Analysis of results of operations

Our consolidated results from operations were as follows:

(XLS:)

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

2011

2010

2009

Orders

40,210

32,681

30,969

Order backlog at December 31,

27,508

26,193

24,771

 

 

 

 

Revenues

37,990

31,589

31,795

Cost of sales

(26,556)

(22,060)

(22,470)

Gross profit

11,434

9,529

9,325

Selling, general and administrative expenses

(5,373)

(4,615)

(4,491)

Non-order related research and development expenses

(1,371)

(1,082)

(1,037)

Other income (expense), net

(23)

(14)

329

Earnings before interest and taxes

4,667

3,818

4,126

Net interest and other finance expense

(117)

(78)

(6)

Provision for taxes

(1,244)

(1,018)

(1,001)

Income from continuing operations, net of tax

3,306

2,722

3,119

Income from discontinued operations, net of tax

9

10

17

Net income

3,315

2,732

3,136

Net income attributable to noncontrolling interests

(147)

(171)

(235)

Net income attributable to ABB

3,168

2,561

2,901

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

3,159

2,551

2,884

Net income

3,168

2,561

2,901

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.38

1.12

1.26

Net income

1.38

1.12

1.27

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.38

1.11

1.26

Net income

1.38

1.12

1.27

A more detailed discussion of the orders, revenues and Operational EBITDA for our divisions follows in the sections of “Divisional analysis” below entitled “Power Products,” “Power Systems,” “Discrete Automation and Motion,” “Low Voltage Products,” “Process Automation” and “Corporate and Other.” Orders and revenues of our divisions include interdivisional transactions which are eliminated in the “Corporate and Other” line in the tables below.

Orders

(XLS:)

 

 

 

 

% Change

($ in millions)

2011

2010

2009

2011

2010

(1)

Includes interdivisional eliminations

Power Products

11,068

9,778

10,940

13

(11)

Power Systems

9,278

7,896

7,830

18

1

Discrete Automation and Motion

9,566

5,862

4,702

63

25

Low Voltage Products

5,364

4,686

4,079

14

15

Process Automation

8,726

7,383

6,684

18

10

Operating divisions

44,002

35,605

34,235

24

4

Corporate and Other(1)

(3,792)

(2,924)

(3,266)

n.a.

n.a.

Total

40,210

32,681

30,969

23

6

In 2011, total order volume increased by 23 percent (18 percent in local currencies, 11 percent excluding the Baldor acquisition). Customer investments to increase operational efficiency and services translated into higher orders for the automation divisions, where the pace of order growth in the second half of 2011 slowed versus the growth rates of the first half of the year. The need to strengthen power distribution networks, driven in part by industrial growth in emerging markets, as well as the integration of renewable energy supplies into power grids, lifted orders in the power businesses.

In 2011, orders in the Power Products division grew by 13 percent (8 percent in local currencies) and were higher in all businesses. The order increase was driven primarily by continued strength in the industrial and power distribution sectors as well as large orders in the transmission sector. Continuing investments in grid upgrades and the integration of renewable energy sources fuelled an 18 percent (12 percent in local currencies) orders increase in the Power Systems division. In August, ABB won its largest-ever power transmission order, worth around $1 billion, to supply a power link connecting offshore North Sea wind farms to the German mainland grid. The strong growth in the Discrete Automation and Motion division reflected continued demand for energy-efficient automation solutions leading to an increase in orders of 63 percent (57 percent in local currencies, 21 percent excluding the Baldor acquisition). While all businesses contributed to the increase in orders in that division, Robotics and Power Electronics posted the highest growth rates. Orders were 14 percent higher in Low Voltage Products (9 percent in local currencies), mainly on increased demand for low-voltage systems to improve electrical efficiency in industry. Order growth slowed in that division in the second half of the year on a combination of more difficult comparisons with the strong growth recorded in 2010, slowing demand in most early-cycle industries and cutback in renewable investments compared to the previous year. The Process Automation division saw orders up 18 percent (12 percent in local currencies), mainly on continuing demand from the oil and gas and related marine industry. Service orders in Process Automation grew at a double-digit pace as well.

