Liquidity and capital resources
The company has consistently generated strong cash flow from operations, providing a source of funds ranging between $14.9 billion and $18.8 billion per year over the past five years. The company provides for additional liquidity through several sources: maintaining a sizable cash balance, access to global funding sources, a committed global credit facility and other committed and uncommitted lines of credit worldwide. At December 31, 2008, the company had total unused lines of credit of $18,264 million. The following table provides a summary of these major sources of liquidity for the years ended December 31, 2004 through 2008.
Cash Flow and Liquidity Trends
|($ in billions)||2008||2007||2006||2005||2004|
|Net cash from operating activities||$18.8||$16.1||$15.0||$14.9||$15.3|
|Cash and short-term marketable securities||$12.9||$16.1||$10.7||$13.7||$10.6|
|Committed global credit facilities||$10.0||$10.0||$10.0||$10.0||$10.0|
|Trade receivables securitization facility||$ —||$ —||$ —||$0.5||$0.5|
The major rating agencies’ ratings on the company’s debt securities at December 31, 2008 appear in the following table. All ratings remain unchanged from December 31, 2007. The company has no contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on its financial position or liquidity. The company believes its earnings and cash flow growth provide sufficient flexibility within the existing credit ratings to continue to execute its current investment, dividend and acquisition strategies, as well as refinance maturing debt when required.
|Standard & Poor’s||Moody’s Investors Service||Fitch|
|Senior long-term debt||A+||A1||A+|
The company prepares its Consolidated Statement of Cash Flows in accordance with Statement of Financial Accounting Standards (SFAS) No. 95, “Statement of Cash Flows,” and highlights causes and events underlying sources and uses of cash in that format on “Results of continuing operations.” For purposes of running its business, the company manages, monitors and analyzes cash flows in a different format.
As discussed in the Global Financing section, a key objective of the company’s Global Financing business is to generate strong return on equity. Increasing receivables is the basis for growth in a financing business. Accordingly, management considers Global Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. After classifying Global Financing accounts receivables as an investment, the remaining net operational cash flow less capital expenditures is viewed by the company as the free cash flow available for investment and distribution to shareholders.
From the perspective of how management views cash flow, in 2008, free cash flow was $14.3 billion, an increase of $1.9 billion compared to 2007. This cash performance was driven primarily by the growth in net income from continuing operations, controls on capital spending and lower retirement-related funding year over year.
Over the past five years, the company generated over $55 billion in free cash flow available for investment and distribution to shareholders. During that period, the company invested $14.3 billion in strategic acquisitions and returned over $61 billion to shareholders through dividends and share repurchases. The amount of prospective returns to shareholders in the form of dividends and share repurchases will vary based upon several factors including each year’s operating results, capital expenditure requirements, research and development and acquisitions, as well as the factors discussed following the table below.
The company’s Board of Directors meets quarterly to consider the dividend payment. The company expects to fund dividend payments through cash from operations. In the second quarter of 2008, the Board of Directors increased the company’s quarterly common stock dividend from $0.40 to $0.50 per share.
The table below represents the way in which management reviews cash flow as described above.
|($ in billions)|
|For the year ended
|Net cash from operating activities (Continuing Operations)||$18.8||$16.1||$15.0||$14.9||$15.3|
|Less: Global Financing accounts receivable||(0.0)||(1.3)||(0.3)||1.8||2.5|
|Net cash from operating activities (Continuing Operations), excluding Global Financing receivables||18.8||17.4||15.3||13.1||12.9|
|Capital expenditures, net||(4.5)||(5.0)||(4.7)||(3.5)||(3.7)|
|Free cash flow (excluding Global Financing accounts receivable)||14.3||12.4||10.5||9.6||9.1|
|Non-Global Financing debt||(3.2)||10.9||(1.1)||1.2||0.7|
|Other (includes Global Financing accounts receivable and Global Financing debt)||5.0||3.8||1.1||1.9||3.1|
|Change in cash, cash equivalents and short-term marketable securities||$(3.2)||$5.5||$(3.0)||$3.1||$2.9|
Events that could temporarily change the historical cash flow dynamics discussed above include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation or future pension funding requirements during periods of severe downturn in the capital markets. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note O, “Contingencies and commitments.” With respect to pension funding, in 2008, the company contributed $917 million to its non-U.S. defined benefit plans, versus $503 million in 2007. Also, in 2007, the company made a $500 million voluntary cash contribution to the U.S. nonpension postretirement plan. As highlighted in the Contractual Obligations table below, the company expects to make legally mandated pension plan contributions to certain non-U.S. plans of approximately $5.6 billion in the next five years. The 2009 contributions are expected to be approximately $1 billion. Financial market performance in 2009 could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. The company is not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations.
