ILLINOIS TOOL WORKS INC. INTRODUCTION
Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 83 divisions in 52 countries. As ofDecember 31, 2021 , the Company employed approximately 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's core source of value creation. It is the Company's competitive advantage and defines how ITW creates value for its shareholders. The ITW Business Model is comprised of three unique elements: •ITW's 80/20 Front-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 driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the "80") and eliminates cost, complexity and distractions associated with the less profitable opportunities (the "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 Innovation has fueled decades of profitable growth at ITW. The Company's unique innovation approach is built on insight gathered from the 80/20 Front-to-Back process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their "80" customers. ITW's innovation efforts are focused on understanding customer needs, particularly those in "80" markets with solid long-term growth fundamentals, and creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 19,300 granted and pending patents; •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 its strategic framework transitioning the Company on its
current path to fully leverage the compelling performance potential of the ITW
Business Model. The Company undertook a complete review of its performance,
focusing on its businesses delivering consistent above-market growth with
best-in-class margins and returns, and developing a strategy to replicate that
performance across its operations.
ITW determined that solid and consistent above-market organic growth is 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'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
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--------------------------------------------------------------------------------entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions.
As a result of this work, ITW'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' largest / most profitable customers and product lines. •Step two, Business Structure Simplification, was implemented to simplify and scale up ITW's operating structure to support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 83 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation. •The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 through 2021 and continues to be a key contributor to the Company's ongoing enterprise strategy. •With the initial portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for and accelerating organic growth, reapplying the 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. ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company's operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
PATH TO FULL POTENTIAL
Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains 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 to drive 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 two businesses, including one business in the 16 -------------------------------------------------------------------------------- Polymers & Fluids segment and one business in the Food Equipment segment, with total combined revenues of$115 million for the year endedDecember 31, 2021 . These two 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 ofMTS Systems Corporation ("MTS") from Amphenol Corporation onDecember 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. 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 2021 Annual Report on Form 10-K.
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--------------------------------------------------------------------------------CONSOLIDATED RESULTS OF OPERATIONS
In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) occurred inChina and other jurisdictions. The COVID-19 outbreak was subsequently declared a global pandemic by theWorld Health Organization onMarch 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 colleagueswho 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 invadedUkraine . In response,the United States and several other countries imposed economic and other sanctions onRussia . Sales to customers inRussia 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 financial results in the second quarter and year-to-date periods of 2022 primarily due to the continued successful execution of enterprise initiatives, including the "Win the Recovery" actions initiated over the course of the past year, and continued focus on the highly differentiated ITW Business Model. Despite rising costs and a 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 growth. Operating income was$926 million in the second quarter and$1.8 billion in the year-to-date period of 2022, respectively. Operating margin was 23.1 percent and 22.9 percent in the second quarter and year-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. 18 --------------------------------------------------------------------------------
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)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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.
•North American organic revenue increased 14.4% in the second quarter as growth
in six segments was partially offset by a decline in the Test & Measurement and
Electronics segment. Organic revenue increased 13.9% in the year-to-date period
due to growth in all segments, primarily driven by the Food Equipment,
Construction Products and Welding segments.
•Europe, Middle East and Africa organic revenue increased 6.5% and 6.9% in the
second quarter and year-to-date periods, respectively, as growth in five
segments was partially offset by a decline in the Automotive OEM and Specialty
Products segments.
•Asia Pacific organic revenue increased 2.7% in the second 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 increased 3.7% and 1.3%, respectively, compared to the
prior 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 from the Company's
enterprise initiatives of 90 basis points.
•In the year-to-date period, operating margin of 22.9% 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 from the Company's
enterprise initiatives of 90 basis points.
