Analysis of results of operations

Our consolidated results from operations were as follows:

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

2012

2011

2010

Orders

40,232

40,210

32,681

Order backlog at December 31,

29,298

27,508

26,193

 

 

 

 

Revenues

39,336

37,990

31,589

Cost of sales

(27,958)

(26,556)

(22,060)

Gross profit

11,378

11,434

9,529

Selling, general and administrative expenses

(5,756)

(5,373)

(4,615)

Non-order related research and development expenses

(1,464)

(1,371)

(1,082)

Other income (expense), net

(100)

(23)

(14)

Earnings before interest and taxes

4,058

4,667

3,818

Net interest and other finance expense

(220)

(117)

(78)

Provision for taxes

(1,030)

(1,244)

(1,018)

Income from continuing operations, net of tax

2,808

3,306

2,722

Income from discontinued operations, net of tax

4

9

10

Net income

2,812

3,315

2,732

Net income attributable to noncontrolling interests

(108)

(147)

(171)

Net income attributable to ABB

2,704

3,168

2,561

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

2,700

3,159

2,551

Net income

2,704

3,168

2,561

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.18

1.38

1.12

Net income

1.18

1.38

1.12

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.18

1.38

1.11

Net income

1.18

1.38

1.12

A more detailed discussion of the orders, revenues, Operational EBITDA and EBIT 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

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% Change

($ in millions)

2012

2011

2010

2012

2011

(1)

Includes interdivisional eliminations

Power Products

11,040

11,068

9,778

13

Power Systems

7,973

9,278

7,896

(14)

18

Discrete Automation and Motion

9,625

9,566

5,862

1

63

Low Voltage Products

6,720

5,364

4,686

25

14

Process Automation

8,704

8,726

7,383

18

Operating divisions

44,062

44,002

35,605

24

Corporate and Other(1)

(3,830)

(3,792)

(2,924)

n.a.

n.a.

Total

40,232

40,210

32,681

23

In 2012, total order volume remained on the same level as 2011 (increased 4 percent in local currencies and was steady, in local currencies, excluding Thomas & Betts) despite challenging markets.

In 2012, orders in the Power Products division were flat compared to the previous year (increased 3 percent in local currencies) as the distribution sector remained stable and industrial demand was supported by demand from the oil and gas sector. In the Power Systems division, orders declined 14 percent (10 percent in local currencies) as capital expenditures in power infrastructure continued to be restrained due to ongoing economic uncertainties, especially in certain mature economies. Transmission utilities are investing selectively, with emerging markets focusing on capacity addition and mature markets focusing mainly on existing grid upgrades. Order growth slowed to 1 percent (4 percent in local currencies) in the Discrete Automation and Motion division following a double-digit growth rate in 2011, reflecting the generally low growth in industrial production in most markets and weakness in the renewable energy sector in 2012. Orders were 25 percent higher in the Low Voltage Products division (29 percent in local currencies) mainly due to Thomas & Betts (flat in local currencies excluding Thomas & Betts). The Process Automation division’s orders reached the prior year’s level (increase of 4 percent in local currencies) supported by demand from the oil and gas and the mining sectors.

Base orders growth slowed in the first half of the year as economic growth remained under pressure, however base orders remained on the previous year’s level primarily driven by demand for industrial automation and energy-saving equipment. In the second half of 2012, base orders increased moderately due to Thomas & Betts. During 2012, base orders grew 3 percent (6 percent in local currencies or 1 percent, in local currencies, excluding Thomas & Betts). Following the double-digit growth in 2011, large orders in 2012 decreased 11 percent (7 percent in local currencies) as fewer large projects were recorded in the power divisions.

In 2011, total order volume increased 23 percent (18 percent in local currencies, 11 percent excluding Baldor). 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 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 2011, 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 Baldor). 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 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).

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:

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% Change

($ in millions)

2012

2011

2010

2012

2011

Europe

13,512

15,202

13,781

(11)

10

The Americas

12,152

9,466

6,223

28

52

Asia

10,346

12,103

8,720

(15)

39

Middle East and Africa

4,222

3,439

3,957

23

(13)

Total

40,232

40,210

32,681

23

In 2012, orders grew 28 percent (32 percent in local currencies) in the Americas due to Thomas & Betts, as well as on organic growth in existing businesses. The U.S. recorded higher orders in every division. Additionally, Canada and Brazil remained significant growth areas in this region. In Asia, orders were down 15 percent (13 percent in local currencies) primarily on lower large orders from the power sector in China and India, as well as from the marine sector in South Korea. Europe declined 11 percent (6 percent in local currencies) despite increases in Finland and the U.K., as a $1 billion offshore wind order in Germany received in 2011 was not repeated in 2012, as well as on lower orders in Sweden, Norway and Italy. Orders grew in MEA by 23 percent (28 percent in local currencies) on large orders from the power sector in Saudi Arabia, solar power orders in South Africa as well as orders from the oil and gas sector in Oman.

