change resulted in higher deferred tax assets,partly offset by higher deferred tax liabilities. The neteffect has been credited to shareholders’ equity as achange in accounting principles.
O. Reporting Financial Information by SegmentFor purposes of satisfying the disclosure requirementsunder IAS 14 regarding geographical and businesssegments, reference is made to these figures disclosedin the Group’s Management’s Discussion on pages9–16 of the Financial Review. Following the Group reor-ganization announced in 1998, the Segments arepresented in the new structure and comparable data of
previous periods are restated accordingly. This numeri-cal information is an integral part of these financialstatements.
P. Definition of Key Ratios/ConceptsThe ratios shown for the Group are calculated as fol-lows:
a) Return on equityNet income as a percentage of average stockholders’equity.
b) Return on capital employedIncome before taxes plus interest expense and ex-change differences as a percentage of average capitalemployed. Capital employed consists of stockholders’equity, minority interest, pension liabilities and short-,medium- and long-term loans. Loans taken up at year-end 1998 to finance the Elsag Bailey acquisition in1999, have been excluded from the calculation.
c) Interest coverage ratioIncome before taxes plus interest expense on financialliabilities divided by interest expense on financial liabili-ties.
d) Debt/equity ratioInterest-bearing short-, medium- and long-term liabili-ties, excluding pension liabilities divided by stockhold-ers’ equity plus minority interest.
e) Net cash positionCash and cash equivalents minus interest-bearingshort-, medium- and long-term liabilities, excludingpension liabilities.
f) Capital turnover rateRevenues divided by average total assets.
22
Notes to the Consolidated Financial Statements
Note 1, Revenues
Revenues include the following items:
(US$ in millions) 1998 1997
Sales 29,673 30,069
Other operating income 1,199 1,196
Total 30,872 31,265
Licence income amounted to $ 34 million ($ 32 million).
Note 2, Other Expenses
(US$ in millions) 1998 1997
Expenses for:
Rents, leasing and external services 1,528 1,658
Packing, freight, sales commission and other delivery expenses 1,254 1,220
Communication, advertising, travel and entertainment 1,253 1,220
Repair and maintenance, insurance premiums, licence fees and other expenses 975 783
Taxes on capital and property, and other items 75 92
Total 5,085 4,973
Note 3, Depreciation of Fixed Assets
(US$ in millions) 1998 1997
Machinery and equipment 700 760
Land and buildings 82 92
Goodwill 144 145
Total 926 997
Note 4, Unusual Items
(US$ in millions) 1998 1997
Capital gains/ losses on sales of participations, land and buildings 114 295
Rationalization and restructuring expenses – 21 – 889
Other items – 61 – 14
Total 32 – 608
Major transactions in 1998 giving rise to capital gains included the divestment of various non-core activities mainly in the U.S.,Sweden and Japan, such as ABB’s investment management business of the Financial Services Segment.
23
Note 5, Interest Income/Expense
The net interest earned by Financial Services of $ 322 million ($ 303 million) which also includes risk earnings is capturedwithin Operating Earnings after Depreciation. The corresponding amount is deducted from the interest income reported.
Interest expense is made up of the following items:
(US$ in millions) 1998 1997
Interest on pension liabilities 117 119
Interest on financial liabilities 617 497
Total 734 616
Note 6, Income Taxes
(US$ in millions) 1998 1997
Current taxes on income 325 384
Deferred taxes 235 – 129
Taxes in equity accounted companies 3 3
Taxes in discontinued operations – 20 –
Total 543 258
Reconciliation of income taxes 1998
Income before taxes 1,865
Applicable tax rate* 40.8%
Applicable income tax charge* 761
Income taxed at different rates – 23
Amortization of goodwill not tax deductible 32
Use of tax losses/credits for which no deferred tax assets have been recognized in previous periods – 137
Recognition of previously not qualifying deferred tax assets – 176
Non-recognition of current or write-down of previously recognized deferred tax assets 73
Others, net 13
Total income taxes (current and deferred) 543
Effective tax rate for the year 29.1%
* The reconciliation is an aggregation of separate reconciliations prepared using the enacted tax rates of each individual tax jurisdiction.The applicable tax rate is the weighted average of those enacted tax rates.
Note 7, Financial Instruments
Cash and Cash Equivalents
(US$ in millions) 1998 1997
Cash and bank 2,975 2,266
Marketable securities 4,815 3,524
Total 7,790 5,790
Marketable securities at fair value 4,865 3,596
Cash and cash equivalents essentially correspond to funds available on short-term notice (up to three months). Certain securitieshaving longer maturities are immediately realizable on the pertinent markets. The above amounts include $ 1.2 billion earmarked forthe prefinancing of the Elsag Bailey acquisition in 1999 with the corresponding liability contained in short-term loans.
Not included above are securities sold before year-end and subject to repurchase agreements to be executed in 1999 (1998)amounting to $ 858 million ($ 1,477 million).
The Group’s cash and cash equivalents at the end of 1998 were mainly denominated in USD (44%), SEK (24%), CHF (9%), NOK(6%) and DEM (5%).
Average nominal interest rates were in the range of the rates for loans (refer to table on next page).
24
Financing Receivables
1998 1997
Loans granted 982 716
Receivables, finance lease 1,163 1,099
Total 2,145 1,815
Total financing receivables at fair value 2,204 1,849
Loans
Short-term loans 1998 1997
Short-term borrowings 2,839 1,124
Short-term part of medium- and long-term loans 570 591
Total short-term loans 3,409 1,715
Short-term loans include $ 1.2 billion for the prefinancing of the Elsag Bailey acquisition in 1999 with the corresponding amountcontained in cash and cash equivalents.
Medium- and long-term loans 1998 1997
Maturity 1999 165 465
Maturity 2000 786 578
Maturity 2001 374 195
Maturity 2002 749 488
Maturity 2003 451 250
Maturity 2004 and later 283 535
Total medium- and long-term loans 2,808 2,511
Total loans 1998 1997
Short-, medium- and long-term loans 6,217 4,226
of which secured 2% 1%
Total loans at fair value 6,290 4,255
The Group’s total loans outstanding at the end of 1998 (1997) were denominated in the following original currencies(approximate values):
% of total loans Average nominal interest rates1998 1997 1998 1997
USD 51% 47% 5.4% 6.4%
CHF 16% 19% 3.0% 3.2%
ITL 10% 7% 6.4% 9.0%
DEM 3% 5% 4.1% 4.9%
JPY 2% 3% 2.0% 2.3%
Scandinavian currencies 2% 4% 4.3% 5.0%
Others 16% 15% 7.7% 8.5%
In accordance with ABB financial policies, the industrial companies primarily borrow in local currency to meet their financialrequirements. It should also be noted that the Group actively utilizes the financial markets to manage its exposures, with theresult that the original borrowing currency may not necessarily reflect the currency of final obligation.
The ABB Group has no subordinated loans and no debt convertible into own equity.
Most of the borrowing is in floating rate interest or has been converted into floating rate interest through the use of deriva-tive instruments. The combined interest rate risk of the financial assets and liabilities both recognized and unrecognized isnot significant.
There are no significant concentrations of credit risks, neither in the Trade Receivables nor in Financing Receivables nor inCash and Cash Equivalents. This is achieved on the one hand, by the global and diversified customer base of ABB and, onthe other hand, by making deposits with and holding securities from counterparties with a rating equal or better than ABB.
25
Derivative Instruments
The ABB Group uses derivative financial instruments to manage its interest rate and currency exposures arising from its operational, financing and investment activities, as well as for proprietary trading purposes within Treasury Centers. Grouppolicies require that industrial companies hedge all contracted foreign currency exposures, as well as 50% of the antici-pated sales volume of standard products over the next 12 months.
As of December 31, 1998, the notional amounts and fair values of the outstanding derivative instruments were as follows:
Instruments
(US$ in millions) Notional Fair Notional FairAmounts Values Amounts Values
1998 1998 1997 1997
Exchange-traded
Interest rate futures 14,466 – 11,696 –
Forward rate agreements 762 – 3,170 –
Over-the-counter (OTC)
Forward rate agreements 47,660 – 2 99,132 11
Interest rate and currency swaps 13,398 10 16,747 – 36
Interest rate options 789 – 83 –
Foreign exchange contracts 34,832 53 45,505 – 137
Foreign exchange options 1,940 4 1,307 4
Fair value of outstanding derivatives 65 – 158
The notional amounts indicate the extent of the outstanding derivatives at the balance sheet date and therefore do notreflect the Group’s exposures or risks arising from such transactions. The respective figures in the table above represent thenet notional amount per contract for exchange traded instruments as opposed to the gross notional amount of purchasesand sales for OTC instruments.
The larger part of the notional amounts outstanding but a smaller part of the fair values originates from proprietary risktrading. In order to exercise proper control, such activities are regulated by financial policies containing strict rules for themonitoring of market and credit risk. Market risk represents the risk of fluctuations in the value of the outstanding deriva-tives and is controlled and measured in real-time against predefined limits. Credit risk represents the loss that would beincurred if counterparts failed to meet their obligations. ABB maintains tight control over credit risk by selecting mostlycounterparts of equal or better rating than itself, as well as by avoidance of counterpart concentration. Credit risk is furtherreduced through the use of close-out netting agreements with most of its counterparts.
The fair value in 1998 (1997) of $ 65 million ($ –158 million) corresponds to the estimated net amount that would bereceived if the outstanding derivatives were liquidated on December 31, 1998. The fair value arises primarily on instrumentsused to hedge Group exposures and as such is offset by opposite values of the underlying transactions being hedged. Toderive the fair value of the outstanding derivatives, option pricing models and discounted cash flow methodology have beenapplied using the appropriate market parameters.
Note 8, Inventories
(US$ in millions) 1998 1997
Materials 1,496 1,484
Work in progress 2,460 2,932
Finished goods 488 491
Total 4,444 4,907
Work in progress is reported net of related advances spent:
Work in progress (gross) 3,554 4,440
Advances spent (see Note 14) – 1,094 – 1,508
Work in progress (net) 2,460 2,932
26
Note 9, Other Current Assets
(US$ in millions) 1998 1997
Non-trade receivables 1,688 1,625
Prepaid expenses/accrued income 937 887
Advances to suppliers 511 552
Advances to contractors 50 31
Sales in excess of invoicing 1,277 1,188
Total 4,463 4,283
Sales recognized in excess of invoicing originate from application of the percentage of completion method for constructioncontracts and are reported net of related advances spent, as follows:
Sales in excess of invoicing (gross) 3,241 2,808
Advances spent (see Note 14) – 1,964 – 1,620
Sales in excess of invoicing (net) 1,277 1,188
Note 10, Shares and Participations
(US$ in millions) Book value
Holdings in equity accounted companies 102
Holdings in other companies 648
Total 750
Major companies: Group interest1
ABB Chongqing Transformer Co. Ltd., Chongqing City A
ABB Daimler-Benz Transportation GmbH, Berlin A
Athens International Airport S.A., Spata, Athens B
Catalytic Distillation Technologies Inc., Bloomfield A
Dillingham Sadelmi Joint Venture, California A
Fastighets AB Skulderbladet, Västerås B
Förvaltningsbolaget Åttan HB, Stockholm A
Förvaltningsbolaget Kryddgården HB, Stockholm A
GVK Industries Ltd., India B
Hanson Electrical, West Midlands B
Humber Power Ltd., London B
Indeck North American Power Fund, Wheeling B
Isocracking Catalyst Co., San Francisco A
Jorf Lasfar Energy Company, Casablanca A
Malaysia Transformer Manufacturing, Kuala Lumpur A
Oldchurch Aviation BV, Amstelveen A
Plasticos Del Lago C.A. Venezuela B
Termobarranquilla SA, Santafé de Bogotá A
1 Group interest, direct or indirect: A = 20 to 50%, B = less than 20%.
27
Note 11, Intangible Assets
(US$ in millions) 1998 1997
Goodwill at cost 2,529 2,552
Accumulated depreciation of goodwill – 925 – 750
Goodwill at net book value 1,604 1,802
Other intangibles at net book value 323* 179
Total 1,927 1,981
Reconciliation of goodwill
Net book value as of January 1 1,802 1,788
Additions 122 123
Disposals – – 1
Depreciation – 144 – 145
Other movements – 195 113
Translation differences 19 – 76
Net book value as of December 31 1,604 1,802
* Includes reclassification of capitalized software from tangible fixed assets.