Base orders grew significantly in the first half of 2011, as the global economic upturn continued. Although the development slowed in the second half of the year amid increased uncertainties about the global macroeconomic outlook, growth rates remained double digit. For ABB as a whole, base orders grew by 21 percent (16 percent in local currencies), as all divisions reported an increase in base orders in 2011. Additionally, a number of sizeable projects in the tender backlog materialized into large orders, which led to significant growth in the year. After a decline in 2010, large orders rebounded and grew 32 percent (25 percent in local currencies).

Total orders in 2010 increased 6 percent (4 percent in local currencies) compared to 2009 as the global economy began to recover, as reflected in increased spending by industrial customers in energy-efficient automation and power solutions to increase productivity and quality. Investments by utilities in large power transmission projects, however, remained cautious.

In 2010, orders in our Power Products division decreased 11 percent (13 percent in local currencies) as transmission spending remained low, resulting in lower order volumes, especially in large power transformers and high-voltage equipment. The economic recovery however did lead to an increase in the power distribution segments with higher orders in the medium-voltage product lines. Orders in our Power Systems division were up 1 percent (down 1 percent in local currencies). Large orders were down, while the division saw a large increase in base orders in substations and power generation due to an ongoing focus on renewable energy and grid reliability. Orders in our automation divisions, which are typically earlier in the business cycle, have benefited from increased investments by industrial customers on the back of an upturn in the global economy. Discrete Automation and Motion orders grew 25 percent (23 percent in local currencies) as industrial customers increased investments in automation solutions to improve productivity and energy efficiency. Within the Discrete Automation and Motion division, order growth was especially strong in the Robotics business, which experienced a turnaround, and in the low-voltage drives business. Towards the end of 2010, mid- to late-cycle businesses also began seeing order growth. Orders in the Low Voltage Products division increased 15 percent (15 percent in local currencies) as demand from general industry and construction improved in most regions. In our Process Automation division, orders grew 10 percent (7 percent in local currencies) as investments in the energy and commodity-based sectors recovered and activity in the marine business also improved, however from low levels.

As base orders began recovering on the upturn in the global economy, we continued to see for the first half of 2010 that large scale investments in both industry and utilities were delayed as customers assessed the stability of the recovery. Later in 2010 customers became more optimistic, which materialized into a number of large order awards in the fourth quarter of 2010. However, this attitude shift was not enough to compensate the low levels of large orders in the first half of 2010. Consequently, large orders were down 17 percent (20 percent in local currencies).

We determine the geographic distribution of our orders based on the location of the customer, which may be different from the ultimate destination of the products’ end use. The geographic distribution of our consolidated orders was as follows:

(XLS:)

 

 

 

 

% Change

($ in millions)

2011

2010

2009

2011

2010

Europe

15,202

13,781

11,983

10

15

The Americas

9,466

6,223

5,996

52

4

Asia

12,103

8,720

8,197

39

6

Middle East and Africa

3,439

3,957

4,793

(13)

(17)

Total

40,210

32,681

30,969

23

6

Orders in 2011 grew in the Americas 52 percent (50 percent in local currencies) driven by the Baldor acquisition as well as by organic growth. The U.S., Canada and Brazil were the main growth drivers in this region, as Brazil recorded large orders in the Power Systems division, as well as in the Power Automation division from the oil & gas and minerals sectors. In Asia, orders were up 39 percent (32 percent in local currencies) on double-digit growth in all divisions. In China, large orders for Power Systems and for Power Products as well as base order growth in the Discrete Automation and Motion and Low Voltage Products divisions drove significant order growth. India returned to double-digit order growth after a contraction in 2010 and South Korea recorded large orders from the marine sector. Europe grew 10 percent (4 percent in local currencies), on growth in the industrial sectors. Additionally, a large order for offshore wind farm connection in Germany was repeated in 2011 (at a higher amount than in the previous year) and Norway won large orders in the oil and gas sector. Order volumes decreased in the MEA by 13 percent (15 percent in local currencies) as large orders from the power sector in Saudi Arabia and from the oil and gas sector in Congo were offset by a lower orders level in the Power Systems division in Kuwait, Qatar and the United Arab Emirates.