•The Company's effective tax rate for the second quarter of 2022 and 2021 was
18.3% and 10.1%, respectively, and 20.7% and 16.3% for the year-to-date periods
of 2022 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
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unrecognized tax benefits resulting from the resolution of a U.S. tax audit. The
effective tax rate for the second quarter and year-to-date periods of 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 $2.37 for the second quarter and $4.48 for
the year-to-date period of 2022 decreased 3.3% and 1.8%, respectively. Excluding
the favorable impact of the second quarter 2021 discrete income tax benefit of
$0.35 related to the remeasurement of the U.K. net deferred tax assets and the
favorable impact of the second quarter 2022 discrete income tax benefit of $0.16
related to the resolution of a U.S. tax audit, EPS increased 5.2% in the second
quarter and 2.6% in the year-to-date period.
•The Company repurchased approximately 1.8 million and 3.6 million shares of its
common stock in the second quarter and year-to-date periods of 2022,
respectively, for approximately $375 million and $750 million , respectively.
RESULTS OF OPERATIONS BY SEGMENT
Total operating revenue and operating income for the second 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
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.
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.
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--------------------------------------------------------------------------------The results of operations for the Automotive OEM segment 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)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
Six Months Ended
Dollars in millions June 30, Components of Increase (Decrease)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
•Operating revenue grew in the second quarter due to higher organic revenue,
partially offset by the unfavorable effect of foreign currency translation. In
the year-to-date period, operating revenue declined due to the unfavorable
effect of foreign currency translation, partially offset by higher organic
revenue.
•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 content,
declined 8% and 7% in the second quarter and year-to-date periods, respectively.
•Operating margin was 14.3% in the second quarter. The decrease of 450 basis
points was primarily driven by unfavorable price/cost of 260 basis points,
higher restructuring expenses of 270 basis points and higher operating expenses,
including employee-related expenses, partially offset by positive operating
leverage of 120 basis points and benefits from the Company's enterprise
initiatives.
•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 higher
restructuring expenses of 180 basis 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 leader in commercial food
equipment differentiated by innovation and integrated service offerings. This
segment primarily serves the food service, food retail and food
institutional/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;
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--------------------------------------------------------------------------------•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 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)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
Six Months Ended
Dollars in millions June 30, Components of Increase (Decrease)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
•Operating revenue grew in the second quarter and year-to-date periods due to
higher organic revenue, partially offset by the unfavorable effect of foreign
currency translation.
•Organic revenue increased 25.0% in the second quarter as equipment and service
organic revenue grew 27.3% and 20.0%, respectively. In the year-to-date period,
organic revenue increased 26.5% as equipment and service organic revenue grew
28.1% and 22.8%, respectively.
•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 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 270 basis
points was primarily due to positive operating leverage of 480 basis points,
benefits from the Company's enterprise initiatives and favorable price/cost of
20 basis points, partially offset by higher operating expenses, including higher
employee-related expenses.
•In the year-to-date period, operating margin of 23.6% increased 200 basis
points primarily due to positive operating leverage of 520 basis points and
benefits from the Company's enterprise initiatives, partially offset by higher
operating expenses, including higher employee-related expenses, and unfavorable
price/cost of 40 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, 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;
•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 electronics, medical,
transportation and telecommunications applications.
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The results of operations for the Test & Measurement and Electronics segment 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)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
Six Months Ended
Dollars in millions June 30, Components of Increase (Decrease)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
•Operating revenue grew in the second quarter and year-to-date periods due to
the MTS Test & Simulation acquisition and higher organic revenue, partially
offset by the unfavorable effect of foreign currency translation.
•Organic revenue increased 0.9% in the second 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.
•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 22.5% in the second quarter. The decrease of 560 basis
points was primarily due to the dilutive 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 from the Company's enterprise initiatives.
•In the year-to-date period, operating margin of 22.2% decreased 600 basis
points primarily driven by the dilutive 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 from the
Company's enterprise 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, 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.
23
--------------------------------------------------------------------------------The results of operations for the Welding segment 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)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
Six Months Ended
Dollars in millions June 30, Components of Increase (Decrease)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
•Operating revenue grew in the second quarter and year-to-date periods due to
higher organic revenue, partially offset by the unfavorable effect of foreign
currency translation.