Note 12, Tangible Fixed Assets
Machinery and equipment Land and buildings Total
(US$ in millions) 1998 1997 1998 1997 1998 1997
Acquisition value 6,888 6,843 3,149 3,318 10,037 10,161
Accumulated depreciation – 4,460 – 4,364 – 1,059 – 1,072 – 5,519 – 5,436
Net book value 2,428 2,479 2,090 2,246 4,518 4,725
Amounts committed for capital expenditure after year-end 48 122 3 20 51 142
Insurance values 8,232 8,488 5,725 5,741 13,957 14,229
Reconciliation of tangible fixed assets Construction Machinery Land and Totalin progress and equipment buildings
Net book value December 31, 1997 242 2,479 2,246 4,967
Capital expenditure 206 572 87 865
Disposals – 16 – 184 – 284 – 484
Additions through acquisitions – 42 21 63
Transfer between asset classes – 265 229 36 –
Depreciation – – 700 – 82 – 782
Other movements 3 – 63 – 18 – 78
Translation differences 3 53 84 140
Net book value December 31, 1998 173 2,428 2,090 4,691
Note 13, Other Current Liabilities
(US$ in millions) 1998 1997
Taxes due 437 538
Non-trade payables 2,051 2,196
Accrued expenses/deferred income 2,475 2,272
Total 4,963 5,006
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Note 14, Advances from Customers
(US$ in millions) 1998 1997
Advances (gross) 5,704 5,740
Advances spent relating to sales in excess of invoicing – 1,964 – 1,620
Advances spent relating to work in progress – 1,094 – 1,508
Advances (net) 2,646 2,612
Advances (gross) represent the total of down and progress payments received for orders or parts of orders not yet invoiced.
Advances spent represent the part of gross advances consumed on work performed for orders not yet invoiced.
Note 15, Deferred Taxes
As per January 1, 1998, the Group has adopted the revised IAS 12 on income taxes. This resulted in an increase of both deferred tax assets and of deferred tax liabilities. The net effect of $ 36 million deferred tax assets has been creditedto equity.
(US$ in millions) 1998
Deferred tax assets/liabilities on: Assets Liabilities
Inventories 117 151
Other current assets 33 148
Shares & participations 2 164
Receivables, finance lease 7 493
Other fixed assets 19 458
Provisions 283 88
Other current liabilities 59 67
Pension liabilites and similar 70 47
Other items 136 339
Unused tax losses and unused tax credits 228 –
Total 954 1,955
Net deferred tax liabilities (1997: $ 790 million) 1,001
Accumulated unused tax losses, tax credits and deductible temporary differences that have not been recognized asdeferred tax assets have developed as follows:
Not recognized Potentialdeductible amounts tax savings
At the end of 1997 2,100 782
Used in 1998 (net) – 131 – 54
At the end of 1998 1,969 728
Not recognized deductible amounts by expiry dates:
1999 42
2000 47
2001 59
2002 68
2003 and after 1,753
Total 1,969
29
Note 16, Stockholders’ Equity
Other reserves Of which(US$ in millions) Share Restricted and retained Net translation
capital reserves earnings income Total differences
Opening balance sheet 2,087 965 1,659 572 5,283 – 604
Transfers between reserves 27 545 – 572
Dividends – 460 – 460
Change in accounting principleand other items – 5 – 69 – 74
Translation differences 116 – 211 – 95 –95
Net income 1998 1,305 1,305
Closing balance sheet 2,087 1,103 1,464 1,305 5,959 – 699
Note 17, Contingent Liabilities and Litigations
Contingent liabilities
(US$ in millions) 1998 1997
Discounted bills of exchange 49 74
Guarantees related to financed contracts 46 28
Other contingent liabilities 53 93
Total 148 195
As part of the Group’s business operations there are, in addition to the contingent liabilities listed above, guarantees for the per-formance of various contractual undertakings. Some of these are of an on-demand nature (in respect of which ABB maintainsinsurance protection against “unfair calling”). There is no indication that such guarantees will result in any material payment notprovided for.
Litigations
Various legal actions and claims are pending or may be asserted in the future against Group companies. They mainly include mattersrelating to warranties, personal injury, damage to property, environmental liability and intellectual property rights.
Related risks have been analyzed as to likelihood of occurrence and amounts involved and provisions have been set up after takinginto consideration available insurance coverage. Although the outcome of these matters cannot always be ascertained with preci-sion, Management believes that no material liabilities exceeding those provided in the financial statements of the Group are likely toresult.
Note 18, Assets Pledged
(US$ in millions) 1998 1997
Cash and cash equivalents 1,052 438
Receivables and inventories 23 90
Tangible fixed assets 40 34
Other assets 37 19
Total 1,152 581
30
Note 19, Transactions with Related Parties
The balance sheet includes the following amounts resulting from transactions with either associates (non-consolidatedcompanies in which ABB has a participation), Adtranz (100% in 1998, 50% in 1997) or shareholders:
(US$ in millions) 1998 1997
Cash and cash equivalents 268 130
Receivables 72 28
Financing receivables 27 9
Payables 235 145
Loans 272 191
Note 20, Leases
Finance leases
(US$ in millions) 1998 1997
Assets held under finance leases 14 16
Assets subject to finance lease accounting are included in the relevant categories shown under Note 12, Tangible Fixed Assets.
Liabilities from finance leases 1998 1997
– short-term 5 4
– medium- and long-term 6 13
Total 11 17
Liabilities from finance lease accounting represent the present value of outstanding lease commitments, whereby amortization iscalculated according to the annuity method. Liabilities from finance leases are reported within short-, medium-, and long-term loans.
Commitments from leases 2004Payments due 1999 2000 2001 2002 2003 and later
Finance leases 6 3 2 1 – 1
Operating leases 378 320 264 238 229 586
The above represents the non-discounted contractual lease commitments. Operating leases correspond essentially to the rentalpayments for real estate during the non-cancelable part of the lease term.
Note 21, Retirement Benefit Costs
Retirement benefit costs charged to income in respect of substantive retirement plans:
(US$ in millions) 1998 1997
Defined benefit plans 285 254
Defined contribution plans 297 334
Total 582 588
31
Status of substantive defined benefit plans:
Benefit obligations Assets in excess ofin excess of assets benefit obligations
1998 1997 1998 1997
Projected benefit obligation – 4,045 – 3,296 – 468 – 961
Plan assets at fair value 1,841 1,438 539 1,112
Funded status – 2,204 – 1,858 71 151
Pension liability (–) / asset* – 1,632 – 1,565 117 84
* Pension liabilities stated in the Balance Sheet include in addition minor defined benefit plans as well as accruals for other post-employment benefits, thelatter referring especially to the Americas.
Principal assumptions used to determine retirement benefit costs and projected benefit obligations:
Weighted average rates: 1998 1997
Discount rate 5.8% 6.8%
Rate of compensation increase 3.5% 4.0%
Expected long-term rate of return on plan assets 7.7% 7.6%
Note 22, Acquisitions and Divestitures
Several acquisitions and divestitures of business activities during 1998 (1997) affected the Balance Sheet in the respectiveyears as follows:
Acquisitions
(US$ in millions) 1998 1997
Cash and cash equivalents – 14
Current assets 94 141
Fixed assets 165 135
Current liabilities – 71 – 88
Non-current liabilities – 36 – 23
Net assets acquired 152 179
Goodwill 122 123
Total purchase considerations 274 302
less cash and cash equivalents acquired – – 14
Cash used for acquisitions 274 288
Divestitures
Cash and cash equivalents 142 10
Current assets 1,530 480
Fixed assets 260 149
Current liabilities – 762 – 117
Non-current liabilities – 1,049 – 74
Net assets disposed 121 448
Gains/losses on divestitures 81 300
Total sales considerations 202 748
less cash and cash equivalents disposed – 142 – 10
Cash from divestitures 60 738
The main effects in 1998 resulted from the discontinued consolidation of the share of 50% in the ABB Daimler-Benz Trans-portation Group (Adtranz). For details see the following Note 23.
Other major acquisitions and divestitures are explained under Management’s Discussion – Analysis of the Group.
32
Note 23, ABB Daimler-Benz Transportation Group (Adtranz)
During 1998, ABB decided to dispose of its 50% share in Adtranz. Subsequent to the year-end, agreement was reached forits disposal. Since Adtranz represented a separate business segment of ABB, the consequences of this decision wereaccounted for using the discontinuing operations method of accounting. Under this method, ABB discontinued the propor-tionate consolidation of Adtranz in 1998. However, the pre-tax loss of $ 64 million and the related taxes for the periodup to September 30, 1998 were fully recorded in the income statement. The proportionate assets held by ABB in respect ofAdtranz were reclassified as a participation (Note 10). While no capital gain from this transaction was recognized in 1998,the net gain on disposal (of $ 41 million) will be recorded in the 1999 financial statements when realized.
Summarized below are:– the amounts included in ABB’s financial statements in 1997– the amounts as per third quarter reporting 1998.
Income statement
(US$ in millions) 1998* 1997**
Revenues 1,296 1,870
Expenses, changes in work in progress, depreciation – 1,351 – 1,926
Unusual items – 14 – 55
Operating earnings after depreciation – 69 – 111
Finance net 5 3
Income/loss before taxes – 64 – 108
Taxes and minority interests 21 – 11
Net income/loss – 43 – 119
** 9 months ending September 30, 1998** 12 months
Balance sheet (December 31)
(US$ in millions) 1997
Current assets 1,406
Fixed assets 405
Total Assets 1,811
Current liabilities 938
Non-current liabilities 664
Stockholders’ equity 209
Total Liabilities and Equity 1,811
Note 24, Event after Balance Sheet Date
ABB successfully completed the acquisition of Elsag Bailey Process Automation Group in January 1999 for a total value of$ 2.1 billion including debt of $ 0.6 billion.
The 1998 accounts are not affected by this transaction except for the prefinancing of part of the purchase price as set outin Note 7.
33
Group Auditors’ Report
As auditors of the ABB Group, we have audited the consolidated
financial statements (balance sheet, income statement, statement
of cash flows and notes) of ABB Asea Brown Boveri Ltd for the
year ended December 31, 1998.
These consolidated financial statements are the responsibility of
the Board of Directors. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit.
We confirm that we meet the legal requirements concerning pro-
fessional qualification and independence.
Our audit was conducted in accordance with auditing standards
promulgated by the profession, and with International Standards
on Auditing issued by the International Federation of Accountants
(IFAC), which require that an audit be planned and performed to
obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement. We have
examined on a test basis evidence supporting the amounts and
disclosures in the consolidated financial statements. We have also
assessed the accounting principles used, significant estimates
made and the overall consolidated financial statement presenta-
tion. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements give a true
and fair view of the financial position, the results of operations
and the cash flows in accordance with International Accounting
Standards (IAS) and comply with the law.
We recommend that the consolidated financial statements sub-
mitted to you be approved.