In 2010, order volumes grew in all markets except in the MEA, which was down 17 percent (19 percent in local currencies), where we were unable to repeat the large order intake of 2009 from utility and oil and gas customers in Algeria, Kuwait and Saudi Arabia. Orders from Europe grew 15 percent (16 percent in local currencies) as a result of large order awards to the Power Systems division from Belgium, Germany, Norway and Sweden as well as a turnaround in the Robotics business of the Discrete Automation and Motion division. In the Americas, orders increased 4 percent (down 1 percent in local currencies) on strong growth in the automation divisions, while Power Systems’ orders were down as the level of large orders in Brazil in 2009 could not be matched in 2010. Orders received in the Power Products division in the Americas remained at the same level as 2009 as lower volumes in the transformer business were offset by growth in high- and medium-voltage equipment. Orders in Asia increased 6 percent (2 percent in local currencies) as growth in the automation divisions offset lower volumes in the transformer business in China.

Order backlog

(XLS:)

 

December 31,

% Change

($ in millions)

2011

2010

2009

2011

2010

(1)

Includes interdivisional eliminations

Power Products

8,029

7,930

8,226

1

(4)

Power Systems

11,570

10,929

9,675

6

13

Discrete Automation and Motion

4,120

3,350

3,046

23

10

Low Voltage Products

887

838

734

6

14

Process Automation

5,771

5,530

5,523

4

Operating divisions

30,377

28,577

27,204

6

5

Corporate and Other(1)

(2,869)

(2,384)

(2,433)

n.a.

n.a.

Total

27,508

26,193

24,771

5

6

In 2011, orders grew at a higher rate than revenues leading to an increase in group order backlog by 5 percent (9 percent in local currencies) compared to 2010. The increase in order backlog in the Power Systems division is largely based on large orders for grid upgrades and the integration of renewable energy sources. The order backlog in the Power Products division grew slightly in 2011 after a decline in 2010. Despite slowing growth in global industrial demand in the second half of 2011, order backlog in the Discrete Automation and Motion division, only partly driven by the Baldor acquisition, and in the Low Voltage Product division continued to grow in 2011. The Process Automation division benefited from large orders in the oil and gas related marine sectors, which increased order backlog.

In 2010, order backlog increased 6 percent (4 percent in local currencies) compared to 2009, following the growth in orders received. Growth of order backlog in the Power Systems division continued to be driven by large orders which typically have longer execution times. Order backlog also increased in the Discrete Automation and Motion and Low Voltage Products divisions as orders received grew faster than revenues reflecting market recovery in the industrial sector. Order backlog in the Process Automation division was flat and in the Power Products division backlog declined, primarily due to weak orders in the transmission sector.

Revenues

(XLS:)

 

 

 

 

% Change

($ in millions)

2011

2010

2009

2011

2010

(1)

Includes interdivisional eliminations

Power Products

10,869

10,199

11,239

7

(9)

Power Systems

8,101

6,786

6,549

19

4

Discrete Automation and Motion

8,806

5,617

5,405

57

4

Low Voltage Products

5,304

4,554

4,071

16

12

Process Automation

8,300

7,432

7,839

12

(5)

Operating divisions

41,380

34,588

35,103

20

(1)

Corporate and Other(1)

(3,390)

(2,999)

(3,308)

n.a.

n.a.

