Power Systems

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

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% Change

($ in millions)

2013

2012

2011

2013

2012

Orders

5,949

7,973

9,278

(25)%

(14)%

Order backlog at Dec. 31,

9,435

12,107

11,570

(22)%

5%

Revenues

8,375

7,852

8,101

7%

(3)%

Income from operations

171

7

548

n.a.

n.a.

Operational EBITDA

419

290

743

44%

(61)%

Orders

Order intake in 2013 was 25 percent lower (25 percent lower in local currencies), as customers postponed investments and delayed the award of large orders. In addition, we increased our project selectivity and focused on higher-margin business as part of the division’s strategic repositioning (announced in December 2012). Power infrastructure spending was restrained due to economic uncertainties in most regions, while transmission utilities continued to invest selectively, focusing on additional capacity in emerging markets while mature markets focused mainly on grid upgrades. Large orders in 2013 included a $110 million order for a HVDC converter station to facilitate the connection of the Lithuanian and Polish power grids, an $80 million order to power Canada’s largest solar photovoltaic plant, and substation orders of $160 million in Kuwait to help strengthen the country’s power grid and support its growing infrastructure. Continued price pressure, resulting from ongoing macroeconomic weakness in certain key geographical markets, also negatively impacted our order levels in 2013.

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 in 2011, with decreases in all businesses except Network Management where software orders increased. 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. 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.

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

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(in %)

2013

2012

2011

Europe

35

30

40

The Americas

25

31

17

Asia

17

18

27

Middle East and Africa

23

21

16

Total

100

100

100

In 2013, orders declined across all regions compared to 2012. The change in the geographical share of orders primarily reflects changes in the geographical locations of large orders received during 2013 compared to 2012. The order decrease in the Americas mainly resulted from the strong level of large orders in 2012. Regionally, the percentage of our orders from Europe was the highest, although both large and base orders were lower than in the previous year.

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.

Order backlog

Order backlog at December 31, 2013, was $9,435 million, a decrease of 22 percent (21 percent in local currencies) compared with 2012. Order backlog was impacted significantly by the lower level of large orders received in 2013, particularly the lack of very large project orders which typically have execution times stretching over several years.

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.

Revenues

Revenues in 2013 increased 7 percent (8 percent in local currencies), with growth in all businesses. The increase was achieved primarily through the execution of projects from the 2012 order backlog. The strong order backlog level at the beginning of 2013 provided the division a strong base from which to generate revenues in 2013 and more than compensated for the lower level of orders received in 2013.

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 the Grid Systems and Substations businesses were marginally down in U.S. dollar terms, but showed a small increase in local currencies. Revenues in 2012 included $138 million from Mincom.

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

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(in %)

2013

2012

2011

Europe

36

40

40

The Americas

23

19

20

Asia

20

19

18

Middle East and Africa

21

22

22

Total

100

100

100

The regional distribution of revenues reflects the geographical end-user markets of the projects we are executing, and consequently varies over time. In 2013, Europe remained the largest region in terms of revenues, despite a decrease in share of revenues compared to previous year. The higher share of revenues from the Americas was due primarily to execution in 2013 of projects from the 2012 order backlog in the U.S. and Brazil.

In 2012, Europe was 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.

Income from operations

In 2013, income from operations increased to $171 million, from $7 million in 2012, due partly to the impacts on 2012 from the repositioning of the Power Systems division (announced in December 2012 and described below). Income from operations in 2013 was also negatively impacted by operational charges in the fourth quarter of approximately $260 million, a significant portion of which related to certain offshore wind projects, where severe winter storms in the North Sea caused time delays and increased costs. The remaining operational charges in the fourth quarter related to project cost increases in certain projects in other businesses. Restructuring-related expenses in 2013 of $101 million were higher than the $52 million in 2012, and included charges to adjust the size of certain operations in response to lower order intake. However, income from operations benefitted from the contribution of higher revenues and lower research and development spending. Additionally, cost savings from supply chain management and operational excellence activities helped mitigate the impact of price pressures in projects executed from the order backlog.

In 2012, income from operations decreased to $7 million. Income from operations was negatively impacted by the execution of lower margin projects from the order backlog, as well as charges totaling approximately $350 million relating to a repositioning of the Power Systems division. The $350 million included charges totaling approximately $100 million related to certain impairments and restructuring-related activities in connection with the closure of low value-adding contracting operations in a number of countries. However, overall, restructuring-related expenses in 2012 of $52 million were marginally lower than the amount recorded in 2011. 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. The impact from lower prices on past orders, now flowing through to revenues, was mitigated by cost savings from supply chain management and operational excellence activities. Income from operations was also impacted by higher depreciation and amortization expenses of $174 million in 2012, compared to $144 million in 2011, mainly resulting from additional depreciation from the Mincom acquisition.

Operational EBITDA

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

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($ in millions)

2013

2012

2011

Income from operations

171

7

548

Depreciation and amortization

183

174

144

Restructuring and restructuring-related expenses

101

52

54

Acquisition-related expenses and certain non-operational items

4

70

FX/commodity timing differences in income from operations

(40)

(13)

(3)

Operational EBITDA

419

290

743

In 2013, Operational EBITDA increased 44 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 61 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

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 the timing of investments, stemming from continued macroeconomic challenges in several economies, as well as ongoing project execution risks in line with the nature of the systems business.