Analysis of results of operations

Our consolidated results from operations were as follows:

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

2013

2012

2011

Orders

38,896

40,232

40,210

Order backlog at December 31,

26,046

29,298

27,508

 

 

 

 

Revenues

41,848

39,336

37,990

Cost of sales

(29,856)

(27,958)

(26,556)

Gross profit

11,992

11,378

11,434

Selling, general and administrative expenses

(6,094)

(5,756)

(5,373)

Non-order related research and development expenses

(1,470)

(1,464)

(1,371)

Other income (expense), net

(41)

(100)

(23)

Income from operations

4,387

4,058

4,667

Net interest and other finance expense

(321)

(220)

(117)

Provision for taxes

(1,122)

(1,030)

(1,244)

Income from continuing operations, net of tax

2,944

2,808

3,306

Income (loss) from discontinued operations, net of tax

(37)

4

9

Net income

2,907

2,812

3,315

Net income attributable to noncontrolling interests

(120)

(108)

(147)

Net income attributable to ABB

2,787

2,704

3,168

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

2,824

2,700

3,159

Net income

2,787

2,704

3,168

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.23

1.18

1.38

Net income

1.21

1.18

1.38

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.23

1.18

1.38

Net income

1.21

1.18

1.38

A more detailed discussion of the orders, revenues, Operational EBITDA and income from operations for our divisions follows in the sections of “Divisional analysis” below entitled “Discrete Automation and Motion,” “Low Voltage Products,” “Process Automation,” “Power Products,” “Power Systems” 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)

2013

2012

2011

2013

2012

(1)

Includes interdivisional eliminations

Discrete Automation and Motion

9,771

9,625

9,566

2%

1%

Low Voltage Products

7,696

6,720

5,364

15%

25%

Process Automation

8,000

8,704

8,726

(8)%

Power Products

10,459

11,040

11,068

(5)%

Power Systems

5,949

7,973

9,278

(25)%

(14)%

Operating divisions

41,875

44,062

44,002

(5)%

Corporate and Other(1)

(2,979)

(3,830)

(3,792)

n.a.

n.a.

Total

38,896

40,232

40,210

(3)%

In 2013, total order volume declined 3 percent (3 percent in local currencies) as lower large orders were not offset by base order growth. Orders were supported by our automation divisions where customer investments to improve operational efficiency and the demand for services increased during the year. The key demand drivers for the power divisions, such as capacity expansion in emerging markets, upgrading of aging infrastructure in mature markets and the integration of renewable energy supplies into power grids, remain intact. Despite strong project tendering activity, some customers have delayed order awards due to macroeconomic uncertainties and this has resulted in order declines in the power divisions compared to 2012.

Supported by growth in the second half of the year, orders in the Discrete Automation and Motion division grew 2 percent (2 percent in local currencies) in 2013, as higher orders in the Robotics business and the positive impact of acquiring Power-One more than compensated the decreases in the Motors and Generators business. Orders increased 15 percent (14 percent in local currencies) in the Low Voltage Products division, due primarily to the impact of including Thomas & Betts for the full year in 2013 (compared to approximately seven months in 2012). In addition, orders in all businesses in this division grew except the Low Voltage Systems business. Orders in the Process Automation division decreased 8 percent (8 percent in local currencies) as stable orders in the product businesses were more than offset by the impact of lower large orders. Orders decreased 5 percent (5 percent in local currencies) in the Power Products division, mainly driven by lower transformer orders. Significantly lower large orders led to a decline of 25 percent (25 percent in local currencies) in orders in the Power Systems division as customers postponed large investments and as a result of our order selectivity and focus on higher-margin business that is part of the division’s strategic repositioning (announced in December 2012).

During 2013, base orders grew 2 percent (2 percent in local currencies) as the economic environment improved in the second half of 2013. As fewer large orders from projects in the Power Systems and Process Automation divisions were received, large orders declined 31 percent (31 percent in local currencies).

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, order growth was 1 percent (4 percent in local currencies) in the Discrete Automation and Motion division, 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. 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 invested selectively, with emerging markets focusing on capacity addition and mature markets focusing mainly on existing grid upgrades.

Base orders growth slowed in the first half of 2012 as economic growth remained under pressure, however base orders remained on the same level as 2011, 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.

