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 84 divisions in 53 countries. As ofDecember 31, 2019 , 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. 14 -------------------------------------------------------------------------------- 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. The ITW Business Model is the Company's competitive advantage and defines how ITW creates value for its shareholders. It 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 18,000 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 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.
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•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 84 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 2019 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 - FINISHING THE JOB
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 finish the job and 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.
As part of its agenda to finish the job, 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 revenues totaling up to$1 billion . In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases. Refer to Note 3. Divestitures in Item 1. Financial Statements for more information regarding 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 its efforts to finish the job and 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,
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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.
Near-term Priorities
There continues to be uncertainty around how severe the COVID-19 pandemic will be, how long its effects will last, or how quickly ITW's customers and end markets will recover. The COVID-19 pandemic has impacted, and is expected to continue to impact, the Company's organic revenue and profitability. However, at this very uncertain time, ITW believes that the strength and resilience of ITW's Business Model and its strong balance sheet continue to put the Company in a favorable position to deal with the crisis as it continues to unfold. For the duration of the COVID-19 pandemic, the Company is focusing its efforts 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 phase.
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 2019 Annual Report on Form 10-K.
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 17 -------------------------------------------------------------------------------- in the Company's global operations starting primarily in the latter part of the first quarter of 2020 as COVID-19 continued to spread and impact the countries in which the Company operates and the markets the Company serves. The Company experienced solid recovery progress in many of the end markets served by the Company in the third quarter of 2020, with operating revenue increasing sequentially 29 percent versus the second quarter of 2020, as demand levels in all segments improved sequentially from the second quarter of 2020, with year-over-year growth in the Construction Products and Polymers & Fluids segments. The COVID-19 pandemic continued to have more pronounced impacts in the Food Equipment and Welding segments. The strength and resilience of ITW's Business Model has resulted in the Company delivering solid financial performance. In the third quarter of 2020, operating revenue declined 4.9 percent, operating income was$789 million , operating margin was 23.8% and free cash flow was$631 million . In the year-to-date period of 2020, despite the decline in operating revenue of 14.5 percent, the Company generated$2.0 billion in operating income, operating margin was 22.0% and free cash flow was$1.9 billion . 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 phase. To support ITW's colleagues, among other initiatives, the Company has 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 factories 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. As ofSeptember 30, 2020 , all of the Company's facilities are open and operational; however, many of these facilities are operating at a reduced capacity and the Company expects the customer demand disruptions caused by the COVID-19 outbreak to continue to have an adverse impact on the Company's operating results in the fourth quarter of 2020 and beyond. 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. A prolonged outbreak will continue to interrupt 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 II - Other Information, Item 1A. Risk Factors. Separately, the Company does not believe that tariffs imposed in the prior year have had a material impact on its operating results. The Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to mitigate the impact of any raw material cost increases resulting from these tariffs.
The Company's consolidated results of operations for the third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 3,307 $ 3,479 (4.9) % (4.6) % (1.0) % - % 0.7 % (4.9) %
Operating income $ 789 $ 868 (9.1) % (6.9) % (0.5) % (2.1) % 0.4 % (9.1) %
Operating margin % 23.8 % 25.0 % (120) bps (60) bps 10 bps (60)
bps (10) bps (120) bps
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Nine Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 9,099 $ 10,640 (14.5) % (12.7) % (1.0) % - % (0.8) % (14.5) %
Operating income $ 1,999 $ 2,578 (22.5) % (22.6) % (0.4) % 1.1 % (0.6) % (22.5) %
Operating margin % 22.0 % 24.2 % (220) bps (270) bps 20 bps 30 bps - (220) bps
•Operating revenue declined in the third quarter due to lower organic revenue
and the impact of 2019 divestitures, partially offset by the favorable effect of
foreign currency translation. In the year-to-date period, operating revenue
decreased due to lower organic revenue, the impact of 2019 divestitures and the
unfavorable effect of foreign currency translation.
