Illinois Tool Works Inc. and Subsidiaries
The Notes to Financial Statements are an integral part of this statement.
Illinois Tool Works Inc. and Subsidiaries
The Notes to Financial Statements are an integral part of this statement.
Illinois Tool Works Inc. and Subsidiaries
The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions, including the Internal Revenue Service ("IRS"), Her Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. Due to the ongoing audits, theThe Company believes it is reasonably possible that within the next twelve months the amount of the Company's unrecognized tax benefits may be decreased by approximately $96$22 million related predominantly to various intercompany transactions.the potential resolution of income tax examinations. The Company has recorded its best estimate of the potential exposure for these issues.
The approximate fair value and related carrying value of the Company's total long-term debt, including current maturities of long-term debt presented as short-term debt, as of SeptemberJune 30, 20172022 and December 31, 20162021 were as follows:
|
| | | | | | | |
In millions | September 30, 2017 | | December 31, 2016 |
Fair value | $ | 7,958 |
| | $ | 8,281 |
|
Carrying value | 7,439 |
| | 7,827 |
|
The approximate fair values of the Company's long-term debt, including current maturities, were based on a valuation model using Level 2 observable inputs which included market rates for comparable instruments for the respective periods.
(8) Legal Settlement
In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income.
(9)(10) Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes in Accumulated other comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
In millions | 2022 | | 2021 | | 2022 | | 2021 |
Beginning balance | $ | (1,471) | | | $ | (1,638) | | | $ | (1,502) | | | $ | (1,642) | |
| | | | | | | |
Foreign currency translation adjustments during the period | (167) | | | 24 | | | (118) | | | 57 | |
Foreign currency translation adjustments reclassified to income | — | | | 2 | | | — | | | 4 | |
Income taxes | (43) | | | 11 | | | (66) | | | (31) | |
Total foreign currency translation adjustments, net of tax | (210) | | | 37 | | | (184) | | | 30 | |
| | | | | | | |
| | | | | | | |
Pension and other postretirement benefit adjustments reclassified to income | 5 | | | 14 | | | 11 | | | 27 | |
Income taxes | (1) | | | (3) | | | (2) | | | (5) | |
Total pension and other postretirement benefit adjustments, net of tax | 4 | | | 11 | | | 9 | | | 22 | |
| | | | | | | |
Ending balance | $ | (1,677) | | | $ | (1,590) | | | $ | (1,677) | | | $ | (1,590) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
In millions | 2017 |
| 2016 | | 2017 | | 2016 |
Beginning balance | $ | (1,516 | ) | | $ | (1,470 | ) | | $ | (1,807 | ) | | $ | (1,504 | ) |
| | | | | | | |
Foreign currency translation adjustments during the period | 67 |
| | (15 | ) | | 271 |
| | (15 | ) |
Foreign currency translation adjustments reclassified to income | — |
| | — |
| | — |
| | 1 |
|
Income taxes | 29 |
| | 10 |
| | 96 |
| | 29 |
|
Total foreign currency translation adjustments, net of tax | 96 |
| | (5 | ) | | 367 |
| | 15 |
|
| | | | | | | |
Pension and other postretirement benefit adjustments during the period | — |
| | — |
| | — |
| | 1 |
|
Pension and other postretirement benefit adjustments reclassified to income | 15 |
| | 11 |
| | 42 |
| | 31 |
|
Income taxes | (2 | ) | | (4 | ) | | (9 | ) | | (11 | ) |
Total pension and other postretirement benefit adjustments, net of tax | 13 |
| | 7 |
| | 33 |
| | 21 |
|
| | | | | | | |
Ending balance | $ | (1,407 | ) | | $ | (1,468 | ) | | $ | (1,407 | ) | | $ | (1,468 | ) |
Foreign currency translation adjustments reclassified to income related to the exit of immaterial foreign operations. Pension and other postretirement benefit adjustments reclassified to income relate primarily torepresented the amortization of actuarial losses.gains and losses and prior service cost. Refer to Note 6.8. Pension and Other Postretirement Benefits for additional information.
The Company designated the €1.0 billion of Euro notes issued in May 2015 and2014, the €1.0 billion of Euro notes issued in May 20142015 and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. The carrying values of the 2015 and 2014 Euro notes were $1.2 billion and $1.2 billion, respectively, as of September 30, 2017. Changes in the value of this debt resulting from fluctuations in the Euro to U.S. dollarDollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). On February 22, 2022, €500 million of the Euro notes issued in May 2014 were redeemed in full. Refer to Note 9. Debt for additional information regarding the redemption of these notes. The carrying values of the 2019, 2015 and 2014 Euro notes were $1.7 billion, $1.0 billion and $514 million, respectively, as of June 30, 2022. The cumulative unrealized pre-tax gain (loss) recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was $118a gain of $456 million and $375$183 million as of SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively.
TheAs of June 30, 2022 and 2021, the ending balance of Accumulated other comprehensive income (loss) asconsisted of September 30, 2017 and 2016 consisted ofafter-tax cumulative translation adjustment losses net of tax, of $1.0$1.5 billion and $1.1$1.3 billion, respectively, and after-tax unrecognized pension and other postretirement benefits costs net of tax, of $372$187 million and $358$309 million, respectively.
(10)(11) Segment Information
The Company has seven reportableCompany's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following 7 segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. SeeRefer to Item 2 -2. Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding operating revenue and operating income for the Company's segments.
ITEM 2. Management’s Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 8583 divisions in 5752 countries. As of December 31, 2016,2021, the Company employed approximately 50,000 persons.
45,000 people.
The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.
Due to the large number of diverse businesses and the Company's decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the Company's corporate management collects data on several key measurements: operating revenue, operating income, operating margin, overhead costs, number of months on hand in inventory, days sales outstanding in accounts receivable, past due receivables and return on invested capital. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.
THE ITW BUSINESS MODEL
The powerful and highly differentiated ITW Business Model is the Company’sCompany's core source of value creation. This business modelIt is the Company’sCompany's competitive advantage and defines how ITW creates value for its shareholders and comprisesshareholders. The ITW Business Model is comprised of three unique elements:
ITW’s •ITW's 80/20 managementFront-to-Back process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the Company and its customers. Through the application of data-drivendata driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the “80”"80") and eliminates cost, complexity and distractions associated with the less profitable opportunities (the “20”"20"). 80/20 enables ITW businesses to consistently achieve world-class operational excellence in product availability, quality, and innovation, while generating superior financial performance;
•Customer-back innovationInnovation has fueled decades of profitable growth at ITW. The Company’sCompany's unique innovation approach is built on insight gathered from the 80/20 managementFront-to-Back process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their “80”"80" customers. ITW’sITW's innovation efforts are focused on understanding customer needs, particularly those in “80”"80" markets with solid long-term growth fundamentals, and subsequently creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of more than 17,000approximately 19,300 granted and pending patents;
ITW’s decentralized, entrepreneurial culture allows•ITW's Decentralized, Entrepreneurial Culture enables ITW businesses to be fast, focused, and responsive. ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational structure that, combined with outstanding execution, delivers best-in-class services and solutions adapted to each business' customers and end markets.
ENTERPRISE STRATEGY
In late 2012, ITW began the process ofits strategic framework transitioning the Company ontoon its current strategic path to fully leverage the compelling performance potential of the ITW Business Model. Since then, ITW has made considerable progress, as evidenced by the Company’s strong financial performance over the past four years.
The roots of ITW’s Enterprise Strategy began in late 2011 / early 2012, when the Company undertook a complete review of its performance. Focusingperformance, focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns, ITW developedand developing a strategy to replicate that performance across its operations.
Based on this rigorous evaluation, ITW determined that solid and consistent above-market organic growth must beis the core growth engine to deliver world-class financial performance and compelling long-term returns for its shareholders. To shift its primary growth engine to organic, the Company began executing a multi-step approach.
•The first step was to narrow the focus and improve the quality of ITW’sITW's business portfolio. As part of the Portfolio Management initiative, ITW exited businesses that were operating in commoditized market spaces and prioritized sustainable differentiation as a must-have requirement for all ITW businesses. This process included both divesting
entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions.
As a result of this work, ITW’sITW's business portfolio now has significantly higher organic growth potential. ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve operating margins and generate price/cost increases. The Company achieved this through product line simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers, while supporting and growing the businesses’businesses' largest / most profitable customers and product lines. With the initiative nearly complete and ITW businesses demonstrating notably improved financial performance, the Company believes that the significant product line simplification work is essentially finalized and will return to more normalized levels in 2017 and beyond.
•Step two, Business Structure Simplification,, was implemented to simplify and scale-up ITW’sscale up ITW's operating structure to support increased engineering, marketing, and sales resources, and at the same time, improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 8583 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.
•The Strategic Sourcing initiative was established sourcing as a core capability to better leverage ITW’s scale and improve global competitiveness. Sourcing is now a core strategic and operational capability at ITW. The Company’s 80/20-enabled sourcing organization has deliveredITW, delivering an average of one percent reduction in spend each year from 2013 through 20162021 and is on trackcontinues to dobe a key contributor to the same in 2017 and 2018.
Company's ongoing enterprise strategy.
•With the initial portfolio realignment and scale-up work largely complete, the Company was able to shiftshifted its focus to preparing for and accelerating organic growth,. As a preparatory step, ITW is in reapplying the process of reapplying 80/20 Front-to-Back process to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.
Once the business has achieved operational excellence and identified the right growth opportunities, the final step is to accelerate organic growth. The process of preparing for accelerated organic growth generally takes 18 to 24 months.
Based on the financial performance of the divisions that are further along in this process, the Company believes that its organic growth framework is capable of delivering above-market organic growth across all segments. Divisions are at various phases in preparation for growth and many are either ready to grow or already growing above their respective markets. ITW management is fully aligned with this plan and very focused on executing it. As of December 31, 2016, approximately 85 percent of the divisions were ready to grow.
PATH TO FULL POTENTIAL
While the Company has made considerable progress and ITW’s performance is nearing best-in-class levels, the Company has significant opportunity for further improvement before it achieves full operating potential. In order to do so, ITW is focused on two key areas of opportunity, including: additional structural margin improvement and sustained above-market organic growth with strong incremental profitability.
Additional Structural Margin Improvement
To deliver on the additional structural margin improvement, the Company is implementing the following two levers: (1) further leveraging the 80/20 management process and (2) strategic sourcing.
The first lever, better leveraging the full power of the ITW Business Model, will be accomplished through a much more consistent and focused approach to 80/20 best practice implementation across the Company. The 80/20 management system has continuously been refined, improved and expanded into a unique holistic business management process of interconnected tools, which improves all aspects of the business and, when applied
consistently and executed more effectively, will lead to additional margin improvement. ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company’sCompany's operating margin and after-tax return on invested capital. TheseAt the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
The second lever, strategic sourcing, is a core elementPATH TO FULL POTENTIAL
Since the launch of ITW’s ongoing operationalthe enterprise strategy, and a sustainable enterprise-wide capability. Through the continued execution of this initiative, the Company expectshas made considerable progress to deliver additional margin improvement with the goalposition itself to reach full potential. The ITW Business Model and unique set of capabilities are a one percent reduction in spend in 2017source of strong and 2018.
Sustained Above-Market Organic Growth with Strong Incremental Profitability
ITW has done extensive work on its portfolio and operating structure to positionenduring competitive advantage, but for the Company to deliver sustainable above-market organic growth. The Company has narrowed the focus and significantly improved the growthtruly reach its full potential, of ITW’s business portfolio. With approximately 85%every one of its divisions ready to grow as of the end of 2016, ITW is well positioned for accelerated growth in 2017 and beyond.must also be operating at its full potential. To deliver on this accelerated growth, the divisions have been implementing the organic growth framework, which includes continued investment in customer-back innovation and a strengthened focus on market penetration. ITW continues to focus on growing its share of "80" products with existing customers with whomdo so, the Company has a resonant value proposition as well as targetremains focused on its core principles to position ITW to perform to its full potential:
•Portfolio discipline
•80/20 Front-to-Back practice excellence
•Full-potential organic growth
Portfolio Discipline
The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model. ITW businesses have the right "raw material" in terms of market and business attributes that best fit the ITW Business Model and have significant potential new customers with similar pain points to existing customers. ITW has made strong progress on the Company’s pivot to organic growth and is well positioned to deliver on sustaineddrive above-market organic growth over the long-term.
The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.
The Company routinely evaluates its portfolio to ensure it delivers sustainable differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and assessing selective high-quality acquisitions to supplement ITW's long-term growth potential.
The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with annual revenues totaling up to $1.0 billion. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. Due to the COVID-19 pandemic, the Company chose to defer any further significant divestiture activity in 2020 and 2021. The Company is reinitiating the divestiture process in 2022 for certain businesses with combined annual revenues of approximately $0.5 billion, subject to approval by the Company's Board of Directors. In the second quarter of 2022, plans were approved to divest 2 businesses, including 1 business in the
Polymers & Fluids segment and 1 business in the Food Equipment segment, with total combined revenues of $115 million for the year ended December 31, 2021. These 2 businesses were classified as held for sale beginning in the second quarter of 2022. Refer to Note 4. Divestitures in Item 1. Financial Statements for further information regarding the Company's divestitures.