•Organic revenue increased 22.1% and 17.5% in the second quarter and
year-to-date periods, respectively, driven by growth in equipment of 24.0% and
17.2% and consumables of 19.1% and 18.1%, respectively. In both periods, organic
revenue grew primarily due to higher demand in the industrial end markets
related to heavy equipment for agriculture, infrastructure, and oil and gas and
in the commercial end markets related to construction, light fabrication, and
farm and ranch customers.
•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 29.3% in the second quarter. The increase of 80 basis
points was primarily due to positive operating leverage of 290 basis points and
benefits from the Company's enterprise initiatives, partially offset by
unfavorable price/cost of 90 basis points and higher operating expenses,
including employee-related expenses.
•In the year-to-date period, operating margin of 30.0% increased 60 basis points
primarily driven by positive operating leverage of 230 basis points and benefits
from the Company's enterprise initiatives, partially offset by unfavorable
price/cost of 120 basis points and higher operating expenses, including
employee-related expenses.
POLYMERS & FLUIDS
This segment is a 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.
24
--------------------------------------------------------------------------------The results of operations for the Polymers & Fluids segment 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)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
Six Months Ended
Dollars in millions June 30, Components of Increase (Decrease)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
•Operating revenue grew in the second quarter and year-to-date periods due to
higher organic revenue, partially offset by the unfavorable effect of foreign
currency translation.
•Organic revenue grew 10.2% and 11.5% in the second 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 an increase in
the hygiene and industrial maintenance, repair and operations end markets in
North America and Europe .
•Operating margin was 25.1% in the second quarter. The decrease of 220 basis
points was primarily due to unfavorable price/cost of 150 basis points and
higher operating expenses, including employee-related expenses, partially offset
by positive operating leverage of 170 basis points, benefits from the Company's
enterprise initiatives and lower intangible asset amortization expense.
Additionally, the prior year was impacted by a one-time benefit related to a
recovery of indirect taxes in Brazil .
•In the year-to-date period, operating margin of 24.8% decreased 180 basis
points primarily driven by unfavorable 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 from the Company's
enterprise initiatives and lower intangible asset amortization expense.
Additionally, the prior year was impacted by a one-time benefit related to a
recovery of 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 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.
25
--------------------------------------------------------------------------------The results of operations for the Construction Products segment 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)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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 % - - - - - -
Six Months Ended
Dollars in millions June 30, Components of Increase (Decrease)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
•Operating revenue grew in the second quarter and year-to-date periods due to
higher organic revenue, partially offset by the unfavorable effect of foreign
currency translation.
•Organic revenue increased 15.1% in the second 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.
•Operating margin was 27.6% in the second quarter as positive operating leverage
of 220 basis points and net benefits from the Company's enterprise initiatives
and cost management were offset by unfavorable price/cost of 410 basis points
and higher operating expenses.
•In the year-to-date period, operating margin of 26.2% decreased 140 basis
points primarily driven by unfavorable price/cost of 510 basis points and higher
operating expenses, including employee-related expenses, partially offset by
positive operating leverage of 260 basis points and benefits from the Company's
enterprise initiatives.
SPECIALTY PRODUCTS
This segment is focused on diversified niche market opportunities 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 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 closures and components for appliances;
•airport ground support equipment; and
•components for medical devices.
