Power Systems

The financial results of our Power Systems division were as follows:

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% Change

($ in millions, except Operational EBITDA margin %)

2012

2011

2010

2012

2011

(1)

Operational EBITDA margin % is calculated as Operational EBITDA divided by Operational revenues.

Orders

7,973

9,278

7,896

(14)

18

Order backlog at Dec. 31,

12,107

11,570

10,929

5

6

Revenues

7,852

8,101

6,786

(3)

19

Operational EBITDA

290

743

304

(61)

144

Operational EBITDA margin %(1)

3.7

9.1

4.5

n.a.

n.a.

EBIT

7

548

114

(99)

381

Reconciliation to Financial Statements

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($ in millions)

2012

2011

2010

(1)

For further details of FX/commodity derivative timing differences, see “Note 23 Operating segment and geographic data.

Operational revenues

7,812

8,128

6,783

FX/commodity timing differences on revenues(1)

40

(27)

3

Revenues (as per Financial Statements)

7,852

8,101

6,786

Operational EBITDA

290

743

304

FX/commodity timing differences on EBIT(1)

13

3

(58)

Restructuring-related costs

(52)

(54)

(48)

Acquisition-related expenses and certain non-operational items

(70)

Depreciation and amortization

(174)

(144)

(84)

EBIT (as per Financial Statements)

7

548

114

Orders

Order intake in 2012 decreased 14 percent (10 percent in local currencies) mainly due to a lower volume of large orders compared with 2011, which had included a $1 billion offshore wind farm order in Germany and an Ultrahigh Voltage Direct Current (UHVDC) power transmission order in India of around $900 million. The level of base orders was slightly lower than 2011, with decreases in all businesses except Network Management where software orders increased. Power infrastructure spending was restrained due to economic uncertainties, especially in some mature economies with high debt levels. Transmission utilities continue to invest selectively, with emerging markets focusing on capacity addition and mature markets mainly on grid upgrades. Large orders secured in 2012 included a $260 million converter station upgrade from the U.S. to improve power reliability in Oregon, a $170 million contract for a power link between an oil and gas field in the North Sea and the Norwegian grid, and multiple power infrastructure-related orders in Saudi Arabia and Iraq with a combined value of around $700 million.

Continued pricing pressure in some of our key geographical markets negatively impacted the order intake in 2012 as in 2011. Mincom (an Australia-based software company specializing in solutions for mining and other asset-intensive industries, acquired in the third quarter of 2011) contributed $137 million to orders in 2012, compared with $47 million in 2011. There was marginal order contribution in 2012 from Tropos Networks Inc. (a U.S.-based company offering wireless mesh communication technology solutions) acquired in the third quarter of 2012.

Order intake in 2011 increased 18 percent (12 percent in local currencies) with growth in both large and base orders. Customers in emerging countries continued to invest in infrastructure development and new capacity, while mature markets focused on grid upgrades and the integration of renewable energy sources. Demand for power solutions to support industrial growth and distribution networks also contributed to the growth. Large orders secured in 2011 included a HVDC Light® transmission link to connect offshore North Sea wind farms to the German mainland grid with a value of approximately $1 billion, and another HVDC Light® power transmission link between Norway and Denmark, with a value of approximately $180 million. Large orders in 2011 also included an UHVDC transmission order from India to supply hydropower across 1,700 kilometers, with a value of around $900 million.

The geographic distribution of orders for our Power Systems division was as follows:

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(in %)

2012

2011

2010

Europe

30

40

47

The Americas

31

17

14

Asia

18

27

15

Middle East and Africa

21

16

24

Total

100

100

100

In 2012, the Americas was the largest region in terms of order intake attributable to strong order growth in the U.S., Canada and Brazil. The order share of Europe decreased in 2012 compared with 2011, reflecting the $1 billion order in Germany booked in 2011. Growth in the MEA region was mainly driven by large orders in Saudi Arabia and Iraq. Asia’s share of orders in 2012 was lower than in the previous year, mainly due to a lower level of large orders from India, where the $900 million order was booked in 2011.

In 2011, Europe was the largest region in terms of order intake. As in 2010, the strong political commitment in Europe to increase the share of renewables in the energy mix contributed to order growth. We saw a substantial growth in orders from Asia in 2011, mainly on the timing of large order awards from India. The share of orders from the Americas increased in 2011, driven by the United States, Canada and Brazil. The 2011 order share from the MEA region decreased in 2011, due to the timing of large order awards, combined with increased competitiveness and pricing pressure.

Order backlog

Order backlog at December 31, 2012, reached a record level of $12,107 million, corresponding to an increase of 5 percent (2 percent in local currencies) compared with 2011.

Order backlog at December 31, 2011, increased 6 percent (11 percent in local currencies) to $11,570 million. Whereas the share of large orders in our order backlog remained fairly consistent, we had an increased proportion of large projects with more than 2 years execution time in the mix.