80/20 Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products.
ITW will continue to drive 80/20 Front-to-Back practice excellence in every division in the Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company, division by division, will produce further customer-facing performance improvement in a number of divisions and additional structural margin expansion at the enterprise level.
Full-potential Organic Growth
Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division, with specific focus on:
•"80" focused Market Penetration - fully leveraging the considerable growth potential that resides in the Company's largest and most differentiated product offerings and customer relationships
•Customer-back Innovation - strengthening the Company's commitment to serial innovation and delivering a continuous flow of differentiated new products to its key customers
•Strategic Sales Excellence - deploying a high-performance sales function in every division
As the Company continues to make progress toward its full potential, the Company will explore opportunities to reinforce or further expand the long-term organic growth potential of ITW through the addition of selective high-quality acquisitions, such as the acquisition of the Test & Simulation business of MTS Systems Corporation ("MTS") from Amphenol Corporation on December 1, 2021. The operating results of the MTS Test & Simulation business were reported within the Company's Test & Measurement and Electronics segment. Refer to Note 3. MTS Test & Simulation Acquisition in Item 1. Financial Statements for further information regarding this acquisition.
TERMS USED BY ITW
Management uses the following terms to describe the financial results of operations of the Company:
•Organic business - acquired businesses that have been included in the Company's results of operations for more than 12 months on a constant currency basis.
•Operating leverage - the estimated effect of the organic revenue volume changes on organic operating income, assuming variable margins remain the same as the prior period.
•Price/cost -represents the estimated net impact of increases or decreases in the cost of materials used in the Company's products versus changes in the selling price to the Company's customers.
•Product line simplification (PLS) - focuses businesses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines; inlines. In the short-term, PLS may result in a decrease in revenue and overhead costs while improving operating margin. In the long-term, PLS is expected to result in growth in revenue, profitability, and returns.
Unless otherwise stated, the changes in financial results in the consolidated results of operations and the results of operations by segment represent the current year period versus the comparable period in the prior year. The following discussion of operating results should be read in conjunction with Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 20162021 Annual Report on Form 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) occurred in China and other jurisdictions. The COVID-19 outbreak was subsequently declared a global pandemic by the World Health Organization on March 11, 2020. In response to the outbreak, governments around the globe have taken various actions to reduce its spread, including travel restrictions, shutdowns of businesses deemed nonessential, and stay-at-home or similar orders. The COVID-19 pandemic and the measures taken globally to reduce its spread have negatively impacted the global economy, causing significant disruptions in the Company's global operations starting primarily in the latter part of the first quarter of 2020 as COVID-19 spread and impacted the countries in which the Company operates and the markets the Company serves.
For the duration of the COVID-19 pandemic, the Company is focusing on the following priorities: (1) protect the health and support the well-being of ITW's colleagues; (2) continue to serve the Company's customers with excellence to the best of its ability; (3) maintain financial strength, liquidity and strategic optionality; and (4) leverage the Company's strengths to position it to fully participate in the recovery. To support ITW's colleagues, among its many actions and initiatives, the Company redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagues who have child and elder care needs, and implemented aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. To support its customers, the Company has worked diligently to keep its facilities open and operating safely. The Company has adapted customer service systems and practices to seamlessly serve its customers under "work from home" requirements in many parts of the world.
In areas around the world where governments issued stay-at-home or similar orders, the vast majority of ITW's businesses were designated as critical or essential businesses and, as such, they remained open and operational. In some cases, this is because the Company's products directly impact the COVID-19 response effort. In other cases, the Company's businesses are designated as critical because they play a vital role in serving and supporting industries that are deemed essential to the physical and economic health of our communities.
While the vast majority of the Company's facilities have remained open and operational during the pandemic, many of these facilities were operating at a reduced capacity at various times since the outset of the pandemic. The full extent of the COVID-19 outbreak and its impact on the markets served by the Company and on the Company's operations and financial position continues to be highly uncertain as conditions continue to fluctuate around the world, with vaccine administration rising in certain regions, spikes in infections (including the spread of variants) continuing to be experienced and certain jurisdictions continuing to impose stay-at-home orders. The pandemic and resurgence of outbreaks could continue to adversely impact the operations of the Company and its customers and suppliers. A description of the risks relating to the impact of the COVID-19 outbreak on the Company's business, operations and financial condition is contained in Part I - Item 1A - Risk Factors in the Company's 2021 Annual Report on Form 10-K.
During the first quarter of 2022, Russian military forces invaded Ukraine. In response, the United States and several other countries imposed economic and other sanctions on Russia. Sales to customers in Russia represented less than one percent of ITW’s total consolidated revenue and were not material to the Company’s results of operations or financial position.
In a challenging and dynamic environment, the Company delivered strong thirdfinancial results in the second quarter and year-to-date financial performance reflectedperiods of 2022 primarily due to the continued progress leveragingsuccessful execution of enterprise initiatives, including the powerful"Win the Recovery" actions initiated over the course of the past year, and continued focus on the highly differentiated ITW Business ModelModel. Despite rising costs and executing enterprise initiatives. Sixa challenging global supply chain environment, the Company generated operating revenue growth of 9.1 percent and 10.1 percent in the second quarter and year-to-date periods of 2022, respectively, as six of seven segments achieved worldwide organic revenue growthgrowth. Operating income was $926 million in the thirdsecond quarter and all seven segments had organic revenue growth$1.8 billion in the year-to-date period. All seven segments had operatingperiod of 2022, respectively. Operating margin at or above 21% in both respective periods.
On July 1, 2016, the Company completed the acquisition of the Engineered Fastenerswas 23.1 percent and Components business ("EF&C") from ZF TRW for a purchase price of approximately $450 million. In 2017, EF&C had operating revenue of $126 million22.9 percent in the thirdsecond quarter and $382 millionyear-to-date periods of 2022, respectively. The Automotive OEM segment continued to be impacted by auto production reductions associated with the supply chain challenges affecting its customers.
The Company's consolidated results of operations for the second quarter and year-to-date periods of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 4,011 | | | $ | 3,676 | | | | | 9.1 | % | | 10.4 | % | 2.9 | % | — | % | | (4.2) | % | 9.1 | % |
Operating income | $ | 926 | | | $ | 893 | | | | | 3.7 | % | | 9.7 | % | 0.5 | % | (2.3) | % | | (4.2) | % | 3.7 | % |
Operating margin % | 23.1 | % | | 24.3 | % | | | | (120) bps | | (20) bps | (50) bps | (50) bps | | — | | (120) bps |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 7,950 | | | $ | 7,220 | | | | | 10.1 | % | | 10.5 | % | 2.9 | % | — | % | | (3.3) | % | 10.1 | % |
Operating income | $ | 1,821 | | | $ | 1,798 | | | | | 1.3 | % | | 5.9 | % | 0.1 | % | (1.5) | % | | (3.2) | % | 1.3 | % |
Operating margin % | 22.9 | % | | 24.9 | % | | | | (200) bps | | (100) bps | (60) bps | (40) bps | | — | | (200) bps |
•Operating revenue increased in the second quarter and year-to-date periods due to higher organic revenue and the MTS Test & Simulation acquisition, which was completed on December 1, 2021, partially offset by the unfavorable effect of foreign currency translation.
•Organic revenue grew 10.4% and 10.5% in the second quarter and year-to-date periods, respectively, as growth in six segments was partially offset by a decline in the Specialty Products segment. Additionally, product line simplification activities reduced organic revenue by 30 basis points in the second quarter and 20 basis points in the year-to-date period. EF&C diluted
◦North American organic revenue increased 14.4% in the Company's operating marginsecond quarter as growth in six segments was partially offset by 40 basis pointsa decline in the Test & Measurement and Electronics segment. Organic revenue increased 13.9% in the year-to-date period due to lower operating margingrowth in all segments, primarily driven by the Food Equipment, Construction Products and acquisition related expenses. The Company expects EF&C's operating margin to improve in later years through the application of the Company's 80/20 business management process. The operating results of EF&C are reported within the Company's Automotive OEM segment. The acquisition of EF&C did not materially affect the Company's results of operations or financial position for any period presented. Refer to Note 2. Acquisition in Item 1 - Financial Statements for further information regarding this acquisition.Welding segments.
The Company’s consolidated results of operations for the third quarter◦Europe, Middle East and year-to-date periods were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic |
| Acq/Div | Restructuring | Impairment | Foreign Currency | Total |
Operating revenue | $ | 3,615 |
| | $ | 3,495 |
| | 3.5 | % | | 1.9 | % | (0.2 | )% | — | % | — | % | 1.8 | % | 3.5 | % |
Operating income | $ | 961 |
| | $ | 808 |
| | 19.0 | % | | 17.5 | % | — | % | (0.2 | )% | — | % | 1.7 | % | 19.0 | % |
Operating margin % | 26.6 | % | | 23.1 | % | | 350 bps |
| | 350 bps |
| — |
| — |
| — |
| — |
| 350 bps |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic |
| Acq/Div | Restructuring | Impairment | Foreign Currency | Total |
Operating revenue | $ | 10,685 |
| | $ | 10,200 |
| | 4.8 | % | | 2.7 | % | 2.3 | % | — | % | — | % | (0.2 | )% | 4.8 | % |
Operating income | $ | 2,644 |
| | $ | 2,322 |
| | 13.9 | % | | 13.2 | % | 0.9 | % | — | % | 0.1 | % | (0.3 | )% | 13.9 | % |
Operating margin % | 24.7 | % | | 22.8 | % | | 190 bps |
| | 230 bps |
| (40) bps |
| — |
| — |
| — |
| 190 bps |
|
OperatingAfrica organic revenue grewincreased 6.5% and 6.9% in the third quarter primarily due to an increase in organic revenue and the favorable effect of foreign currency translation. In the year-to-date period, operating revenue grew primarily due to an increase in organic and acquisition revenues.
Organic revenue grew 1.9% and 2.7% in the third quarter and year-to-date periods, respectively. Six segments achieved worldwide organic revenue growth in the third quarter, and all seven segments achieved growth in the year-to-date period. In the third quarter, Food Equipment declined 0.4% primarily due to lower equipment demand in North America.
| |
◦ | North American organic revenue was flat in the third quarter. Growth in the Welding, Specialty Products, Construction Products and Polymers & Fluids segments was offset by a decline in the Automotive OEM, Food Equipment and Test & Measurements and Electronics segments. In the year-to-date period, organic revenue grew 1.0%. Growth in five segments was partially offset by a decline in the Food Equipment and Automotive OEM segments. |
| |
◦ | Europe, Middle East and Africa organic revenue increased 2.4% in the third quarter as growth in the Automotive OEM, Food Equipment, Construction Products and Specialty Products segments was partially offset by a decline in the Welding, Polymers & Fluids and Test & Measurement and Electronics segments. Organic revenue increased 3.8% in the year-to-date period as growth in six segments was partially offset by a decline in the Welding segment. |
| |
◦ | Asia Pacific organic revenue increased 8.1% in the third quarter as all seven segments achieved organic revenue growth. In the year-to-date period, organic revenue grew 7.6% as growth in six segments was partially offset by a decline in the Welding segment. |
In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income.
Operating income of $961 million and $2.6 billion in the third quarter and year-to-date periods, respectively, increased 19.0% and 13.9%as growth in five segments was partially offset by a decline in the respective periods. Excluding the favorable impact of the confidential legal settlement, operating income would haveAutomotive OEM and Specialty Products segments.
◦Asia Pacific organic revenue increased 9.1% and 9.8%2.7% in the thirdsecond quarter due to growth in four segments, partially offset by a decline in the Specialty Products, Automotive OEM and Welding segments. In the year-to-date period, organic revenue grew 4.5% due to growth in six segments, partially offset by a decline in the Specialty Products segment. China organic revenue declined 4.4% in the second quarter as a decrease in the Automotive OEM, Specialty Products, Welding and Construction Products segments was partially offset by growth in the Test & Measurement and Electronics, Polymers & Fluids and Food Equipment segments. In the year-to-date period, China organic revenue declined 1.6% as a decrease in the Specialty Products, Construction Products, Welding and Polymers & Fluids segments was partially offset by growth in the Test & Measurement and Electronics, Automotive OEM and Food Equipment segments. The results in 2022 were negatively impacted by the COVID-19 outbreak and government stay-at-home orders in China.
•Operating income of $926 million and $1.8 billion in the second quarter and year-to-date periods respectively.
Operating margin of 26.6% inincreased 3.7% and 1.3%, respectively, compared to the third quarter increased 350 basis points. Excluding the 220 basis points of favorability from the confidential legal settlement, operating margin of 24.4% increased 130 basis pointsprior year primarily due to higher organic revenue, partially offset by unfavorable foreign currency translation and higher restructuring expenses.
•Operating margin was 23.1% in the second quarter. The decrease of 120 basis points was primarily driven by unfavorable price/cost of 160 basis points, the dilutive impact of 50 basis points from the MTS Test & Simulation acquisition, higher restructuring expenses and higher operating expenses, including employee-related expenses and freight costs, partially offset by positive operating leverage of 200 basis points and benefits offrom the Company's enterprise initiatives that contributed 110of 90 basis points. In addition, positive operating leverage of 50 basis points was partially offset by unfavorable price/cost of 40 basis points.
