Process Automation

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

 

 

 

 

% Change

($ in millions)

2014

2013

2012

2014

2013

Orders

8,577

8,000

8,704

7%

(8)%

Order backlog at Dec. 31,

5,661

5,772

6,416

(2)%

(10)%

Revenues

7,948

8,497

8,156

(6)%

4%

Income from operations

1,003

990

912

1%

9%

Operational EBITDA

1,029

1,096

1,003

(6)%

9%

Orders

Orders in 2014 increased 7 percent (10 percent in local currencies), mainly due to high demand from the marine sector, especially for LNG vessels. Orders in the oil and gas businesses also increased while orders in the mining businesses remained at low levels as most mining customers delayed or postponed capital investments. Orders in the metals businesses also remained at low levels due to overcapacity issues affecting our customers. Other customers such as steel companies are focusing their spending on operating expenses and not on capital investment due to profitability pressures affecting their industry. The paper industry in North America, South America and parts of Asia, however, has improved and has started to increase its level of capital investment.

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.

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

(in %)

2014

2013

2012

Europe

33

37

37

The Americas

23

23

25

Asia

35

31

27

Middle East and Africa

9

9

11

Total

100

100

100

In 2014, the share of orders from Asia increased primarily due to the impacts of large orders received in South Korea from the LNG marine sector and strong order growth in China. Orders grew in MEA, allowing it to maintain its share of orders, and included the impact of the award of a gas treatment plant contract in Tunisia. The share of orders from the Americas remained steady. Growth in Brazil was offset by the effects of lower mining investments in Chile while North America grew slightly. Orders decreased in Europe which resulted in a reduction in the share of orders from Europe compared to 2013. Marine orders in Finland were offset by lower order intake in Germany and Southern Europe.

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 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.

Order backlog

Order backlog at December 31, 2014, was 2 percent lower compared to 2013. In local currencies, order backlog was 9 percent higher, reflecting the higher order intake during the year, especially large orders.

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.

Revenues

In 2014, revenues were down 6 percent (4 percent in local currencies) reflecting the impacts of lower order intake in the previous year. Revenue decreases were more significant in the systems businesses, especially in mining systems, due to the weak opening order backlog while revenues in the oil and gas businesses increased. Product revenues were flat. Revenues in the Measurement Products business grew slightly but were offset by a decline in revenues in the Control Technologies business. Product revenues in the Turbocharging business increased slightly compared to the low levels last year. Revenues were also impacted by the exit in 2013 from a large service contract.

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. Revenues in our product businesses grew moderately, particularly in Measurement Products and Control Technologies. Lifecycle services also showed modest growth.

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

(in %)

2014

2013

2012

Europe

35

36

37

The Americas

23

24

23

Asia

33

32

30

Middle East and Africa

9

8

10

Total

100

100

100

The regional distribution of revenues in 2014 did not change significantly compared to 2013. Revenue share declines were realized in Europe and the Americas, while Asia and MEA increased. In Europe, revenues declined as result of an exit in 2013 from a large service contract in Finland and lower revenues in Sweden. In the Americas, lower opening order backlog in the mining business led to lower revenues in Chile and Peru, which more than offset growth in the U.S. The revenue share from Asia increased slightly while the revenue increase in MEA was mainly from Algeria and the United Arab Emirates.

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.

Income from operations

In 2014, income from operations increased compared to 2013, mainly due to the gain on sale of the Full Service business partially offset by the impact of lower revenues.

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.

Operational EBITDA

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

($ in millions)

2014

2013

2012

Income from operations

1,003

990

912

Depreciation and amortization

88

87

82

Restructuring and restructuring-related expenses

43

31

28

Gains and losses on sale of businesses, acquisition-related expenses and certain non-operational items

(113)

(6)

2

FX/commodity timing differences in income from operations

8

(6)

(21)

Operational EBITDA

1,029

1,096

1,003

In 2014, Operational EBITDA decreased 6 percent compared to 2013, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above.

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.

Fiscal year 2015 outlook

The outlook for 2015 is mixed and varies by industry. While the oil and gas sector has recently been a key growth driver, the decrease in oil prices is expected to lead to lower and/or delayed capital expenditures by our upstream oil and gas customers. However, mid- and downstream activities such as refining, chemicals and petrochemicals may see increased investment. The marine market is expected to continue to be strong, while demand from the mining segment is forecast to remain at low levels. The metals industry still suffers from overcapacity, while the pulp and paper industry is expected to grow moderately, especially in the emerging markets.