KPMG Klynveld Peat Ernst & Young AG
Marwick Goerdeler SA
B. A. Mathers J. Birgerson
B. J. DeBlanc E. Rufli
Auditors in charge
Zurich, February 3, 1999
ABB Group Auditors’ Report
34
ABB’s Global Scope and Major Subsidiaries
ArgentinaAsea Brown Boveri S.A., Buenos Aires A MS
AustraliaAsea Brown Boveri Pty. Ltd., Sydney, NSW A HOABB EPT Management Ltd., Sydney, NSW A HOABB Industry Pty Ltd., Revesby, NSW A MSABB Transmission & Distribution Ltd., Moorebank, NSW A HO
AustriaAsea Brown Boveri Aktiengesellschaft, Vienna A HO
BelgiumAsea Brown Boveri S.A., Brussels A SA
BrazilAsea Brown Boveri Ltda., Osasco A MS
CanadaAsea Brown Boveri Inc., St. Laurent, Quebec A HO
ChinaAsea Brown Boveri (China) Investments Ltd.,Beijing A HOABB Hefei Transformer Co. Ltd., Hefei B MSABB Industrial and Building Systems Ltd., Hong Kong A SA
ColombiaAsea Brown Boveri Ltda., Bogotá A MS
Czech RepublicAsea Brown Boveri s.r.o., Prague A SAABB EJF Brno a.s., Brno A MSABB Energetické Systémy s.r.o., Brno A MS
DenmarkAsea Brown Boveri A/S, Odense A HOABB Electric A/S, Fredericia A MSABB Energi & Industri A/S, Skovlunde A MS
EgyptAsea Brown Boveri S.A.E., Cairo A HO
FinlandABB Oy, Helsinki A HOABB Control Oy, Vaasa A MSABB Industry Oy, Helsinki A MSABB Installaatiot Oy, Paimio A MSABB Service Oy, Helsinki A MSABB Transmit Oy, Vaasa A MS
FranceAsea Brown Boveri S.A., Paris La Défense A HOABB Flexible Automation S.N.C., Saint-Ouen-l’Aumône A MSABB Industrie S.A.S., Champagne-sur-Seine A MS
GermanyAsea Brown Boveri Aktiengesellschaft, Mannheim A HOABB Calor Emag Schaltanlagen, Mannheim A MSABB Energieanlagenbau GmbH, Dresden A MSABB Flexible Automation GmbH, Friedberg A MSABB Gebäudetechnik AG, Mannheim A HOABB Industrietechnik GmbH, Mannheim A MSABB Kraftwerke Aktiengesellschaft, Mannheim A MSABB Schaltanlagentechnik GmbH, Ladenburg A MSABB Stotz-Kontakt GmbH, Mannheim A MSABB Turbinen Nürnberg GmbH, Nürnberg A MSABB Utilities Automation GmbH, Mannheim A MSBusch-Jaeger Elektro GmbH, Mannheim/Lüdenscheid A MS
GreeceAsea Brown Boveri S.A., Metamorphossis Attica A SA
HungaryAsea Brown Boveri Ltd., Budapest A SA
IndiaAsea Brown Boveri Ltd., Bombay B MSABB ABL Ltd., New Delhi B MS
IndonesiaPT ABB Energy Systems Indonesia, Surabaya B MS
IrelandAsea Brown Boveri Ltd., Dublin A MS
ItalyAsea Brown Boveri S.p.A., Milan A HOABB Adda S.p.A., Lodi A MSABB Elettrocondutture S.p.A., Vittuone, MI A MSABB Sace S.p.A., Bergamo A MSABB Sadelmi S.p.A., Milan A MSABB SAE S.p.A., Milan A MSABB Sistemi Industriali S.p.A., Sesto San Giovanni, MI A MSSOIMI Soc. Impianti Ind. S.p.A., Sesto San Giovanni, MI A MS
JapanABB K.K., Kobe A HO
Korea, Republic ofAsea Brown Boveri Ltd., Seoul A MS
MalaysiaAsea Brown Boveri Holdings Sdn. Bhd., Petaling Jaya A HO
MexicoAsea Brown Boveri S.A. de C.V., Mexico City A HO
NetherlandsAsea Brown Boveri BV, Rotterdam A HOABB Capital, B.V., Amsterdam A FSABB Lummus Crest Holding B.V., The Hague A MS
New ZealandAsea Brown Boveri Ltd., Auckland A MS
NorwayAsea Brown Boveri AS, Billingstad A HOABB Installasjon AS, Billingstad A MSABB Kraft AS, Drammen A MSABB Norsk Kabel AS, Drammen A MSABB Offshore Systems AS, Sandnes A MS
PhilippinesAsea Brown Boveri Inc., Paranaque, MetroManila A HO
PolandAsea Brown Boveri Ltd., Warsaw A HOABB Dolmel Ltd., Wroclaw A MSABB Elta Sp.z.o.o., Lódz B MSABB Zamech Ltd., Elblag A MSABB ZWAR S.A., Warsaw B MS
PortugalAsea Brown Boveri S.G.P.S., S.A., Amadora A HO
RomaniaAsea Brown Boveri SRL, Bucharest A HO
RussiaAsea Brown Boveri Ltd., Moscow A HO
Saudi ArabiaABB Electrical Industries Ltd., Riyadh C MS
SingaporeAsea Brown Boveri Holdings Pte. Ltd., Singapore A HO
South AfricaAsea Brown Boveri (Pty) Ltd., Sandton A HO
SpainAsea Brown Boveri S.A., Madrid A HOABB Generación S.A., Valle de Trapaga (Vizcaya) A MSABB Trafo S.A., Zaragoza A MS
SwedenAsea Brown Boveri AB, Västerås A HOABB Atom AB, Västerås A MSABB Automation Products AB, Västerås A MSABB Automation Systems AB, Västerås A MSABB Contracting AB, Västerås A MSABB Financial Services AB, Stockholm A FSABB Generation AB, Västerås A MSABB Network Partner AB, Västerås A MSABB Power Systems AB, Ludvika A MSABB Service AB, Västerås A SAABB Stal AB, Finspång A MSABB Switchgear AB, Ludvika A MSABB Ventilation Products AB, Jönköping A MS
SwitzerlandAsea Brown Boveri AG, Baden A HOABB Hochspannungstechnik AG, Zurich A MSABB Industrie AG, Baden A MSABB Installationen AG, Volketswil A MSABB Kraftwerke AG, Baden A MSABB Network Partner AG, Baden A MSABB Turbo-Systems AG, Baden A MS
TaiwanAsea Brown Boveri Ltd., Taipei A MS
ThailandAsea Brown Boveri Ltd., Bangkok A HO
TurkeyAsea Brown Boveri Holding A.S., Istanbul A HO
UkraineAsea Brown Boveri Ltd., Kiev A HO
United KingdomAsea Brown Boveri Ltd., London A HOABB Industrial Systems Ltd., Stevenage A MSABB Kent plc, Luton A HOABB Power T&D Ltd., Telford A MSABB Vetco Gray U.K. Ltd., Aberdeen A MSWilliam Steward (Holdings) Ltd., London A HO
United StatesAsea Brown Boveri Inc., Norwalk, CT A HOABB Air Preheater Inc., Wellsville, NY A MSABB C-E Services Inc., Windsor, CT A MSABB Flexible Automation Inc., New Berlin, WI A MSABB Industrial Systems Inc., Columbus, OH A MSABB Lummus Global Inc., Bloomfield, NJ A MSABB Power Generation Inc., Midlothian, VA A SAABB Power T&D Company Inc., Raleigh, NC A MSABB Service Inc., Massillon, OH A MSABB Susa, Inc., North Brunswick, NJ A MSABB Vetco Gray Inc., Houston, TX A MSCombustion Engineering Inc., Norwalk, CT A HO
VenezuelaAsea Brown Boveri S.A., Caracas A MS
VietnamABB Transformers Ltd., Hanoi B MS
ZimbabweAsea Brown Boveri (Private) Ltd., Harare A MS
1 Parent company’s interest, direct or indirect: A = more than 95%, B = 50 to 95%, C = less than 50%
2 FS = Financial services, HO = Holding, MS = Manufacturing and sales, SA = Sales
Country/Company Group Activity2
Interest1Country/Company Group Activity2
Interest1Country/Company Group Activity2
Interest1
35
ABB Group Statistical Data
(US$ in millions, unless otherwise stated) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Consolidated Income Statement
Revenues 30,872 31,265 33,767 32,751 28,758 27,521 29,109 28,443 26,337 20,260
Depreciation of Fixed Assets – 926 – 997 – 1,044 – 1,021 – 893 – 844 – 901 – 819 – 750 – 549
Operating Earnings after Depreciation 2,111 1,137 2,113 2,181 1,574 1,311 1,219 1,417 1,386 918
Income before Taxes 1,865 853 1,901 2,003 1,362 520 861 997 1,052 872
Net Income before Minority Interest 1,322 595 1,242 1,361 795 72 528 633 628 628
Net Income 1,305 572 1,233 1,315 760 68 505 609 590 589
Consolidated Balance Sheet
Cash and Cash Equivalents 7,790 5,790 5,553 6,831 7,612 5,700 5,534 5,211 4,975 4,332
Other Current Assets 15,080 14,846 15,606 15,437 12,348 10,672 11,432 12,688 12,848 10,470
Fixed Assets 9,513 9,148 9,737 9,808 9,095 8,532 8,983 10,157 10,286 7,743
Total Assets 32,383 29,784 30,896 32,076 29,055 24,904 25,949 28,056 28,109 22,545
Current Liabilities 17,883 16,520 17,147 17,302 15,458 13,390 13,203 15,394 15,441 13,209
Advances from Customers 2,646 2,612 2,610 3,576 3,417 2,567 2,983 2,820 2,798 1,768
Medium- and Long-Term Loans 2,808 2,511 1,823 2,644 3,049 2,866 2,993 2,496 2,712 1,746
Other Long-Term Liabilities 2,772 2,538 3,094 2,971 2,732 2,244 2,384 2,547 2,442 1,447
Stockholders’ Equity incl. Minority Interest 6,274 5,603 6,222 5,583 4,399 3,837 4,386 4,799 4,715 4,375
Consolidated Statement of Cash Flows
Cash Flows from Operating Activities 2,104 1,791 834 951 2,135 1,515 1,942 2,128 1,044 1,437
Cash Flows related to Investing Activities – 1,091 – 722 – 1,118 – 402 – 501 – 839 – 373 – 316 – 1,024 – 3,951
Cash Flows related to Financing Activities 942 – 421 – 855 – 1,696 – 122 – 54 – 477 – 1,528 218 3,323
Effects of Translation Differences 45 – 411 – 139 366 400 – 456 – 769 – 48 405 27
Net Changes in Cash and Cash Equivalents 2,000 237 – 1,278 – 781 1,912 166 323 236 643 836
Other Data
Orders Received 31,462 34,803 33,884 35,163 30,827 28,644 31,153 29,209 28,938 21,348
Capital Expenditure for Tangible Fixed Assets 865 1,093 1,168 1,171 935 816 957 1,035 961 783
Capital Expenditure for Acquisitions 274 302 333 315 196 212 253 612 677 3,090
Expenditure for Research and Development 2,463 2,657 2,638 2,627 2,353 2,271 2,386 2,342 1,931 1,361
Dividends Declared Pertaining toFiscal Year (Swiss francs in millions) 740 700 650 520 370 340 340 330 300 290
Net cash/net debt position 1,573 1,564 1,204 1,997 1,686 242 – 7 – 950 – 2,110 – 1,760
Average Capital Employed 12,319 12,085 12,537 12,478 11,816 11,579 12,531 13,403 12,724 9,585
Number of Employees 199,232 213,057 214,894 209,637 207,557 206,490 213,407 214,399 215,154 189,493
Ratios
Operating Earnings after Depreciation/Revenues 6.8% 3.6% 6.3% 6.7% 5.5% 4.8% 4.2% 5.0% 5.3% 4.5%
Return on Equity 23.2% 10.3% 22.2% 28.4% 20.2% 1.8% 11.8% 13.9% 14.5% 16.8%
Return on Capital Employed 21.1% 12.2% 19.9% 21.8% 16.9% 15.4% 14.7% 14.7% 17.3% 15.1%
36
ABB Board of Directors
Percy N. Barnevik (born 1941) Chairman
Chairman: ABB AB, Investor, Sandvik
Board Member: General Motors
Robert A. Jeker (born 1935) Vice-Chairman
Chairman: ABB AG, Batigroup, Feldschlösschen-Hürlimann,Georg Fischer, Messe Basel, Stratec, Swiss Steel
Board Member: Neue Zürcher Zeitung
Former President: Credit Suisse
Gerhard Cromme (born 1943)
CEO: Fried. Krupp AG Hoesch-Krupp
Board Member: ABB AG, Allianz, Suez Lyonnaise des Eaux,Veba, Volkswagen
Jürgen Dormann (born 1940)
CEO: Hoechst
Board Member: ABB AG, Allianz, IBM Corporation
Yotaro Kobayashi (born 1933)
Chairman and Co-CEO: Fuji XEROX
Board Member: Xerox Corporation
Japanese Chairman: The Trilateral Commission
Vice Chairman: International University of Japan, Keizai Doyokai (Japan Association of Corporate Executives)
Donald H. Rumsfeld (born 1932)
Chairman: Gilead Sciences
Board Member: ABB AB, Gulfstream Aerospace, Kellogg,Tribune Company
Former U.S. Ambassador to NATO, U.S. Secretary of Defense, CEO of G.D. Searle & Co., and CEO of General Instrument Corp.