•In the year-to-date period, operating margin of 24.7% increased 190 basis points. Excluding the 80 basis points of favorability from the confidential legal settlement, operating margin of 23.9% increased 11022.9% decreased 200 basis points primarily driven by unfavorable price/cost of 200 basis points, the dilutive impact of 60 basis points from the MTS Test & Simulation acquisition, higher restructuring expenses and higher operating expenses, including employee-related expenses and freight costs, partially offset by positive operating leverage of 200 basis points and benefits offrom the Company's enterprise initiatives of 10090 basis points. In addition, positive operating leverage
•The Company's effective tax rate for the second quarter of 50 basis points2022 and improved overhead efficiencies were partially offset by2021 was 18.3% and 10.1%, respectively, and 20.7% and 16.3% for the dilutive impactyear-to-date periods of 40 basis points2022 and 2021, respectively. The effective tax rate for the second quarter and year-to-date periods of 2022 included a discrete income tax benefit of $51 million related to a decrease in
unrecognized tax benefits resulting from the EF&C acquisitionresolution of a U.S. tax audit. The effective tax rate for the second quarter and unfavorable price/costyear-to-date periods of 40 basis points.2021 included a discrete income tax benefit of $112 million related to the remeasurement of net deferred tax assets due to the enactment of the U.K. Finance Bill 2021, which increases the U.K. income tax rate from 19% to 25% effective April 1, 2023. Additionally, the effective tax rates for 2022 and 2021 included discrete income tax benefits related to excess tax benefits from stock-based compensation of $1 million and $4 million for the second quarter of 2022 and 2021, respectively, and $8 million and $13 million for the year-to-date period of 2022 and 2021, respectively.
•Diluted earnings per share (EPS) of $1.85$2.37 for the thirdsecond quarter and $5.07$4.48 for the year-to-date period increased 23.3%of 2022 decreased 3.3% and 19.3%1.8%, respectively. Excluding the favorable effectimpact of the confidential legal settlementsecond quarter 2021 discrete income tax benefit of $0.14$0.35 related to the remeasurement of the U.K. net deferred tax assets and $0.17 in the thirdfavorable impact of the second quarter and year-to-date periods, respectively,2022 discrete income tax benefit of $0.16 related to the resolution of a U.S. tax audit, EPS increased 14.0% and 15.3% in the respective periods.
Free cash flow was $702 million and $1.5 billion for the third quarter and year-to-date periods, respectively. Free cash flow for the year-to-date period includes the impact from an additional discretionary pension contribution of $115 million5.2% in the second quarter of 2017. Refer toand 2.6% in the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.year-to-date period.
•The Company repurchased approximately 1.8 million and 5.53.6 million shares of its common stock in the third quarter and year-to-date periods, respectively, for approximately $250 million and $750 million, respectively.
The Company increased the quarterly dividend by 20.0% in the third quarter of 2017. Total cash dividends of $224 million and $674 million were paid in the thirdsecond quarter and year-to-date periods of 2017,2022, respectively, for approximately $375 million and $750 million, respectively.
Adjusted after-tax return on average invested capital was 26.3% for the third quarter. Excluding 220 basis points attributable to the confidential legal settlement, adjusted after-tax return on average invested capital was 24.1%, an increase of 110 basis points. In the year-to-date period, adjusted after-tax return on average invested capital was 25.0%, an increase of 270 basis points. Excluding 90 basis points attributable to the confidential legal settlement, adjusted after-tax return on average invested capital was 24.1%, an increase of 180 basis points. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
RESULTS OF OPERATIONS BY SEGMENT
Total operating revenue and operating income for the thirdsecond quarter and year-to-date periods of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended June 30, | | Six Months Ended June 30, |
Dollars in millions | Operating Revenue | | Operating Income | | Operating Revenue | | Operating Income |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Automotive OEM | $ | 711 | | | $ | 707 | | | $ | 101 | | | $ | 133 | | | $ | 1,471 | | | $ | 1,490 | | | $ | 239 | | | $ | 322 | |
Food Equipment | 614 | | | 514 | | | 152 | | | 113 | | | 1,180 | | | 965 | | | 278 | | | 209 | |
Test & Measurement and Electronics | 696 | | | 606 | | | 157 | | | 170 | | | 1,381 | | | 1,158 | | | 306 | | | 327 | |
Welding | 486 | | | 402 | | | 142 | | | 115 | | | 936 | | | 803 | | | 281 | | | 236 | |
Polymers & Fluids | 496 | | | 466 | | | 125 | | | 127 | | | 977 | | | 901 | | | 243 | | | 239 | |
Construction Products | 565 | | | 518 | | | 156 | | | 143 | | | 1,116 | | | 987 | | | 292 | | | 273 | |
Specialty Products | 447 | | | 471 | | | 121 | | | 128 | | | 899 | | | 928 | | | 241 | | | 254 | |
Intersegment revenue | (4) | | | (8) | | | — | | | — | | | (10) | | | (12) | | | — | | | — | |
Unallocated | — | | | — | | | (28) | | | (36) | | | — | | | — | | | (59) | | | (62) | |
Total | $ | 4,011 | | | $ | 3,676 | | | $ | 926 | | | $ | 893 | | | $ | 7,950 | | | $ | 7,220 | | | $ | 1,821 | | | $ | 1,798 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Dollars in millions | Operating Revenue | | Operating Income | | Operating Revenue | | Operating Income |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Automotive OEM | $ | 795 |
| | $ | 765 |
| | $ | 172 |
| | $ | 166 |
| | $ | 2,443 |
| | $ | 2,091 |
| | $ | 556 |
| | $ | 512 |
|
Food Equipment | 549 |
| | 544 |
| | 150 |
| | 149 |
| | 1,575 |
| | 1,578 |
| | 414 |
| | 405 |
|
Test & Measurement and Electronics | 525 |
| | 516 |
| | 127 |
| | 108 |
| | 1,524 |
| | 1,487 |
| | 337 |
| | 274 |
|
Welding | 378 |
| | 361 |
| | 100 |
| | 95 |
| | 1,150 |
| | 1,125 |
| | 312 |
| | 282 |
|
Polymers & Fluids | 434 |
| | 422 |
| | 90 |
| | 89 |
| | 1,297 |
| | 1,283 |
| | 272 |
| | 266 |
|
Construction Products | 440 |
| | 415 |
| | 112 |
| | 94 |
| | 1,260 |
| | 1,223 |
| | 303 |
| | 278 |
|
Specialty Products | 498 |
| | 477 |
| | 138 |
| | 125 |
| | 1,451 |
| | 1,429 |
| | 401 |
| | 373 |
|
Intersegment revenues | (4 | ) | | (5 | ) | | — |
| | — |
| | (15 | ) | | (16 | ) | | — |
| | — |
|
Unallocated | — |
| | — |
| | 72 |
| | (18 | ) | | — |
| | — |
| | 49 |
| | (68 | ) |
Total | $ | 3,615 |
| | $ | 3,495 |
| | $ | 961 |
| | $ | 808 |
| | $ | 10,685 |
| | $ | 10,200 |
| | $ | 2,644 |
| | $ | 2,322 |
|
Segments are allocated a fixed overhead charge based on the segment's revenue. Expenses not charged to the segments are reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuations on a quarterly and annual basis. Unallocated in 2017 includes the favorable impact from the previously discussed confidential legal settlement.
AUTOMOTIVE OEM
This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers market. Products in this segment include:
•plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.
The results of operations for the Automotive OEM segment for the thirdsecond quarter and year-to-date periods of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 711 | | | $ | 707 | | | | | 0.6 | % | | 6.1 | % | — | % | — | % | (5.5) | % | 0.6 | % |
Operating income | $ | 101 | | | $ | 133 | | | | | (23.5) | % | | (4.1) | % | — | % | (14.4) | % | (5.0) | % | (23.5) | % |
Operating margin % | 14.3 | % | | 18.8 | % | | | | (450) bps | | (180) bps | — | | (270) bps | — | | (450) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 795 |
| | $ | 765 |
| | 4.1 | % | | 1.3 | % | — | % | — | % | 2.8 | % | 4.1 | % |
Operating income | $ | 172 |
| | $ | 166 |
| | 2.9 | % | | 1.0 | % | — | % | (1.2 | )% | 3.1 | % | 2.9 | % |
Operating margin % | 21.6 | % | | 21.8 | % | | (20) bps |
| | (10) bps |
| — |
| (20) bps |
| 10 bps |
| (20) bps |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,471 | | | $ | 1,490 | | | | | (1.3) | % | | 2.5 | % | — | % | — | % | (3.8) | % | (1.3) | % |
Operating income | $ | 239 | | | $ | 322 | | | | | (25.7) | % | | (14.0) | % | — | % | (8.5) | % | (3.2) | % | (25.7) | % |
Operating margin % | 16.3 | % | | 21.6 | % | | | | (530) bps | | (350) bps | — | | (180) bps | — | | (530) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 2,443 |
| | $ | 2,091 |
| | 16.9 | % | | 4.7 | % | 12.2 | % | — | % | — | % | 16.9 | % |
Operating income | $ | 556 |
| | $ | 512 |
| | 8.4 | % | | 6.1 | % | 4.2 | % | (1.7 | )% | (0.2 | )% | 8.4 | % |
Operating margin % | 22.7 | % | | 24.5 | % | | (180) bps |
| | 30 bps |
| (160) bps |
| (40) bps |
| (10) bps |
| (180) bps |
|
•Operating revenue increasedgrew in the thirdsecond quarter due to higher organic revenue, partially offset by the favorableunfavorable effect of foreign currency translation. In the year-to-date period, operating revenue declined due to the unfavorable effect of foreign currency translation, andpartially offset by higher organic revenue. Operating
•Organic revenue increased 6.1% in the second quarter and 2.5% in the year-to-date period. The impact of Automotive OEM customers adjusting production schedules to account for the shortage of semiconductor chips and other components continued to negatively impact operating results in 2022. Worldwide auto builds were flat in the second quarter and decreased 2% in the year-to-date period.
◦North American organic revenue increased 18.4% and 10.2% in the second quarter and year-to-date periods, respectively, compared to North American auto builds which grew 12% in the second quarter and 5% in the year-to-date period.
◦European organic revenue declined 0.5% and 5.9% in the second quarter and year-to-date periods, respectively, compared to European auto builds which decreased 5% in the second quarter and 12% in the year-to-date period.
◦Asia Pacific organic revenue decreased 1.8% in the second quarter and increased 4.5% in the year-to-date period. China organic revenue declined 10.6% and increased 0.7% in the second quarter and year-to-date periods, respectively, versus China auto builds which decreased 6% in the second quarter and increased 1% in the year-to-date period due to customer mix. Auto builds of foreign automotive manufacturers in China, where the Company has higher organiccontent, declined 8% and acquisition revenues.
Organic revenue grew 1.3% and 4.7%7% in the thirdsecond quarter and year-to-date periods, respectively, as a result of penetration gains, exceeding auto build growth in every key geography. Worldwide auto builds grew 2% and 3% in the third quarter and year-to-date periods, respectively.
| |
◦ | European organic revenue grew 7.8% and 8.8% in the third quarter and year-to-date periods, respectively, compared to European auto builds which increased 5% in the third quarter and 2% in the year-to-date period. |
| |
◦ | Asia Pacific organic revenue increased 9.0% and 12.2% in the third quarter and year-to-date periods, respectively. China organic revenue grew 10.3% and 17.9% in the third quarter and year-to-date periods, respectively, versus Chinese auto builds which increased 1% in the third quarter and 3% in the year-to-date period. |
| |
◦ | North American organic revenue declined 6.7% and 0.8% in the third quarter and year-to-date periods, respectively. North American auto builds declined 10% in the third quarter and 4% in the year-to-date period. Auto builds for the Detroit 3, where the Company has higher content, declined 14% in the third quarter and 7% in the year-to-date period. |
•Operating margin was 21.6%14.3% in the thirdsecond quarter. The decrease of 20450 basis points was primarily driven by unfavorable price/cost of 120260 basis points, higher restructuring expenses of 270 basis points and higher restructuringoperating expenses, partially offset by the net benefits from the Company's enterprise initiatives and cost management of 80 basis points and positive operating leverage of 30 basis points.
In the year-to-date period, operating margin of 22.7% decreased 180 basis points primarily driven by the dilutive impact of 160 basis points from the EF&C acquisition, unfavorable price/cost of 110 basis points and higher restructuringincluding employee-related expenses, partially offset by positive operating leverage of 80120 basis points and the net benefits from the Company's enterprise initiativesinitiatives.
•In the year-to-date period, operating margin of 16.3% decreased 530 basis points primarily driven by unfavorable price/cost of 290 basis points, higher operating expenses, including employee-related expenses, and cost managementhigher restructuring expenses of 60180 basis points.points, partially offset by positive operating leverage of 40 basis points and benefits from the Company's enterprise initiatives.
