Liquidity and capital resources

Principal sources of funding

We meet our liquidity needs principally using cash from operations, proceeds from the issuance of debt instruments (bonds and commercial paper), and short-term bank borrowings.

During 2017, 2016 and 2015, our financial position was strengthened by the positive cash flow from operating activities of $3,799 million, $3,843 million and $3,818 million, respectively.

Our net debt is shown in the table below:

 

December 31,

($ in millions)

2017

2016

Short-term debt and current maturities of long-term debt

738

1,003

Long-term debt

6,709

5,800

Cash and equivalents

(4,526)

(3,644)

Marketable securities and short-term investments

(1,102)

(1,953)

Net debt (defined as the sum of the above lines)

1,819

1,206

Net debt at December 31, 2017, increased $613 million compared to December 31, 2016, as cash flows from operating activities during 2017 of $3,799 million was more than offset by cash outflows for acquisitions of businesses (primarily B&R) ($2,130 million), the dividend payment to our shareholders ($1,635 million), net purchases of property, plant and equipment and intangible assets ($883 million) and amounts paid to purchase treasury stock ($251 million). Other significant transactions affecting our liquidity included the issuance of treasury shares for $163 million and payments of dividends to noncontrolling shareholders of $127 million. Movements in foreign exchange rates increased net debt by approximately $54 million. See “Financial position”, “Investing activities” and “Financing activities” for further details.

Our Group Treasury Operations is responsible for providing a range of treasury management services to our group companies, including investing cash in excess of current business requirements. At December 31, 2017 and 2016, the proportion of our aggregate “Cash and equivalents” and “Marketable securities and short-term investments” managed by our Group Treasury Operations amounted to approximately 49 percent and 57 percent, respectively.

Throughout 2017 and 2016, the investment strategy for cash (in excess of current business requirements) has generally been to invest in short-term time deposits with maturities of less than 3 months, supplemented at times by investments in corporate commercial paper, money market funds, and in some cases, government securities. During 2017 and 2016, we also continued to place limited funds in connection with reverse repurchase agreements. We actively monitor credit risk in our investment portfolio and hedging activities. Credit risk exposures are controlled in accordance with policies approved by our senior management to identify, measure, monitor and control credit risks. We closely monitor developments in the credit markets and make appropriate changes to our investment policy as deemed necessary. The rating criteria we require for our counterparts have remained unchanged during 2017 (compared to 2016) as follows: a minimum rating of A/A2 for our banking counterparts (with limited exceptions), while the minimum required rating for investments in short-term corporate commercial paper is A-1/P-1. In addition to rating criteria, we have specific investment parameters and approved instruments as well as restrictions on the types of investments we make. These parameters are closely monitored on an ongoing basis and amended as we consider necessary.

Our cash is held in various currencies around the world. Approximately 35 percent of our cash and cash equivalents held at December 31, 2017, was in U.S. dollars, while other significant amounts were held in Chinese renminbi (23 percent), euro (17 percent) and Indian rupee (5 percent).

We believe the cash flows generated from our business, supplemented, when necessary, through access to the capital markets (including short-term commercial paper) and our credit facilities are sufficient to support business operations, capital expenditures, business acquisitions, the payment of dividends to shareholders and contributions to pension plans. Consequently, we believe that our ability to obtain funding from these sources will continue to provide the cash flows necessary to satisfy our working capital and capital expenditure requirements, as well as meet our debt repayments and other financial commitments for the next twelve months. See “Disclosures about contractual obligations and commitments”.

Due to the nature of our operations, our cash flow from operations generally tends to be weaker in the first half of the year than in the second half of the year.

Debt and interest rates

Total outstanding debt was as follows:

 

December 31,

($ in millions)

2017

2016

Short-term debt and current maturities of long-term debt

738

1,003

Long-term debt:

 

 

Bonds

6,487

5,660

Other long-term debt

222

140

Total debt

7,447

6,803

The decrease in short-term debt in 2017 was due to the repayment at maturity of both our USD 500 million 1.625% Notes and our AUD 400 million 4.25% Notes. This was partially offset by the reclassification of our CHF 350 million 1.5% Bonds due in 2018. In addition, we increased the amount of issued commercial paper ($259 million outstanding at December 31, 2017, compared to $57 million outstanding at December 31, 2016).

Our debt has been obtained in a range of currencies and maturities and on various interest rate terms. For certain of our debt obligations, we use derivatives to manage the fixed interest rate exposure. For example, we use interest rate swaps to effectively convert fixed rate debt into floating rate liabilities. After considering the effects of interest rate swaps, the effective average interest rate on our floating rate long-term debt (including current maturities) of $3,213 million and our fixed rate long-term debt (including current maturities) of $3,907 million was 0.6 percent and 3.5 percent, respectively. This compares with an effective rate of 1.3 percent for floating rate long-term debt of $1,745 million and 2.9 percent for fixed rate long-term debt of $4,923 million at December 31, 2016.