Agostino Rocca (born 1945)
President and CEO: Techint Group
Chairman: Siderar, Techint S.A., Techint Engineering Co.,Tecpetrol
Deputy Chairman: Siderca
Advisory Member: New York Stock Exchange (NYSE), Praxair, Santander Group
Edwin Somm (born 1933)
President: The Association of Swiss Engineering Employers, The Swiss Association of Machinery Manufacturers
Board Member: ABB AG, Georg Fischer, SIG, Swiss Steel
Peter D. Sutherland (born 1946)
Chairman and Managing Director: GoldmanSachs International
Co-Chairman: BP Amoco
Board Member: ABB AB, Ericsson, Investor
Former Director-General GATT and WTO, Former EU Commissioner
Björn Svedberg (born 1937)
Board Member: ABB AB, Gambro, Investor, SAAB, SAGA Petroleum
Lodewijk C. van Wachem (born 1931)
Chairman: Royal Dutch Petroleum
Board Member: Akzo Nobel, ATCO, Bayer, BMW, IBM, Philips, Zurich Financial Services
Former President and CEO: Royal Dutch/Shell
Beat Hess, Secretary to the Board
Auditors
KPMG Klynveld Peat Marwick Goerdeler SAZurich
Ernst & Young AGZurich
Proposed Changes in the ABB Board of Directors
Messrs. Björn Svedberg and Lodewijk C. van Wachemhave announced their intentions to resign from the ABBGroup Board of Directors at the Annual General Meeting onMarch 18, 1999. The Board thanks them for their outstand-ing contributions to the company.
The Board intends to propose to the shareholders onMarch 18, 1999 to newly elect to the ABB Group BoardMr. Martin Ebner, Chairman of BZ Group Holding andPresident of BZ Bank, Switzerland and Mr. JacobWallenberg, Chairman of Skandinaviska Enskilda Bankenand member of the management group of Investor AB,Sweden. In addition, the President and CEO of the ABBGroup, Mr. Göran Lindahl is proposed to join the Board.
Further, the remaining members will be proposed forreelection to the ABB Group Board.
The ABB Group Board has also declared its intention toreelect Mr. Percy N. Barnevik as Chairman of the ABBGroup Board and Mr. Robert A. Jeker as Vice-Chairman.
37
ABB Asea Brown Boveri Ltd, Zurich
Income Statement
Year ended December 31 (CHF in thousands) 1998 1997
Revenues 169,804 181,357
Personnel expenses – 82,639 – 95,055
Other expenses* – 217,381 – 154,814
Depreciation of fixed assets – 4,422 – 20,671
Unusual items – –
Dividend income 899,625 1,094,007
Interest income 96,427 31,193
Interest expense – 50,488 – 43,231
Capital gains on sales of shares and participations 920,513 110,598
Write-down of shares and participations – 842,503 – 151,363
Income Before Taxes 888,936 952,021
Income taxes* – 8,621 – 10,510
Net Income 880,315 941,511
* 1997 restated in accordance with new principles of tax recognition.
Balance Sheet
December 31 (CHF in thousands) Notes 1998 1997
Assets
Current Assets
Cash and cash equivalents 1, 7 2,019,578 790,858
Receivables 2 105,955 162,781
Total Current Assets 7 2,125,533 953,639
Fixed Assets
Loans granted 7 1,677,013 404,475
Shares and participations 8 7,293,386 7,384,883
Trademarks 6,369 8,492
Machinery and equipment 9 3,060 4,195
Total Fixed Assets 8,979,828 7,802,045
Total Assets 11,105,361 8,755,684
Fiduciary assets (ABB Group) 257,736 238,735
Liabilities and Equity
Liabilities
Current liabilities 3, 7 3,068,014 717,533
Provisions 29,355 29,874
Medium- and long-term loans 7 – 180,600
Bonds 4 300,000 300,000
Total Liabilities 3,397,369 1,228,007
Stockholders’ Equity
Share capital 2,768,000 2,768,000
Legal reserve 5 553,600 553,600
Other reserves 1,869,866 1,869,866
Retained earnings 1,636,211 1,394,700
Net income 880,315 941,511
Total Stockholders’ Equity 7,707,992 7,527,677
Total Liabilities and Equity 11,105,361 8,755,684
Fiduciary liabilities (ABB Group) 257,736 238,735
Contingent liabilities 6 126,411 45,117
38
Note 1, Cash and Cash Equivalents
(CHF in thousands) 1998 1997
Cash and bank 1,650,551 601,551
Marketable securities 369,027 189,307
Total 2,019,578 790,858
Note 2, Receivables
(CHF in thousands) 1998 1997
Non-trade receivables 57,088 156,742
Prepaid expenses / accrued income 48,867 6,039
Total 105,955 162,781
Note 3, Current Liabilities
(CHF in thousands) 1998 1997
Non-trade payables 218,862 610,517
Accrued expenses / deferred income 592,414 107,016
Short-term loans 2,256,738 –
Total 3,068,014 717,533
Note 4, Bonds
(CHF in thousands) 1998 1997
1992–2002 7.00 % 150,000 150,000
1992–2002 7.25 % 150,000 150,000
Total 300,000 300,000
Note 5, Legal Reserve
(CHF in thousands) 1998 1997
Balance at the beginning of the year 553,600 553,600
Allocation to legal reserve – –
Balance at the end of the year 553,600 553,600
Note 6, Contingent Liabilities
(CHF in thousands) 1998 1997
Guarantees related to financial operations 126,411 45,117
In addition to the above stated contingent liabilities the company has provided certain guarantees, indemnities andsimilar instruments (“Guarantees”) securing the performance by Group companies of contracts and undertakings enteredinto in the normal course of business. Quantified guarantees amount to CHF 171,043 thousand (CHF 185,545 thousandin 1997). Unquantified guarantees relate to contracts and undertakings of an aggregate value of approximately CHF1,917,389 thousand (CHF 1,967,335 thousand in 1997). The extent of the company’s potential exposure can, however, notreliably be assessed on the basis of such values and no liabilities are expected to arise from the Guarantees.
Notes to the Financial Statements
39
Note 7, Transactions with Related Parties
(CHF in thousands) 1998 1997
The balance sheet includes the following amounts resulting from transactions with subsidiaries:
Current assets 1,688,985 648,486
Loans granted 1,663,138 383,227
Current liabilities 2,514,923 392,524
Medium- and long-term loans – 180,600
The balance sheet includes the following amounts resulting from transactions with shareholders:
Marketable securities 2,742 9,307
Note 8, Shares and Participations
Major subsidiaries of ABB Asea Brown Boveri Ltd are listed on page 34 of the Financial Review.
Note 9, Insurance Value of Machinery and Equipment
The insurance value of machinery and equipment amounts to CHF 13 million at the end of 1998 (CHF 13 million in 1997).
There are no further items which require disclosure in accordance with Art. 663 b of the Swiss Code ofObligations.
Proposed Appropriation of Profit
(CHF in thousands) 1998 1997
Net income for the year 880,315 941,511
Carried forward from previous year 1,636,211 1,394,700
2,516,526 2,336,211
Dividend on class A shares in favor of ABB AB – 370,000 – 350,000
Dividend on class B shares in favor of ABB AG – 370,000 – 350,000
Balance to be carried forward 1,776,526 1,636,211
40
Auditors’ Report
As statutory auditors, we have audited the accounting records
and the financial statements (balance sheet, income statement
and notes) of ABB Asea Brown Boveri Ltd, Zurich, for the year
ended December 31, 1998.
These financial statements are the responsibility of the Board
of Directors. Our responsibility is to express an opinion on these
financial statements based on our audit. We confirm that we meet
the legal requirements concerning professional qualification and
independence.
Our audit was conducted in accordance with auditing standards
promulgated by the profession, which require that an audit be
planned and performed to obtain reasonable assurance about
whether the financial statements are free from material misstate-
ment. We have examined on a test basis evidence supporting
the amounts and disclosures in the financial statements. We have
also assessed the accounting principles used, significant
estimates made and the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the accounting records, financial statements and
the proposed appropriation of available earnings comply with the
law and the company’s articles of incorporation.
We recommend that the financial statements submitted to you be
approved.
KPMG Klynveld Peat Marwick Goerdeler SA
B. A. Mathers
B. J. DeBlanc
Auditors in charge
Zurich, February 3, 1999
41
ABB Parent Companies’ Financial Results 1998
ABB Asea Brown Boveri Group1,000 Companies
33 Business Areas organized into7 Business Segments
ABB Asea Brown Boveri Ltd
Zurich
Switzerland
ABB AGBaden
Switzerland
50%
ABB ABVästeråsSweden
50%
ABB AB Shareholders ABB AG Shareholders ABB AB (Sweden) and ABB AG (Switzerland) are
the two sole owners in equal parts of ABB Asea
Brown Boveri Ltd, Zurich (Switzerland), which is
the holding company of the ABB Group with
approximately 1,000 companies around the world.
The two parent companies each provide a trans-
parent vehicle for investing in ABB as virtually all
of their income and stockholders’ equity comes
from their respective 50-percent shares of the ABB
Group income and equity.
ABB companies throughout the world report
their financial results in local currencies, which
are then translated to U.S. dollars to establish
the ABB Group’s consolidated accounts. In order
to compute the income of the two parent com-
panies, ABB AB (Sweden) and ABB AG (Switzer-
land), their 50-percent shares of ABB Group
income are translated from U.S. dollars to Swedish
kronor (SEK) and Swiss francs (CHF), respectively.
42
ABB AB Annual Report 1998
ABB AB Board of Directors, President and Auditors
Honorary Chairman
Curt Nicolin (born 1921).
President of ASEA 1961–1975.
Chairman 1976–1991.
Members elected by the shareholders
Chairman
Percy N. Barnevik (born 1941). Elected 1998.
Chairman: ABB Asea Brown Boveri Ltd, Investor, Sandvik.
Board Member: General Motors.
Shares held: 45,000 A shares,107,260 B shares.
Donald H.Rumsfeld (born 1932). Elected 1996.
Chairman: Gilead Sciences.
Board Member: ABB Asea Brown Boveri Ltd,Gulfstream Aerospace, Kellogg, Tribune Company.
Former U.S. Ambassador to NATO, U.S. Secretary ofDefense, CEO of G.D. Searle & Co., and CEO of GeneralInstrument Corp.
Shares held: 100 (ADR).
Peter D.Sutherland (born 1946). Elected 1996.
Chairman and Managing Director: GoldmanSachs International.
Co-Chairman: BP Amoco
Board Member: ABB Asea Brown Boveri Ltd, Ericsson, Investor.
Former Director-General GATT and WTO.
Former EU Commissioner.
Shares held: 112.
Björn Svedberg (born 1937). Elected 1991.
Board Member: ABB Asea Brown Boveri Ltd, Gambro, Investor, SAAB, Saga Petroleum.
Shares held: 0.
President
Gunnar Björkenor (born 1951). Appointed 1998.
General Counsel Asea Brown Boveri AB.
Shares held: 161 A shares,14 B shares.
ABB AB’s Statutory Auditors and Group Auditors
Gunnar Widhagen (born 1938). Elected 1985.
(Elected Deputy Auditor 1973.)
Authorized Public Accountant.
Carl-Gustaf Gutberg (born 1946). Elected 1994.
(Elected Deputy Auditor 1988.)
Authorized Public Accountant.
Deputy Auditors:
Torbjörn Hanson (born 1943). Elected 1985.
Authorized Public Accountant.
Jan Birgerson (born 1954). Elected 1996.
Authorized Public Accountant.
43
ABB AB Board of Directors Report
ABB AB (Sweden) and associated companyABB AB’s share of ABB Group’s income beforetaxes and after minority interests for 1998was US$ 920 million (1997: US$ 409 million),an increase of 125 percent. The average U.S.dollar exchange rate increased 4 percent fromSEK 7.61/US$ during 1997 to SEK 7.95/US$ in1998.The year-end exchange rate was up 3 per-cent from SEK 7.90/US$ at the close of 1997to SEK 8.13/US$ at December 31,1998. Aftertranslation, ABB AB’s share of ABB Groupincome before taxes and after minority interestsincreased from SEK 3,116 million in 1997 toSEK 7,318 million in 1998. ABB AB’s income be-fore taxes, including associated company,amounted to SEK 7,311 million in 1998 (1997:SEK 3,114 million). After taxes of SEK 2,130 mil-lion (1997: SEK 940 million), net incomeamounted to SEK 5,181 million (1997: SEK 2,174million) for the year, an increase of 138 percent.
ABB AB’s net income per share amounted toSEK 5.52 in 1998 (1997: 2.32).
ABB AB, parent companyFor fiscal year 1998, ABB AB will receive adividend of CHF 370 million from ABB AseaBrown Boveri Ltd. In order for ABB Group’s1998 profits to be made available to ABB ABshareholders in the spring of 1999, the amountin SEK of 2,042 million was anticipated in theparent company’s 1998 financial statements.
Administrative expenses increased fromSEK11 million in 1997 to SEK 14 million in 1998,and interest net decreased from SEK 9 millionto SEK 7 million. Net income amounted toSEK 2,046 million (1997: SEK1,925 million) forthe year.