Total

37,990

31,589

31,795

20

(1)

Revenues in 2011 increased 20 percent (15 percent in local currencies) on the back of strong orders recorded in the previous year as well as on improving revenues from early-cycle business in the first half of the year. Excluding the Baldor acquisition, revenues increased 14 percent (9 percent in local currencies).

Revenues in the Power Products division increased 7 percent (2 percent in local currencies) following two years of revenue declines, mainly on growth in medium-voltage products but also on higher revenues in transformers and high-voltage products. In the Power Systems division, revenues increased 19 percent (14 percent in local currencies) on the successful execution of large orders placed in the previous year in the grid systems and power generation businesses. Revenues rose 57 percent (51 percent in local currencies) in the Discrete Automation and Motion division and 22 percent (16 percent in local currencies) excluding the Baldor acquisition. The Robotics business confirmed the turnaround seen in 2010 and grew at a double-digit pace in 2011. Revenues growth softened in the second half of the year in Low Voltage Products resulting in 16 percent higher revenues in 2011 (11 percent in local currencies) compared to the previous year. Revenues in the Process Automation division, which is later in the economic cycle, were 12 percent (6 percent in local currencies) higher, supported by solid orders received in minerals, pulp and paper, turbo chargers and oil and gas businesses.

Revenues in 2010 declined 1 percent (2 percent in local currencies) due primarily to the impact of lower orders received in the prior year. The short-cycle business improvement in the second half of the year and the good large order execution in 2010 could not compensate for the impact of weak revenues generated at the beginning of the year.

Revenues in the Power Products division decreased 9 percent (11 percent in local currencies) due to lower opening backlog and continued weak orders in high-voltage and transformers products. The Power Systems division’s revenues increased 4 percent (2 percent in local currencies) on order execution especially in substations and power generation projects. Revenues in the Discrete Automation and Motion division increased 4 percent (3 percent in local currencies) driven by a turnaround in the Robotics business, as well as growth in industrial and commercial sectors in many countries around the world. Revenues rose 12 percent (13 percent in local currencies) in the Low Voltage Products division reflecting a strong recovery of our short-cycle business. In the Process Automation division, revenues decreased 5 percent (6 percent in local currencies) mainly due to a decline of orders in the metal and marine businesses and in our performance-based outsourced maintenance contracts business.

We determine the geographic distribution of our revenues based on the location of the customer, which may be different from the ultimate destination of the products’ end use. The geographic distribution of our consolidated revenues was as follows:

(XLS:)

 

 

 

 

% Change

($ in millions)

2011

2010

2009

2011

2010

Europe

14,657

12,378

13,093

18

(5)

The Americas

9,043

6,213

6,049

46

3

Asia

10,136

8,872

8,684

14

2

Middle East and Africa

4,154

4,126

3,969

1

4

Total

37,990

31,589

31,795

20

(1)

In 2011, revenues in Europe grew 18 percent (11 percent in local currencies) on the execution of large Power Systems orders, as well as on demand for automation products across the region. Revenues from the Americas increased 46 percent (43 percent in local currencies and 14 percent excluding the Baldor acquisition). In the U.S., industrial demand grew significantly and the transmission and distribution markets recovered from a low level, while Brazil revenues grew on the execution of large orders. Revenues from Asia increased 14 percent (9 percent in local currencies) on growth from the industrial automation sector in China and India. Revenues in MEA increased 1 percent, however declined 2 percent in local currencies. Weaker large orders in the previous year lead to a decline in revenues in the utilities and oil and gas sector, which offset higher revenues from the other industrial automation sectors.