The Pension Protection Act of 2006 (the Act) was enacted into law in 2006, and, among other things, increases the funding requirements for certain U.S. defined benefit plans beginning after December 31, 2007. No mandatory contribution is required for the U.S. defined benefit plan in 2009 or 2010 as of December 31, 2008.
|($ in millions)|
|Payments due in|
|Total Contractual Payment Stream||2009||2010-11||2012-13||After 2013|
* Represents future pension contributions that are mandated by local regulations or statute, all associated with non-U.S. pension plans. The projected payments beyond 2013 are not currently determinable. See note U, “Retirement-Related Benefits,” for additional information on the non-U.S. plans’ investment strategies and expected contributions and for information regarding the company’s unfunded pension plans of $20,086 million at December 31, 2008.
** These amounts represent the liability for unrecognized tax benefits under FIN 48. The company estimates that approximately $163 million of the liability is expected to be settled within the next 12 months. The settlement period for the noncurrent portion of the income tax liability cannot be reasonably estimated as the timing of the payments will depend on the progress of tax examinations with the various tax authorities; however, it is not expected to be due within the next 12 months.
|Long-term debt obligations||$30,289||$8,874||$5,190||$5,595||$10,630|
|Interest on long-term debt obligations||16,437||1,382||2,264||1,821||10,969|
|Capital (finance) lease obligations||213||57||78||40||38|
|Operating lease obligations||5,969||1,481||2,312||1,362||814|
|Other long-term liabilities:|
|Minimum pension funding (mandated)*||5,582||974||2,467||2,141||—|
|Long-term termination benefits||2,230||571||285||229||1,145|
Total contractual obligations are reported in the table above excluding the effects of time value and therefore, may not equal the amounts reported in the Consolidated Statement of Financial Position. Total contractual obligations increased $23.8 billion from the amount reported in the 2007 Annual Report primarily due to the addition of interest on long-term debt obligations ($16.4 billion), which was not previously reported, and an increase in long-term debt obligations ($4.2 billion), including current (2009) maturities.
Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that meet any of the following criteria: (1) they are noncancelable, (2) the company would incur a penalty if the agreement was canceled, or (3) the company must make specified minimum payments even if it does not take delivery of the contracted products or services (take-or-pay). If the obligation to purchase goods or services is noncancelable, the entire value of the contract is included in the table above. If the obligation is cancelable, but the company would incur a penalty if canceled, the dollar amount of the penalty is included as a purchase obligation. Contracted minimum amounts specified in take-or-pay contracts are also included in the table as they represent the portion of each contract that is a firm commitment.
In the ordinary course of business, the company enters into contracts that specify that the company will purchase all or a portion of its requirements of a specific product, commodity or service from a supplier or vendor. These contracts are generally entered into in order to secure pricing or other negotiated terms. They do not specify fixed or minimum quantities to be purchased and, therefore, the company does not consider them to be purchase obligations.
Off-Balance Sheet Arrangements
In the ordinary course of business, the company enters into off-balance sheet arrangements as defined by the SEC Financial Reporting Release 67 (FRR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”
The company has no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. See the table above for the company’s contractual obligations and note O, “Contingencies and Commitments,” for detailed information about the company’s guarantees, financial commitments and indemnification arrangements. The company does not have retained interests in assets transferred to unconsolidated entities or other material off-balance sheet interests or instruments.