The Board of Directors of ABB AB proposes adividend of SEK 2.18 per share (1997: SEK 2.10),totaling SEK 2,045 million (1997: SEK1,970 mil-lion).
For information on compensation to the Boardof Directors, employees and auditors, seeNote 2 “ABB AB Notes to the Financial State-ment” on page 47.
1998 Board ActivitiesDuring 1998, the Board has held four meetingsand a statutory meeting. In addition to thematters normally attended by the Board, theBoard has also (i) prepared a prospectuspursuant to Chapter 4, Article18 of the Com-
panies Act in relation to Gambro AB’s saleof ABB AB A shares and (ii) adopted Rulesof Procedures for the Board. The Rules of Procedures specifies that the Board shallconvene four times a year in addition to thestatutory meeting.
ABB Single-Class ShareThe Boards of Directors of ABB Asea BrownBoveri Ltd of Switzerland, ABB AB of Swedenand ABB AG of Switzerland have approveda plan that would simplify the share capitalstructure of the ABB Group. The plan contem-plates the creation of a Swiss company thatwould offer a single class of shares in exchangefor existing ABB AB and ABB AG shares intwo separate exchange offers. The exchangeoffers are expected to commence shortlyfollowing the Annual General Meetings ofboth ABB AB and ABB AG, scheduled to takeplace on March 18, 1999. More informationabout the offer will be separately distributedto the shareholders of ABB AB and ABB AGsubject to prevailing securities laws and regula-tions.
Board of DirectorsMr. Björn Svedberg has announced hisintention to resign from the Board of Directorsof ABB AB at the next Annual General Meet-ing on March 18,1999 and decided not to standfor reelection to the Board of ABB Group.After serving 8 years on the ABB AB and ABBGroup Boards, Mr. Svedberg has renderedgreat and lasting services on behalf of the com-pany and the Board expresses its sinceregratitude and recognition for his valuable efforts.The remaining members are proposed to be re-elected to the ABB AB Board. The Board intendsto propose to the shareholders to elect Mr.Jacob Wallenberg, Chairman of SkandinaviskaEnskilda Banken and member of the manage-ment group of Investor AB, Sweden to the ABBAB Board.
Introduction of the EuroNo transactions made by ABB AB are affectedby the euro introduction. No decision hasbeen taken by the Board of Directors to intro-duce euro accounting in the Annual Report.
The effects of the euro conversion for the ABBGroup are described on page 6.
44
ABB AB and associated company, five-year overview
(SEK in millions) 1998 1997 1996 1995 1994
Share of ABB Group income before taxes and after minority interests 7,318 3,116 6,304 6,904 5,057
Parent Company’s result before taxes (excluding dividend from ABB) – 7 – 2 8 7 – 7
Income before taxes 7,311 3,114 6,312 6,911 5,050
Net income 5,181 2,174 4,144 4,682 2,923
Stockholders’ equity 24,363 21,053 20,413 17,655 15,029
Per-share data1
(SEK) 1998 1997 1996 1995 1994
Net income 5.52 2.32 2 4.42 4.99 3 3.21
Stockholders’ equity 26.0 22.4 21.8 18.8 16.5
Dividend (1998 proposed) 2.18 2.10 1.75 1.60 1.151 Per-share data 1994–1996 have been adjusted for the 10 :1 stock split in ABB AB shares effective as of April 21, 1997.2 Excluding ABB AB’s part of the ABB Group restructuring charge in 1997, net income per share was SEK 4.77.3 Excluding ABB AB’s part of the gain from the transfer of the ABB Group transportation activities in 1995 to ABB-Daimler Benz Transportation,
net income per share was SEK 4.04.
Key ratios
1998 1997 1996 1995 1994
Pay-out ratio (%) 39.5 90.6 39.6 32.1 35.9
Direct yield (%) 2.5 2.2 2.3 2.5 2.1
Market-to-book (%) 332 418 354 343 329
P/E (price/net income) 15.6 40.5 17.4 12.9 16.9
See “Definitions and Key Ratios”, page 48.
ABB AB in Brief
ABB AB Board of Directors Report
Proposed Appropriation of Profits
At the disposal of the Annual General Meeting are the following earnings (SEK in millions):
Income for the year 2,046
and the balance carried forward 1,230
Total 3,276
The Board of Directors and the President propose that the earnings be appropriated as follows:
to the Shareholders, a dividend of SEK 2.18 per share, totaling 2,045
to be carried forward 1,231
Total 3,276
No transfer to restricted equity is required
Year 2000No problem areas have been identified in theadministrative routines of ABB AB. Consequently
no special actions have been taken in relationto the Year 2000 issue.
45
ABB AB Financial Statements
Income StatementsABB AB and ABB AB,
Notes associated company 1 parent company
Year ended December 31 (SEK in millions) 1998 1997 1998 1997
Administrative expenses – 14 – 11 – 14 – 11
Share of ABB Group income before taxes and after minority interests 7,318 3,116 – –
Dividend income2 – – 2,053 1,927
Interest income 7 9 7 9
Interest expense 0 0 0 0
Income before taxes 7,311 3,114 2,046 1,925
Taxes 4 – 2,130 – 940 – –
Net income 5,181 2,174 2,046 1,9251 ABB AB’s share in the ABB Group results recognized according to the equity method.2 of which anticipated in 1998 SEK 2,042 million and in 1997 SEK 1,920 million.
Statement of Cash FlowsABB AB and ABB AB,
associated company parent company
Year ended December 31 (SEK in millions) 1998 1997 1998 1997
Cash Flow from Operating Activities
Income before taxes 7,311 3,114 2,046 1,925
Adjustments for earnings in equity accounted company in excess of dividend – 3,257 – 524 – –
4,054 2,590 2,046 1,925
Changes in operating assets and liabilities:
Changes in other current receivables 1 0 1 0
Changes in receivables for anticipated dividend – – 122 – 275
Changes in accrued expenses – 1 – – 1 0
Changes in other current liabilities (excl. taxes due) 1 – 1 1 – 1
4,055 2,589 1,925 1,649
Taxes paid – 2,130 – 940 0 0
Net cash from Operating Activities 1,925 1,649 1,925 1,649
Cash Flow from Investing Activities
Changes in financing receivables 1 4 1 4
Acquisition of shares and participations – – – 0
Net cash from Investing Activities 1 4 1 4
Cash Flow from Financing Activities
Dividend paid – 1,969 – 1,639 – 1,969 – 1,639
Changes in short-, medium- and long-term loans – 3 – 4 – 3 – 4
Net cash from Financing Activities –1,972 –1,643 –1,972 –1,643
Net Change in Cash and Cash Equivalents –46 10 –46 10
Cash and cash equivalents at the beginning of the year 186 176 186 176
Cash and cash equivalents at the end of the year1 140 186 140 1861 Cash and Cash Equivalents
Cash and Bank 4 3 4 3Marketable securities 136 183 136 183
Total 140 186 140 186
46
ABB AB Financial Statements
Balance SheetsABB AB and ABB AB,
Notes associated company 1 parent company
December 31 (SEK in millions) 1998 1997 1998 1997
Assets
Fixed Assets
Financial Assets
Shares and participations 6 24,223 20,868 8,985 8,985
Financing receivables – 1 – 1
Total Fixed Assets 24,223 20,869 8,985 8,986
Current Assets
Current Receivables
Other current receivables 2 3 2 3
Receivables for anticipated dividend – 2,042 1,920
Marketable securities 136 183 136 183
Cash and Bank 4 3 4 3
Total Current Assets 142 189 2,184 2,109
Total Assets 24,365 21,058 11,169 11,095
Equity and Liabilities
Equity 5, 7
Restricted Equity
Share capital 4,690 4,690 4,690 4,690
Restricted reserves 3,201 3,201 3,201 3,201
Equity method reserve 10,061 9,714 – –
Unrestricted Equity
Retained earnings 1,230 1,274 1,230 1,274
Net income 5,181 2,174 2,046 1,925
Total Stockholders’ Equity 24,363 21,053 11,167 11,090
Medium- and Long-term Loans 3 0 1 0 1
Current Liabilities
Short-term loans 3 1 3 1 3
Other current liabilities 1 0 1 0
Accrued expenses 0 1 0 1
Total Current Liabilities 2 4 2 4
Total Equity and Liabilities 24,365 21,058 11,169 11,095
Asset Pledged – – – –
Contingent Liabilities – – – –1 ABB AB’s participation in the ABB Group accounted for according to the equity method.
47
ABB AB Notes to the Financial Statements
SEK/US$ rate was SEK 8.13/US$ (December 31,1997: SEK 7.90/US$).
Note 2, Compensations
Board of directorsAt the 1998 Annual General Meeting, share-holders adopted a resolution stating thatno compensation should be paid to the Boardof Directors for the year 1998.
EmployeesAs of July1,1996 ABB AB has no employees.
AuditorsThe audit fee for the year 1998 amounted toSEK 0.2 million (1997: SEK 0.2 million).
Note 3, Loans (Short- and long-term portion)
“Loans” consists of a bond designating ABB ABas the formal borrower, although it is actuallyattributable to Gambro AB for which ABB ABhas a corresponding receivable.The loan was issued in 1974 at an originalamount of SEK18 million, to an interest rate of7.25 percent and maturing in 1999.The remaining short-term portion loan amountsto SEK1 million (1997: SEK 3 million), long-termportion loans amount to SEK 0 (1997: SEK1 mil-lion).
Note 4, Taxes, ABB AB and associated company
(SEK in millions) 1998 1997
Current taxes on income1 1,192 1,434
Deferred taxes1 938 – 494
Total 2,130 9401 Associated company only
Note 1, Principles of accounting
Principles of accounting for associated companyThe equity method is used in accounting forthe interest of ABB AB in the ABB Group. Themethod is in accordance with the recommen-dation issued by the Swedish Financial Account-ing Standard Council. Following the equitymethod, ABB AB reports its share in the ABBGroup’s earnings and stockholder’s equity only,and not a full consolidation. The ABB Groupaccounting is in accordance with the Interna-tional Accounting Standards (IAS). There are nodeviations from the recommendations of theSwedish Financial Accounting Standards Council.
Anticipated dividendIn ABB AB’s financial statements for 1998, theproposed dividend from ABB Asea BrownBoveri Ltd for fiscal year 1998 has been antici-pated. This procedure was also used in 1997.
TaxationProvision is made for all taxes estimated to bepayable on reported income. These taxes are calculated in accordance with the applicableregulations.
Cash and marketable securitiesBank balances and fixed-term deposits of ABBAB are stated at face value.
Foreign currenciesABB AB’s share of ABB Group’s earnings isbased on the average SEK/US$ exchange rateand ABB AB’s share of ABB Group’s stock-holders’ equity is based on the year-endSEK/US$ exchange rate. The average SEK/US$rate during 1998 was SEK 7.95/US$ (1997: SEK 7.61/US$), while the year-end 1998
Note 5, Stockholders’ equity, ABB AB and associated company
(SEK in millions) Share Restricted Equity meth- Retained Net Totalcapital reserves od reserve earnings income
Opening balance sheet 4,690 3,201 9,714 3,448 21,053
Share of earnings in the ABB Group
in excess of dividend 246 – 246
Dividend1 – 1,969 – 1,969
Change in accounting principlesand other items – 300 – 300
Translation differences 401 – 3 398
Net income 1998 5,181 5,181
Closing balance sheet 4,690 3,201 10,061 1,230 5,181 24,3631 Rounded to SEK1,970 million in last year’s proposed dividend.
48
Definitions and Key Ratios
The key ratios below are based on recommen-dations of the Industry and Commerce Commit-tee of the Stockholm Stock Exchange (NBK).
1 Earnings per shareEarnings per share are calculated in accordancewith the equity accounting method consideringABB AB’s share in ABB Group net income plusABB AB’s own net income. Earnings per shareare calculated on the basis of the average num-ber of shares outstanding during the period.
2 Stockholders’ equity per shareStockholders’ equity per share is calculatedon total stockholders’ equity in ABB AB andassociated company balance sheet, dividedby the number of shares outstanding at year-end.
3 Market capitalization of ABB ABThe market capitalization of ABB AB is cal-culated on the number of shares outstandingat year-end.
Västerås, February 3,1999
Percy N. Barnevik(Chairman)
Donald H. Rumsfeld Peter D. Sutherland Björn Svedberg
Gunnar Björkenor(President)
Our auditors report was submitted on February 5, 1999.