26
--------------------------------------------------------------------------------The results of operations for the Specialty Products segment 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)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
Six Months Ended
Dollars in millions June 30,
Components of Increase (Decrease)
Acquisition/ Foreign
2022 2021 Inc (Dec) Organic Divestiture Restructuring 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
•Operating revenue declined in the second quarter and year-to-date periods due to the unfavorable effect of foreign currency translation and lower organic revenue. •Organic revenue decreased 1.7% and 0.6% in the second quarter and year-to-date periods, respectively. Equipment sales declined 20.7% and 18.4% in the second 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 inNorth 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 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 inEurope and the strength film and appliance businesses inAsia Pacific , partially offset by growth in the specialty films and filter medical businesses inEurope . •Operating margin was 26.9% in the second quarter. The decrease of 30 basis points was primarily due to higher operating expenses, including employee-related expenses, and higher restructuring expenses, partially offset by benefits from the Company's enterprise initiatives and favorable price/cost of 20 basis points. •In the year-to-date period, operating margin of 26.8% decreased 60 basis points primarily driven by higher operating expenses, including employee-related expenses, and unfavorable price/cost of 30 basis points, partially offset by benefits from the Company's enterprise initiatives.
OTHER FINANCIAL HIGHLIGHTS
•Interest expense was$47 million and$95 million in the second quarter and year-to-date periods of 2022, respectively, versus$52 million and$104 million in 2021, respectively. Interest expense in 2022 was lower than 2021 primarily due to the repayment of notes dueSeptember 15, 2021 andMay 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 repayment of notes. •Other income (expense) was income of$24 million in the second quarter of 2022 and$38 million in the year-to-date period, an increase of$2 million compared to the second quarter of 2021 and an increase of$4 million in the year-to-date period primarily due to foreign currency translation gains in 2022 compared to foreign currency translation losses in 2021 and higher other net periodic benefit income in 2022, partially offset by lower investment income in 2022. 27 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are free cash flow and short-term credit facilities. As ofJune 30, 2022 , the Company had$0.9 billion of cash and equivalents on hand and no outstanding borrowings under its$2.5 billion revolving credit facility. The Company also has 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, 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 second quarter and year-to-date periods of 2022
and 2021 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) Free cash flow decreased in the second quarter and year-to-date periods of 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
OnAugust 3, 2018 , the Company's Board of Directors authorized a stock repurchase program which provided for the repurchase of up to$3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). Under the 2018 Program, the Company repurchased approximately 6.7 million shares of its common stock at an average price of$158.11 per share during 2019, approximately 4.2 million shares of its common stock at an average price of$167.69 per share during 2020, approximately 1.2 million shares of its common stock at an average price of$211.50 in the first quarter of 28 -------------------------------------------------------------------------------- 2021, approximately 1.1 million shares of its common stock at an average price of$233.29 in the second quarter of 2021, approximately 1.0 million shares of its common stock at an average price of$229.03 in the third quarter of 2021, approximately 1.1 million shares of its common stock at an average price of$237.11 in the fourth quarter of 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. OnMay 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$205.03 in the second quarter of 2022. As ofJune 30, 2022 , there were$2.5 billion of authorized repurchases remaining under the 2021 Program. 29 --------------------------------------------------------------------------------
After-tax Return on
The Company uses after-tax return on average invested capital ("After-tax ROIC")
to measure the effectiveness of its 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 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. The 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, other than cash and
equivalents and outstanding debt which do not represent capital investment in
the Company's 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
follows:
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
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 %
30-------------------------------------------------------------------------------- (1) Effective tax rate used for interest expense and other (income) expense for the three months endedJune 30, 2022 and 2021 was 23.9% and 23.0%, respectively. Effective tax rate used for interest expense and other (income) expense for the six months endedJune 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 within each of the periods presented.
(3) Returns for the three months endedJune 30, 2022 and 2021 were converted to an annual rate by multiplying the calculated return by 4. Returns for the six months endedJune 30, 2022 and 2021 were converted to an annual rate by multiplying the calculated return by 2.
A reconciliation of the tax rate for the three and six months ended
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 change in 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 6. Income Taxes in Item 1. Financial Statements for further information regarding the second quarter 2022 and second quarter 2021 discrete tax benefits.