Revenues

Revenues in 2012 decreased 3 percent (increased 2 percent in local currencies), mainly reflecting the scheduled execution of our order backlog. Lower revenues in the Power Generation business could not be fully offset by revenue growth in our Network Management business. Revenues in Grid Systems and Substations were marginally down in U.S. dollar terms, but showed a small increase in local currencies. Revenues in 2012 included $138 million from Mincom.

Revenues in 2011 increased 19 percent (14 percent in local currencies). Among our businesses, the revenue growth was led by Grid Systems, reflecting the strong order backlog at the beginning of the year. Revenue growth in Power Generation resulted from a substantial order backlog and a higher book and bill ratio in 2011 than in 2010 (orders that can be converted to revenues within the same calendar year). A revenue increase in Network Management was helped by the software businesses acquired in 2011 and 2010. Revenues in 2011 included $47 million from Mincom since the date of acquisition.

The geographic distribution of revenues for the Power Systems division was as follows:

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(in %)

2012

2011

2010

Europe

40

40

34

The Americas

19

20

21

Asia

19

18

17

Middle East and Africa

22

22

28

Total

100

100

100

The regional distribution of revenues reflects the geographical end-user markets of the projects we are executing, and consequently varies with time. In 2012, Europe remained the largest region in terms of revenues, partly reflecting the execution of offshore wind projects. The share of revenues from MEA was stable, despite a minor revenue decline in the region compared to 2011, caused by a revenue decrease in the United Arab Emirates and Qatar which could only partly be compensated by growth in Saudi Arabia and Iraq. Revenues grew in Asia, mainly driven by Australia, while the Americas saw a drop due to the timing of execution of some projects in Brazil.

In 2011, the share of revenues from Europe, the largest region for the division, increased. Revenues from MEA, the second largest region, were lower, reflecting scheduled project execution. Revenues grew in the Americas, mainly driven by Brazil, while the revenue growth from Asia was led by Australia and India.

Operational EBITDA

In 2012, Operational EBITDA decreased 61 percent (57 percent in local currencies), mainly due to the execution of lower margin projects from the order backlog, as well as a charge of approximately $250 million relating to a repositioning of the Power Systems division (announced in December 2012) to secure higher and more consistent future profitability. An increase in sales expenses as well as research and development spending related mainly to the acquisitions of Mincom and Tropos Networks Inc. In addition to the impact from acquisitions, sales expenses were also affected by increased tender activity. General and administrative expenses in 2012 remained approximately on the same level as in 2011. The impact from lower prices on past orders, now flowing through to revenues, were mitigated by cost savings from supply chain management and operational excellence activities.

In 2011, Operational EBITDA increased 144 percent (132 percent in local currencies). The higher Operational EBITDA and Operational EBITDA margin in 2011 was mainly the result of higher revenues, the non-recurrence of project-related charges in the cables business, as well as successful claims management. Sales expenses, as well as general and administrative expenses increased mainly following the acquisitions of Ventyx and Mincom. The increase in sales expenses also reflected higher doubtful debt provisions than in 2010. Higher research and development spending, as well as the impact from lower prices on past orders now flowing through to revenues, were largely offset by cost savings.

EBIT

In 2012, EBIT decreased to $7 million. In addition to the impacts disclosed in the “Operational EBITDA” section, EBIT was negatively impacted by further charges of approximately $100 million (presented in the reconciliation table above as restructuring-related costs, and acquisition-related expenses and certain operational items) related to the repositioning of the Power Systems division. These charges related to certain impairments and the closure of low value-adding contracting operations in a number of countries. Overall, restructuring-related expenses in 2012 were marginally lower than the $54 million in 2011. EBIT was also impacted by higher depreciation and amortization expenses of $174 million in 2012, compared to $144 million in 2011, mainly resulting from the Mincom acquisition. There was a small positive impact related to FX/commodity derivative timing differences of $13 million in 2012 compared to $3 million in 2011.

In 2011, EBIT increased to $548 million. In addition to the impacts disclosed in the “Operational EBITDA” section, EBIT was impacted by higher depreciation and amortization expenses of $144 million in 2011, compared to $84 million in 2010, mainly resulting from the Ventyx and Mincom acquisitions. This negative impact was offset by a positive contribution from FX/commodity derivative timing differences of $3 million in 2011 compared to a negative impact of $58 million in 2010. Restructuring-related expenses were $54 million in 2011 compared to $48 million in 2010.

Fiscal year 2013 outlook

Fundamental market drivers for the Power Systems division remain intact; these include power infrastructure investments in emerging markets to add capacity, aging infrastructure upgrades in mature markets, a focus on renewables, energy efficiency, and the development of more reliable, flexible and smarter grids. There is, however, uncertainty in terms of timing of investments, stemming from continued macroeconomic challenges in several economies, as well as execution risks surrounding the repositioning of the division.