Financial position

Balance sheets

 

December 31,

%
Change

($ in millions)

2016

2015

Current assets

 

 

 

Cash and equivalents

3,644

4,565

(20)%

Marketable securities and short-term investments

1,953

1,633

20%

Receivables, net

9,696

10,061

(4)%

Inventories, net

4,347

4,757

(9)%

Prepaid expenses

176

225

(22)%

Deferred taxes

888

881

1%

Other current assets

688

638

8%

Assets held for sale

548

n.a.

Total current assets

21,940

22,760

(4)%

For a discussion on cash and equivalents, see sections “Liquidity and Capital Resources –Principal sources of funding” and “Cash flows” for further details.

Marketable securities and short-term investments increased in 2016 due primarily to higher amounts deposited with banks with fixed deposit terms over three months partially offset by lower investments in commercial paper (see “Cash flows – Investing activities”, below, and “Note 4 Cash and equivalents, marketable securities and short-term investments”).

Receivables decreased 4 percent (1 percent in local currencies). The decrease was due partly to lower revenue levels in 2016 compared to 2015 but was mostly offset by the impact of a small increase in days sales outstanding (DSO). The change in DSO was due primarily to the geographic mix of revenues with a higher proportion of revenues coming from locations where there are longer customary payment terms. For details on the components of Receivables, see “Note 7 Receivables, net”.

Inventories decreased 9 percent (4 percent in local currencies) primarily due to lower business volumes. In addition, inventory was lower due to positive results from the Company’s 1,000-day program focusing on inventory optimization.

 

December 31,

%
Change

($ in millions)

2016

2015

Current liabilities

 

 

 

Accounts payable, trade

4,446

4,342

2%

Billings in excess of sales

1,241

1,375

(10)%

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

1,003

1,454

(31)%

Advances from customers

1,398

1,598

(13)%

Deferred taxes

258

249

4%

Provisions for warranties

1,142

1,089

5%

Other provisions

1,765

1,920

(8)%

Other current liabilities

3,936

3,817

3%

Liabilities held for sale

218

n.a.

Total current liabilities

15,407

15,844

(3)%

Accounts Payable increased 6 percent in local currencies due primarily to an increase in the number of days of payables outstanding which was achieved through focused efforts to extend payment terms with suppliers.

Billings in excess of sales decreased 7 percent in local currencies primarily due to the reclassification of amounts to Liabilities held for sale.

The decrease in Short-term debt and current maturities of long-term debt was primarily due to the repayment during the year of the USD 600 million Notes and the CHF 500 million Bonds offset partially by the reclassification to short-term debt of the USD 500 million and AUD 400 million Notes, both due in 2017.

Advances from customers decreased 10 percent in local currencies due to the impacts of lower orders, especially from the larger orders for capital expenditures from the oil and gas sector. In addition, market conditions have placed pressure on contract payment terms, reducing the amount of advances we have received.

Provisions for warranties increased 9 percent in local currencies due primarily to an increase in the warranty liability in the solar business of the Discrete Automation and Motion division. This increase was required to cover costs associated with higher than expected product failure rates of certain solar inverters manufactured by Power-One and sold to customers primarily before being acquired by the Company in 2013.

The decrease in Other provisions (5 percent in local currencies) was primarily due a reduction in the liability for self-insurance and lower provisions for contract losses as the large offshore wind projects are completed.

 

December 31,

%
Change

($ in millions)

2016

2015

Non-current assets

 

 

 

Property, plant and equipment, net

4,743

5,276

(10)%

Goodwill

9,501

9,671

(2)%

Other intangible assets, net

1,996

2,337

(15)%

Prepaid pension and other employee benefits

90

68

32%

Investments in equity-accounted companies

170

178

(4)%

Deferred taxes

527

423

25%

Other non-current assets

532

643

(17)%

Total non-current assets

17,559

18,596

(6)%

In 2016, Property, plant and equipment, net, decreased 7 percent in local currencies due primarily to the reclassification of amounts to Assets held for sale.

Other intangible assets decreased primarily due to the amortization during the year. For additional information on intangible assets see “Note 11 Goodwill and other intangible assets” to our Consolidated Financial Statements.

