Analysis of results of operations

Our consolidated results from operations were as follows:

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

2014

2013

2012

Orders

41,515

38,896

40,232

Order backlog at December 31,

24,900

26,046

29,298

 

 

 

 

Revenues

39,830

41,848

39,336

Cost of sales

(28,615)

(29,856)

(27,958)

Gross profit

11,215

11,992

11,378

Selling, general and administrative expenses

(6,067)

(6,094)

(5,756)

Non-order related research and development expenses

(1,499)

(1,470)

(1,464)

Other income (expense), net

529

(41)

(100)

Income from operations

4,178

4,387

4,058

Net interest and other finance expense

(282)

(321)

(220)

Provision for taxes

(1,202)

(1,122)

(1,030)

Income from continuing operations, net of tax

2,694

2,944

2,808

Income (loss) from discontinued operations, net of tax

24

(37)

4

Net income

2,718

2,907

2,812

Net income attributable to noncontrolling interests

(124)

(120)

(108)

Net income attributable to ABB

2,594

2,787

2,704

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

2,570

2,824

2,700

Net income

2,594

2,787

2,704

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.12

1.23

1.18

Net income

1.13

1.21

1.18

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.12

1.23

1.18

Net income

1.13

1.21

1.18

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

 

 

 

 

% Change

($ in millions)

2014

2013

2012

2014

2013

(1)

Includes interdivisional eliminations

Discrete Automation and Motion

10,559

9,771

9,625

8%

2%

Low Voltage Products

7,550

7,696

6,720

(2)%

15%

Process Automation

8,577

8,000

8,704

7%

(8)%

Power Products

10,764

10,459

11,040

3%

(5)%

Power Systems

6,871

5,949

7,973

15%

(25)%

Operating divisions

44,321

41,875

44,062

6%

(5)%

Corporate and Other(1)

(2,806)

(2,979)

(3,830)

n.a.

n.a.

Total

41,515

38,896

40,232

7%

(3)%

In 2014, total order volume increased 7 percent (9 percent in local currencies) and increased across all divisions except Low Voltage Products. Orders increased primarily due to higher large orders while base orders also increased. In the automation divisions, orders were supported by customer investments to improve operational efficiency and an increase in the demand for services. In the power divisions, the key demand drivers such as capacity expansion in emerging markets, upgrading of aging infrastructure in mature markets and the integration of renewable energy supplies into power grids, remained intact.

In 2014, orders in the Discrete Automation and Motion division grew 8 percent (10 percent in local currencies) on higher orders in all businesses and supported by the impact of including Power-One for the full year in 2014. Orders decreased 2 percent in the Low Voltage Products division (flat in local currencies) as the impacts of divesting the HVAC and Steel Structures businesses offset the order increases which were realized in most of the division’s other businesses. Orders in the Process Automation division increased 7 percent (10 percent in local currencies) on significantly higher large orders in the marine sector compared to the previous year. Orders increased 3 percent (5 percent in local currencies) in the Power Products division, supported by the industry sector and continued selective investments in large transmission projects. In the Power Systems division, orders grew 15 percent (20 percent in local currencies), driven primarily by the receipt of several large orders.

During 2014, base orders grew 2 percent (4 percent in local currencies) reflecting the global economic conditions which showed positive trends but remained mixed in certain markets. Following a weak large order intake in 2013, large orders increased 45 percent (50 percent in local currencies) in 2014. Successful sales efforts resulted in orders from the 2013 tender backlog successfully turning into orders in 2014. This allowed large orders to grow significantly, particularly in the Process Automation and Power Systems divisions.

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. Despite strong project tendering activity, some customers delayed order awards due to macroeconomic uncertainties and this 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).

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:

 

 

 

 

% Change

($ in millions)

2014

2013

2012

2014

2013

Europe

14,246

13,334

13,512

7%

(1)%

The Americas

11,957

11,365

12,152

5%

(6)%

Asia

11,215

10,331

10,346

9%

Middle East and Africa

4,097

3,866

4,222

6%

(8)%

Total

41,515

38,896

40,232

7%

(3)%

Orders in 2014 grew in all regions on higher orders in both power and automation. Orders in Europe increased 7 percent (9 percent in local currencies) driven by increases in large orders. Orders were higher in the United Kingdom, Sweden, Finland, France, Switzerland, Spain and the Netherlands, offsetting lower orders in Germany, Italy, Norway and Russia. Orders increased 5 percent (9 percent in local currencies) in the Americas on higher base and large orders in the U.S., Canada, Brazil and Argentina. In Asia, orders grew 9 percent (11 percent in local currencies) on higher orders in China, South Korea, India and Japan while orders were lower in Australia. Orders increased in MEA by 6 percent (9 percent in local currencies) supported by growth in Saudi Arabia while orders decreased in the United Arab Emirates and South Africa.

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 primarily 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.