In 2010, revenues in Europe decreased 5 percent (4 percent in local currencies) driven mainly by weak revenue generation from the utilities sector in Germany and Spain as well as from the industrial sector in Finland, Denmark and Norway. Revenues in other major countries in the region were slightly lower or nearly flat compared to 2009 except in Italy and Netherlands where revenues increased in all divisions. Revenues from the Americas increased 3 percent (decreased 1 percent in local currencies) as a result of higher invoicing from the execution of large orders in Brazil which more than offset lower revenues in the U.S. transmission and distribution market. Revenues from Asia increased 2 percent (decreased 2 percent in local currencies) as revenues increased in China, triggered by growth in the industrial sector and decreased in India (in local currencies) on account of weak orders in both utilities and industrial sectors. Revenues in MEA increased 4 percent (4 percent in local currencies) driven by the execution of large orders in system businesses in Kuwait, Iraq, Saudi Arabia and Algeria which were partly offset by lower revenues in Congo and Qatar.

Cost of sales

Cost of sales consists primarily of labor, raw materials and components but also includes expenses for warranty, contract losses and project penalties, as well as order-related development expenses incurred in connection with projects for which corresponding revenues were recognized.

In 2011, cost of sales increased 20 percent (16 percent in local currencies) to $26,556 million. The increase in the cost of sales reflects the growth in revenues from organic businesses and new acquisitions. Cost of sales was negatively affected by higher prices in certain commodities and an unfavorable change in business mix. The increase in the cost of sales in 2011 was partly offset by savings realized from the cost saving initiatives, mainly in the areas of supply management and operational excellence. As a percentage of revenues, cost of sales remained stable at 69.9 percent, as the cost saving initiatives helped to offset continued pricing pressure on revenues.

In 2010, cost of sales decreased 2 percent (3 percent in local currencies) to $22,060 million in line with the decline in revenues volume. Cost of sales, as a percentage of revenues, decreased to 69.8 percent from 70.7 percent in 2009. The reduction in cost of sales reflected measures mainly taken in the areas of supply management, global footprint and operational excellence as part of the cost take-out program. Restructuring programs implemented in many countries also helped to reduce costs as our operations benefited from higher production utilization. Savings from these programs were however partly offset by cost overruns in our cables business in our Power Systems division (see “Divisional analysis – Power Systems”). Improvement in the cost of sales as a percentage of revenues in 2010 was also limited by the continued impact of price erosion.

Selling, general and administrative expenses

The components of selling, general and administrative expenses were as follows:

(XLS:)

($ in millions)

2011

2010

2009

Selling expenses

(3,533)

(2,947)

(2,868)

Selling expenses as a percentage of orders received

8.8%

9.0%

9.3%

General and administrative expenses

(1,840)

(1,668)

(1,623)

General and administrative expenses as a percentage of revenues

4.8%

5.3%

5.1%

Total selling, general and administrative expenses

(5,373)

(4,615)

(4,491)

Total selling, general and administrative expenses as a percentage of revenues

14.1%

14.6%

14.1%

Total selling, general and administrative expenses as a percentage of the average of orders received and revenues

13.7%

14.4%

14.3%

In 2011, selling expenses increased 20 percent (14 percent in local currencies). Excluding the expenses from Baldor, selling expenses were 14 percent (8 percent in local currencies) higher as compared to 2010. Increase in selling expenses in 2011 continued to be driven by a larger sales force employed by all divisions to strengthen their market presence particularly in the emerging countries. Selling expenses further increased following the growth in orders as certain elements of such expenses, in particular expenses related to order pursuing activities and sales commissions, are variable expenses.

In 2010, selling expenses increased 3 percent (2 percent in local currencies) due to (i) expenses from newly acquired companies, (ii) more sales resources employed, especially in emerging markets to support order growth and (iii) an increase in variable selling expenses, such as commissions and the costs associated with pursuing orders. Due to the higher orders volume, selling expenses as a percentage of orders received decreased to 9.0 percent from 9.3 percent in 2009.

In 2011, general and administrative expenses increased 10 percent (6 percent in local currencies). Excluding expenses from Baldor, general and administrative expenses increased 5 percent (1 percent in local currencies). The increase in general and administrative expenses in 2011 was driven primarily by initiatives to strengthen functional support areas especially in the emerging markets such as China, India and the Middle East countries. As a percentage of revenues, general and administrative expenses decreased to 4.8 percent from 5.3 percent in 2010 reflecting a strong increase in revenues on relatively stable expenses achieved through higher efficiency derived from continuous process improvement and improved cost management.