For a discussion of our use of derivatives to modify the interest characteristics of certain of our individual bond issuances, see “Note 12 Debt” to our Consolidated Financial Statements.

Credit facility

During 2016 we exercised our second and final option to extend the maturity of our $2 billion multicurrency revolving credit facility from 2020 to 2021.

No amount was drawn under the credit facility at December 31, 2017 and 2016. The facility is available for general corporate purposes. The facility contains cross-default clauses whereby an event of default would occur if we were to default on indebtedness, as defined in the facility, at or above a specified threshold.

The credit facility does not contain financial covenants that would restrict our ability to pay dividends or raise additional funds in the capital markets. For further details of the credit facility, see “Note 12 Debt” to our Consolidated Financial Statements.

Commercial paper

At December 31, 2017, we had two commercial paper programs in place:

  • a $2 billion commercial paper program for the private placement of U.S. dollar denominated commercial paper in the United States, and
  • a $2 billion Euro-commercial paper program for the issuance of commercial paper in a variety of currencies.

At December 31, 2017, $259 million was outstanding under the $2 billion program in the United States, compared to $57 million outstanding at December 31, 2016.

No amount was outstanding under the $2 billion Euro-commercial paper program at December 31, 2017 and 2016.

European program for the issuance of debt

The European program for the issuance of debt allows the issuance of up to the equivalent of $8 billion in certain debt instruments. The terms of the program do not obligate any third party to extend credit to us and the terms and possibility of issuing any debt under the program are determined with respect to, and as of the date of issuance of, each debt instrument. During 2017, we issued EUR 750 million 0.75% Notes, due 2024, and during 2016, we issued EUR 700 million 0.625% Notes, due 2023, under the program. At December 31, 2017, three bonds (principal amount of EUR 1,250 million, due in 2019, principal amount of EUR 700 million, due in 2023 and principal amount of EUR 750 million, due in 2024) having a combined carrying amount of $3,216 million, were outstanding under the program. At December 31, 2016, two bonds (principal amount of EUR 1,250 million, due in 2019, and principal amount of EUR 700 million, due in 2023) having a combined carrying amount of $2,043 million, were outstanding under the program.

Australian program for the issuance of debt

During 2012, we set up a program for the issuance of up to AUD 1 billion (equivalent to $779 million, using December 31, 2017, exchange rates) of medium-term notes and other debt instruments. The terms of the program do not obligate any third party to extend credit to us and the terms and possibility of issuing any debt under the program are determined with respect to, and as of the date of issuance of, each debt instrument. No amount was outstanding under this program at December 31, 2017. At December 31, 2016, one bond, having a principal amount of AUD 400 million, which matured in 2017, was outstanding under the program. The carrying amount of the bond at December 31, 2016, was $291 million.

Credit ratings

Credit ratings are assessments by the rating agencies of the credit risk associated with ABB and are based on information provided by us or other sources that the rating agencies consider reliable. Higher ratings generally result in lower borrowing costs and increased access to capital markets. Our ratings are of “investment grade” which is defined as Baa3 (or above) from Moody’s and BBB− (or above) from Standard & Poor’s.

At both December 31, 2017 and 2016, our long-term debt was rated A2 by Moody’s and A by Standard & Poor’s.

Limitations on transfers of funds

Currency and other local regulatory limitations related to the transfer of funds exist in a number of countries where we operate, including: China, Egypt, India, Indonesia, South Korea, Malaysia, Russian Federation, Taiwan, Thailand and Turkey. Funds, other than regular dividends, fees or loan repayments, cannot be readily transferred offshore from these countries and are therefore deposited and used for working capital needs in those countries. In addition, there are certain countries where, for tax reasons, it is not considered optimal to transfer the cash offshore. As a consequence, these funds are not available within our Group Treasury Operations to meet short-term cash obligations outside the relevant country. The above described funds are reported as cash in our Consolidated Balance Sheets, but we do not consider these funds immediately available for the repayment of debt outside the respective countries where the cash is situated, including those described above. At December 31, 2017 and 2016, the balance of “Cash and equivalents” and “Marketable securities and other short-term investments” under such limitations (either regulatory or sub-optimal from a tax perspective) totaled approximately $2,222 million and $1,737 million, respectively.

During 2017 we continued to direct our subsidiaries in countries with restrictions to place such cash with our core banks or investment grade banks, in order to minimize credit risk on such cash positions. We continue to closely monitor the situation to ensure bank counterparty risks are minimized.