Liquidity and capital resources

Principal sources of funding

In 2012, 2011 and 2010, we met our liquidity needs principally using cash from operations, proceeds from the issuance of debt instruments (bonds and commercial paper), short-term bank borrowings and the proceeds from sales of marketable securities.

During 2012, 2011 and 2010, our financial position was strengthened by the positive cash flow from operating activities of $3,779 million, $3,612 million and $4,197 million, respectively.

Our net (debt) cash is shown in the table below:

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December 31, ($ in millions)

2012

2011

Cash and equivalents

6,875

4,819

Marketable securities and short-term investments

1,606

948

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

(2,537)

(765)

Long-term debt

(7,534)

(3,231)

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

(1,590)

1,771

Despite the cash generated by operations during 2012 of $3,779 million, the net cash position at December 31, 2011, had become a net debt position at December 31, 2012, primarily due to the cash outflow for the acquisition of businesses ($3,694 million), purchases of property, plant and equipment, including intangible assets, ($1,293 million) and the payment of dividends ($1,626 million) during 2012. See “Financial position”, “Net cash used in investing activities” and “Net cash used in 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, 2012 and 2011, the proportion of our aggregate “Cash and equivalents” and “Marketable securities and short-term investments” managed by our Group Treasury Operations amounted to approximately 65 percent and 60 percent, respectively.

Throughout 2012 and 2011, the investment strategy for cash (in excess of current business requirements) has been to predominantly invest in short-term time deposits with maturities of less than 3 months, supplemented at times by investments in corporate commercial paper, AAA-rated money market liquidity funds and U.S. government securities. Since late summer 2011, as credit risk concerns in the eurozone economic area increased, we diversified out of eurozone bank exposures. As the crisis deepened and uncertainty grew, we restricted the counterparties with whom we were prepared to place cash, such that we reduced our deposits with banks in the eurozone. During 2012, these restrictions have continued. 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 2012 (compared to 2011) as follows – a minimum rating of A/A2 for our banking counterparts, while the minimum required rating for investments in short-term corporate paper is A-1/P-1. In addition to rating criteria, we have specific investment parameters and approved instruments as well as restricting 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. 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. 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”.

Debt and interest rates

Total outstanding debt was as follows:

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December 31, ($ in millions)

2012

2011

Short-term debt including current maturities of long-term debt (including bonds)

2,537

765

Long-term debt:

 

 

– bonds (excluding portion due within one year)

7,380

3,059

– other long-term debt

154

172

Total debt

10,071

3,996

The increase in short-term debt in 2012 was primarily due to the reclassification to short-term debt of our EUR 700 million 4.625% Instruments due 2013 and the increase in issued commercial paper ($1,019 million at December 31, 2012, compared to $435 million outstanding at December 31, 2011). The increase in long-term debt in 2012 was primarily due to the new bonds issued during 2012 and bonds assumed in the Thomas & Betts acquisition (see “Note 12 Debt” to our Consolidated Financial Statements).

Our debt has been obtained in a range of currencies and maturities and on various interest rate terms. We use derivatives to reduce the interest rate exposures arising on certain of our debt. 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 $2,353 million and our fixed rate long-term debt (including current maturities) of $6,187 million was 1.6 percent and 3.1 percent, respectively. This compares with an effective rate of 1.6 percent for floating rate long-term debt of $1,875 million and 3.7 percent for fixed-rate long-term debt of $1,432 million at December 31, 2011.

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

We have a $2 billion multicurrency revolving credit facility, maturing in 2015. No amount was drawn under the credit facility at December 31, 2012 and 2011. The facility is for general corporate purposes and serves as a back-stop facility to our commercial paper programs to the extent that we issue commercial paper under the programs described below. 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 significant 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

We have in place three commercial paper programs:

  • a $2 billion commercial paper program for the private placement of USD-denominated commercial paper in the United States (replacing the $1 billion program that existed at December 31, 2011),
  • a $1 billion Euro-commercial paper program for the issuance of commercial paper in a variety of currencies, and
  • a 5 billion Swedish krona program (equivalent to approximately $768 million, using December 31, 2012, exchange rates), allowing us to issue short-term commercial paper in either Swedish krona or euro.

At December 31, 2012, $1,019 million was outstanding under the $2 billion program in the United States, compared to $435 million outstanding under the $1 billion program at December 31, 2011. No amounts were outstanding under either the $1 billion Euro-commercial paper program or the 5 billion Swedish krona program at either December 31, 2012 or 2011.

European program for the issuance of debt

At December 31, 2012 and 2011, $2,579 million and $910 million, respectively, of our total debt outstanding, represented debt issuances under this program that 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.

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 approximately $1,038 million, using December 31, 2012 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 December 31, 2012, $413 million of our total debt represented a debt issuance under this program.

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 December 31, 2012 and 2011, our long-term company ratings were A2 and A from Moody’s and Standard & Poor’s, respectively.

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, China, Egypt, India, Korea, Kuwait, Malaysia, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. 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 locally. 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, 2012 and 2011, 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 $1,905 million and $1,530 million, respectively.

During 2012, 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.