In 2010, general and administrative expenses increased 3 percent (2 percent in local currencies) compared to 2009. Excluding expenses from newly acquired companies, general and administrative expenses were flat (decreased 1 percent in local currencies).

While selling, general and administrative expenses increased, the expenses as a percentage of average orders and revenues decreased 0.7 percentage points to 13.7 percent in 2011.

Non-order related research and development expenses

In 2011, non-order related research and development expenses increased 27 percent (18 percent in local currencies), as we accelerated efforts to keep ahead with technology advancements in order to maintain industry leadership. The increase was also due to incremental costs of the newly-acquired companies. In 2010, compared to 2009, non-order related research and development expenses increased 4 percent (4 percent in local currencies) to $1,082 million in line with our commitment to maintain a high level of research and development activity.

Non-order related research and development expenses as a percentage of revenues increased to 3.6 percent in 2011 after increasing to 3.4 percent in 2010 from 3.3 percent in 2009.

Other income (expense), net

(XLS:)

($ in millions)

2011

2010

2009

(1)

Excluding asset write-downs

Restructuring expenses(1)

(26)

(54)

(111)

Capital gains, net

40

51

14

Asset write-downs

(29)

(57)

(50)

Income from equity-accounted companies and other income (expense)

(8)

46

476

Total

(23)

(14)

329

“Other income (expense), net,” typically consists of restructuring expenses, net capital gains (which include gains or losses from the sale of businesses and gains or losses from the sale or disposal of property, plant and equipment), asset write-downs, as well as our share of income or loss from equity-accounted companies and license income.

Restructuring and related expenses are recorded in various lines within the Consolidated Income Statements, depending on the nature of the charges. In 2011, restructuring expenses reported in “Other income (expense), net” amounted to $26 million. The expenses were primarily related to Low Voltage Products restructuring initiatives in Germany, France and the U.S., a Power Products restructuring project in Spain and Discrete Automation and Motion restructuring initiatives in the U.S. In 2010, restructuring expenses reported in “Other income (expense), net” were incurred for restructuring projects across all our divisions, principally in the Process Automation, Discrete Automation and Motion, as well as the Power Products divisions. In 2009, restructuring expenses reported in “Other income (expense), net” were incurred for restructuring projects in all of our divisions but mainly in the Discrete Automation and Motion and Process Automation divisions.

In 2011, “Capital gains, net” amounted to $40 million and included a $45 million net gain from the sales of land and buildings mainly in Venezuela, Nigeria, Sweden, Brazil and Switzerland. “Capital gains, net,” in 2010, consisted mainly of $35 million in gains on the sale of land and buildings, mainly in Sweden, Norway and Austria, as well as a $13 million gain on the sale of an equity-accounted company in Colombia. In 2009, “Capital gains, net” consisted primarily of gains from the sale of real estate, mainly in Norway, France, Switzerland and the Netherlands.

In 2011, “Asset write-downs” amounted to $29 million, reflecting a total of $20 million write-downs and impairment of tangible and intangible assets related mainly to restructuring projects in various countries, and a $9 million impairment on the investment in the shares of a listed company. “Asset write-downs” in 2010 included $23 million for the impairment, prior to sale, of two equity-accounted companies in the Ivory Coast, and other impairments and write-downs of tangible and intangible assets primarily related to Russia, Thailand, Czech Republic and the United States. “Asset write-downs” in 2009 included a $10 million impairment of certain fixed assets in the United States and other impairments and write-downs of tangible and intangible assets primarily relating to ongoing restructuring programs in various countries.