Order backlog

 

December 31,

% Change

($ in millions)

2014

2013

2012

2014

2013

(1)

Includes interdivisional eliminations

Discrete Automation and Motion

4,385

4,351

4,426

1%

(2)%

Low Voltage Products

891

1,057

1,117

(16)%

(5)%

Process Automation

5,661

5,772

6,416

(2)%

(10)%

Power Products

7,791

7,946

8,493

(2)%

(6)%

Power Systems

8,246

9,435

12,107

(13)%

(22)%

Operating divisions

26,974

28,561

32,559

(6)%

(12)%

Corporate and Other(1)

(2,074)

(2,515)

(3,261)

n.a.

n.a.

Total

24,900

26,046

29,298

(4)%

(11)%

In 2014, consolidated order backlog decreased 4 percent (increased 5 percent in local currencies). Order backlog in all divisions reflected the effects of significant foreign currency changes as the U.S. dollar strengthened during 2014 against substantially all currencies. In the Discrete Automation and Motion, Process Automation and Power Products divisions, order backlog increased in local currencies as a result of growth in global industrial demand. Order backlog in the Process Automation division also increased due to large orders received in the marine and oil and gas sectors. Order backlog in the Low Voltage Products division decreased in local currencies due to divestments during 2014. Order backlog in the Power Systems division decreased 4 percent in local currencies as the impacts of higher large orders during 2014 were more than offset by the impacts of the run off of the order backlog in the businesses affected by the Power Systems repositioning announced in 2012 and the exit from the solar EPC business announced in 2014.

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.

Revenues

 

 

 

 

% Change

($ in millions)

2014

2013

2012

2014

2013

(1)

Includes interdivisional eliminations

Discrete Automation and Motion

10,142

9,915

9,405

2%

5%

Low Voltage Products

7,532

7,729

6,638

(3)%

16%

Process Automation

7,948

8,497

8,156

(6)%

4%

Power Products

10,333

11,032

10,717

(6)%

3%

Power Systems

7,020

8,375

7,852

(16)%

7%

Operating divisions

42,975

45,548

42,768

(6)%

7%

Corporate and Other(1)

(3,145)

(3,700)

(3,432)

n.a.

n.a.

Total

39,830

41,848

39,336

(5)%

6%

Revenues in 2014 decreased 5 percent (2 percent in local currencies) due primarily to the impacts of the lower opening order backlog in the Power Systems and Process Automation divisions compared to the beginning of 2013 and the impacts of business divestments.

On a divisional basis, revenues grew 2 percent (4 percent in local currencies) in the Discrete Automation and Motion division, supported by growth in the Robotics business and also due to the impact of including Power-One for the full year in 2014. In the Low Voltage Products division, revenues decreased 3 percent (flat in local currencies) as steady to higher revenues in most businesses were offset by decreases in revenues resulting from divestments. Revenues in the Process Automation division decreased 6 percent (4 percent in local currencies) due to the effects of the lower opening order backlog, primarily in the systems businesses and were also impacted by the exit from a large service contract in the fourth quarter of 2013. Revenues in the Power Products division decreased 6 percent (4 percent in local currencies) mainly reflecting the low opening order backlog. In the Power Systems division, revenues decreased 16 percent (13 percent in local currencies) due to the lower opening order backlog in all businesses.

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 in 2013 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 higher (5 percent in local currencies) 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.

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:

 

 

 

 

% Change

($ in millions)

2014

2013

2012

2014

2013

Europe

13,674

14,385

14,073

(5)%

2%

The Americas

11,482

12,115

10,699

(5)%

13%

Asia

10,874

11,230

10,750

(3)%

4%

Middle East and Africa

3,800

4,118

3,814

(8)%

8%

Total

39,830

41,848

39,336

(5)%

6%

In 2014, revenues declined in all regions. In Europe, revenues decreased 5 percent (3 percent in local currencies) as revenue increases in Norway, the United Kingdom, France, Switzerland and Spain were more than offset by revenue declines in Germany, Italy, Sweden, Finland, Russia and the Netherlands. Revenues from the Americas declined 5 percent (2 percent in local currencies). Revenues were steady in the U.S. and included the impacts of including Power-One for a full year in 2014 while revenues declined in Canada and Brazil. Revenues from Asia decreased 3 percent (1 percent in local currencies) as revenues were flat in China while decreases were realized in India, South Korea and Australia. Revenues in MEA declined 8 percent (6 percent in local currencies) as a result of lower revenues in Saudi Arabia and South Africa in the power divisions while revenues increased in the United Arab Emirates.

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, the 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.

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 2014, cost of sales decreased 4 percent (1 percent in local currencies) to $28,615 million. As a percentage of revenues, cost of sales increased from 71.3 percent in 2013 to 71.8 percent in 2014. Cost of sales as a percentage of revenues decreased in most divisions as benefits from cost savings more than offset the impacts from price pressures in certain markets. However, the consolidated cost of sales as a percentage of revenues was higher due to high project-related costs in the Power Systems division and the dilutive impact on margins from the Power-One acquisition in the Discrete Automation and Motion division.

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.