 

December 31,

%
Change

($ in millions)

2016

2015

Non-current liabilities

 

 

 

Long-term debt

5,800

5,985

(3)%

Pension and other employee benefits

1,834

1,924

(5)%

Deferred taxes

957

965

(1)%

Other non-current liabilities

1,604

1,650

(3)%

Total non-current liabilities

10,195

10,524

(3)%

Long-term debt decreased 3 percent of which 2 percentage points were due to movements in foreign exchange rates. The remaining change was due primarily to the issue of the EUR 700 million Notes in May 2016, offset by the reclassification to current of the USD 500 million Notes and the AUD 400 million Notes. See “Liquidity and Capital Resources – Debt and interest rates” for information on long-term debt.

The decrease in Pension and other employee benefits was primarily due to foreign exchange rate movement. For additional information, see “Note 17 Employee benefits” to our Consolidated Financial Statements.

For a breakdown of other noncurrent liabilities, see “Note 13 Other provisions, other current liabilities and other non-current liabilities” to our Consolidated Financial Statements.

Cash flows

In the Consolidated Statements of Cash Flows, the effects of discontinued operations are not segregated.

The Consolidated Statements of Cash Flows can be summarized as follows:

($ in millions)

2016

2015

2014

Net cash provided by operating activities

3,843

3,818

3,845

Net cash used in investing activities

(1,305)

(974)

(1,121)

Net cash used in financing activities

(3,355)

(3,380)

(3,024)

Effects of exchange rate changes on cash and equivalents

(104)

(342)

(278)

Net change in cash and equivalents – continuing operations

(921)

(878)

(578)

Operating activities

($ in millions)

2016

2015

2014

Net income

2,034

2,055

2,718

Depreciation and amortization

1,135

1,160

1,305

Total adjustments to reconcile net income to net cash provided by operating activities (excluding depreciation and amortization)

1

(55)

(200)

Total changes in operating assets and liabilities

673

658

22

Net cash provided by operating activities

3,843

3,818

3,845

Operating activities in 2016 provided net cash of $3,843 million, an increase from 2015 of 1 percent as Net income was steady and net working capital improvements continued to contribute to positive cash flows. Net working capital management improvements included a reduction of inventories and a significant increase in trade payables, resulting from focused efforts to extend payment terms with suppliers. The timing of income tax payments also improved cash provided by operating activities. These benefits were offset by impacts from lower advances from customers. In addition, cash flows from operating activities was negatively impacted by the misappropriation of $103 million in cash by the treasurer of our subsidiary in South Korea.

Operating activities in 2015 provided net cash of $3,818 million, a decrease from 2014 of 1 percent. The decrease was driven by lower net income, partly offset by improvements in net working capital. Provisions, net, increased by $330 million reflecting the timing differences for cash payments on restructuring programs. Although net income in 2015 included restructuring and related expenses of $370 million in relation to the White Collar Productivity program, cash payments during 2015 amounted to $35 million. Net working capital also improved due to stronger collections from customers as we decreased our trade receivables but also increased our advances from customers and billings in excess of sales. Improvements in inventory were offset by similar reductions in trade payables.

Investing activities

($ in millions)

2016

2015

2014

Purchases of marketable securities (available-for-sale)

(1,214)

(1,925)

(1,430)

Purchases of short-term investments

(3,092)

(614)

(1,465)

Purchases of property, plant and equipment and intangible assets

(831)

(876)

(1,026)

Acquisition of businesses (net of cash acquired) and increases in cost- and equity-accounted companies

(26)

(56)

(70)

Proceeds from sales of marketable securities (available-for-sale)

1,057

434

361

Proceeds from maturity of marketable securities (available-for-sale)

539

1,022

523

Proceeds from short-term investments

2,241

653

1,011

Proceeds from sales of property, plant and equipment

61

68

33

Proceeds from sales of businesses (net of transaction costs and cash disposed) and cost- and equity-accounted companies

(1)

69

1,110

Net cash from settlement of foreign currency derivatives

(57)

231

(179)

Other investing activities

18

20

11

Net cash used in investing activities

(1,305)

(974)

(1,121)

Net cash used in investing activities in 2016 was $1,305 million, compared to $974 million in 2015. The change was primarily due to the change in the cash impacts from derivative cash flows classified as investing activities as in 2016 we had net outflows of $57 million, compared to inflows of $231 million in 2015, on settlement of foreign currency derivatives relating to investing activities. These cash flows primarily result from the maturity and settlement of derivatives in place to hedge foreign currency exposures on internal subsidiary funding and the amount of the settlement results from movements in foreign currency exchange rates throughout the year.

