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 2015, 2014 and 2013, our financial position was strengthened by the positive cash flow from operating activities of $3,818 million, $3,845 million and $3,653 million, respectively.

Our net debt is shown in the table below:

December 31, ($ in millions)

2015

2014

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

1,454

353

Long-term debt

5,985

7,312

Cash and equivalents

(4,565)

(5,443)

Marketable securities and short-term investments

(1,633)

(1,325)

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

1,241

897

Net debt at December 31, 2015, increased $344 million compared to December 31, 2014, as cash flows from operating activities during 2015 of $3,818 million were more than offset by the cash outflows for the payment of dividends and the nominal value reduction (totaling $1,749 million), net purchases of property, plant and equipment and intangible assets ($808 million) and amounts paid to purchase treasury stock ($1,487 million). Movements in foreign exchange rates also contributed to the increase in net debt, having an impact of approximately $160 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, 2015 and 2014, the proportion of our aggregate “Cash and equivalents” and “Marketable securities and short-term investments” managed by our Group Treasury Operations amounted to approximately 55 percent and 60 percent, respectively.

Throughout 2015 and 2014, 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 2015, 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 2015 (compared to 2014) as follows—a minimum rating of A/A2 for our banking counterparts, 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.

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 12 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)

2015

2014

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

1,454

353

Long-term debt:

 

 

Bonds

5,811

7,100

Other long-term debt

174

212

Total debt

7,439

7,665

The increase in short-term debt in 2015 was due to the reclassification to short-term debt of both our USD 600 million 2.5% Notes due 2016 and our CHF 500 million 1.25% Bonds due 2016. In addition, we increased the amount of issued commercial paper ($132 million outstanding at December 31, 2015, compared to $120 million outstanding at December 31, 2014).

Our debt has been obtained in a range of currencies and maturities and on various interest rate terms. We use derivatives to manage the interest rate exposure arising on certain of our debt obligations. 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 $2,285 million and our fixed rate long-term debt (including current maturities) of $4,876 million was 0.8 percent and 3.2 percent, respectively. This compares with an effective rate of 1.1 percent for floating rate long-term debt of $2,310 million and 3.2 percent for fixed rate long-term debt of $5,056 million at December 31, 2014.

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 2014 we replaced our $2 billion multicurrency revolving credit facility, maturing in 2015, with a new $2 billion revolving multicurrency credit facility, maturing in 2019. The credit facility provides us an option in 2015 and 2016 to extend the maturity of the new facility to 2020 and 2021, respectively. In 2015 we exercised the option to extend the maturity of the facility to 2020.

No amount was drawn under the credit facility at December 31, 2015 and 2014. The facility is 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, 2015, we had in place two commercial paper programs:

  • 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 (which replaced the previous $1 billion Euro-commercial paper program in February 2014).

At December 31, 2015, $132 million was outstanding under the $2 billion program in the United States, compared to $120 million outstanding at December 31, 2014.

No amount was outstanding under the $2 billion Euro- commercial paper program at December 31, 2015 and 2014.

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. At December 31, 2015, it was more than 12 months since the program had been updated. New bonds could be issued under the program but cannot be listed without us formally updating the program. At December 31, 2015 and 2014, one bond (principal amount of EUR 1,250 million and due in 2019) having a carrying amount of $1,363 million and $1,515 million, respectively, was outstanding under this 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 $731 million, using December 31, 2015, 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. At both December 31, 2015 and 2014, one bond, having a principal amount of AUD 400 million and maturing in 2017, was outstanding under the program. The carrying amount of the bond at December 31, 2015 and 2014, was $297 million and $334 million, respectively.

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, 2015 and 2014, 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: Algeria, Argentina, Chile, Egypt, India, Indonesia, Kazakhstan, Korea, Malaysia, Peru, Russia, South Africa, Taiwan, Thailand, Turkey and to a certain extent, China. 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, 2015 and 2014, 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 $1,402 million and $1,498 million, respectively.

During 2015 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.