FOOD EQUIPMENT
This segment is a highly focused and branded industry-leaderindustry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food institutional/restaurant,service, food serviceretail and food retailinstitutional/restaurant markets. Products in this segment include:
•warewashing equipment;
•cooking equipment, including ovens, ranges and broilers;
•refrigeration equipment, including refrigerators, freezers and prep tables;
•food processing equipment, including slicers, mixers and scales;
•kitchen exhaust, ventilation and pollution control systems; and
•food equipment service, maintenance and repair.
The results of operations for the Food Equipment segment for the thirdsecond quarter and year-to-date periods of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 614 | | | $ | 514 | | | | | 19.6 | % | | 25.0 | % | — | % | — | % | (5.4) | % | 19.6 | % |
Operating income | $ | 152 | | | $ | 113 | | | | | 34.0 | % | | 40.4 | % | — | % | (0.3) | % | (6.1) | % | 34.0 | % |
Operating margin % | 24.7 | % | | 22.0 | % | | | | 270 bps | | 280 bps | — | | (10) bps | — | | 270 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 549 |
| | $ | 544 |
| | 1.1 | % | | (0.4 | )% | — | % | — | % | 1.5 | % | 1.1 | % |
Operating income | $ | 150 |
| | $ | 149 |
| | 0.6 | % | | 0.3 | % | — | % | (1.0 | )% | 1.3 | % | 0.6 | % |
Operating margin % | 27.3 | % | | 27.4 | % | | (10) bps |
| | 20 bps |
| — |
| (30) bps |
| — |
| (10) bps |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,180 | | | $ | 965 | | | | | 22.3 | % | | 26.5 | % | — | % | — | % | (4.2) | % | 22.3 | % |
Operating income | $ | 278 | | | $ | 209 | | | | | 33.0 | % | | 38.2 | % | — | % | (0.3) | % | (4.9) | % | 33.0 | % |
Operating margin % | 23.6 | % | | 21.6 | % | | | | 200 bps | | 210 bps | — | | (10) bps | — | | 200 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,575 |
| | $ | 1,578 |
| | (0.2 | )% | | 0.7 | % | — | % | — | % | (0.9 | )% | (0.2 | )% |
Operating income | $ | 414 |
| | $ | 405 |
| | 2.2 | % | | 2.5 | % | — | % | 0.6 | % | (0.9 | )% | 2.2 | % |
Operating margin % | 26.3 | % | | 25.7 | % | | 60 bps |
| | 40 bps |
| — |
| 20 bps |
| — |
| 60 bps |
|
•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to the favorable effect of foreign currency translation,higher organic revenue, partially offset by a slight decline in organic revenue. Operating revenue decreased in the year-to-date period due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth.translation.
•Organic revenue decreased 0.4%increased 25.0% in the thirdsecond quarter as equipment and service organic revenue declined 0.5%grew 27.3% and 0.4%20.0%, respectively. In the year-to-date period, organic revenue increased 0.7%26.5% as equipment and service organic revenue increased 0.8%grew 28.1% and 0.4%22.8%, respectively.
| |
◦ | North American organic revenue declined 3.6% in the third quarter. Equipment organic revenue decreased 5.5% primarily due to lower end market demand in food services. Service organic revenue declined 0.3%. In the year-to-date period, North American organic revenue decreased 1.1%. Equipment organic revenue, which had a challenging comparable in the prior year period of 5.7% growth, decreased 1.8% primarily due to lower demand in the retail and restaurant end markets, partially offset by higher demand in the institutional end market. Service organic revenue was flat. |
| |
◦ | International organic revenue increased 4.0% and 3.2% in the third quarter and year-to-date periods, respectively. Equipment organic revenue grew 5.9% and 4.0% in the third◦North American organic revenue increased 26.7% in the second quarter and 24.8% in the year-to-date period. Equipment organic revenue grew 33.1% in the second quarter and 28.5% in the year-to-date period with growth in the restaurant, institutional and food retail end markets. Service organic revenue increased 15.9% and 18.5% in the second quarter and year-to-date periods, respectively. ◦International organic revenue increased 22.7% and 28.8% in the second quarter and year-to-date periods, respectively. Equipment organic revenue grew 20.5% and 27.6% in the second quarter and year-to-date periods, respectively, primarily due to higher demand in the European refrigeration and warewash end markets. Service organic revenue decreased 0.5% in the third quarter and increased 1.3% in the year-to-date period. |
Operating margin of 27.3% in the third quarter declined 10 basis points primarily due to product mixhigher demand in the European warewash, refrigeration and cooking end markets. Service organic revenue increased 27.8% and 31.0% in the second quarter and year-to-date periods, respectively.
•Operating margin was 24.7% in the second quarter. The increase of 100270 basis points and higher restructuring expenses, partially offset by thewas primarily due to positive operating leverage of 480 basis points, benefits offrom the Company's enterprise initiatives of 110 basis points and favorable price/cost of 1020 basis points.points, partially offset by higher operating expenses, including higher employee-related expenses.
•In the year-to-date period, operating margin of 26.3%23.6% increased 60200 basis points primarily due to thepositive operating leverage of 520 basis points and benefits offrom the Company's enterprise initiatives, of 100 basis points and 20 basis points each for favorable price/cost, positive operating leverage and lower restructuring expenses, partially offset by product mixhigher operating expenses, including higher employee-related expenses, and unfavorable price/cost of 10040 basis points.
TEST & MEASUREMENT AND ELECTRONICS
This segment is a branded and innovative producer of test and measurement and electronic manufacturing and maintenance, repair, and operations, or "MRO" solutions that improve efficiency and quality for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, industrial capital goods, automotive original equipment manufacturers and tiers, industrial capital goods, energy and consumer durables markets. Products in this segment include:
•equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;
•electronic assembly equipment and related consumable solder materials;equipment;
•electronic components and component packaging;
•static control equipment and consumables used for contamination control in clean room environments; and
•pressure sensitive adhesives and components for telecommunications, electronics, medical, transportation and transportationtelecommunications applications.
The results of operations for the Test & Measurement and Electronics segment for the thirdsecond quarter and year-to-date periods of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 696 | | | $ | 606 | | | | | 14.9 | % | | 0.9 | % | 17.8 | % | — | % | | (3.8) | % | 14.9 | % |
Operating income | $ | 157 | | | $ | 170 | | | | | (7.8) | % | | (7.5) | % | 2.4 | % | 0.3 | % | | (3.0) | % | (7.8) | % |
Operating margin % | 22.5 | % | | 28.1 | % | | | | (560) bps | | (240) bps | (330) bps | 10 bps | | — | | (560) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 525 |
| | $ | 516 |
| | 1.8 | % | | 0.8 | % | — | % | — | % | 1.0 | % | 1.8 | % |
Operating income | $ | 127 |
| | $ | 108 |
| | 16.9 | % | | 13.3 | % | — | % | 2.8 | % | 0.8 | % | 16.9 | % |
Operating margin % | 24.1 | % | | 21.0 | % | | 310 bps |
| | 260 bps |
| — |
| 50 bps |
| — |
| 310 bps |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 1,381 | | | $ | 1,158 | | | | | 19.2 | % | | 4.3 | % | 17.9 | % | — | % | | (3.0) | % | 19.2 | % |
Operating income | 306 | | | $ | 327 | | | | | (6.4) | % | | (4.8) | % | 0.3 | % | 0.4 | % | | (2.3) | % | (6.4) | % |
Operating margin % | 22.2 | % | | 28.2 | % | | | | (600) bps | | (240) bps | (370) bps | 10 bps | | — | | (600) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,524 |
| | $ | 1,487 |
| | 2.5 | % | | 3.5 | % | — | % | — | % | (1.0 | )% | 2.5 | % |
Operating income | $ | 337 |
| | $ | 274 |
| | 22.8 | % | | 22.5 | % | — | % | 1.3 | % | (1.0 | )% | 22.8 | % |
Operating margin % | 22.1 | % | | 18.4 | % | | 370 bps |
| | 340 bps |
| — |
| 30 bps |
| — |
| 370 bps |
|
•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to the favorable effect of foreign currency translationMTS Test & Simulation acquisition and higher organic revenue, growth. Operating revenue increased in the year-to-date period due to organic revenue growth, partially offset by the unfavorable effect of foreign currency translation.
•Organic revenue increased 0.8% and 3.5%0.9% in the thirdsecond quarter and 4.3% in the year-to-date period.
◦Organic revenue for the test and measurement businesses increased 8.3% and 9.2% in the second quarter and year-to-date periods, respectively, primarily driven by higher semiconductor demand in North America and the impact of a stronger capital spending environment. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 5.2% and 5.6% in the second quarter and year-to-date periods, respectively.
| |
◦ | Organic revenue for the test and measurement businesses increased 4.2% and 5.1% in the third quarter and year-to-date periods, respectively, primarily due to higher semi-conductor end market demand across all major regions. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 2.6% and 3.9% in the third quarter and year-to-date periods, respectively. |
| |
◦ | Electronics organic revenue, which had a challenging comparable in the prior year third quarter of 12.5% growth, decreased 2.6% in the third quarter and increased 1.8% in the year-to-date period. The electronics assembly businesses declined 12.8% and 2.2% in the third quarter and year-to-date periods, respectively, primarily due to a decrease in North America. The other electronics businesses grew 7.0% and 4.8% in the third quarter and year-to-date periods, respectively, due to higher semi-conductor end market demand. |
◦Electronics organic revenue decreased 6.1% in the second quarter and 0.7% in the year-to-date period primarily due to lower demand in the consumer electronics end market, partially offset by higher demand in the semiconductor end market. The electronics assembly businesses declined 24.8% and 11.2% in the second quarter and year-to-date periods, respectively, primarily due to lower demand in North America, partially offset by growth in Asia Pacific and Europe. Additionally, the electronics assembly businesses had a challenging comparable in the prior year of 82.3% growth in the second quarter and 53.4% growth in the year-to-date period. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, increased 6.8% and 5.4% in the second quarter and year-to-date periods, respectively, with growth across all major regions.
•Operating margin was 24.1%22.5% in the thirdsecond quarter. The increasedecrease of 310560 basis points was primarily due to the netdilutive impact of 330 basis points from the MTS Test & Simulation acquisition, unfavorable price/cost of 210 basis points, and higher operating expenses, including employee-related expenses, partially offset by benefits resulting from the Company's enterprise initiatives and cost management of 130 basis points, favorable price/cost of 50 basis points, lower restructuring expenses and positive operating leverage of 20 basis points.initiatives.
•In the year-to-date period, operating margin of 22.1% increased 37022.2% decreased 600 basis points primarily driven by the netdilutive impact of 370 basis points from the MTS Test & Simulation acquisition, unfavorable price/cost of 200 basis points, and higher operating expenses, including employee-related expenses, partially offset by positive operating leverage of 100 basis points and benefits resulting from the Company's enterprise initiatives and cost management of 130 basis points, positive operating leverage of 110 basis points and 30 basis points each of favorable price/cost and lower restructuring expenses.initiatives.
WELDING
This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, construction,automotive original equipment manufacturers and tiers, and industrial capital goods markets. Products in this segment include:
•arc welding equipment; and
•metal arc welding consumables and related accessories; andaccessories.
metal jacketing and other insulation products.
The results of operations for the Welding segment for the thirdsecond quarter and year-to-date periods of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 486 | | | $ | 402 | | | | | 20.8 | % | | 22.1 | % | — | % | — | % | | (1.3) | % | 20.8 | % |
Operating income | $ | 142 | | | $ | 115 | | | | | 24.0 | % | | 25.1 | % | — | % | (0.3) | % | | (0.8) | % | 24.0 | % |
Operating margin % | 29.3 | % | | 28.5 | % | | | | 80 bps | | 70 bps | — | | — | | | 10 bps | 80 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Restructuring | Impairment | Foreign Currency | Total |
Operating revenue | $ | 378 |
| | $ | 361 |
| | 4.8 | % | | 3.9 | % | — | % | — | % | 0.9 | % | 4.8 | % |
Operating income | $ | 100 |
| | $ | 95 |
| | 5.4 | % | | 7.0 | % | (2.2 | )% | — | % | 0.6 | % | 5.4 | % |
Operating margin % | 26.6 | % | | 26.5 | % | | 10 bps |
| | 80 bps |
| (60) bps |
| — |
| (10) bps |
| 10 bps |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 936 | | | $ | 803 | | | | | 16.5 | % | | 17.5 | % | — | % | — | % | | (1.0) | % | 16.5 | % |
Operating income | $ | 281 | | | $ | 236 | | | | | 19.1 | % | | 20.0 | % | — | % | (0.3) | % | | (0.6) | % | 19.1 | % |
Operating margin % | 30.0 | % | | 29.4 | % | | | | 60 bps | | 60 bps | — | | (10) bps | | 10 bps | 60 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Restructuring | Impairment | Foreign Currency | Total |
Operating revenue | $ | 1,150 |
| | $ | 1,125 |
| | 2.3 | % | | 2.2 | % | — | % | — | % | 0.1 | % | 2.3 | % |
Operating income | $ | 312 |
| | $ | 282 |
| | 10.8 | % | | 7.4 | % | 2.3 | % | 1.1 | % | — | % | 10.8 | % |
Operating margin % | 27.2 | % | | 25.1 | % | | 210 bps |
| | 120 bps |
| 60 bps |
| 30 bps |
| — |
| 210 bps |
|
•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue, andpartially offset by the favorableunfavorable effect of foreign currency translation.