Net cash used in investing activities in 2015 was $974 million, compared to $1,121 million in 2014. Significantly lower proceeds from sales of businesses were partially offset by a reduction in the net amount invested in marketable securities and other short-term investments as well as lower purchases of property, plant and equipment and intangible assets. Net cash used in investing activities was also lower in 2015 compared to 2014 as we received $231 million in net cash on settlement of foreign currency derivatives relating to investing activities compared with net cash outflows in 2014 of $179 million.

Total cash disbursements for the purchase of property, plant and equipment and intangibles were lower in 2016 compared to 2015 and lower in 2015 compared to 2014, primarily due to movements in foreign exchange rates and an increase in the amount of unpaid purchases. In 2016, total purchases of $831 million included $595 million for construction in process (generally for construction of buildings and other property facilities), $168 million for the purchase of machinery and equipment, $28 million for the purchase of land and buildings, and $40 million for the purchase of intangible assets. In 2015, total purchases of $876 million included $568 million for construction in process (generally for construction of buildings and other property facilities), $200 million for the purchase of machinery and equipment, $50 million for the purchase of land and buildings, and $58 million for the purchase of intangible assets. In 2014, total purchases of $1,026 million included $724 million for construction in progress, $188 million for the purchase of machinery and equipment, $38 million for the purchase of land and buildings, and $76 million for the purchase of intangible assets.

In 2016 and 2015, we continued to increase the amount of our excess liquidity invested in marketable securities and short-term investments. Amounts at December 31, 2016, were placed primarily in fixed-term deposits with banks and in short-term money market funds. At December 31, 2015, amounts were placed primarily in short-term money market funds and corporate commercial paper. The increase in investments during 2016, 2015 and 2014, resulted in a net outflow of $469 million, $430 million and $1,000 million, respectively.

In 2016 and 2015, there were no significant acquisitions or divestments of businesses. During 2014, we received net pre-tax proceeds from sales of businesses and cost- and equity-accounted companies of $1,110 million, primarily from the divestment of the Full Service business, the Steel Structures business of Thomas & Betts, the HVAC business of Thomas & Betts and the Power Solutions business of Power-One.

Financing activities

($ in millions)

2016

2015

2014

Net changes in debt with maturities of 90 days or less

(152)

3

(103)

Increase in debt

912

68

150

Repayment of debt

(1,249)

(101)

(90)

Delivery of shares

192

107

38

Purchase of treasury stock

(1,299)

(1,487)

(1,003)

Dividends paid

(1,357)

(1,841)

Reduction in nominal value of common shares paid to shareholders

(1,610)

(392)

Dividends paid to noncontrolling shareholders

(122)

(137)

(132)

Other financing activities

(27)

(84)

(43)

Net cash used in financing activities

(3,355)

(3,380)

(3,024)

Our financing activities primarily include debt transactions (both from the issuance of debt securities and borrowings directly from banks), share transactions and payments of distributions to controlling and noncontrolling shareholders.

In 2016, the net cash outflow for debt with maturities of 90 days or less related primarily to reduction of $75 million in the amount outstanding under our commercial paper program in the U.S. and net repayments of short-term borrowings in various countries. In 2014, the net cash outflow for debt with maturities of 90 days or less related primarily to repayments made of borrowings in various countries offset by a small increase in the amount outstanding under our commercial paper program in the U.S.

In 2016, the increase in debt was due primarily to the issuance of our EUR 700 million 0.625% Notes due 2023 (equal to $807 million at date of issuance). In 2015 and 2014, increases in other debt included cash flows from additional borrowings in various countries.

During 2016, $1,249 million of debt was repaid, reflecting primarily the repayment at maturity of the USD 600 million 2.5% Notes and CHF 500 million 1.25% Bonds (in total equivalent to $1,106 million at dates of repayment). In 2015 and 2014 repayment of debt reflects repayments of borrowings in various countries.

