Process Automation

The financial results of our Process Automation division were as follows:

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% Change

($ in millions)

2013

2012

2011

2013

2012

Orders

8,000

8,704

8,726

(8)%

Order backlog at Dec. 31,

5,772

6,416

5,771

(10)%

11%

Revenues

8,497

8,156

8,300

4%

(2)%

Income from operations

990

912

963

9%

(5)%

Operational EBITDA

1,096

1,003

1,028

9%

(2)%

Orders

Orders in 2013 declined 8 percent (8 percent in local currencies), reflecting the response of our customers to ongoing economic uncertainty. Order declines were primarily due to reductions in large orders as tender activity for major expansion projects decreased across most sectors. Orders during the year largely reflected customer investment in productivity improvements for existing assets rather than investment in capacity expansion. Orders from the oil and gas and marine sectors remained strong but were lower than in 2012, while orders from metals and pulp and paper customers decreased.

Despite economic uncertainty across many parts of the world, orders in 2012 reached the same level as 2011 (increased 4 percent in local currencies) driven by key markets in marine, mining, and oil and gas. Orders from pulp and paper, and metals sectors were weaker however, especially in Europe, China and India. Certain short-cycle product businesses, such as Measurement Products, also recorded lower volumes in the second half of the year.

The geographic distribution of orders for our Process Automation division was as follows:

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(in %)

2013

2012

2011

Europe

37

37

39

The Americas

23

25

23

Asia

31

27

30

Middle East and Africa

9

11

8

Total

100

100

100

In 2013, the share of orders from Asia grew while declining in the Americas and MEA. In Asia, the increase was primarily from China, where higher orders were mainly driven by the marine sector while the mining sector remained weak. South Korea also remained strong in the marine sector. In Europe, the offshore oil and gas market in the North Sea continued to see capital investments based on current high oil prices and improving reservoir assessment technology. The European shipbuilding sector also saw renewed activity, although economic constraints such as overcapacity and the lack of financing have affected this sector. Overall, Europe, with the same share of orders as in 2012, had a moderate decrease in orders, although still at high levels. Orders in the Americas were impacted by a reduction in investments made by the mining sector, while the MEA region decreased primarily due to a reduction in large orders received from the oil and gas sector.

Growth in 2012 was driven by the MEA region and the Americas, while Europe retained its high share of total orders. Growth in MEA was driven by several oil and gas investments across the region, as well as harbor cranes investments in the United Arab Emirates and a mining investment in Mozambique. In the Americas, South America recorded the strongest growth, driven by several mining investments in Chile and Peru, as well as a large marine order in Brazil. North America also continued to be strong, largely driven by mining investments in Canada. Growth in Europe was overall low, as growth in Central Europe, driven by the marine and cranes sector, was offset by declines in Northern Europe. Asia recorded lower orders as the historically high activity level in the South Korean marine sector in 2011 was not repeated, while China grew moderately.

Order backlog

Order backlog at December 31, 2013, was 10 percent lower (8 percent in local currencies) than in 2012, reflecting the impact of a reduction in order intake during the year.

Order backlog at December 31, 2012, was 11 percent higher (8 percent in local currencies) than in 2011. Order backlog growth was largely driven by our Marines and Cranes, Mining, and Oil, Gas and Petrochemical businesses.

Revenues

Although orders decreased in 2013, revenues were 4 percent higher than 2012 (5 percent in local currencies) as we executed on projects in the order backlog from 2012. Revenue growth resulted primarily from the systems businesses, particularly in the marine and mining sectors. The Oil, Gas and Petrochemical business also recorded modest growth, while revenues declined in the Paper, Metals & Cement business. Revenues in our product businesses grew moderately, particularly in Measurement Products and Control Technologies. Life-cycle services also showed modest growth.

In 2012, revenues were down 2 percent (up 2 percent in local currencies) compared to 2011. We continued to execute from a strong order backlog. Revenue growth was led by the systems business, where the marine, and pulp and paper sectors recorded strong growth, while the metals and minerals sectors were lower. Our Oil, Gas, and Petrochemical business was flat. Product businesses grew moderately, where growth in our Measurement Products business was offset by a decline in our Turbo Products business. Life-cycle services continued to be strong and recorded a moderate growth, while our Full Service business was down, as we continued to refocus our portfolio towards higher value-added activities.

The geographic distribution of revenues for our Process Automation division was as follows:

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(in %)

2013

2012

2011

Europe

36

37

39

The Americas

24

23

22

Asia

32

30

27

Middle East and Africa

8

10

12

Total

100

100

100

In 2013, revenues grew across most regions. The share of revenues from Asia increased as revenues grew in South Korea and China with high demand from the marine sector, while in Australia revenues grew in the oil and gas and mining sectors. The share of revenues from the Americas also increased as revenues grew primarily in South America, driven by the mining sector in Chile and Peru, while revenue levels in North America were maintained. Although the share of revenues from Europe decreased, revenues from Europe increased, mainly from higher revenues in the oil and gas sector in Northern Europe, while the rest of Europe was slightly lower. The share of revenues from MEA was lower, primarily due to the timing of large projects in Africa.

In 2012, revenue growth was led by Asia and the Americas. In Asia, strong growth was recorded in South Korea, driven by the Marine business, as well as growth in Singapore and Australia. China and India however declined. In the Americas, revenue growth was driven by the mining sector in Chile, as well as the oil and gas sector in Canada. Europe’s share of revenues decreased, although still at high levels, as growth in the Oil and Gas, and Marine businesses in Northern Europe was offset by lower growth in Central Europe.

Income from operations

In 2013, income from operations increased primarily due to higher revenues, as well as a favorable product mix resulting from stronger growth rates in our higher-margin businesses. Improved project execution in the systems businesses and strict cost control also contributed to the increase.

In 2012, income from operations declined slightly compared to the previous year. The biggest driver for the decline was lower profitability in the Turbocharging business which was impacted by difficult market conditions, as well as $20 million additional restructuring expenses to further align our business structure to prevailing market conditions. Most of the restructuring expenses were recorded in the Turbocharging and Full Service businesses, as well as the Paper Metals and Cement businesses. In the systems business, the margin was on the same level as in 2011, while in the services business, life-cycle services continued to be strong and achieved a higher margin.

Operational EBITDA

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

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($ in millions)

2013

2012

2011

Income from operations

990

912

963

Depreciation and amortization

87

82

83

Restructuring and restructuring-related expenses

31

28

8

Acquisition-related expenses and certain non-operational items

(6)

2

FX/commodity timing differences in income from operations

(6)

(21)

(26)

Operational EBITDA

1,096

1,003

1,028

In 2013, Operational EBITDA increased 9 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 declined slightly 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

The outlook for 2014 is mixed and is industry dependent. The oil and gas industry is expected to be one key source of growth, not only because demand is expected to remain high and continue to grow, but also because new technologies (such as hydraulic fracturing) and new challenges (such as subsea automation) will drive capital expenditure. However, the mining and metals industry suffers from both overcapacity and increasing exploration cost. The pulp and paper industry has invested in fiber production during last two years, however future growth in this industry is expected to be limited.