Power Products

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

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% Change

($ in millions)

2013

2012

2011

2013

2012

Orders

10,459

11,040

11,068

(5)%

Order backlog at Dec. 31,

7,946

8,493

8,029

(6)%

6%

Revenues

11,032

10,717

10,869

3%

(1)%

Income from operations

1,331

1,328

1,476

(10)%

Operational EBITDA

1,637

1,585

1,782

3%

(11)%

Orders

In 2013, orders decreased 5 percent (5 percent in local currencies), as a result of a challenging market environment and restrained investment by power utilities. Although demand in the industrial and distribution sectors continued to offer opportunities, order intake was affected by lower demand in the power transmission sector.

In 2012, order intake was maintained at the level of 2011 (increased 3 percent in local currencies) despite challenging economic and market conditions. Order intake was driven by steady demand in the industrial and distribution sectors and selective investments in the power transmission sector.

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

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(in %)

2013

2012

2011

Europe

31

33

32

The Americas

28

27

26

Asia

29

29

33

Middle East and Africa

12

11

9

Total

100

100

100

In 2013, the higher share of orders from MEA reflected continued development of power infrastructure in the region. The share of the Americas was steady, mainly driven by distribution upgrades. Asia maintained its share of total orders with China showing growth while Australia declined, as demand from industrial customers was lower, especially the mining sector. Europe’s share of orders declined, reflecting the current market uncertainty.

In 2012, the share of orders from MEA increased as a result of power transmission infrastructure orders. The share of the Americas was driven by grid upgrades in North America and capacity-related investments in South America. Asia’s share declined in comparison to 2011 which included a large order in China. Europe was steady despite continued economic challenges restraining large scale investments.

Order backlog

In 2013, order backlog decreased 6 percent (5 percent in local currencies) compared to 2012. This resulted from lower order intake (described above) and the higher revenues executed from the 2012 backlog.

In 2012, order backlog increased 6 percent (4 percent in local currencies) compared to 2011. The increase was mainly driven by transmission orders, which have a longer order-to-revenue conversion cycle, and steady base orders.

Revenues

In 2013, revenues increased 3 percent (3 percent in local currencies), mainly reflecting the execution of the 2012 order backlog. This included the execution of orders with longer lead times, as well as higher revenues from industries typically having a shorter lead time, such as the distribution and industry sectors. Service revenues continued to grow but represented the same share of total division revenues as in 2012.

In 2012, revenues decreased 1 percent (increased 2 percent in local currencies), reflecting the timing of order backlog conversion and market conditions. Revenues from distribution- and industry-related sectors were steady while the decrease in transmission-related volumes reflected the order backlog conversion. Service revenues grew and represented an increased share of total division revenues.

The geographic distribution of revenues for our Power Products division was as follows:

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(in %)

2013

2012

2011

Europe

32

32

34

The Americas

27

27

27

Asia

30

32

30

Middle East and Africa

11

9

9

Total

100

100

100

In 2013, the shares of revenues from both the Americas and Europe remained unchanged, reflecting the current economic environment. The share of revenues from Asia fell as revenues in certain key markets decreased slightly compared to 2012. The increase in the share of revenues from MEA was primarily driven by revenue increases in Saudi Arabia.

In 2012, Asia increased its share of revenues reflecting the timing of order execution. The share of Europe declined due to continued economic uncertainty and selective capital investments by customers. The Americas maintained its share of revenues due to higher demand in the U.S.

Income from operations

In 2013, income from operations was at the same level as 2012, as benefits from higher revenues were mostly offset by higher non-operational charges and higher depreciation and amortization. Operating margins were maintained as price pressure from lower margin orders in the backlog was largely offset by cost savings. In 2013, the gains from FX/commodity derivative timing differences were lower than in 2012. Restructuring-related expenses were at the same level as 2012.

In 2012, income from operations was lower than in 2011, primarily reflecting the execution of lower-margin order backlog as a result of pricing pressure. Cost saving initiatives helped to partially reduce the impact, as did a positive effect from FX/commodity timing differences and slightly lower restructuring and restructuring-related expenses.

Operational EBITDA

The reconciliation of income from operations to Operational EBITDA for the Power Products division was as follows:

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($ in millions)

2013

2012

2011

Income from operations

1,331

1,328

1,476

Depreciation and amortization

223

209

200

Restructuring and restructuring-related expenses

66

65

70

Acquisition-related expenses and certain non-operational items

19

1

FX/commodity timing differences in income from operations

(2)

(18)

36

Operational EBITDA

1,637

1,585

1,782

In 2013, Operational EBITDA increased 3 percent compared to 2012, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above.

In 2012, Operational EBITDA decreased 11 percent compared to 2011, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above.

Fiscal year 2014 outlook

Utility transmission and distribution investments continue to be restrained, based on the overall macroeconomic environment, as industrial growth varies across geographies and markets. Emerging markets are selectively investing in infrastructure projects, while mature markets focus on upgrades and essentials driven by power reliability, efficiency and environmental concerns. Industrial investment remains largely focused in sectors such as oil and gas. The power transmission utility sector is still seeing selective project investments while distribution demand seems to be leveling out, driven by a deceleration in electricity consumption growth rates. The overall market remains competitive.