Gunnar Widhagen Carl-Gustaf GutbergAuthorized Public Accountant Authorized Public Accountant
Note 6, Shares and participations
(SEK in millions, Equity Net Number Percent Par value Book value Book valueunless otherwise stated) income of shares holding ABB AB ABB AB and
parent Co. assoc. Co.
ABB Asea Brown Boveri Ltd,Zurich, Switzerland1 48,446 10,375 1,384,000 50 CHF 1,384 million 8,985 24,223
ASEA AB,Västerås, Sweden1 SEK 100,000 – 1,000 100 SEK 100,000 0 –
Total 8,985 24,2231 No change compared to 1997
Note 7, Stockholders’ equity, ABB AB, parent company
SEK in millions Share Restricted Retained Net Totalcapital reserves earnings income
Opening balance sheet 4,690 3,201 3,199 11,090
Dividends1 – 1,969 – 1,969
Net income 1998 2,046 2,046
Closing balance sheet 4,690 3,201 1,230 2,046 11,1671 Rounded to SEK1,970 million in last year’s proposed dividend.
ABB AB Notes to the Financial Statements/Definition and Key Ratios
49
Auditors’ Report
To the general meeting of the shareholders of ABB AB.
We have audited the parent company and the consolidated financial
statements, the accounts and the administration of the Board of
Directors and the Managing Director of ABB AB for the 12-month period
ending December 31,1998. These accounts and the administration of
the Company are the responsibility of the Board of Directors and
the Managing Director. Our responsibility is to express an opinion on the
financial statements and the administration based on our audit.
We conducted our audit in accordance with Generally Accepted Auditing
Standards in Sweden. Those Standards require that we plan and perform
the audit to obtain reasonable assurance that 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 their application by the Board of Directors and the Managing
Director, as well as evaluating the overall presentation of information
in the financial statements. We examined significant decisions, actions
taken and circumstances of the Company in order to be able to deter-
mine the possible liability to the Company of any Board Member or the
Managing Director or whether they have in some other way acted in
contravention of the Companies Act, the Annual Accounts Act or the
Articles of Association. We believe that our audit provides a reasonable
basis for our opinion set out below.
In our opinion, the parent company and the consolidated financial
statements have been prepared in accordance with the Annual Accounts
Act and give a true and fair view of the result of its operations and of
the financial position of the Parent Company and the Group, and, conse-
quently we recommend that the income statements and the balance
sheets of the Parent Company and the Group be adopted, and that the
profit (loss) of the Parent Company be dealt with in accordance with
the proposal in the Administration Report.
In our opinion, the Board Members and the Managing Director have
not committed any act or been guilty of any omission which could give
rise to any liability to the Company. We therefore recommend that
the Members of the Board of Directors and the Managing Director be
discharged from liability for the financial year.
Stockholm, February 5,1999
Gunnar Widhagen Carl-Gustaf Gutberg
Authorized Public Accountant Authorized Public Accountant
ABB AB Auditors’ Report
50
Turnover of ABB AB shares 1994–1998(Millions of shares)
1998 1997 1996 1995 1994
Stockholm Stock Exchange 844 450 416 435 484
London Stock Exchange(incl. SEAQ International) 595 404 423 366 386
NASDAQ (New York), ADRs 59 54 59 70 60
Other Stock Exchanges 20 11 7 4 5
Turnover data1994–1997 have been adjusted for10 :1 stock split in ABB ABoriginal shares and ADRs effective as of April 21,1997 and December 23,1998, respectively.
ABB AB Investor Information
Ten largest ABB AB shareholders, December 31,1998Excluding non-Swedish shareholders
Number of % of voting % of capitalshares held rights stock(thousands)
Investor 92,966 13.4 9.9
Fourth National PensionInsurance Fund 64,731 9.3 6.9
Swedish Staff PensionSociety (SPP) 35,345 4.4 3.8
Nordbanken funds 25,792 1.6 2.7
Skandia 16,075 1.8 1.7
Trygg Hansa Insurance 14,762 1.4 1.6
SEB/Trygg/ABB funds 13,329 1.6 1.4
AMF Pension (insurance) 12,000 1.7 1.3
SHB funds 11,883 1.7 1.3
AMF Sick Pay Insurance 8,270 1.2 0.9
Source: DN Ägarservice AB
Shareholders and shares held, by size of holding, December 31, 1998
Size of Number of Number of Percent ofholding shareholders shares held capital stock
1–500 120,707 15,285,887 1.63
501–1,000 19,310 15,404,811 1.64
1,001–10,000 27,442 75,666,347 8.07
10,001–100,000 1,940 48,869,681 5.21
100,001– 378 782,686,294 83.45
Total 169,777 937,913,020 100.00
Source: Värdepapperscentralen VPC AB
ABB AB shareholdersAs of December 31,1998, the total number ofABB AB shareholders was 169,777 (December 31,1997: 170,125). About 44 percent of ABB AB’sshares are owned by institutional investorsin Sweden.Non-Swedish shareholders ownapproximately 43 percent of the share capital(1997: 32 percent) and 33 percent of the votes(1997: 23 percent).
The majority of foreign owners are registered inthe name of nominees; therefore, actual foreignowners are not officially registered. Includingowners registered in the name of nominees,BZ Bank AG is the largest foreign shareholderwith 12.9 percent of the share capital and 8.8 percent of the voting rights.
Dividend policy and dividend ABBAB’s principal source of revenue is dividendincome on its holding of shares in ABB AseaBrown Boveri Ltd. The Board of Directors’ policyis to distribute the full dividend received fromABB Asea Brown Boveri Ltd to its shareholders.The amount of the dividend, calculated in SEK,is affected both by the actual amount paid byABB in CHF and the SEK/CHF exchange rate onthe dividend date.
For fiscal year 1998, ABB AB will receive a divi-dend of CHF 370 million from ABB (dividendpayment is received in April,1999). This dividendfrom ABB Asea Brown Boveri Ltd has beenhedged and equals SEK 2,042 million. In orderfor profits generated by the ABB Group in 1998to be made available to ABB AB shareholdersin the spring of 1999, SEK2,042 million was an-ticipated in the Parent Company’s 1998 financialstatements.
The Board of Directors of ABB AB, accordingly,has resolved to propose a dividend of SEK 2.18per share, totaling SEK 2,045 million (1997:SEK1,970 million). Dividend per share in 1997amounted to SEK 2.10.
During1998, for fiscal year 1997, ABB AB re-ceived a dividend of CHF 350 million from ABB,corresponding to SEK 1,931 million. In orderfor profits generated by the ABB Group in 1997to be made available to ABB AB shareholdersin the spring of 1998, SEK 1,920 million of thedividend in question was anticipated in the Par-ent Company’s 1997 financial statements. Thedividend that ABB AB received from ABB AseaBrown Boveri Ltd is not subject to Swedishtaxation.
51
15
12
9
6
J F M A M J J A S O N D J F M A M J J A S O N D1997 1998
US$
18
Price Trend for ABB AB B shares, Stockholm, Sweden
Bars indicate highest and lowest prices paid for shares each month (in SEK). Affärsvärlden Generalindex (rebased)
120
100
80
60
J F M A M J J A S O N D J F M A M J J A S O N D1997 1998
SEK
140
Bars indicate highest and lowest prices paid for ADRs each month (in U.S. dollars). NASDAQ Composite Index (rebased)
Note: The price trend for ABB AB ADRs has been adjustedfor 10 :1 stock split effective as of December 23,1998.
Per-share data1 A Shares B Shares(SEK, unless otherwise stated)
1998 1997 1998 1997
Net income 5.52 2.32 2 5.52 2.32 2
Dividend (1998 proposed) 2.18 2.10 2.18 2.10
Stockholders’ equity 26.0 22.4 26.0 22.4
Price: – High 131.5 126.0 130.0 126.0
– Low 60.5 76.8 60.0 76.5
– Year-end 86.5 94.0 86.0 93.5
Par value 5 5 5 5
Vote per share 1 1 1/10 1/10
Key ratios1
Return on equity (%) 22.8 11.2 22.8 11.2
Direct yield (%) 2.5 2.2 2.5 2.2
Market-to-book (%) 333 420 331 417
P/E (price/net income) 15.7 40.5 15.6 40.3
Number of shares outstanding 668,197,570 668,197,570 269,715,450 269,715,450
% of total capital stock 71.2 71.2 28.8 28.8
% of voting rights 96.1 96.1 3.9 3.9
Number of shares fully diluted 668,197,570 668,197,570 269,715,450 269,715,450
Stock exchanges listing3 Stockholm Stockholm, Copenhagen,London, NASDAQ (ADR)
1 See “Definitions and Key Ratios” page 48.2 Excluding ABB AB’s part of the restructuring charge in 1997, net income per share was SEK 4.77.3 On NASDAQ in the U.S., ABB AB B shares are traded as level-two sponsored American Depositary Receipts (ADR).
1 ABB AB ADR represents 1 ABB AB B share. ABB AB A and B shares are traded on SEAQ International, London.ABB AB B shares are traded in Frankfurt, XETRA, and on the “Freiverkehr” (third segment) in Munich.
Price Trend for ABB AB ADRs in the United States1 ABB AB ADR represents 1 ABB AB B share
ABB AB has no restriction as to share ownership. At the end of 1998, ABB AB’s market capi-talization, based on outstanding shares, was approximately SEK 81.0 billion (US$10.0 billion),making ABB AB the sixth-largest company in Sweden in terms of market capitalization.
Trend of ABB AB share prices during 1998
During 1998, the price of ABB AB A shares traded on the
Stockholm Stock Exchange decreased by 7 percent, which
meant that the shares developed less than the general
trend in Stockholm (Affärsvärlden Generalindex: +10 per-
cent). In New York, where ABB AB shares are traded in U.S.
dollars, the price of the ADR decreased 6 percent, com-
pared with an increase of the NASDAQ Composite Index
of 40 percent.
52
ABB AB Annual General Meeting
The Annual General Meeting of ABB AB will beheld in the Aros Congress Center, Munkgatan7,Västerås, Sweden at 9.30 a.m.,Thursday, March18, 1999.
At the Annual General Meeting, approval isrequired from the ABB AB shareholders asto both the composition of the ABB Asea BrownBoveri Ltd Board and its dividend policy.
For withholding tax reasons, there is no directconnection between the date of the AnnualGeneral Meeting and the date for dividend pay-out and ex-dividend trading. In 1999, the divi-dend pay-out and ex-dividend trading will takeplace as described in the following text.
NoticeShareholders who wish to participate in theMeeting must notify the Board of Directors oftheir intention to attend, not later than 12.00noon, Monday, March 15,1999.Written notifica-tion should be made to: ABB ABc/o WM-data Assistans ABP.O.Box 1495SE-17129 SolnaNotification may also be made by telephone +46 (0) 8 670 7430 or by fax, +46 (0) 8 470 8560 or bye-mail [email protected] must state their name, address,telephone number, Swedish personal identitynumber (where applicable), and the number ofshares held. Shareholders should also indicatewhether they plan to be present for lunch. ABBAB will confirm receipt of notification bysending an admission card to shareholders notlater than Tuesday, March 16,1999. This cardshould be shown when entering the premisesfor the meeting.
Right to participateOnly shareholders listed not later than March 8,1999, in the share register maintained by Värde-papperscentralen VPC AB (Swedish SecuritiesRegister Center) are entitled to participate in themeeting. To be eligible to participate in themeeting, shareholders who have transferredtheir shares to the trust department of a bank,or to a private broker, must request that theshares be temporarily registered in their ownname in the VPC share register. Shareholdersare advised to notify their trustees of this requestbefore March 8,1999.
ADR holdersRegistered holders of American DepositaryReceipts representing ABB AB B shares have previously been advised by Citibank, N.A.,the depositary, of the steps to be taken tocomply with the requirements cited above ifthey wish to participate in the Annual GeneralMeeting in person or by proxy. If a holderhas not received these instructions, or desiresadditional information, the holder should callthe depositary at +1-800-422-2066.
Record date of dividendMonday, March 29,1999, is the final day for trad-ing in shares carrying rights to dividends.TheBoard of Directors has proposed Thursday, April1,1999, as the record date for payment of thedividend. If shareholders at the Annual GeneralMeeting approve this proposal, it is estimatedthat VPC will dispatch dividend payments onMonday, April 12,1999. To facilitate dividendpayments, shareholders should have a bankaccount which is linked to their VP securitiesaccount.