•Organic revenue grew 3.9%increased 22.1% and 17.5% in the thirdsecond quarter and year-to-date periods, respectively, driven by growth in equipment of 6.5%24.0% and 17.2% and consumables of 0.5%. In the year-to-date period, organic revenue increased 2.2% as equipment grew 4.6%19.1% and 18.1%, partially offset by a decrease of 0.8% in consumables.respectively. In both periods, organic revenue grew primarily due to increasedhigher demand in the industrial end markets related to heavy equipment for agriculture, infrastructure, and miningoil and gas and in the commercial end markets related to construction, light fabrication, and farm and ranch customers.
| |
◦ | North American organic revenue increased 8.0% in the third quarter primarily due to 11.0% and 5.2% growth in the industrial and commercial end markets, respectively. North American organic revenue grew 4.8% in the year-to-date period primarily driven by approximately 5% growth in the industrial and commercial end markets. |
| |
◦ | International organic revenue decreased 11.2% and 7.3% in the third quarter and year-to-date periods, respectively, primarily due to weaker end market demand in the European and Asian oil and gas end markets. |
◦North American organic revenue increased 25.3% in the second quarter due to growth in the industrial and commercial end markets of 29.6% and 18.9%, respectively. In the year-to-date period, organic revenue grew 18.6% due to growth in the industrial and commercial end markets of 22.1% and 13.7%, respectively.
◦International organic revenue grew 8.1% and 12.3% in the second quarter and year-to-date periods, respectively, primarily due to higher equipment demand in the oil and gas end markets.
•Operating margin was 26.6%29.3% in the thirdsecond quarter. The increase of 1080 basis points was primarily due to the netpositive operating leverage of 290 basis points and benefits offrom the Company's enterprise initiatives, and partially offset by unfavorable price/cost management of 8090 basis points and positivehigher operating leverage of 60 basis points, partially offset by 60 basis points each of unfavorable price/cost and higher restructuringexpenses, including employee-related expenses.
•In the year-to-date period, operating margin of 27.2%30.0% increased 21060 basis points due to the netprimarily driven by positive operating leverage of 230 basis points and benefits offrom the Company's enterprise initiatives, and cost management of 140 basis points, lower restructuring expenses of 60 basis points and positive operating leverage of 40 basis points, partially offset by unfavorable price/cost of 60120 basis points. In addition, the prior year period was negatively impacted by an intangible asset impairment charge of 30 basis points.points and higher operating expenses, including employee-related expenses.
POLYMERS & FLUIDS
This segment is a highly branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial, MRO and construction markets. Products in this segment include:
•adhesives for industrial, construction and consumer purposes;
•chemical fluids which clean or add lubrication to machines;
•epoxy and resin-based coating products for industrial applications;
•hand wipes and cleaners for industrial applications;
•fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
•fillers and putties for auto body repair; and
•polyester coatings and patch and repair products for the marine industry.
The results of operations for the Polymers & Fluids segment for the thirdsecond quarter and year-to-date periods of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 496 | | | $ | 466 | | | | | 6.7 | % | | 10.2 | % | — | % | — | % | | (3.5) | % | 6.7 | % |
Operating income | $ | 125 | | | $ | 127 | | | | | (2.1) | % | | 0.9 | % | — | % | 0.5 | % | | (3.5) | % | (2.1) | % |
Operating margin % | 25.1 | % | | 27.3 | % | | | | (220) bps | | (230) bps | — | | 10 bps | | — | | (220) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 434 |
| | $ | 422 |
| | 2.6 | % | | 1.0 | % | — | % | — | % | 1.6 | % | 2.6 | % |
Operating income | $ | 90 |
| | $ | 89 |
| | 2.5 | % | | 2.1 | % | — | % | (0.9 | )% | 1.3 | % | 2.5 | % |
Operating margin % | 21.0 | % | | 21.0 | % | | — |
| | 20 bps |
| — |
| (20) bps |
| — |
| — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 977 | | | $ | 901 | | | | | 8.5 | % | | 11.5 | % | — | % | — | % | | (3.0) | % | 8.5 | % |
Operating income | $ | 243 | | | $ | 239 | | | | | 1.4 | % | | 4.1 | % | — | % | 0.3 | % | | (3.0) | % | 1.4 | % |
Operating margin % | 24.8 | % | | 26.6 | % | | | | (180) bps | | (180) bps | — | | 10 bps | | (10) bps | (180) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,297 |
| | $ | 1,283 |
| | 1.0 | % | | 0.5 | % | — | % | — | % | 0.5 | % | 1.0 | % |
Operating income | $ | 272 |
| | $ | 266 |
| | 2.5 | % | | 4.3 | % | — | % | (1.6 | )% | (0.2 | )% | 2.5 | % |
Operating margin % | 21.0 | % | | 20.7 | % | | 30 bps |
| | 80 bps |
| — |
| (30) bps |
| (20) bps |
| 30 bps |
|
•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue, andpartially offset by the favorableunfavorable effect of foreign currency translation.
•Organic revenue grew 1.0%10.2% and 0.5%11.5% in the thirdsecond quarter and year-to-date periods, respectively, primarily driven by an increase in North America and Europe. Additionally, product line simplification activities reduced organic revenue by 40 basis points in the second quarter and 30 basis points in the year-to-date period.
◦Organic revenue for the automotive aftermarket businesses increased 3.9% in the second quarter primarily due to growth in the body repair and engine repair businesses in North America and growth in the European additives businesses, partially offset by a decline in the tire repair and car care businesses in North America. In the year-to-date period, organic revenue increased 9.9% with growth in the car care, body repair, engine repair and tire repair businesses in North America and growth in the European additives businesses.
◦Organic revenue for the polymers businesses increased 24.9% in the second quarter and 18.2% in the year-to-date period with growth across all major regions, primarily in the heavy industrial and wind end markets.
◦Organic revenue for the fluids businesses grew 2.6% and 4.3% in the second quarter and year-to-date periods, respectively, primarily due to higher demandan increase in the hygiene and industrial maintenance, repair and operations end markets in North American end markets.America and Europe.
| |
◦ | Organic revenue for the automotive aftermarket businesses increased 0.6% in the third quarter primarily driven by growth in the tire repair businesses in North America. In the year-to-date period, organic revenue grew 0.3% as stronger demand in the car care, engine and tire repair businesses in North America was offset by a decline in the body repair and additives businesses in Asia Pacific. |
| |
◦ | Organic revenue for the fluids businesses grew 4.4% and 2.2% in the third quarter and year-to-date periods, respectively, primarily due to an increase in the industrial maintenance, repair, and operations end markets in Europe and North America. |
| |
◦ | Organic revenue for the polymers businesses decreased 1.3% in the third quarter primarily driven by a decline in Europe, partially offset by an increase in North America. In the year-to-date period, organic revenue declined 0.9% primarily driven by a decline in Europe and North America. |
•Operating margin was 21.0%25.1% in the third quartersecond quarter. The decrease of 220 basis points was primarily due to unfavorable price/cost of 150 basis points and was flat compared to the prior year as the nethigher operating expenses, including employee-related expenses, partially offset by positive operating leverage of 170 basis points, benefits offrom the Company's enterprise initiatives and cost management and positive operating leverage were offsetlower intangible asset amortization expense. Additionally, the prior year was impacted by unfavorable price/costa one-time benefit related to a recovery of 30 basis points and higher restructuring expenses.indirect taxes in Brazil.
•In the year-to-date period, operating margin of 21.0% increased 3024.8% decreased 180 basis points primarily driven by the netunfavorable price/cost of 180 basis points and higher operating expenses, including employee-related expenses, partially offset by positive operating leverage of 200 basis points, benefits offrom the Company's enterprise initiatives and cost managementlower intangible asset amortization expense. Additionally, the prior year was impacted by a one-time benefit related to a recovery of 100 basis points, partially offset by 30 basis points each of unfavorable price/cost and higher restructuring expenses.indirect taxes in Brazil.
CONSTRUCTION PRODUCTS
This segment is a branded supplier of innovative engineered fastening systems and solutions. This segment primarily serves the residential construction, renovation/remodel construction and commercial construction markets. Products in this segment include:
•fasteners and related fastening tools for wood and metal applications;
•anchors, fasteners and related tools for concrete applications;
•metal plate truss components and related equipment and software; and
•packaged hardware, fasteners, anchors and other products for retail.
The results of operations for the Construction Products segment for the thirdsecond quarter and year-to-date periods of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 565 | | | $ | 518 | | | | | 9.1 | % | | 15.1 | % | — | % | — | % | (6.0) | % | 9.1 | % |
Operating income | $ | 156 | | | $ | 143 | | | | | 9.2 | % | | 15.0 | % | — | % | — | % | (5.8) | % | 9.2 | % |
Operating margin % | 27.6 | % | | 27.6 | % | | | | — | | | — | | — | | — | | — | | — | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 440 |
| | $ | 415 |
| | 6.0 | % | | 3.5 | % | — | % | — | % | 2.5 | % | 6.0 | % |
Operating income | $ | 112 |
| | $ | 94 |
| | 18.8 | % | | 9.0 | % | — | % | 7.2 | % | 2.6 | % | 18.8 | % |
Operating margin % | 25.4 | % | | 22.6 | % | | 280 bps |
| | 130 bps |
| — |
| 150 bps |
| — |
| 280 bps |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,116 | | | $ | 987 | | | | | 13.1 | % | | 18.1 | % | — | % | — | % | (5.0) | % | 13.1 | % |
Operating income | $ | 292 | | | $ | 273 | | | | | 7.2 | % | | 11.5 | % | — | % | 0.2 | % | (4.5) | % | 7.2 | % |
Operating margin % | 26.2 | % | | 27.6 | % | | | | (140) bps | | (150) bps | — | | 10 bps | — | | (140) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,260 |
| | $ | 1,223 |
| | 3.0 | % | | 2.7 | % | — | % | — | % | 0.3 | % | 3.0 | % |
Operating income | $ | 303 |
| | $ | 278 |
| | 8.9 | % | | 5.6 | % | — | % | 2.7 | % | 0.6 | % | 8.9 | % |
Operating margin % | 24.0 | % | | 22.7 | % | | 130 bps |
| | 70 bps |
| — |
| 60 bps |
| — |
| 130 bps |
|
•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue, growth andpartially offset by the favorableunfavorable effect of foreign currency translation.
•Organic revenue increased 3.5% and 2.7%15.1% in the thirdsecond quarter and 18.1% in the year-to-date period with growth across all major regions. Additionally, product line simplification activities reduced organic revenue by 60 basis points in the second quarter and 40 basis points in the year-to-date period.
◦North American organic revenue grew 29.0% in the second quarter driven by higher demand in the United States residential and commercial end markets of 33.5% and 20.1%, respectively. In the year-to-date period, organic revenue increased 30.5% driven by higher demand in the United States residential and commercial end markets of 34.8% and 17.5%, respectively.
◦International organic revenue increased 4.4% and 8.5% in the second quarter and year-to-date periods, respectively. European organic revenue grew 5.5% in the second quarter and 10.5% in the year-to-date period primarily driven by higher demand in the commercial and residential end markets. Asia Pacific organic revenue increased 3.0% in the second quarter and 5.8% in the year-to-date period primarily due to higher demand in the Australia and New Zealand residential end markets.
| |
◦ | North American organic revenue grew 4.4% in the third quarter primarily due to 6.9% growth in the residential end markets, partially offset by a decline of 3.3% in the commercial end markets. North American organic revenue increased 1.9% in the year-to-date period primarily due to 2.6% growth in the residential end markets, partially offset by a decline of 0.4% in the commercial end markets. |
| |
◦ | International organic revenue increased 2.8% and 3.2% in the third quarter and year-to-date periods, respectively. Asia Pacific organic revenue increased 2.7% in both the third quarter and year-to-date periods primarily due to growth in the Australia and New Zealand retail end markets. European organic revenue increased 2.9% in the third quarter primarily due to growth in continental Europe and the Nordic countries. In the year-to-date period, European organic revenue grew 3.7% primarily due to growth in continental Europe, the United Kingdom and the Nordic countries. |
•Operating margin was 25.4%27.6% in the third quarter. The increasesecond quarter as positive operating leverage of 280220 basis points was driven by lower restructuring expenses of 150 basis points, theand net benefits offrom the Company's enterprise initiatives and cost management of 130 basis points and positive operating leverage of 90 basis points, partiallywere offset by unfavorable price/cost of 90410 basis points.points and higher operating expenses.
•In the year-to-date period, operating margin of 24.0% increased 13026.2% decreased 140 basis points primarily driven by the net benefitsunfavorable price/cost of the Company's enterprise initiatives510 basis points and cost management of 90 basis points,higher operating expenses, including employee-related expenses, partially offset by positive operating leverage of 70260 basis points and lower restructuring expenses of 60 basis points, partially offset by unfavorable price/cost of 90 basis points.benefits from the Company's enterprise initiatives.