“Income from equity-accounted companies and other income (expense)” in 2011 amounted to a net loss of $8 million mainly due to charges related to the deconsolidation of a Russian subsidiary, partly offset by income from equity-accounted companies and income from license fees. In 2010, “Income from equity-accounted companies and other income (expense)” primarily consisted of a $22 million release of provisions and income of $13 million from a break-fee related to the withdrawn bid to acquire Chloride Group PLC. In 2009, “Income from equity-accounted companies and other income (expense)” primarily consisted of the partial release of provisions related to the investigations in the power transformers business after the European Commission imposed a fine of 33.75 million euro (equivalent to $49 million on date of payment) in October 2009. Additionally, license income of approximately $5 million, mainly from Switzerland and Germany, was included in this line item.

Earnings before interest and taxes

(XLS:)

 

 

 

 

% Change

($ in millions)

2011

2010

2009

2011

2010

Power Products

1,476

1,636

1,959

(10)

(16)

Power Systems

548

114

394

381

(71)

Discrete Automation and Motion

1,294

911

574

42

59

Low Voltage Products

904

788

518

15

52

Process Automation

963

759

626

27

21

Operating divisions

5,185

4,208

4,071

23

3

Corporate and Other

(450)

(402)

50

(12)

n.a.

Intersegment elimination

(68)

12

5

 

 

Total

4,667

3,818

4,126

22

(7)

In 2011, EBIT increased 22 percent (14 percent in local currencies) while in 2010, EBIT decreased 7 percent (8 percent in local currencies) as a result of the factors discussed above.

EBIT margins were as follows:

(XLS:)

(in %)

2011

2010

2009

Power Products

13.6

16.0

17.4

Power Systems

6.8

1.7

6.0

Discrete Automation and Motion

14.7

16.2

10.6

Low Voltage Products

17.0

17.3

12.7

Process Automation

11.6

10.2

8.0

Operating divisions

12.5

12.2

11.6

Total

12.3

12.1

13.0

In 2011, EBIT margin increased 0.2 percentage points to 12.3 percent. The increase in EBIT and EBIT margin reflects the contribution from higher volumes including the $1,950 million of revenues from Baldor. Costs savings generated in 2011 further improved the EBIT and EBIT margin as the amount of those savings more than offset the impact from price pressure that continued particularly in the power sector. Profitability was affected by an unfavorable business mix, higher amortization from the intangibles from the Baldor acquisition and continued investments in sales and research and development offset by the non-recurrence of project-related charges in 2010 in the Power Systems division.

In 2010, EBIT margin in the operating divisions increased, driven by a strong recovery in the short-cycle business, particularly in our automation divisions. Price pressures continued in 2010; however the impact on earnings was more than offset by savings generated from the cost take-out program. EBIT margin in 2010 was lower in the Power Products division compared to 2009, mainly due to lower revenues (see “Divisional analysis – Power Products”), while in the Power Systems division EBIT margin declined as a result of losses in the cables business (see “Divisional analysis – Power Systems”).

For further details of Operational EBITDA and Operational EBITDA margin see “Divisional analysis” and see “Note 22 Operating segment and geographic data” to our Consolidated Financial Statements for a reconciliation of Operational EBITDA to EBIT.

Net interest and other finance expense

Net interest and other finance expense consists of “Interest and dividend income” offset by “Interest and other finance expense.”

“Interest and other finance expense” includes interest expense on our debt, the amortization of upfront costs associated with our credit facility and our debt securities, commitment fees on our bank facility and exchange losses on financial items, offset by gains on marketable securities and exchange gains on financial items.

(XLS:)

($ in millions)

2011

2010

2009

Interest and dividend income

90

95

121

Interest and other finance expense

(207)

(173)

(127)

Net interest and other finance expense

(117)

(78)

(6)

In 2011, “Interest and dividend income” declined compared to 2010, primarily due to the lower average aggregate level of “Cash and equivalents” and “Marketable securities and short-term investments” in 2011 compared to 2010, as the funds were used to finance the acquisition of businesses such as Baldor (a cash outflow of $4,276 million in January 2011 – see “Note 3 Acquisitions, increases in controlling interests and divestments” to our Consolidated Financial Statements).