Change of addressVPC automatically performs address changesfor individuals who have made the customarydefinitive registration of their new addressvia the Swedish Post Office, providing that theshareholder has informed his/her bank thathis/her VP account should be subject to thistype of “SPAR” updating. This means that thereis no obligation to inform ABB AB or VPC ofa change of address. If preferred, it is possibleto register a business address through a de-signated account-operating institute, instead ofusing a personal address.
To ensure that dividend payments, information,etc., are sent to the correct address, legal enti-ties should give notice of any change of addressas soon as possible.
53
ABB AG Annual Report 1998
ABB AG Board of Directors and Auditors
ABB AG’s Statutory Auditors and Group Auditors
KPMG Klynveld Peat Marwick Goerdeler SA, Zurich
Board of Directors
As of December 31,1998
Chairman
Robert A. Jeker (born 1935)
Chairman: Batigroup, Feldschlösschen-Hürlimann, Georg Fischer, Messe Basel, Stratec, Swiss Steel
Vice Chairman: ABB Asea Brown Boveri Ltd
Board Member: Neue Zürcher Zeitung
Former President: Credit Suisse
Elected 1986, term expiring 1999.
Gerhard Cromme (born 1943)
CEO: Fried. Krupp AG Hoesch-Krupp
Board Member: ABB Asea Brown Boveri Ltd, Allianz, Suez Lyonnaise des Eaux, Veba, Volkswagen
Elected 1997, term expiring 2001.
Jürgen Dormann (born 1940)
CEO: Hoechst
Board Member: ABB Asea Brown Boveri Ltd, Allianz, IBM Corporation
Elected 1998, term expiring 2002.
Edwin Somm (born 1933)
Former CEO: ABB Switzerland (1988–1997)
Chairman: The Association of Swiss Engineering Employers, The Swiss Association of Machinery Manufacturers
Board Member: ABB Asea Brown Boveri Ltd Georg Fischer, SIG, Swiss Steel
Elected 1997, term expiring 2001.
54
ABB AG Board of Directors Report
ABB AG (Switzerland) and associated companyABB AG’s share of ABB Group’s income beforetaxes and after minority interests for 1998 wasUS$ 920 million (1997: US$ 409 million), an in-crease of 125 percent. The average U.S. dollarexchange rate was slightly up from CHF 1.44/US$during 1997 to CHF 1.45/US$ in 1998. The year-end exchange rate was down 5 percent fromCHF 1.45/US$ at the close of 1997 to CHF1.38/US$at December 31,1998. After translation, ABB AG’sshare of ABB Group income before taxes andafter minority interests increased from CHF 590million in 1997 to CHF 1,335 million in 1998.ABB AG’s income before taxes, including asso-ciated company, amounted to CHF 1,346 million(1997: CHF 612 million) in 1998. After taxesof CHF 390 million (1997: CHF180 million), netincome amounted to CHF 956 million (1997:CHF 432 million) for the year, an increase of121 percent.
ABB AG’s net income per bearer share amountedto CHF 103.30 in 1998 (1997: CHF 46.80) andCHF 20.66 (1997: CHF 9.36) per registered share.
ABB AG, parent companyThe dividend from ABB AG’s shareholding inABB Asea Brown Boveri Ltd amounted toCHF 350 million in 1998 (1997: CHF 325 million).For fiscal year 1998, ABB AG will receive adividend of CHF 370 million from ABB AseaBrown Boveri Ltd. This amount was anticipatedin the parent company’s 1998 financial state-ments. Therefore a total of CHF 720 million re-sults as dividend income in fiscal 1998. Interestincome totaled CHF 20 million (1997: CHF 30million). Interest income divided by averagecash and cash equivalents of CHF 435 millionamounts to a return of 4.6 percent. Total ex-penditures decreased to CHF11 million (1997:CHF15 million). Net income amounted toCHF 730 million (1997: CHF 345 million) forthe year.
The Board of Directors proposes that thedividend to shareholders be increased toCHF 41.00 gross per bearer share (1997:CHF 40.00) and CHF 8.20 gross per registeredshare (1997: CHF 8.00), a total of CHF 379 mil-lion (1997: CHF 370 million).
Board of DirectorsThe term of office for Mr. Robert A. Jeker expiresat the next General Meeting on March 18,1999.Robert A. Jeker is available for reelection for afurther term.
The Board of Directors proposes the reelectionof Robert A. Jeker to the Board for a four-yearterm of office, i.e. until the Annual GeneralMeeting in 2003.
ABB Single-Class ShareThe Boards of Directors of ABB Asea BrownBoveri Ltd of Switzerland, ABB AB of Swedenand ABB AG of Switzerland have approveda plan that would simplify the share capitalstructure of the ABB Group. The plan contem-plates the creation of a Swiss company thatwould offer a single class of shares in exchangefor existing ABB AB and ABB AG shares intwo separate exchange offers. The exchangeoffers are expected to commence shortlyfollowing the Annual General Meetings of bothABB AB and ABB AG, scheduled to takeplace on March 18, 1999. In order to equalizethe asset values in ABB AG and ABB AB theBoard of Directors suggests that the excess cashin ABB AG be paid out as a special dividendto ABB AG shareholders. More information aboutthe offers will be separately distributed to theshareholders of ABB AB and ABB AG subject toprevailing securities laws and regulations.
55
ABB AG and associated company, five-year overview
(CHF in millions) 1998 1997 1996 1995 1994
Share of ABB Group income before taxesand after minority interests 1,335 590 1,156 1,146 899
Parent Company’s result before taxes (excluding dividend from ABB) 11 22 27 47 – 14
Income before taxes 1,346 612 1,183 1,193 885
Net income 956 432 783 822 505
Stockholders’ equity 4,411 4,140 4,640 3,604 3,096
Per-share data
(CHF) 1998 1997 1996 1995 1994
Net income per:
– Bearer share1 103.30 46.80 2 85.40 90.20 3 57.30
– Registered share1 20.66 9.36 2 17.08 18.04 3 11.46
Stockholders’ equity per:
– Bearer share 477 447 4 506 395 351
– Registered share 95 89 4 101 79 70
Dividend (1998 proposed) per:
– Bearer share 41.00 40.00 38.00 30.00 20.00
– Registered share 8.20 8.00 7.60 6.00 4.001 As from 1997: Basic and diluted earnings per share.2 Excluding ABB AG's part of the ABB Group restructuring charge in 1997, net income per bearer share was CHF 93.80 and per registered share CHF 18.76.3 Excluding ABB AG’s part of the gain from the transfer of the ABB Group transportation activities in 1995, net income per bearer share was CHF 73.95 and
per registered share CHF 14.79.4 Shareholders’ equity per share reduced through lowering of the par value. This led to a repayment of CHF 50 per bearer share and CHF 10 per registered
share. A total of CHF 463 million was paid back to the shareholders on July 10,1997.
Key ratios
1998 1997 1996 1995 1994
Pay-out ratio (%) 39.6 85.7 44.5 33.3 34.9
Direct yield (%), Bearer share 2.5 2.2 2.3 2.2 1.8
Market-to-book (%) 338 410 328 338 319
P/E (price/net income), Bearer share 15.6 39.2 19.5 14.9 19.7
See “Definitions and Key Ratios,” page 59.
ABB AG in Brief
56
Income StatementsABB AG and ABB AG,
associated company1 parent company
Year ended December 31 (CHF in millions) 1998 1997 1998 1997
Share of ABB Group income before taxes and after minority interests 1,335 590 – –
Dividend income – – 720 2 325
Other operating income 1 5 1 5
Administrative expenses – 5 – 7 – 5 – 7
Interest income 20 30 20 30
Interest expense – 5 – 6 – 5 – 6
Income Before Taxes 1,346 612 731 347
Income Taxes – 390 3 – 180 3 – 1 – 2
Net Income 956 432 730 345
1 ABB AG’s share in the ABB Group results recognized according to the equity method.2 Of which anticipated for fiscal 1998: CHF 370 million.3 Contains share in ABB Group taxes.
Statement of Cash Flows1
Year ended December 31 (CHF in millions) 1998 1997
Cash Flow from Operating Activities
Income before taxes 731 347
Changes in operating assets and liabilities:
Changes in receivables for anticipated dividend – 370 0
Changes in other current receivables 2 5
Changes in other current liabilities (excl. taxes due) – 1 – 3
362 349
Taxes paid – 2 – 6
Net Cash from Operating Activities 360 343
Cash Flow from Investing Activities
Changes in financing receivables 0 148
Net Cash from Investing Activities 0 148
Cash Flow related to Financing Activities
Dividend paid – 370 – 348
Repayment of loan 1987–1999 0 – 148
Repayment of loan 1989–2000 – 150 0
Repayment of share capital through reduction of par value 0 – 463
Changes in other financing liabilities 0 – 3
Net Cash related to Financing Activities –520 –962
Net Change in Cash and Cash Equivalents –160 –471
Cash and cash equivalents – beginning of year 450 921
Cash and cash equivalents – end of year 290 4501 Cash flows for ABB AG and associated company and for the parent company are identical.
ABB AG Financial Statements
57
Balance SheetsABB AG and ABB AG,
associated company1 parent company
December 31 (CHF in millions) Notes 1998 1997 1998 1997
Assets
Current Assets
Cash and cash equivalents 1 290 450 290 450
Receivables for anticipated dividend 0 0 370 0
Other current receivables 11 13 11 13
Total Current Assets 301 463 671 463
Fixed Assets
Financing receivables 6 6 6 6
Shares and participations 2 4,120 3,839 2,363 2,363
Intangible assets 0 0 0 0
Land and buildings 3 0 0 0 0
Total Fixed Assets 4,126 3,845 2,369 2,369
Total Assets 4,427 4,308 3,040 2,832
Liabilities and Equity
Current Liabilities
Accrued expenses 1 2 1 2
Other current liabilities 15 16 15 16
Total Current Liabilities 16 18 16 18
Medium- and Long-term Loans 4 0 150 0 150
Stockholders’ Equity
Share capital 5 463 463 463 463
Restricted reserves 2,859 3,087 1,698 1,698
Retained earnings 133 158 133 158
Net income 956 432 730 345
Total Stockholders’ Equity 7 4,411 4,140 3,024 2,664
Total Liabilities and Equity 4,427 4,308 3,040 2,8321 ABB AG’s participation in the ABB Group accounted for according to the equity method.
ABB AG Financial Statements
58
ABB AG Notes to the Financial Statements
ABB AG, parent company
Note 1*, Cash and Cash Equivalents
(CHF in millions) 1998 1997
Bank balances and short-term deposits 49 39
Other fixed-time deposits1 106 192
Bonds 132 214
Shares 3 5
Total 290 450
Of which funds invested inaffiliated companies 55 91
The carrying amounts approximate fair values.1 At December 31,1998, the Company had two interest rate swap
contracts with an obligation to pay floating interest rate and the right to receive interest at a fixed rate:Notional amount Expiry dateCHF 47 million January 15,1999CHF 12 million June 28,1999The positive fair value of these interest rate swaps of approximately CHF 0.3 million has not been reflected in the income statement.
Note 2, Shares and Participations
(CHF in millions) 1998 1997
ABB Asea Brown Boveri Ltd, Zurich1 2,354 2,354
Other participations 9 9
Total 2,363 2,3631 Share of participation: 50%
Number of shares: 1,384,000 (ABB Asea Brown Boveri Ltd total: 2,768,000 shares)
Par value: CHF 1,384 million (ABB Asea Brown Boveri Ltd total: CHF 2,768 million)
Note 3, Land and Buildings
(CHF in millions) 1998 1997
Insured value (fire) 1 3
Note 4*, Medium- and Long-term Loans
(CHF in millions) 1998 1997
31⁄2% loan 1989–2000 (ex option)early repayment (at par) as per December 12,1998 0 150
Total 0 150
Weighted average interest rate – 3.50%
Note 5*, Share Capital
(CHF in millions) 1998 1997
8,159,470 bearer shares, CHF 50 par value 408 408
5,470,750 registered shares,CHF 10 par value 55 55
Total 463 463
Note 6*, Guarantee Commitments
(CHF in millions) 1998 1997
Total 0 0
* Notes apply to both ABB AG, parent company and ABB AG and associatedcompany.