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)

2013

2012

2011

2013

2012

Europe

13,334

13,512

15,202

(1)%

(11)%

The Americas

11,365

12,152

9,466

(6)%

28%

Asia

10,331

10,346

12,103

(15)%

Middle East and Africa

3,866

4,222

3,439

(8)%

23%

Total

38,896

40,232

40,210

(3)%

Orders in 2013 declined 6 percent (5 percent in local currencies) in the Americas, driven by lower orders in Brazil and lower large orders in the power sector in the U.S. and Canada. However, orders in the U.S. remained stable as base order growth (due to the impact of including Thomas & Betts for the full year in 2013) compensated lower large power orders. In Asia, orders remained unchanged (increased 1 percent in local currencies) as growth in the automation divisions was offset by lower orders in the power businesses, primarily in India and Australia. China returned to growth as most divisions received higher orders than in the previous year from that country. Europe declined 1 percent (decrease of 3 percent in local currencies), as a moderate increase in the industrial sectors was offset by lower orders in the power divisions. Order growth in Germany, France and Spain mostly compensated declines in Italy, the United Kingdom, Russia as well as in most Nordic countries. Orders decreased in MEA by 8 percent (7 percent in local currencies) as large orders received in Kuwait and the United Arab Emirates could not offset lower large orders from the power sector in Saudi Arabia and Iraq, as well as from the oil and gas sector in Oman.

In 2012, orders grew 28 percent (32 percent in local currencies) in the Americas due to Thomas & Betts (which operates primarily in the U.S. and Canada), 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 United Kingdom, 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.

Order backlog

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December 31,

% Change

($ in millions)

2013

2012

2011

2013

2012

(1)

Includes interdivisional eliminations

Discrete Automation and Motion

4,351

4,426

4,120

(2)%

7%

Low Voltage Products

1,057

1,117

887

(5)%

26%

Process Automation

5,772

6,416

5,771

(10)%

11%

Power Products

7,946

8,493

8,029

(6)%

6%

Power Systems

9,435

12,107

11,570

(22)%

5%

Operating divisions

28,561

32,559

30,377

(12)%

7%

Corporate and Other(1)

(2,515)

(3,261)

(2,869)

n.a.

n.a.

Total

26,046

29,298

27,508

(11)%

7%

In 2013, consolidated order backlog declined 11 percent (10 percent in local currencies) with decreases in all divisions but primarily decreases in the Power Systems and Process Automation divisions. The decrease in the Power Systems division was due mainly to customers postponing investments, resulting in delays in the award of large orders, as well as reduced order intake resulting from the division’s increased project selectivity, as part of the division’s repositioning announced in December 2012. Order backlog in the Process Automation division decreased primarily due to a reduction in large orders received in the industrial sector. Despite an improvement of the macroeconomic environment in the second half of the year, order backlog in the Low Voltage Products division as well as in the Discrete Automation and Motion division was below the respective levels at the end of 2012.

In 2012, order backlog increased 7 percent (5 percent in local currencies) compared to 2011. 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. The order backlog in the Power Products division grew in all businesses in 2012 while the Power Systems division also increased its order backlog despite a lower level of large orders.

Revenues

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% Change

($ in millions)

2013

2012

2011

2013

2012

(1)

Includes interdivisional eliminations

Discrete Automation and Motion

9,915

9,405

8,806

5%

7%

Low Voltage Products

7,729

6,638

5,304

16%

25%

Process Automation

8,497

8,156

8,300

4%

(2)%

Power Products

11,032

10,717

10,869

3%

(1)%

Power Systems

8,375

7,852

8,101

7%

(3)%

Operating divisions

45,548

42,768

41,380

7%

3%

Corporate and Other(1)

(3,700)

(3,432)

(3,390)

n.a.

n.a.

Total

41,848

39,336

37,990

6%

4%

Revenues in 2013 increased 6 percent (7 percent in local currencies) due primarily to execution from prior year’s high order backlog and due to the impact of including Thomas & Betts for the full year in 2013.