Orders in 2011 grew in the Americas 52 percent (50 percent in local currencies) driven by Baldor, 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 and 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 the Power Systems and Power Products divisions, 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 2010) 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.

Order backlog

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December 31,

% Change

($ in millions)

2012

2011

2010

2012

2011

(1)

Includes interdivisional eliminations

Power Products

8,493

8,029

7,930

6

1

Power Systems

12,107

11,570

10,929

5

6

Discrete Automation and Motion

4,426

4,120

3,350

7

23

Low Voltage Products

1,117

887

838

26

6

Process Automation

6,416

5,771

5,530

11

4

Operating divisions

32,559

30,377

28,577

7

6

Corporate and Other(1)

(3,261)

(2,869)

(2,384)

n.a.

n.a.

Total

29,298

27,508

26,193

7

5

In 2012, order backlog increased 7 percent (5 percent in local currencies) compared to 2011. The order backlog in the Power Products division grew in all businesses in 2012. The Power Systems division also increased its order backlog despite a lower level of large orders. Although global economic conditions remained challenging, order backlog increased in 2012 in the Discrete Automation and Motion division. While the Low Voltage Products division grew, a substantial portion of the increase in the order backlog was due to Thomas & Betts. The order backlog in the Process Automation division grew on orders from the mining as well as the oil and gas sectors.

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 Products 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.

Revenues

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% Change

($ in millions)

2012

2011

2010

2012

2011

(1)

Includes interdivisional eliminations

Power Products

10,717

10,869

10,199

(1)

7

Power Systems

7,852

8,101

6,786

(3)

19

Discrete Automation and Motion

9,405

8,806

5,617

7

57

Low Voltage Products

6,638

5,304

4,554

25

16

Process Automation

8,156

8,300

7,432

(2)

12

Operating divisions

42,768

41,380

34,588

3

20

Corporate and Other(1)

(3,432)

(3,390)

(2,999)

n.a.

n.a.

Total

39,336

37,990

31,589

4

20

Revenues in 2012 increased 4 percent (7 percent in local currencies) based on a solid order level recorded in the previous year, as well as on the impact of Thomas & Betts. Excluding Thomas & Betts, revenues were steady, decreasing 1 percent despite a difficult economic environment (increase of 3 percent in local currencies).

Revenues in the Power Products division declined 1 percent (increased 2 percent in local currencies) impacted by lower revenues from the Transformers business. In the Power Systems division, revenues were 3 percent lower but increased 2 percent in local currencies, as orders recorded in the previous year were executed and translated into revenues. Revenues rose 7 percent (10 percent in local currencies) in the Discrete Automation and Motion division, as the Robotics business continued to grow at a double-digit rate in 2012. In the Low Voltage Products division, revenues grew 25 percent (29 percent in local currencies); excluding Thomas & Betts, revenues decreased 4 percent (stable in local currencies) following double-digit growth in 2011. Revenues in the Process Automation division were 2 percent lower but increased 2 percent in local currencies supported by demand from oil and gas related sectors, while revenues declined in other businesses such as Turbochargers and Full Service.

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 Baldor, revenues increased 14 percent (9 percent in local currencies).

In 2011, 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 Baldor. 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 the Low Voltage Products division 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, Turbochargers and Oil and Gas businesses.

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:

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% Change

($ in millions)

2012

2011

2010

2012

2011

Europe

14,073

14,657

12,378

(4)

18

The Americas

10,699

9,043

6,213

18

46

Asia

10,750

10,136

8,872

6

14

Middle East and Africa

3,814

4,154

4,126

(8)

1

Total

39,336

37,990

31,589

4

20

In 2012, revenues in Europe decreased 4 percent (increased 2 percent in local currencies), despite growth in the Discrete Automation and Motion division, as the other divisions recorded lower revenues. Growth in Germany, Sweden, Norway and the United Kingdom was offset by declines in Italy, France and Spain. Revenues from the Americas increased 18 percent (20 percent in local currencies and 4 percent, in local currencies, excluding Thomas & Betts) on higher industrial demand for the automation divisions. The U.S. grew 25 percent (8 percent excluding Thomas & Betts), while Brazil recorded lower revenues than in the previous year. Revenues from Asia increased 6 percent (8 percent in local currencies) on growth in all divisions. Within this region, revenues in South Korea grew on the execution of large marine orders, while China recorded stable revenues and India recorded lower revenues. Revenues in MEA declined 8 percent (5 percent in local currencies) on lower revenues generated in the power and the oil and gas sectors in the region.