SPECIALTY PRODUCTS
This segment is focused on diversified niche market opportunities that deliver strong operating results with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, consumer durables, general industrial, industrial capital goods and printing and publishing and industrial capital goods markets. Products in this segment include:
•line integration, conveyor systems and line automation for the food and beverage industries;
•plastic consumables that multi-pack cans and bottles and related equipment;
•foil, film and related equipment used to decorate consumer products;
•product coding and marking equipment and related consumables;
•plastic and metal fastenersclosures and components for appliances;
•airport ground support equipment; and
•components for medical devices.
The results of operations for the Specialty Products segment for the thirdsecond quarter and year-to-date periods of 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 447 | | | $ | 471 | | | | | (5.0) | % | | (1.7) | % | — | % | — | % | (3.3) | % | (5.0) | % |
Operating income | $ | 121 | | | $ | 128 | | | | | (6.2) | % | | (2.5) | % | — | % | (1.2) | % | (2.5) | % | (6.2) | % |
Operating margin % | 26.9 | % | | 27.2 | % | | | | (30) bps | | (20) bps | — | | (30) bps | 20 bps | (30) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 498 |
| | $ | 477 |
| | 4.6 | % | | 4.5 | % | (1.2 | )% | — | % | 1.3 | % | 4.6 | % |
Operating income | $ | 138 |
| | $ | 125 |
| | 10.8 | % | | 13.6 | % | (0.3 | )% | (3.9 | )% | 1.4 | % | 10.8 | % |
Operating margin % | 27.7 | % | | 26.1 | % | | 160 bps |
| | 230 bps |
| 30 bps |
| (100) bps |
| — |
| 160 bps |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | |
Dollars in millions | June 30, | | Components of Increase (Decrease) |
| 2022 | | 2021 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 899 | | | $ | 928 | | | | | (3.1) | % | | (0.6) | % | — | % | — | % | (2.5) | % | (3.1) | % |
Operating income | $ | 241 | | | $ | 254 | | | | | (5.4) | % | | (3.2) | % | — | % | (0.1) | % | (2.1) | % | (5.4) | % |
Operating margin % | 26.8 | % | | 27.4 | % | | | | (60) bps | | (70) bps | — | | — | | 10 bps | (60) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
Dollars in millions | September 30, | | Components of Increase (Decrease) |
| 2017 | | 2016 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,451 |
| | $ | 1,429 |
| | 1.5 | % | | 3.1 | % | (1.1 | )% | — | % | (0.5 | )% | 1.5 | % |
Operating income | $ | 401 |
| | $ | 373 |
| | 7.6 | % | | 9.8 | % | — | % | (1.8 | )% | (0.4 | )% | 7.6 | % |
Operating margin % | 27.6 | % | | 26.1 | % | | 150 bps |
| | 170 bps |
| 30 bps |
| (50) bps |
| — |
| 150 bps |
|
•Operating revenue increaseddeclined in the thirdsecond quarter and year-to-date periods due to organic revenue growth and the favorable effect of foreign currency translation, partially offset by a divestiture. For the year-to-date period, operating revenue increased due to organic revenue growth, partially offset by a divestiture and the unfavorable effect of foreign currency translation.translation and lower organic revenue.
•Organic revenue increased 4.5%decreased 1.7% and 3.1% for the third quarter and year-to-date periods, respectively, as the consumer packaging businesses grew 3.6% and 3.2% in each respective period. Consumable sales increased 6.1% and 5.1%0.6% in the thirdsecond quarter and year-to-date periods, respectively. Equipment sales declined 1.3%20.7% and 4.4%18.4% in the thirdsecond quarter and year-to-date periods, respectively, with lower demand across all major regions. Consumable sales grew 3.0% in the second quarter and 4.1% in the year-to-date period primarily due to higher demand in North America. Additionally, product line simplification activities reduced organic revenue by 90 basis points and 70 basis points in the second quarter and year-to-date periods, respectively.
| |
◦ | North American organic revenue increased 3.0% in the third quarter primarily due to an increase in the brand identification, medical and consumer packaging businesses. In the year-to-date period, organic revenue grew 0.5% primarily due to growth in the medical, consumer packaging, appliance and brand identification businesses, partially offset by a decline in the equipment businesses. |
| |
◦ | International organic revenue increased 6.9% and 7.7% in the third quarter and year-to-date periods, respectively, primarily driven by growth in the consumer packaging and equipment businesses in Europe and Asia Pacific. |
◦North American organic revenue increased 5.1% and 5.8% in the second quarter and year-to-date periods, respectively, primarily driven by growth in the consumer packaging, foils and thermal films businesses, partially offset by a decline in the appliance and ground support equipment businesses.
◦International organic revenue decreased 12.9% and 11.0% in the second quarter and year-to-date periods, respectively, primarily due to a decline in the ground support equipment, consumer packaging and appliance businesses in Europe and the strength film and appliance businesses in Asia Pacific, partially offset by growth in the specialty films and filter medical businesses in Europe.
•Operating margin was 27.7% for26.9% in the thirdsecond quarter. The increasedecrease of 16030 basis points was primarily drivendue to higher operating expenses, including employee-related expenses, and higher restructuring expenses, partially offset by the net benefits offrom the Company's enterprise initiatives and cost management of 130 basis points, positive operating leverage of 90 basis points and the impact of a divestiture, partially offset by higher restructuring expenses of 100 basis points and unfavorablefavorable price/cost of 1020 basis points.
•In the year-to-date period, operating margin of 27.6% increased 15026.8% decreased 60 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 130 basis points, positivehigher operating leverage of 70 basis points and the impact of a divestiture, partially offset by higher restructuringexpenses, including employee-related expenses, and unfavorable price/cost of 30 basis points.points, partially offset by benefits from the Company's enterprise initiatives.
OTHER FINANCIAL HIGHLIGHTS
•Interest expense of $65was $47 million and $194$95 million in the thirdsecond quarter and year-to-date periods of 2022, respectively, increased from $58versus $52 million and $174$104 million in the respective 2016 periods,2021, respectively. Interest expense in 2022 was lower than 2021 primarily due to the debt issuancerepayment of notes due September 15, 2021 and May 20, 2022, partially offset by higher average outstanding commercial paper in 2022. Refer to Note 9. Debt in Item 1. Financial Statements for further information regarding the fourth quarterrepayment of 2016.notes.
•Other income (expense) was income of $10$24 million in the thirdsecond quarter of 20172022 and $24$38 million in the year-to-date period, a decreasean increase of $2 million compared to the prior yearsecond quarter of $3 million in the third quarter2021 and $10an increase of $4 million in the year-to-date period primarily driven bydue to foreign currency translation losses.
The effective tax rate was 29.3% and 28.7% for the third quarter and year-to-date periods, respectively,gains in 2022 compared to 30.0%foreign currency translation losses in both respective periods of 2016. Included in the effective tax rate for 2017 was a discrete income tax benefit of $6 million in the third quarter2021 and $32 million in the year-to-date period related to the adoption of the new stock-based compensation guidance. Excluding this discrete tax benefit, the Company's effective tax rate for the third quarter and year-to-date periods of 2017 would have been 30.0%. Refer to Note 1. Significant Accounting Policies in Item 1 - Financial Statements for further information.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance to change the criteria for revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, several new revenue recognition disclosures will be required. Under current guidance, the Company generally recognizes operating revenue when ownership and risk of loss are transferred to the customer, which is typically at the time of product shipment or delivery of service. The Company has completed a review of revenue transactions for a significant portion of its businesses. While the review is not fully completed, the Company does not currently expect the adoption of this guidance to have a material impact on its operating revenue, results of operations or financial position. However, the Company expects to provide additional disclosures in the notes to financial statements required under the new guidance. The new guidance will be effective for the Company beginning January 1, 2018 and allows for either full or modified retrospective adoption methods. The Company expects to adopt the new revenue accounting guidance utilizing the modified retrospective method.
In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. Under the new guidance, a lessee will be required to recognize a lease liability and lease asset for all leases with a lease term greater than twelve months in the statement of financial position, including operating leases. Subsequent measurement, including presentation of expenses and cash flows, will depend on the classification of the lease as either a financing or operating lease. In addition, several new disclosures will be required. This guidance will be effective for the Company beginning January 1, 2019, with early adoption permitted. While the Company has not yet completed its evaluation of the impact the new lease accounting guidance will have on the consolidated financial statements and related disclosures, the Company expects to recognize right of use assets and liabilities for its operating leases in the statement of financial position upon adoption.
In March 2016, the FASB issued authoritative guidance that included several changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification of tax benefits in the statement of cash flows. Among the more significant changes, the new guidance requires the income tax effects associated with the settlement of stock-based awards to be recognized through income tax expense rather than directly in equity. Additionally, the income tax effects related to excess tax benefits should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax benefits recognized in equity under the prior guidance were $25 million for the nine months ended September 30, 2016. The Company adopted the new guidance effective January 1, 2017 and applied the newly adopted provisions prospectively. Excess tax benefits of $6 million and $32 million were included in Income Taxes in the statement of income for the three and nine month periods ended September 30, 2017, respectively. The expected effect on income tax expense or net cash provided from operating activities related to future stock-based award settlements will vary each quarter and will depend on inputs such as the stock price at the time of settlement and the number of awards settled in the period presented.
In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset,higher other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. The new guidance is effective for the Company beginning January 1, 2018 and will be applied prospectively with the cumulative effect of adoption recorded directly to retained earnings. Although the Company is currently completing its assessment of the potential impact of this new guidance, the Company anticipates a cumulative-effect balance sheet adjustment reducing deferred tax assets and retained earnings upon adoption. Additionally, intra-entity asset transfers may result in future tax rate volatility under the new guidance. The Company intends to complete its assessment in the fourth quarter of 2017.
In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be includedincome in operating2022, partially offset by lower investment income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, such as interest cost, the expected return on assets, and amortization of actuarial gains and losses and prior service cost, should be presented below operating income. The guidance is effective for the Company starting January 1, 2018 and will be applied retrospectively to the presentation of net periodic benefit cost and prospectively to the capitalization of service cost. The Company does not expect the adoption of this guidance to have a material impact on the results of operations or financial position. Refer to Note 6. Pension and Other Postretirement Benefits in Item 1 - Financial Statements for further information information regarding the Company’s net periodic benefit cost.
2022.
LIQUIDITY AND CAPITAL RESOURCES
The Company’sCompany's primary sources of liquidity are free cash flow and short-term credit facilities. In addition,As of June 30, 2022, the Company had $2.8$0.9 billion of cash and equivalents on hand at September 30, 2017 and no outstanding borrowings under its $2.5 billion revolving credit facility. The Company also maintainshas maintained strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:
•internal investments to support organic growth and sustain core businesses;
•payment of an attractive dividend to shareholders; and
•external investments in selective strategic acquisitions that support the Company's organic growth focus, such as the acquisition of the MTS Test & Simulation business, and an active share repurchase program. Refer to Note 3. MTS Test & Simulation Acquisition in Item 1. Financial Statements for further information regarding this acquisition.
The Company believes that, based on its operating revenue, operating margin, current free cash flow, and credit ratings, it could readily obtain additional financing, if necessary.
Cash Flow
The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company's financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the thirdsecond quarter and year-to-date periods of 20172022 and 20162021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
In millions | 2022 | | 2021 | | 2022 | | 2021 |
Net cash provided by operating activities | $ | 501 | | | $ | 555 | | | $ | 824 | | | $ | 1,164 | |
Additions to plant and equipment | (81) | | | (78) | | | (155) | | | (146) | |
Free cash flow | $ | 420 | | | $ | 477 | | | $ | 669 | | | $ | 1,018 | |
| | | | | | | |
Cash dividends paid | $ | (380) | | | $ | (360) | | | $ | (762) | | | $ | (721) | |
Repurchases of common stock | (375) | | | (250) | | | (750) | | | (500) | |
Acquisition of businesses (excluding cash and equivalents) | — | | | — | | | (2) | | | — | |
Net proceeds from (repayments of) debt with original maturities of three months or less | 71 | | | — | | | 635 | | | — | |
Proceeds from debt with original maturities of more than three months | 97 | | | — | | | 454 | | | — | |
Repayments of debt with original maturities of more than three months | (207) | | | (350) | | | (863) | | | (350) | |
Other, net | 7 | | | 44 | | | 13 | | | 64 | |
Effect of exchange rate changes on cash and equivalents | (50) | | | 13 | | | (42) | | | (17) | |
Net increase (decrease) in cash and equivalents | $ | (417) | | | $ | (426) | | | $ | (648) | | | $ | (506) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
In millions | 2017 | | 2016 | | 2017 | | 2016 |
Net cash provided by operating activities | $ | 780 |
| | $ | 624 |
| | $ | 1,707 |
| | $ | 1,638 |
|
Additions to plant and equipment | (78 | ) |
| (81 | ) |
| (219 | ) |
| (202 | ) |
Free cash flow | $ | 702 |
| | $ | 543 |
| | $ | 1,488 |
| | $ | 1,436 |
|
| | | | | | | |
Cash dividends paid | $ | (224 | ) | | $ | (195 | ) | | $ | (674 | ) | | $ | (593 | ) |
Repurchases of common stock | (250 | ) | | (482 | ) | | (750 | ) | | (1,482 | ) |
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates | — |
| | (454 | ) | | (3 | ) | | (456 | ) |
Net proceeds from (repayments of) debt with original maturities of three months or less | 6 |
| | 499 |
| | 697 |
| | 188 |
|
Net repayments of debt with original maturities of more than three months | — |
| | — |
| | (652 | ) | | — |
|
Other | 19 |
| | 36 |
| | 73 |
| | 109 |
|
Effect of exchange rate changes on cash and equivalents | 36 |
| | (3 | ) | | 134 |
| | 7 |
|
Net increase (decrease) in cash and equivalents | $ | 289 |
| | $ | (56 | ) | | $ | 313 |
| | $ | (791 | ) |
Free cash flow for the nine months ended September 30, 2017 included an additional $115 million discretionary pension contribution madedecreased in the second quarter and year-to-date periods of 2017.2022 due to higher working capital investments to support revenue growth, including increased inventory levels to help mitigate supply chain risk and sustain customer service levels.