ABB AG and associated company
Note 7, Stockholders’ Equity
(CHF in millions) Share Reserved Total Restricted Retained Net Total Translationcapital shares reserves earnings income differences
Opening balance sheet 463 0 463 3,174 503 4,140 – 36
Dividends – 370 – 370
Translation differences – 264 – 264 - 264
Change in accounting principle and other items – 51 – 51
Net income 1998 956 956
Closing balance sheet 463 0 463 2,859 133 956 4,411 –300
59
ABB AG Principles of Accounting/Definitions and Key Ratios
Principles of accounting
1 Principles of accounting for associatedcompanyThe equity method is used in accounting for theinterest of ABB AG in the ABB Group. Follow-ing the equity method, ABB AG reports its sharein the ABB Group’s income and stockholders’equity only and not a full consolidation.
ABB Group’s consolidated accounts are present-ed in accordance with International AccountingStandards (IAS).
2 Cash and cash equivalentsCash and cash equivalents includes bank de-posits, time deposits and bonds which canreadily be converted into liquid assets. Bankbalances and fixed-term deposits of ABB AGare stated at face value. Fixed-term deposits inforeign currencies are translated at the ex-change rates on the balance sheet date. Securi-ties are valued at market price. Gains andlosses are included in interest income on theincome statement.
3 Foreign currenciesABB AG’s share of ABB Group’s income isbased on the average CHF/US$ exchange rateand ABB AG’s share of ABB Group’s stock-holders’ equity is based on the year-endCHF/US$ exchange rate. The average CHF/US$rate during 1998 was CHF 1.45/US$ (1997:CHF 1.44/US$), while the year-end 1998 CHF/US$ rate was CHF 1.38/US$ (December 31,1997: CHF 1.45/US$).
Definitions and key ratios
1 Earnings per shareEarnings per share are calculated in accordancewith the equity accounting method consideringABB AG’s share in ABB Group net income plusABB AG’s own net income.
Earnings per share are calculated on the basisof the average number of shares outstandingduring the period (basic earnings per share)and, where applicable, on the basis of the fullydiluted number of shares (diluted earnings pershare).
2 Stockholders’ equity per shareStockholders’ equity per share is calculated ontotal stockholders’ equity in ABB AG andassociated company balance sheet, divided bythe number of shares outstanding at year-end.
3 Market capitalization of ABB AGThe market capitalization of ABB AG is calcu-lated on the number of shares outstanding atyear-end.
60
Proposal of the Board of Directors for the Appropriation of Available Earnings of ABB AG
(CHF in millions) 1998 1997
Profit brought forward from previous year 133 158
Net income for the year 730 345
Balance sheet profit available to the General Meeting 863 503
Dividend of 82% on the share capital of CHF 462,681,000 (1997: 80% on CHF 462,681,000) entitled to dividend – 379 – 370
To be carried forward to new account 484 133
If this proposal is accepted, the following dividends will be paid from April 12,1999:
On bearer shares with a par value of CHF 50:
– against presentation of coupon No. 7 CHF 41.00
– less 35% withholding tax CHF 14.35
Net CHF 26.65
On registered shares with a par value of CHF 10:
– remittance to shareholders of record on April 12,1999 CHF 8.20
– less 35% withholding tax CHF 2.87
Net CHF 5.33
Baden, February 3,1999
Robert A. Jeker Edwin Somm(Chairman) (Member)
61
Auditors’ Report
Report of the statutory and group auditors to the general meeting on
March 18,1999 of ABB AG, Baden
As statutory and group auditors we have audited the accounting records
and the financial statements (balance sheet, income statement, state-
ment of cash flow and notes) of the parent company (ABB AG, parent
company) and the group (ABB AG and associated company) for the year
ended December 31,1998.
These parent company and group financial statements are the respon-
sibility of the Board of Directors. Our responsibility is to express an
opinion on these parent company and group financial statements based
on our audit. We confirm that we meet the legal requirements concerning
professional qualification and independence.
Our audit was conducted in accordance with auditing standards pro-
mulgated by the profession and with the International Standards on
Auditing issued by the International Federation of Accountants (IFAC),
which require that an audit be planned and performed to obtain
reasonable assurance about whether the financial statements are free
from material misstatement. We have examined on a test basis evidence
supporting the amounts and disclosures in the parent company and
group financial statements. We have also assessed the accounting
principles used, significant estimates made and the overall group financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
ABB AG, parent company
In our opinion, the accounting records and parent company financial
statements and the proposed appropriation of available earnings comply
with the law and the company’s articles of incorporation.
We recommend that the parent company financial statements submitted
to you be approved.
ABB AG and associated company
In our opinion, the group financial statements give a true and fair view
of the financial position, the results of operations and the cash flows in
accordance with the International Accounting Standards (IAS), and
comply with the law.
We recommend that the group financial statements submitted to you
be approved.
KPMG Klynveld Peat Marwick Goerdeler SA
B. A. Mathers B. J. DeBlanc
Auditor in Charge Auditor in Charge
Zurich, February 3,1999
ABB AG Auditors’ Report
62
ABB AG Investor Information
ABB AG shareholders Number of Percent of Percent ofDecember 31,1998 shareholders share capital votes
Bearer shares (CHF 50 par value; 1 vote) 45,000 1 88.2 59.9
Registered shares (CHF 10 par value; 1 vote) 5,214 11.8 40.1
– Private persons 4,978 1.3
– Banks, finance companies 94 5.0
– Insurance companies, pension funds 63 1.1
– Industry, commerce, services, holding companies 49 4.2
– Non-provident foundations 23 0.1
– Public corporations 7 0.11 Estimate
Important shareholders
At the end of December 1998 the largest shareholders known to the Company are:
Unotec Holding AG, Glarus, together with companies linked to it, held 1,762,065 registered shares. This corresponds to12.9 percent of total voting rights.
Stillhalter Vision AG, Wilen, held 1,394,058 registered shares which corresponds to 10.2 percent of total voting rights. Of thistotal only 475,955 registered shares are recorded in the share register as shares with voting rights, due to statutory regula-tions.
To the best of the Company’s knowledge, no further shareholder holds 5 percent or more of total voting rights.
Trading volumes of ABB AG shares 1994–1998(CHF in millions)
1998 1997 1996 1995 1994
Swiss Exchange 30,252 28,224 16,910 13,839 12,759
SEAQ International, London 5,626 8,220 5,656 7,460 9,355
Dividend policy and dividendABB AG’s principal source of revenue is divi-dend income on its holding of shares in ABBAsea Brown Boveri Ltd. The Board of Directors’policy is to distribute the full dividend receivedfrom ABB Asea Brown Boveri Ltd to its share-holders.
For fiscal year 1998, ABB AG will receive adividend of CHF 370 million from ABB AseaBrown Boveri Ltd (1997: CHF 350 million).
This amount was anticipated in the parent com-pany’s 1998 financial statements. The Boardof Directors of ABB AG proposes a dividend for1998 of CHF 41.00 gross per bearer share (1997:CHF 40.00) and CHF 8.20 gross per registeredshare (1997: CHF 8.00), a total dividend fordistribution of CHF 379 million (1997: CHF 370million). This corresponds to the full dividendreceived from ABB Asea Brown Boveri Ltd aswell as ABB AG’s own result for 1998.
63
2500
2000
1500
1000
J F M A M J J A S O N D J F M A M J J A S O N D1997 1998
CHF
3000
3500
Bars indicate highest and lowest prices paid for ADRs each month (in U.S. dollars). NASDAQ Composite Index (rebased)
Bars indicate highest and lowest prices paid for shares each month (in CHF). Swiss Performance Index (rebased)
Per-share data1 Bearer shares Registered shares(CHF, unless otherwise stated)
1998 1997 1998 1997
Net income2 103.30 46.80 3 20.66 9.36 3
Dividend (1998 proposed) 41.00 40.00 8.20 8.00
Stockholders’ equity 477 447 95 89
Price: – High 2,591 2,448 529 487
– Low 1,150 1,605 240 307
– Year end 1,610 1,835 322 369
Par value 50 50* 10 10*
Vote per share 1 1 1 1
Key ratios1
Return on equity (%) 22.4 9.8 22.4 9.8
Direct yield (%) 2.5 2.2 2.5 2.2
Market-to-book (%) 338 410 338 412
P/E (price/net income) 15.6 39.2 15.6 39.4
Number of shares outstanding4 8,159,470 8,159,470 5,470,750 5,470,750
% of total capital stock 88.2 88.2 11.8 11.8
% of voting rights 59.9 59.9 40.1 40.1
Number of shares fully diluted 8,159,470 8,159,470 5,470,750 5,470,750
Stock exchanges listing5 Swiss Exchange, Swiss Exchange Frankfurt (Xetra), Vienna
1 See “Definitions and Key Ratios” page 59.2 Basic and diluted earnings per share.3 Excluding ABB AG's part of the restructuring charge in 1997, net income per bearer share was CHF 93.80 and
per registered share CHF 18.76.4 ABB AG bearer and registered shares entitled to dividend.5 In addition, ABB AG bearer shares are traded as level-one sponsored American Depositary Receipts (ADR) in
the U.S.10 ABB AG ADRs represent 1 bearer share. ABB AG bearer shares are traded on SEAQ International,London and on the “Freiverkehr” (third segment) in Munich.
ABB AG has no restriction as to share ownership, with the exception that no single share-holder or group of shareholders can be recorded in the share register with more than 8.7 percent of the registered shares issued.
At the end of 1998, ABB AG’s market capitalization, based on outstanding shares, wasapproximately CHF 14.9 billion (US$10.8 billion), making ABB AG the ninth-largest companyin Switzerland in terms of market capitalization.
* The capital reduction via lowering of the nominal share value was approved at the Annual General Meeting onApril 3,1997. This led to a repayment of CHF 50 per bearer share and CHF 10 per registered share. A total of CHF 463 million was paid back to the shareholders on July 10,1997.
Price trend for ABB AG ADRs in the United States10 ABB AG ADRs represents 1 ABB AG bearer share
Price trend for ABB AG bearer shares, Zurich
160
140
120
100
J F M A M J J A S O N D J F M A M J J A S O N D1997 1998
US$
180
200
Trend of ABB AG share prices during 1998During 1998, the price of ABB AG bearer shares traded on the Swiss Stock Exchange decreased by 12 percent, whichmeant that the shares developed less than the generaltrend in Zurich (Swiss Performance Index: +15 percent). InNew York, where ABB AG shares are traded in U.S. dollars,the price of the ADR decreased by 7 percent, comparedwith an increase of the NASDAQ Composite Index by 40 percent.
64
ABB AG Annual General Meeting
The 1999 Annual General Meeting of ABB AGwill be held on Thursday, March 18,1999, at3.30 p.m. in the “Tägerhard” sports center inWettingen (near Zurich), Switzerland.
At the Annual General Meeting, ABB AG share-holders will be consulted on both the compo-sition of the ABB Asea Brown Boveri Ltd Boardand its dividend policy.
For withholding tax reasons, there is no directconnection between the date of the AnnualGeneral Meeting and the date for dividend pay-out and ex-dividend trading. In 1999, thedate for dividend pay-out and ex-dividend trading will be April 12.
Admission CardsHolders of registered shares of ABB AG willreceive their admission cards on request usingthe reply form enclosed with the invitation.
Upon depositing their shares, holders of bearershares can obtain their admission cards upto March 12, 1999, from one of the followingbanks:
UBS AG, ZurichCredit Suisse First Boston, ZurichCredit Suisse, ZurichZürcher Kantonalbank, ZurichAargauische Kantonalbank, AarauNeue Aargauer Bank, Badenor, against confirmation of having depositedtheir shares, directly from ABB AG, Share Office,CH-5401 Baden.
The full text of the invitation in accordance withArt. 700 of the Swiss Code of Obligations, waspublished in Schweizerisches Handelsamtsblatton February 18,1999.
ABB Asea Brown Boveri LtdInvestor RelationsP. O. Box 8131CH-8050 ZurichSwitzerland Phone +41 (0)1 317 7111Telefax +41 (0)1 311 9817
ABB ABP. O. BoxSE-72160 VästeråsSwedenPhone +46 (0)21 13 7020Telefax +46 (0)21 32 5448
ABB Asea Brown Boveri LtdEnvironmental AffairsV. Esplanaden 9a 4 F1SE-35231 VäxjöSwedenPhone +46 (0)470 22 005Telefax +46 (0)470 22 002
ABB AGP. O. BoxCH-5401 BadenSwitzerland Phone +41 (0)56 205 7700Telefax +41 (0)56 222 1026
ABB Asea Brown Boveri LtdCorporate CommunicationsP. O. Box 8131CH-8050 ZurichSwitzerland Phone +41 (0)1 317 7111Telefax +41 (0)1 311 7958
Internet addresshttp://www.abb.com
a
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