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, in local currencies, excluding Baldor). 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.

Cost of sales

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

In 2012, cost of sales increased 5 percent (9 percent in local currencies) to $27,958 million. Excluding the impact from Thomas & Betts, cost of sales increased 1 percent (5 percent in local currencies). As a percentage of revenues, cost of sales increased to 71.1 percent from 69.9 percent in 2011. Higher cost of sales as a percentage of revenues is the result of price erosion on the execution of order backlog, an unfavorable business mix arising from a higher proportion of revenues generated from lower margin types of business, current period margin erosion in certain projects and charges associated with repositioning the Power Systems division. Such cost increases were partly compensated by cost saving initiatives.

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 existing 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.

Selling, general and administrative expenses

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

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($ in millions)

2012

2011

2010

Selling expenses

(3,862)

(3,533)

(2,947)

Selling expenses as a percentage of orders received

9.6%

8.8%

9.0%

General and administrative expenses

(1,894)

(1,840)

(1,668)

General and administrative expenses as a percentage of revenues

4.8%

4.8%

5.3%

Total selling, general and administrative expenses

(5,756)

(5,373)

(4,615)

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

14.6%

14.1%

14.6%

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

14.5%

13.7%

14.4%

In 2012, selling expenses increased 9 percent (14 percent in local currencies); excluding Thomas & Betts, selling expenses increased 4 percent (9 percent in local currencies) compared to 2011. As a percentage of orders received, selling expenses increased to 9.6 percent from 8.8 percent. The increase in selling expenses in 2012 was mainly driven by additional sales force employees to develop new markets and implement sales and marketing programs in order to secure market positions in a competitive environment.

In 2011, selling expenses increased 20 percent (14 percent in local currencies). Excluding Baldor, selling expenses were 14 percent (8 percent in local currencies) higher as compared to 2010. The 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 2012, general and administrative expenses increased 3 percent (6 percent in local currencies). Excluding Thomas & Betts, general and administrative expenses declined 5 percent (2 percent in local currencies), reflecting tighter cost control throughout the organization. As a percentage of revenues, general and administrative expenses remained unchanged at 4.8 percent in 2012.

In 2011, general and administrative expenses increased 10 percent (6 percent in local currencies). Excluding 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 2012, selling, general and administrative expenses increased 7 percent (11 percent in local currencies). Excluding Thomas & Betts, selling, general and administrative expenses increased 1 percent (increased 5 percent in local currencies). As a percentage of revenues, selling, general and administrative expenses increased 0.5 percentage-points to 14.6 percent. As a percentage of the average of orders and revenues, selling, general and administrative expenses increased 0.8 percentage-points to 14.5 percent as orders intake was flat. While in 2011, selling, general and administrative expenses increased, the expenses as a percentage of the average of orders and revenues decreased 0.7 percentage-points to 13.7 percent.

Non-order related research and development expenses

In 2012, non-order related research and development expenses increased 7 percent (11 percent in local currencies), mainly due to increased research and development activities, as well as to the incremental costs of newly-acquired companies.

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 newly-acquired companies.

Non-order related research and development expenses as a percentage of revenues increased slightly to 3.7 percent in 2012, after increasing to 3.6 percent in 2011 from 3.4 percent in 2010.

Other income (expense), net

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($ in millions)

2012

2011

2010

(1)

Excluding asset impairments

Restructuring expenses(1)

(54)

(26)

(54)

Capital gains, net

28

40

51

Asset impairments

(111)

(29)

(57)

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

37

(8)

46

Total

(100)

(23)

(14)

“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 impairments, 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 2012, such expenses reported in “Other income (expense), net” were $54 million, mainly related to the Power Products division’s restructuring activities in Spain, Sweden and Brazil and to restructuring in the Power Systems division. In 2011, restructuring expenses reported in “Other income (expense), net” amounted to $26 million. The expenses were primarily related to the Low Voltage Products division’s restructuring initiatives in Germany, France and the U.S., a Power Products division’s restructuring project in Spain and Discrete Automation and Motion division’s 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 2012, “Capital gains, net” was $28 million, including $25 million net gain from the sales of land and buildings mainly in Switzerland, Austria, the Netherlands and Sweden. 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 sales 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 2012, “Asset impairments” totaled $111 million, which primarily consisted of $87 million impairments of investments in equity-accounted companies. In 2011, “Asset impairments” amounted to $29 million, reflecting a total of $20 million impairments 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 impairments” in 2010, included $23 million for the impairment, prior to sale, of two equity-accounted companies in the Ivory Coast, and other impairments of tangible and intangible assets, primarily related to Russia, Thailand, the Czech Republic and the United States.