Selling, general and administrative expenses

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

($ in millions)

2014

2013

2012

Selling expenses

4,054

4,071

3,862

Selling expenses as a percentage of orders received

9.8%

10.5%

9.6%

General and administrative expenses

2,013

2,023

1,894

General and administrative expenses as a percentage of revenues

5.1%

4.8%

4.8%

Total selling, general and administrative expenses

6,067

6,094

5,756

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

15.2%

14.6%

14.6%

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

14.9%

15.1%

14.5%

In 2014, general and administrative expenses remained stable compared to 2013 (increased 2 percent in local currencies). As a percentage of revenues, general and administrative expenses increased from 4.8 percent to 5.1 percent mainly due to the impact of lower revenues.

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 2014, selling expenses remained stable compared to 2013 (increased 2 percent in local currencies). Selling expenses as a percentage of orders received decreased from 10.5 percent to 9.8 percent mainly due to the impact of higher orders received.

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 2014, selling, general and administrative expenses remained stable compared to 2013 (increased 2 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses decreased from 15.1 percent to 14.9 percent as the impact of lower revenues was more than offset by the impact of higher orders.

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).

Non-order related research and development expenses

In 2014, non-order related research and development expenses increased 2 percent compared to 2013 (4 percent in local currencies).

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

Non-order related research and development expenses as a percentage of revenues increased to 3.8 percent in 2014, after decreasing to 3.5 percent in 2013 from 3.7 percent in 2012.

Other income (expense), net

($ in millions)

2014

2013

2012

(1)

Excluding asset impairments

Restructuring and restructuring-related expenses(1)

(37)

(45)

(54)

Net gain from sale of property, plant and equipment

17

18

26

Asset impairments

(34)

(29)

(111)

Net gain (loss) from sale of businesses

543

(16)

(2)

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

40

31

41

Total

529

(41)

(100)

“Other income (expense), net” primarily includes certain restructuring and restructuring-related expenses, gains and losses from sale of businesses and sale of property, plant and equipment, recognized asset impairments, as well as our share of income or loss from equity-accounted companies. “Other income (expense), net” was an income of $529 million in 2014, compared with an expense of $41 million in 2013, mostly due to the impact of the net gains recorded in 2014 from the sale of HVAC, Power Solutions, Steel Structures and Full Service businesses.

In 2013, “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.

Income from operations

 

 

 

 

% Change(1)

($ in millions)

2014

2013

2012

2014

2013

(1)

Certain percentages are stated as n.a. as the computed change would not be meaningful.

Discrete Automation and Motion

1,422

1,458

1,469

(2)%

(1)%

Low Voltage Products

1,475

1,092

856

35%

28%

Process Automation

1,003

990

912

1%

9%

Power Products

1,204

1,331

1,328

(10)%

Power Systems

(360)

171

7

n.a.

n.a.

Operating divisions

4,744

5,042

4,572

(6)%

10%

Corporate and Other

(569)

(650)

(524)

n.a.

n.a.

Intersegment elimination

3

(5)

10

n.a.

n.a.

Total

4,178

4,387

4,058

(5)%

8%

In 2014 and 2013, 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 transaction costs associated with long-term debt and committed credit facilities, commitment fees on credit facilities, foreign exchange gains and losses on financial items and gains and losses on marketable securities.

($ in millions)

2014

2013

2012

Interest and dividend income

80

69

73

Interest and other finance expense

(362)

(390)

(293)

Net interest and other finance expense

(282)

(321)

(220)

In 2014, “Interest and other finance expense” decreased compared to 2013, mainly resulting from (i) the maturity of a bond in June 2013 and (ii) the reduction in interest expense resulting from an additional interest rate swap entered into during 2014 – see “Note 12 Debt” to our Consolidated Financial Statements.

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.

Provision for taxes

($ in millions)

2014

2013

2012

Income from continuing operations before taxes

3,896

4,066

3,838

Provision for taxes

(1,202)

(1,122)

(1,030)

Effective tax rate for the year

30.9%

27.6%

26.8%

In 2014, the tax rate of 30.9% included the effects of taxes on net gains on sale of businesses. Included in the provision for taxes of $1,202 million were taxes of $279 million relating to $543 million of gains on sale of businesses. These divestment transactions increased the effective tax rate as gains were realized primarily in higher-tax jurisdictions and the goodwill allocated to the divested businesses was not deductible for tax purposes. Excluding the effects of these divestment transactions, the effective tax rate for 2014 would have been 27.5%.

The provision for taxes in 2014 included a net increase of valuation allowance on deferred taxes of $52 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 $31 million related to certain of our operations in South America.

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 2014, 2013 and 2012, 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, decreased $250 million to $2,694 million in 2014 compared to 2013, and increased $136 million to $2,944 million in 2013 compared to 2012.

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 2014 and 2012 was not significant.

Net income attributable to ABB

As a result of the factors discussed above, net income attributable to ABB decreased $193 million to $2,594 million in 2014 compared to 2013, and increased $83 million to $2,787 million in 2013 compared to 2012.

Earnings per share attributable to ABB shareholders

(in $)

2014

2013

2012

Income from continuing operations, net of tax:

 

 

 

Basic

1.12

1.23

1.18

Diluted

1.12

1.23

1.18

Net income attributable to ABB:

 

 

 

Basic

1.13

1.21

1.18

Diluted

1.13

1.21

1.18

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 and 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.