Revenues rose 5 percent (5 percent in local currencies) in the Discrete Automation and Motion division as the Robotics business grew for the fourth consecutive year. In the Low Voltage Products division, revenues grew 16 percent (16 percent in local currencies) as most businesses recorded higher revenues, and due to the impact of including Thomas & Betts for the full year in 2013. Revenues in the Process Automation division, were 4 percent (5 percent in local currencies) higher in 2013, supported by the execution of orders from the 2012 order backlog, especially in the marine, mining, and oil and gas sectors. Revenues in the Power Products division increased 3 percent (3 percent in local currencies), as all businesses reported higher revenues, assisted by strong order execution from the 2012 order backlog. In the Power Systems division, revenues increased 7 percent (8 percent in local currencies) on execution from the 2012 order backlog, led by the Power Generation and Grid Systems businesses.

In 2012, revenues 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).

In 2012, 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 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 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.

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)

2013

2012

2011

2013

2012

Europe

14,385

14,073

14,657

2%

(4)%

The Americas

12,115

10,699

9,043

13%

18%

Asia

11,230

10,750

10,136

4%

6%

Middle East and Africa

4,118

3,814

4,154

8%

(8)%

Total

41,848

39,336

37,990

6%

4%

In 2013, revenues in Europe increased 2 percent (flat in local currencies) with higher revenues in all divisions except Power Systems. Revenue increases in Sweden, Norway, United Kingdom, Finland, France and the Netherlands more than offset revenue declines in Germany, Italy, Switzerland and Spain. Revenues from the Americas increased 13 percent (15 percent in local currencies) with higher revenues in all five divisions, and from the impact of including Thomas & Betts for the full year in 2013. Revenues increased at a double-digit rate in the U.S., Canada and Brazil, the main markets in this region. Revenues from Asia increased 4 percent (6 percent in local currencies) with stable or higher revenues in all divisions except Power Products. The revenue increase in Asia was due to higher revenues from the Low Voltage Products division, as well as the successful execution, in the Process Automation division, of marine orders for the oil and gas sector in China and South Korea. In India revenues grew moderately. Revenues in MEA grew by 8 percent (11 percent in local currencies) primarily from increases in the Power Products division, while revenues from the oil and gas sector declined. Saudi Arabia, South Africa and Iraq recorded significant revenue increases.

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.

Cost of sales

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

In 2013, cost of sales increased 7 percent (8 percent in local currencies) to $29,856 million. As a percentage of revenues, cost of sales increased from 71.1 percent in 2012 to 71.3 percent in 2013. Despite margin improvements in the Low Voltage Products division, cost of sales as a percentage of revenues increased due to a negative business mix and margin reductions on the execution of lower margin orders from the backlog in the Power Products division. Furthermore, additional negative impacts from project-related charges in the Power Systems division were recorded. Cost of sales as a percentage of service revenues decreased due to productivity gains and a positive business mix.

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, margin erosion in certain projects and charges associated with repositioning the Power Systems division. Such cost increases were partly compensated by cost saving initiatives.

Selling, general and administrative expenses

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

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($ in millions)

2013

2012

2011

Selling expenses

4,071

3,862

3,533

Selling expenses as a percentage of orders received

10.5%

9.6%

8.8%

General and administrative expenses

2,023

1,894

1,840

General and administrative expenses as a percentage of revenues

4.8%

4.8%

4.8%

Total selling, general and administrative expenses

6,094

5,756

5,373

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

14.6%

14.6%

14.1%

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

15.1%

14.5%

13.7%

In 2013, selling expenses increased 5 percent (5 percent in local currencies) mainly due to the increase in the number of sales-related employees added in certain key markets.

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. 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 2013, general and administrative expenses increased 7 percent (7 percent in local currencies) driven partly by the incremental costs of newly-acquired companies and investment in information technology infrastructure. However, general and administrative expenses as a percentage of revenues, remained unchanged.

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.

In 2013, selling, general and administrative expenses increased 6 percent (6 percent in local currencies). As a percentage of the average of orders and revenues, selling, general and administrative expenses increased 0.6 percentage-points to 15.1 percent, primarily due to the decrease in orders received and increased selling expenses (explained above).

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 (5 percent in local currencies). 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.

Non-order related research and development expenses

In 2013, non-order related research and development expenses remained flat (declined 1 percent in local currencies).

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.

Non-order related research and development expenses as a percentage of revenues decreased to 3.5 percent in 2013, after increasing slightly to 3.7 percent in 2012 from 3.6 percent in 2011.