In 2016 and 2015, “Purchase of treasury stock” reflects the cash paid to purchase 65 million and 73 million, respectively, of our own shares in connection with the share buyback program announced in September 2014. In 2014, the amount reflects cash paid to acquire 45 million of our own shares of which 33 million shares were purchased in connection with the share buyback program. For additional information on the share buyback program see “Note 19 Stockholders’ equity” to our Consolidated Financial Statements.

Disclosures about contractual obligations and commitments

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. The amounts in the table may differ from those reported in our Consolidated Balance Sheet at December 31, 2016. Changes in our business needs, cancellation provisions and changes in interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Therefore, our actual payments in future periods may vary from those presented in the table. The following table summarizes certain of our contractual obligations and principal and interest payments under our debt instruments, leases and purchase obligations at December 31, 2016.

($ in millions)

Total

Less than
1 year

1–3
years

3–5
years

More than
5 years

Payments due by period

 

 

 

 

 

(1)

Capital lease obligations represent the total cash payments to be made in the future and include interest expense of $62 million and executory costs of $1 million.

Long-term debt obligations

6,534

843

1,700

1,255

2,736

Interest payments related to long-term debt obligations

1,446

195

320

231

700

Operating lease obligations

1,548

382

552

371

243

Capital lease obligations(1)

177

30

48

31

68

Purchase obligations

4,553

3,730

710

99

14

Total

14,258

5,180

3,330

1,987

3,761

In the table above, the long-term debt obligations reflect the cash amounts to be repaid upon maturity of those debt obligations. The cash obligations above will differ from the long-term debt balance reflected in “Note 12 Debt” to our Consolidated Financial Statements due to the impacts of fair value hedge accounting adjustments and premiums or discounts on certain debt. In addition, capital lease obligations are shown separately in the table above while they are combined with Long-term debt amounts in our Consolidated Balance Sheets.

We have determined the interest payments related to long-term debt obligations by reference to the payments due under the terms of our debt obligations at the time such obligations were incurred. However, we use interest rate swaps to modify the interest characteristics of certain of our debt obligations. The net effect of these swaps may be to increase or decrease the actual amount of our cash interest payment obligations, which may differ from those stated in the above table. For further details on our debt obligations and the related hedges, see “Note 12 Debt” to our Consolidated Financial Statements.

Of the total of $921 million unrecognized tax benefits (net of deferred tax assets) at December 31, 2016, it is expected that $9 million will be paid within less than a year. However, we cannot make a reasonably reliable estimate as to the related future payments for the remaining amount.

Off balance sheet arrangements

Commercial commitments

We disclose the maximum potential exposure of certain guarantees, as well as possible recourse provisions that may allow us to recover from third-parties amounts paid out under such guarantees. The maximum potential exposure does not allow any discounting of our assessment of actual exposure under the guarantees. The information below reflects our maximum potential exposure under the guarantees, which is higher than our assessment of the expected exposure.

Guarantees

The following table provides quantitative data regarding our third-party guarantees. The maximum potential payments represent a worst-case scenario, and do not reflect our expected outcomes.

 

Maximum potential payments

December 31, ($ in millions)

2016

2015

Performance guarantees

193

209

Financial guarantees

69

77

Indemnification guarantees

71

50

Total

333

336

The carrying amounts of liabilities recorded in the Consolidated Balance Sheets in respect of the above guarantees were not significant at December 31, 2016 and 2015, and reflect our best estimate of future payments, which we may incur as part of fulfilling our guarantee obligations.

In addition, in the normal course of bidding for and executing certain projects, we have entered into standby letters of credit, bid/performance bonds and surety bonds (collectively “performance bonds”) with various financial institutions. Customers can draw on such performance bonds in the event that the Company does not fulfill its contractual obligations. ABB would then have an obligation to reimburse the financial institution for amounts paid under the performance bonds. At December 31, 2016 and 2015, the total outstanding performance bonds aggregated to $7.9 billion and $9.5 billion, respectively. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2016, 2015 and 2014.

For additional descriptions of our performance, financial and indemnification guarantees see “Note 15 Commitments and contingencies” to our Consolidated Financial Statements.