In 2012, “Income from equity-accounted companies and other income (expense)” amounted to $37 million, consisting mainly of the release of a compliance-related provision in Germany and income from an insurance claim in Italy that were partially offset by a provision for certain pension claims in the United States. “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 bid to acquire Chloride Group PLC.

Earnings before interest and taxes

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% Change

($ in millions)

2012

2011

2010

2012

2011

Power Products

1,328

1,476

1,636

(10)

(10)

Power Systems

7

548

114

(99)

381

Discrete Automation and Motion

1,469

1,294

911

14

42

Low Voltage Products

856

904

788

(5)

15

Process Automation

912

963

759

(5)

27

Operating divisions

4,572

5,185

4,208

(12)

23

Corporate and Other

(516)

(538)

(402)

(4)

(34)

Intersegment elimination

2

20

12

 

 

Total

4,058

4,667

3,818

(13)

22

In 2012 and 2011, the EBIT changes were a result of the factors discussed above.

EBIT margins were as follows:

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(in %)

2012

2011

2010

Power Products

12.4

13.6

16.0

Power Systems

0.1

6.8

1.7

Discrete Automation and Motion

15.6

14.7

16.2

Low Voltage Products

12.9

17.0

17.3

Process Automation

11.2

11.6

10.2

Operating divisions

10.7

12.5

12.2

Total

10.3

12.3

12.1

In 2012, EBIT margin decreased 2.0 percentage-points to 10.3 percent driven by price erosion from the execution of lower-priced projects in the backlog, changes in the business and geographical mix, charges associated with the Power Systems strategic repositioning, charges relating to acquisitions and certain impairments. Continued investment for long-term growth in the sales and research and development areas further impacted EBIT in 2012. Cost savings helped to partly offset the impacts from the factors described above.

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.

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.

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($ in millions)

2012

2011

2010

Interest and dividend income

73

90

95

Interest and other finance expense

(293)

(207)

(173)

Net interest and other finance expense

(220)

(117)

(78)

In 2012, “Interest and dividend income” declined compared to 2011, due primarily to the impact of lower market interest rates for certain currencies, mainly the euro.

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 and increases in controlling interests” to our Consolidated Financial Statements).

In 2012, “Interest and other finance expense” increased compared to 2011, primarily reflecting (i) the net increase in long-term debt including current maturities (from $3,307 million at December 31, 2011, to $8,540 million at December 31, 2012) as a result of bonds issued in 2012 (see “Liquidity and capital resources” for a further discussion), partially offset by (ii) the impact of a net release of provisions for expected interest due on tax penalties, primarily due to the favorable resolution of a tax dispute – see “Note 16 Taxes” to our Consolidated Financial Statements.

In 2011, “Interest and other finance expense” increased compared to 2010, primarily reflecting (i) the increase in long-term debt including current maturities (from $2,058 million at December 31, 2010, to $3,307 million at December 31, 2011) as a result of the bonds issued in 2011, (ii) the increase in EUR-denominated interest rates and (iii) movements in foreign exchange rates that have resulted in higher foreign exchange losses on financial items in 2011 than in 2010.

Provision for taxes

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($ in millions)

2012

2011

2010

Income from continuing operations, before taxes

3,838

4,550

3,740

Provision for taxes

(1,030)

(1,244)

(1,018)

Effective tax rate for the year (%)

26.8

27.3

27.2

The provision for taxes in 2012 represented an effective tax rate of 26.8 percent and included:

  • tax credits, arising in foreign jurisdictions, for which the technical merits did not allow a benefit to be taken, and
  • a net increase in valuation allowance on deferred taxes of $44 million, as we determined it was not more likely than not that such deferred tax assets would be realized. This amount included $36 million related to certain of our operations in Central Europe.

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 of $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.

Income from continuing operations, net of tax

As a result of the factors discussed above, income from continuing operations, net of tax, decreased $498 million to $2,808 million in 2012 compared to 2011, and increased $584 million to $3,306 million in 2011 compared to 2010.

Net income attributable to ABB

As a result of the factors discussed above, net income attributable to ABB decreased $464 million to $2,704 million in 2012 compared to 2011 and increased $607 million to $3,168 million in 2011 compared to 2010.

Earnings per share attributable to ABB shareholders

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(in $)

2012

2011

2010

Income from continuing operations, net of tax:

 

 

 

Basic

1.18

1.38

1.12

Diluted

1.18

1.38

1.11

Net income attributable to ABB:

 

 

 

Basic

1.18

1.38

1.12

Diluted

1.18

1.38

1.12

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.