Stock Repurchase Program
On February 13, 2015,August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which providesprovided for the buybackrepurchase of up to $6.0$3.0 billion of the Company's common stock over an open-ended period of time (the “2015 Program”"2018 Program"). Under the 20152018 Program, the Company repurchased approximately 5.36.7 million shares of its common stock at an average price of $94.07 in the first quarter of 2016,$158.11 per share during 2019, approximately 4.84.2 million shares of its common stock at an average price of $104.54 in the second quarter of 2016,$167.69 per share during 2020, approximately 4.31.2 million shares of its common stock at an average price of $116.27$211.50 in the thirdfirst quarter of 2016,
2021, approximately 4.31.1 million shares of its common stock at an average price of $117.29$233.29 in the fourthsecond quarter of
2016, 2021, approximately 1.91.0 million shares of its common stock at an average price of $128.47$229.03 in the firstthird quarter of 2017,2021, approximately 1.81.1 million shares of its common stock at an average price of $136.81$237.11 in the secondfourth quarter of 2017,2021, and approximately 1.2 million shares of its common stock at an average price of $216.62 in the first quarter of 2022. The 2018 Program was completed in the first quarter of 2022.
On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2021 Program"). Under the 2021 Program, the Company repurchased approximately 0.6 million shares of its common stock at an average price of $209.29 in the first quarter of 2022 and approximately 1.8 million shares of its common stock at an average price of $142.54$205.03 in the thirdsecond quarter of 2017.2022. As of SeptemberJune 30, 2017,2022, there were approximately $2.7$2.5 billion of authorized repurchases remaining under the 20152021 Program.
Adjusted After-TaxAfter-tax Return on Average Invested Capital
The Company uses adjusted after-tax return on average invested capital ("After-tax ROIC") to measure the effectiveness of its operations’operations' use of invested capital to generate profits. After-tax ROIC is not defined under U.S. generally accepted accounting principles ("GAAP"). After-tax ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performanceCompany's ability to generate returns from cash invested in its operations and may be different than the method used by other companies to calculate After-tax ROIC. AdjustedThe Company defines After-tax ROIC as operating income after taxes divided by average invested capital, which is annualized when presented in interim periods. Operating income after taxes is a non-GAAP measure consisting of net income before interest expense and other income (expense), on an after-tax basis, which are excluded as they do not represent returns generated by the Company's operations. For comparability, the Company also excluded the discrete tax benefit of $51 million in the second quarter of 2022 from net income and the effective tax rate for the three and six months ended June 30, 2022. Additionally, for comparability, the Company excluded the discrete tax benefit of $112 million in the second quarter of 2021 from net income and the effective tax rate for the three and six months ended June 30, 2021. Total invested capital represents the net assets of the Company, excludingother than cash and equivalents and outstanding debt which are excluded as they do not represent capital investment in the Company's operations,operations. The most comparable GAAP measure to operating income after taxes is net income. Net income to average invested capital and After-tax ROIC for the second quarter and year-to-date periods of 2022 and 2021 were as well asfollows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
Dollars in millions | 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net Income | $ | 738 | | | $ | 775 | | | $ | 1,400 | | | $ | 1,446 | |
Discrete tax benefit related to the second quarter 2022 | (51) | | | — | | | (51) | | | — | |
Discrete tax benefit related to the second quarter 2021 | — | | | (112) | | | — | | | (112) | |
Interest expense, net of tax (1) | 36 | | | 41 | | | 73 | | | 81 | |
Other (income) expense, net of tax (1) | (18) | | | (17) | | | (29) | | | (26) | |
Operating income after taxes | $ | 705 | | | $ | 687 | | | $ | 1,393 | | | $ | 1,389 | |
| | | | | | | |
Denominator: | | | | | | | |
Invested capital: | | | | | | | |
Cash and equivalents | $ | 879 | | | $ | 2,058 | | | $ | 879 | | | $ | 2,058 | |
Trade receivables | 3,109 | | | 2,786 | | | 3,109 | | | 2,786 | |
Inventories | 1,975 | | | 1,400 | | | 1,975 | | | 1,400 | |
Net assets held for sale | 73 | | | — | | | 73 | | | — | |
Net plant and equipment | 1,736 | | | 1,767 | | | 1,736 | | | 1,767 | |
Goodwill and intangible assets | 5,702 | | | 5,374 | | | 5,702 | | | 5,374 | |
Accounts payable and accrued expenses | (2,241) | | | (1,933) | | | (2,241) | | | (1,933) | |
Debt | (7,640) | | | (7,648) | | | (7,640) | | | (7,648) | |
Other, net | (214) | | | (283) | | | (214) | | | (283) | |
Total net assets (stockholders' equity) | 3,379 | | | 3,521 | | | 3,379 | | | 3,521 | |
Cash and equivalents | (879) | | | (2,058) | | | (879) | | | (2,058) | |
Debt | 7,640 | | | 7,648 | | | 7,640 | | | 7,648 | |
Total invested capital | $ | 10,140 | | | $ | 9,111 | | | $ | 10,140 | | | $ | 9,111 | |
| | | | | | | |
Average invested capital (2) | $ | 10,143 | | | $ | 8,926 | | | $ | 10,024 | | | $ | 8,864 | |
| | | | | | | |
Net income to average invested capital (3) | 29.1 | % | | 34.8 | % | | 27.9 | % | | 32.6 | % |
After-tax return on average invested capital (3) | 27.8 | % | | 30.8 | % | | 27.8 | % | | 31.3 | % |
(1) Effective tax rate used for interest expense and other (income) expense for the Company's equity investment inthree months ended June 30, 2022 and 2021 was 23.9% and 23.0%, respectively. Effective tax rate used for interest expense and other (income) expense for the Wilsonart business (formerly the Decorative Surfaces segment). six months ended June 30, 2022 and 2021 was 23.5% and 22.7%, respectively.
(2) Average invested capital is calculated using the total invested capital balances at the start of the period and at the end of each quarter. ROIC forquarter within each of the third quarter and year-to-date periods of 2017 and 2016 was as follows:presented.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
Dollars in millions | 2017 |
| 2016 | | 2017 | | 2016 |
Operating income | $ | 961 |
|
| $ | 808 |
|
| $ | 2,644 |
|
| $ | 2,322 |
|
Tax rate | 29.3 | % |
| 30.0 | % |
| 28.7 | % |
| 30.0 | % |
Income taxes | (282 | ) |
| (243 | ) |
| (759 | ) |
| (697 | ) |
Operating income after taxes | $ | 679 |
| | $ | 565 |
| | $ | 1,885 |
| | $ | 1,625 |
|
| | | | | | | |
Invested capital: | | | | | | | |
Trade receivables | $ | 2,672 |
|
| $ | 2,496 |
|
| $ | 2,672 |
|
| $ | 2,496 |
|
Inventories | 1,225 |
|
| 1,167 |
|
| 1,225 |
|
| 1,167 |
|
Net plant and equipment | 1,759 |
|
| 1,702 |
|
| 1,759 |
|
| 1,702 |
|
Goodwill and intangible assets | 6,051 |
|
| 6,191 |
|
| 6,051 |
|
| 6,191 |
|
Accounts payable and accrued expenses | (1,816 | ) |
| (1,762 | ) |
| (1,816 | ) |
| (1,762 | ) |
Other, net | 487 |
|
| 393 |
|
| 487 |
|
| 393 |
|
Total invested capital | $ | 10,378 |
| | $ | 10,187 |
| | $ | 10,378 |
| | $ | 10,187 |
|
| | | | | | | |
Average invested capital | $ | 10,354 |
|
| $ | 9,973 |
|
| $ | 10,051 |
|
| $ | 9,821 |
|
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) | — |
|
| (116 | ) |
| — |
|
| (114 | ) |
Adjusted average invested capital | $ | 10,354 |
|
| $ | 9,857 |
|
| $ | 10,051 |
|
| $ | 9,707 |
|
Adjusted return on average invested capital | 26.3 | % |
| 23.0 | % |
| 25.0 | % |
| 22.3 | % |
ROIC increased 330 basis points(3) Returns for the three month periodmonths ended SeptemberJune 30, 2017 compared2022 and 2021 were converted to an annual rate by multiplying the prior year period as a result of a 20.1% improvement in after-tax operating income versus a 5.0% increase in adjusted average invested capital. ROIC increased 270 basis pointscalculated return by 4. Returns for the nine month periodsix months ended SeptemberJune 30, 2017 compared2022 and 2021 were converted to an annual rate by multiplying the prior year period as a resultcalculated return by 2.
A reconciliation of a 16.0% improvement in after-tax operating income versus a 3.5% increase in adjusted average invested capital.
ROIC was favorably impacted by 220 basis points and 90 basis pointsthe tax rate for the three and nine month periodssix months ended SeptemberJune 30, 2017, respectively,2022, excluding the second quarter 2022 discrete tax benefit of $51 million related to the resolution of a U.S. tax audit, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2022 |
Dollars in millions | Income Taxes | | Tax Rate | | Income Taxes | | Tax Rate |
As reported | $ | 165 | | | 18.3 | % | | $ | 364 | | | 20.7 | % |
Discrete tax benefit related to the second quarter 2022 | 51 | | | 5.6 | % | | 51 | | | 2.8 | % |
As adjusted | $ | 216 | | | 23.9 | % | | $ | 415 | | | 23.5 | % |
A reconciliation of the tax rate for the three and six months ended June 30, 2021, excluding the second quarter 2021 discrete tax benefit of $112 million related to a confidential legal settlementchange in 2017. the U.K. income tax rate, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2021 |
Dollars in millions | Income Taxes | | Tax Rate | | Income Taxes | | Tax Rate |
As reported | $ | 88 | | | 10.1 | % | | $ | 282 | | | 16.3 | % |
Discrete tax benefit related to the second quarter 2021 | 112 | | | 12.9 | % | | 112 | | | 6.4 | % |
As adjusted | $ | 200 | | | 23.0 | % | | $ | 394 | | | 22.7 | % |
Refer to Note 8. Legal Settlement6. Income Taxes in Item 1 -1. Financial Statements for further information regarding this settlement.
Thethe second quarter 2022 and second quarter 2021 discrete tax benefit related to share-based compensation of $6 million and $32 million for the three and nine month periods ended September 30, 2017 improved after-tax ROIC by approximately 30 and 40 basis points, respectively. Refer to Note 1. Significant Accounting Policies in Item 1 - Financial Statements for further information.benefits.
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as of SeptemberJune 30, 20172022 and December 31, 20162021 is summarized as follows:
| | | | | | | | | | | | | | | | | |
In millions | June 30, 2022 | | December 31, 2021 | | Increase/ (Decrease) |
Current assets: | | | | | |
Cash and equivalents | $ | 879 | | | $ | 1,527 | | | $ | (648) | |
Trade receivables | 3,109 | | | 2,840 | | | 269 | |
Inventories | 1,975 | | | 1,694 | | | 281 | |
Prepaids and other current assets | 305 | | | 313 | | | (8) | |
Assets held for sale | 103 | | | — | | | 103 | |
Total current assets | 6,371 | | | 6,374 | | | (3) | |
Current liabilities: | | | | | |
Short-term debt | 1,525 | | | 778 | | | 747 | |
Accounts payable and accrued expenses | 2,241 | | | 2,233 | | | 8 | |
Liabilities held for sale | 30 | | | — | | | 30 | |
Other | 498 | | | 459 | | | 39 | |
Total current liabilities | 4,294 | | | 3,470 | | | 824 | |
Net working capital | $ | 2,077 | | | $ | 2,904 | | | $ | (827) | |
|
| | | | | | | | | | | |
In millions | September 30, 2017 | | December 31, 2016 | | Increase/ (Decrease) |
Current assets: | | | | | |
Cash and equivalents | $ | 2,785 |
| | $ | 2,472 |
| | $ | 313 |
|
Trade receivables | 2,672 |
| | 2,357 |
| | 315 |
|
Inventories | 1,225 |
| | 1,076 |
| | 149 |
|
Other | 230 |
| | 218 |
| | 12 |
|
Total current assets | 6,912 |
| | 6,123 |
| | 789 |
|
Current liabilities: | | | | | |
Short-term debt | 698 |
| | 652 |
| | 46 |
|
Accounts payable and accrued expenses | 1,816 |
| | 1,713 |
| | 103 |
|
Other | 353 |
| | 395 |
| | (42 | ) |
Total current liabilities | 2,867 |
| | 2,760 |
| | 107 |
|
Net working capital | $ | 4,045 |
| | $ | 3,363 |
| | $ | 682 |
|
CashAs of June 30, 2022, a significant portion of the Company's cash and equivalents totaled approximately $2.8 billion as of September 30, 2017 and $2.5 billion as of December 31, 2016, primarily all of which was held by international subsidiaries. Cash and equivalents held internationally may be subject to U.S. income taxes and foreign withholding taxes if repatriated to the U.S. Cash and equivalents balances held internationally are typically used for international operating needs or reinvested to fund expansion of existing international businesses,businesses. International funds may also be used to fund new international acquisitions or, usedif not considered permanently invested, may be repatriated to repay debtthe U.S. The Company has accrued for foreign withholding taxes related to foreign held internationally. cash and equivalents that are not permanently invested.