31
--------------------------------------------------------------------------------Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as ofJune 30, 2022 andDecember 31, 2021 is summarized as follows: Increase/ In millions June 30, 2022 December 31, 2021 (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) As ofJune 30, 2022 , a significant portion of the Company's cash and equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to theU.S. Cash and equivalents held internationally are typically used for international operating needs or reinvested to fund expansion of existing international businesses. International funds may also be used to fund international acquisitions or, if not considered permanently invested, may be repatriated to theU.S. The Company has accrued for foreign withholding taxes related to foreign held cash and equivalents that are not permanently invested. In theU.S. , the Company utilizes cash flows from operations to fund domestic cash needs and the Company's capital allocation priorities. This includes operating needs of theU.S. businesses, dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existingU.S. businesses and general corporate needs. The Company may also use its commercial paper program, which is backed by a long-term credit facility, for short-term liquidity needs. The Company believes cash generated by operations and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in theU.S.
Debt
Total debt as of
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 ofJune 30, 2022 andDecember 31, 2021 , respectively. The weighted-average interest rate on commercial paper as ofJune 30, 2022 andDecember 31, 2021 was 1.08% and 0.14%, respectively. Short-term debt as ofJune 30, 2022 also included$523 million related to the 1.25% Euro notes dueMay 22, 2023 , which were reclassified from Long-term debt to Short-term debt in the second quarter of 2022. As ofDecember 31, 2021 , Short-term debt also included$568 million related to the 1.75% Euro notes dueMay 20, 2022 , which were redeemed in full at face value onFebruary 22, 2022 . Additionally, the$350 million of 3.375% notes dueSeptember 15, 2021 were redeemed in full at face value onJune 15, 2021 . 32 -------------------------------------------------------------------------------- The Company has a$2.5 billion revolving credit facility with a termination date ofSeptember 27, 2024 , which is available to provide additional liquidity, including to support the potential issuances of commercial paper. No amounts were outstanding under the$2.5 billion revolving credit facility as ofJune 30, 2022 orDecember 31, 2021 . Total Debt to EBITDA The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the trailing twelve month periods endedJune 30, 2022 andDecember 31, 2021 was as follows: Dollars in millions June 30, 2022 December 31, 2021 Total debt$ 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 Stockholders' Equity
The changes to stockholders' equity during the six months ended
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 FORWARD-LOOKING STATEMENTS
This Quarterly 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," "intend," "may," "strategy," "prospects," "estimate," "will," "should," "could," "project," "target," "anticipate," "guidance," "forecast," and other similar words, and may include, without limitation, statements regarding the duration 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, free cash flow, economic and regulatory conditions in various geographic regions including inflation, the impact of foreign currency fluctuations, the timing and amount of benefits from the Company's 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 ofU.S. generated cash to fund cash requirements in theU.S. , the cost and availability of additional financing, the availability of raw materials and energy 33 -------------------------------------------------------------------------------- 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 divested businesses, the impact ofU.S. and global tax legislation and the estimated timing and amount related to the resolution of tax matters, the cost of compliance with environmental regulations, the impact of failure of the Company's employees to comply with applicable laws and regulations, and the outcome of outstanding legal 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, (3) changes or deterioration in international and domestic political and economic conditions, such as the Russian invasion ofUkraine and the impact of related economic and other sanctions imposed onRussia , (4) the unfavorable impact of foreign currency fluctuations, (5) the timing and amount of benefits from the Company's enterprise strategy initiatives and their impact on organic revenue growth, (6) market conditions and cost and availability of financing to fund the Company's share repurchases, (7) a delay or decrease in the introduction of new products into the Company's product lines, (8) any failure to protect the Company's intellectual property, (9) potential negative impact of impairments to goodwill and other intangible assets on the Company's return on invested capital, financial condition or results of operations, (10) raw material price increases and supply shortages or delays, (11) financial market risks to the Company's obligations under its defined benefit pension plans, (12) negative effects of service interruptions, data corruption, cyber-based attacks, network security 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 endedDecember 31, 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 ITW speak only as of the date on which they are made. ITW 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.
ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-public information or other confidential commercial information. Investors should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
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