“Interest and dividend income” decreased in 2010 compared to 2009. This decrease was primarily due to the lower level of interest rates during 2010 as a whole, compared to 2009. During the first six months of 2009, interest rates on EUR-denominated balances, which constituted a significant portion of our total “Cash and equivalents” and “Marketable securities and short-term investments” balances, were higher than during the rest of 2009 and 2010.

In 2011, “Interest and other finance expense” increased compared to 2010, primarily reflecting i) the increase in long-term debt (from $1,139 million at December 31, 2010, to $3,231 million at December 31, 2011) as a result of the bonds issued in 2011 – see “Liquidity and Capital Resources” for a further discussion, ii) the increase in EUR-denominated interest rates (our EUR-denominated bonds have been swapped into floating rate obligations – see “Note 12 Debt” to our Consolidated Financial Statements) and iii) movements in foreign exchange rates that have resulted in higher foreign exchange losses on financial items in 2011 than in 2010.

“Interest and other finance expense” increased in 2010 compared to 2009. However, the 2009 figure of $127 million is a net figure that includes the realization of foreign exchange gains on certain government bonds that were recorded in “Accumulated other comprehensive loss” at December 31, 2008. If these gains are excluded from the 2009 figure, “Interest and other finance expense” decreased in 2010 compared to 2009, reflecting the continued low level of interest rates throughout 2010.

Provision for taxes

(XLS:)

($ in millions)

2011

2010

2009

Income from continuing operations, before taxes

4,550

3,740

4,120

Provision for taxes

(1,244)

(1,018)

(1,001)

Effective tax rate for the year (%)

27.3

27.2

24.3

The provision for taxes in 2011 represented an effective tax rate of 27.3 percent and included:

  • tax credits, arising in foreign jurisdictions, for which the technical merits did not allow a benefit to be taken, and
  • the net reduction in valuation allowance on deferred taxes of approximately $22 million, as we determined it was more likely than not that such deferred tax assets would be realized.

The provision for taxes in 2010 represented an effective tax rate of 27.2 percent and included:

  • a net increase in valuation allowance on deferred taxes by $60 million, as we determined it was no longer more likely than not that such deferred tax assets would be realized. This amount included $44 million related to certain of our operations in Central Europe.

The provision for taxes in 2009 represented an effective tax rate of 24.3 percent and included:

  • the net reduction in valuation allowance of approximately $46 million on deferred taxes, as we determined it was more likely than not that such deferred tax assets would be realized. This net reduction in valuation allowance included a benefit of $60 million related to our operations in Central Europe.
  • a benefit of approximately $74 million related to the release of provisions for previously disclosed investigations by European authorities into suspect payments and alleged anti-competitive practices that were recognized as income for financial accounting purposes, but were not taxable.

Income from continuing operations, net of tax

As a result of the factors discussed above, income from continuing operations, net of tax, increased by $584 million to $3,306 million in 2011 compared to 2010, and decreased by $397 million to $2,722 million in 2010 compared to 2009.

Net income attributable to ABB

As a result of the factors discussed above, net income attributable to ABB increased $607 million to $3,168 million in 2011 compared to 2010 and decreased $340 million to $2,561 million in 2010 compared to 2009.

Earnings per share attributable to ABB shareholders

(XLS:)

(in $)

2011

2010

2009

Income from continuing operations, net of tax:

 

 

 

Basic

1.38

1.12

1.26

Diluted

1.38

1.11

1.26

Net income attributable to ABB:

 

 

 

Basic

1.38

1.12

1.27

Diluted

1.38

1.12

1.27

Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise: outstanding written call options; outstanding options and shares granted subject to certain conditions under our share-based payment arrangements. See “Note 20 Earnings per share” to our Consolidated Financial Statements.

Financial review

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