Other income (expense), net

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($ in millions)

2013

2012

2011

(1)

Excluding asset impairments

Restructuring and restructuring-related expenses(1)

(45)

(54)

(26)

Net gains on sale of assets

15

28

40

Asset impairments

(29)

(111)

(29)

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

18

37

(8)

Total

(41)

(100)

(23)

“Other income (expense), net” primarily includes certain restructuring and restructuring-related expenses, gains or losses from the sale of businesses and sale of property, plant and equipment, recognized asset impairments, as well as license income and our share of income or loss from equity-accounted companies. “Other income (expense), net” decreased to an expense of $41 million from $100 million in 2012, mostly due to the impact in 2012 of $87 million of impairments recognized for certain equity-method investments. “Other income (expense), net” increased to an expense of $100 million in 2012 from $23 million in 2011, due primarily to the $87 million impairments recorded in 2012.

Income from operations

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% Change

($ in millions)

2013

2012

2011

2013

2012

Discrete Automation and Motion

1,458

1,469

1,294

(1)%

14%

Low Voltage Products

1,092

856

904

28%

(5)%

Process Automation

990

912

963

9%

(5)%

Power Products

1,331

1,328

1,476

(10)%

Power Systems

171

7

548

n.a.

n.a.

Operating divisions

5,042

4,572

5,185

10%

(12)%

Corporate and Other

(650)

(524)

(542)

24%

(3)%

Intersegment elimination

(5)

10

24

 

 

Total

4,387

4,058

4,667

8%

(13)%

In 2013 and 2012, changes in income from operations were a result of the factors discussed above and in the divisional analysis below.

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 credit 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)

2013

2012

2011

Interest and dividend income

69

73

90

Interest and other finance expense

(390)

(293)

(207)

Net interest and other finance expense

(321)

(220)

(117)

In 2013, “Interest and dividend income” declined compared to 2012, mainly resulting from lower cash and equivalents, and marketable securities and short-term investments balances during 2013.

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 2013, “Interest and other finance expense” increased compared to 2012, mainly resulting from (i) the increase in interest expense, as bonds issued in 2012 were outstanding for a full year in 2013, and (ii) interest expense in 2012 included a release of provisions for expected interest due on certain income tax obligations, primarily due to the favorable resolution of a tax dispute – see “Note 16 Taxes” to our Consolidated Financial Statements.

In 2012, “Interest and other finance expense” increased compared to 2011, primarily reflecting (i) higher interest expense due to higher debt (resulting from the issuance of bonds in 2012), partially offset by (ii) the impact of a net release of provisions for expected interest due on tax penalties, as described above.

Provision for taxes

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($ in millions)

2013

2012

2011

Income from continuing operations, before taxes

4,066

3,838

4,550

Provision for taxes

(1,122)

(1,030)

(1,244)

Effective tax rate for the year

27.6%

26.8%

27.3%

The provision for taxes in 2013 included a net increase in valuation allowance on deferred taxes of $31 million, as we determined it was not more likely than not that such deferred tax assets would be realized. This amount included an expense of $104 million related to certain of our operations in Central Europe and South America. It also included a benefit of $42 million related to certain of our operations in Central Europe.

The provision for taxes in 2012 included 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 included 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 2013, 2012 and 2011, also included tax credits, arising in foreign jurisdictions, for which the technical merits did not allow a benefit to be taken.

Income from continuing operations, net of tax

As a result of the factors discussed above, income from continuing operations, net of tax, increased $136 million to $2,944 million in 2013 compared to 2012, and decreased $498 million to $2,808 million in 2012 compared to 2011.

Income (loss) from discontinued operations, net of tax

The loss (net of tax) from discontinued operations for 2013 related primarily to provisions for certain environmental obligations. The income from discontinued operations, net of tax, for 2012 and 2011 was not significant.

Net income attributable to ABB

As a result of the factors discussed above, net income attributable to ABB increased $83 million to $2,787 million in 2013 compared to 2012, and decreased $464 million to $2,704 million in 2012 compared to 2011.

Earnings per share attributable to ABB shareholders

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(in $)

2013

2012

2011

Income from continuing operations, net of tax:

 

 

 

Basic

1.23

1.18

1.38

Diluted

1.23

1.18

1.38

Net income attributable to ABB:

 

 

 

Basic

1.21

1.18

1.38

Diluted

1.21

1.18

1.38

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.