In the U.S., the Company utilizes cash flows from domestic operations to fund domestic cash needs which primarily consistand the Company's capital allocation priorities. This includes operating needs of the U.S. businesses, dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existing U.S. businesses and general corporate needs. The Company may also usesuse its commercial paper program, which is backed by a long-term credit facilities,facility, for short-term liquidity needs. The Company believes cash generated domesticallyby operations and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.
Debt
Total debt as of SeptemberJune 30, 20172022 and December 31, 20162021 was as follows: |
| | | | | | | |
In millions | September 30, 2017 | | December 31, 2016 |
Short-term debt | $ | 698 |
| | $ | 652 |
|
Long-term debt | 7,439 |
| | 7,177 |
|
Total debt | $ | 8,137 |
| | $ | 7,829 |
|
| | | | | | | | | | | |
In millions | June 30, 2022 | | December 31, 2021 |
Short-term debt | $ | 1,525 | | | $ | 778 | |
Long-term debt | 6,115 | | | 6,909 | |
Total debt | $ | 7,640 | | | $ | 7,687 | |
Short-term debt included commercial paper of $1.0 billion and $210 million as of June 30, 2022 and December 31, 2021, respectively. The weighted-average interest rate on commercial paper as of June 30, 2022 and December 31, 2021 was 1.08% and 0.14%, respectively. Short-term debt as of SeptemberJune 30, 20172022 also included commercial paper of $688 million. Short-term debt as of December 31, 2016 included $650$523 million related to the 0.90%1.25% Euro notes paiddue May 22, 2023, which were reclassified from Long-term debt to Short-term debt in the second quarter of 2022. As of December 31, 2021, Short-term debt also included $568 million related to the 1.75% Euro notes due May 20, 2022, which were redeemed in full at face value on February 22, 2022. Additionally, the February 25, 2017$350 million of 3.375% notes due date.September 15, 2021 were redeemed in full at face value on June 15, 2021.
The Company has a $2.5 billion revolving credit facility with a termination date of September 27, 2024, which is available to provide additional liquidity, including to support the potential issuances of commercial paper. No amounts were outstanding under the $2.5 billion revolving credit facility as of June 30, 2022 or December 31, 2021.
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company’sCompany's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the trailing twelve month periods ended SeptemberJune 30, 20172022 and December 31, 20162021 was as follows:
| | | | | | | | | | | |
Dollars in millions | June 30, 2022 | | December 31, 2021 |
Total debt | $ | 7,640 | | | $ | 7,687 | |
| | | |
Net income | $ | 2,648 | | | $ | 2,694 | |
Add: | | | |
Interest expense | 193 | | | 202 | |
Other income | (55) | | | (51) | |
Income taxes | 714 | | | 632 | |
Depreciation | 281 | | | 277 | |
Amortization and impairment of intangible assets | 136 | | | 133 | |
EBITDA | $ | 3,917 | | | $ | 3,887 | |
Total debt to EBITDA ratio | 2.0 | | | 2.0 | |
|
| | | | | | | |
Dollars in millions | September 30, 2017 | | December 31, 2016 |
Total debt | $ | 8,137 |
| | $ | 7,829 |
|
| | | |
Net income | $ | 2,270 |
| | $ | 2,035 |
|
Add: | | | |
Interest expense | 257 |
| | 237 |
|
Other income | (71 | ) | | (81 | ) |
Income taxes | 930 |
| | 873 |
|
Depreciation | 252 |
| | 246 |
|
Amortization and impairment of intangible assets | 210 |
| | 224 |
|
EBITDA | $ | 3,848 |
| | $ | 3,534 |
|
Total debt to EBITDA ratio | 2.1 |
| | 2.2 |
|
Stockholders’Stockholders' Equity
The changes to stockholders’stockholders' equity during 2017the six months ended June 30, 2022 were as follows:
| | | | | |
In millions | |
Total stockholders' equity, December 31, 2021 | $ | 3,626 | |
Net income | 1,400 | |
Repurchases of common stock | (750) | |
Dividends declared | (758) | |
Foreign currency translation adjustments, net of tax | (184) | |
Other, net | 45 | |
Total stockholders' equity, June 30, 2022 | $ | 3,379 | |
|
| | | |
In millions | |
Total stockholders’ equity, December 31, 2016 | $ | 4,259 |
|
Net income | 1,763 |
|
Repurchases of common stock | (750 | ) |
Cash dividends declared | (715 | ) |
Foreign currency translation adjustments, net of tax | 367 |
|
Stock option and restricted stock activity | 73 |
|
Other | 29 |
|
Total stockholders’ equity, September 30, 2017 | $ | 5,026 |
|
FORWARD-LOOKING STATEMENTS
This documentQuarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe," "expect," "plans," "intends,"intend," "may," "strategy," "prospects," "estimate," "will," "should," "could," "project," "target," "anticipate," "guidance," "forecast," and other similar words, including,and may include, without limitation, statements regarding the expectedduration and potential effects of the COVID-19 pandemic and global supply chain challenges, related government actions and the Company's strategy in response thereto on the Company's business, future financial and operating performance, of acquired businessesfree cash flow, economic and impact of divested businesses, economicregulatory conditions in various geographic regions including inflation, the timing and amountimpact of share repurchases,foreign currency fluctuations, the timing and amount of benefits from the Company's Enterprise Strategy,enterprise strategy initiatives, the timing and amount of dividends and share repurchases, the protection of the Company's intellectual property, the likelihood of future goodwill or intangible asset impairment charges, the impact of adopting new accounting pronouncements, the adequacy of internally generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency of U.S. generated cash to fund cash requirements in the U.S., the cost and availability of additional financing, the availability of raw materials and energy
and the impact of raw material cost inflation, enterprise initiatives, the Company's portion of future benefit payments related to pension and other postretirement benefits, the Company's information technology infrastructure, potential acquisitions and divestitures and the expected performance of acquired businesses and impact of a change indivested businesses, the methodimpact of calculatingU.S. and global tax legislation and the serviceestimated timing and interest cost componentsamount related to the resolution of net periodic pension and other postretirement benefit costs to a specific spot rate approach, the availability of raw materials and energy, the expiration of any one of the Company's patents,tax matters, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the impact of failure of the Company's employees to comply with applicable laws and regulations, the impact of foreign currency fluctuations,and the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the
resolution of tax matters.proceedings. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include (1) the COVID-19 pandemic, related government actions and the Company's strategy in response thereto, (2) weaknesses or downturns in the markets served by the Company, (2)(3) changes or deterioration in international and domestic political and economic conditions, (3)such as the Russian invasion of Ukraine and the impact of related economic and other sanctions imposed on Russia, (4) the unfavorable impact of foreign currency fluctuations, (5) the timing and amount of benefits from the Company’sCompany's enterprise strategy initiatives and their impact on organic revenue growth, (4)(6) market conditions and cost and availability of financing to fund the Company's share repurchases, (5) the risk of intentional acts of the Company's employees, agents or business partners that violate anti-corruption and other laws, (6) the unfavorable impact of foreign currency fluctuations, (7) a delay or decrease in the introduction of new products into the Company’sCompany's product lines, or(8) any failure to protect the Company's intellectual property, (8) the potential negative impact of acquisitions on the Company’s profitability and returns, (9) negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (10) potential negative impact of impairments to goodwill and other intangible assets on the Company’s profitability andCompany's return on invested capital, (11) increases in funding costsfinancial condition or decreases in credit availability due to market conditions or changes to the Company's credit ratings, (12)results of operations, (10) raw material price increases and supply shortages (13) unfavorable tax law changes and tax authority rulings, (14)or delays, (11) financial market risks to the Company’sCompany's obligations under its defined benefit pension plans, (15) potential adverse outcomes in legal proceedings, and (16)(12) negative effects of service interruptions, data corruption, cyber-based attacks, or network security breaches.breaches, or violations of data privacy laws, (13) the potential negative impact of acquisitions on the Company's profitability and returns, (14) potential negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (15) impact of tax legislation and regulatory action and changing tax rates, (16) potential adverse outcomes in legal proceedings, (17) uncertainties related to environmental regulation and the physical risks of climate change, (18) potential failure of the Company's employees, agents or business partners to comply with anti-corruption, import/export, human rights and other laws, and (19) increases in inflation or interest rates and the possibility of economic recession. A more detailed description of these risks is contained under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2021. These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Any forward-looking statements made by the CompanyITW speak only as of the date on which they are made. The CompanyITW is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.
The CompanyITW practices fair disclosure for all interested parties. Investors should be aware that while the CompanyITW regularly communicates with securities analysts and other investment professionals, it is against the Company'sITW's policy to disclose to them any material non-public information or other confidential commercial information. ShareholdersInvestors should not assume that the CompanyITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
ITEM 4. Controls and Procedures
The Company carried out an evaluation, under the supervision andCompany's management, with the participation of the Company’sCompany's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, ofhas evaluated the effectiveness of the Company’sCompany's disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e)) as of SeptemberJune 30, 2017.2022. Based on such evaluation, the Company’sCompany's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer have concluded that, as of SeptemberJune 30, 2017,2022, the Company’sCompany's disclosure controls and procedures were effective.
In connection with the evaluation by management, including the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, no changes in the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended SeptemberJune 30, 20172022 were identified that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
None. The Company's threshold for disclosing environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million.
ITEM 1A. Risk Factors
The Company's business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary materially from recent results or from anticipated future results. Refer to the description of the Company's risk factors previously disclosed in Part I - Item 1A - Risk Factors in the Company's 20162021 Annual Report on Form 10-K. There have been no material changes to the risk factors described therein.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 13, 2015,August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which providesprovided for the repurchase of up to $6.0$3.0 billion of the Company's common stock over an open-ended period of time (the “2015 Program”"2018 Program"). The 2018 Program was completed in the first quarter of 2022.
On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2021 Program"). As of SeptemberJune 30, 2017,2022, there were approximately $2.7$2.5 billion of authorized repurchases remaining under the 20152021 Program.
Share repurchase activity under the Company's share repurchase program for the thirdsecond quarter of 20172022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
In millions except per share amounts |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Maximum Value of Shares That May Yet Be Purchased Under Programs |
April 2022 | | — | | | $ | — | | | — | | | $ | 2,865 | |
May 2022 | | 1.5 | | | $ | 205.37 | | | 1.5 | | | $ | 2,545 | |
June 2022 | | 0.3 | | | $ | 203.07 | | | 0.3 | | | $ | 2,490 | |
Total | | 1.8 | | | | | 1.8 | | | |
|
| | | | | | | | | | | | | | |
In millions except per share amounts | | | | | | |
| | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Value of Shares That May Yet Be Purchased Under Program |
July 2017 | | 0.6 |
| | $ | 142.97 |
| | 0.6 |
| | $ | 2,856 |
|
August 2017 | | 0.7 |
| | $ | 140.35 |
| | 0.7 |
| | $ | 2,762 |
|
September 2017 | | 0.5 |
| | $ | 145.15 |
| | 0.5 |
| | $ | 2,696 |
|
Total | | 1.8 |
| | | | 1.8 |
| | |
| | | | | | | | |
Exhibit Number | | Exhibit Description |
| | |
Exhibit Number | | Exhibit Description |
| | |
| | |
| | |
| | |
| | |
101 | | The following financial and related information from the Illinois Tool Works Inc. Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20172022 is formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL) and submitted electronically herewith: (i) Statement of Income, (ii) Statement of Comprehensive Income, (iii) Statement of Financial Position, (iv) Statement of Changes in Stockholders' Equity, (v) Statement of Cash Flows, and (v)(vi) related Notes to Financial Statements. |
| | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | |
| | | |
| | ILLINOIS TOOL WORKS INC. |
| | | |
Dated: | August 4, 2022 | By: | |
Dated: | October 27, 2017 | By: | /s/ Randall J. Scheuneman |
| | | Randall J. Scheuneman |
| | | Vice President & Chief Accounting Officer |
| | | (Principal Accounting Officer and Duly Authorized Officer) |