•Organic revenue decreased 4.6% and 12.7% in the third quarter and year-to-date
periods, respectively, primarily due to disruptions in the Company's global
operations resulting from the COVID-19 pandemic. Organic revenue declined in
five of seven segments in the third quarter and all seven segments decreased in
the year-to-date period. In the third quarter, Construction Products and
Polymers & Fluids grew 7.6% and 5.8%, respectively, primarily due to growth in
North America . Product line simplification activities reduced organic revenue by
30 basis points in the third quarter and 40 basis points in the year-to-date
period.
•North American organic revenue decreased 5.0% in the third quarter as a
decrease in five segments was partially offset by growth in the Construction
Products and Polymers & Fluids segments. In the year-to-date period, organic
revenue decreased 12.0% as a decline in six segments, primarily driven by the
Automotive OEM, Food Equipment and Welding segments, was partially offset by
growth in the Construction Products segment.
•Europe, Middle East and Africa organic revenue decreased 8.0% in the third
quarter. A decline in the Food Equipment, Specialty Products, Automotive OEM,
Test & Measurement and Electronics and Welding segments was partially offset by
growth in the Construction Products and Polymers & Fluids segments. Organic
revenue decreased 17.7% in the year-to-date period as all seven segments had a
decline in organic revenue.
•Asia Pacific organic revenue increased 3.4% in the third quarter as growth in
the Automotive OEM, Specialty Products, Polymers & Fluids, Construction Products
and Test & Measurement and Electronics segments was partially offset by a
decline in the Food Equipment and Welding segments. Organic revenue decreased
5.1% in the year-to-date period as all seven segments had a decline in organic
revenue. China organic revenue grew 10.2% in the third quarter primarily due to
an increase in the Automotive OEM, Polymers & Fluids, Specialty Products and
Test & Measurement and Electronics segments, partially offset by a decline in
the Food Equipment, Welding and Construction Products segments. In the
year-to-date period, China organic revenue declined 3.8% as a decrease in the
Food Equipment, Welding and Specialty Products segments, was partially offset by
growth in the Polymers & Fluids, Test & Measurement and Electronics, Automotive
OEM and Construction Products segments.
•Operating income of $789 million and $2.0 billion in the third quarter and
year-to-date periods, respectively, decreased 9.1% and 22.5% in the respective
periods primarily due to lower organic revenue.
•Operating margin was 23.8% in the third quarter. The decrease of 120 basis
points was primarily driven by negative operating leverage of 100 basis points,
higher restructuring expenses, product mix and the recapture of amortization and
depreciation expense related to a business previously classified as held for
sale, partially offset by benefits from the Company's enterprise initiatives of
120 basis points and favorable price/cost of 10 basis points.
•In the year-to-date period, operating margin of 22.0% decreased 220 basis
points primarily driven by negative operating leverage of 300 basis points and
product mix, partially offset by benefits from the Company's enterprise
initiatives of 120 basis points, lower restructuring expenses and favorable
price/cost of 10 basis points.
•The effective tax rate for the third quarter of 2020 and 2019 was 21.3% and
21.6%, respectively, and 22.0% and 23.5% for the year-to-date periods of 2020
and 2019, respectively. The effective tax rate included discrete income tax
benefits related to excess tax benefits from stock-based compensation of $7
million for the third quarter of both 2020 and 2019, and $20 million and
$16 million for the year-to-date periods of 2020 and 2019, respectively.
Additionally, the effective tax rate for the third quarter and year-to-date
periods of 2019 benefited from a discrete tax benefit of $21 million in the
third quarter of 2019 for the U.S. federal provision to return adjustment which
primarily related to changes in estimates related to the "Tax Cuts and Jobs
Act."
•Diluted earnings per share (EPS) were $1.83 for the third quarter and $4.61 for
the year-to-date period of 2020.
•Free cash flow was $631 million and $1.9 billion for the third quarter and
year-to-date periods of 2020, respectively. Refer to the Cash Flow section of
Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
•The Company repurchased approximately 4.2 million shares of its common stock in
the year-to-date period of 2020 for approximately $706 million . The Company did
not repurchase any shares of its common stock in the third quarter of
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2020, as the Company temporarily suspended its share repurchase program starting
in March 2020 due to the COVID-19 pandemic.
•After-tax return on average invested capital was 29.6% for the third quarter
and 24.4% for the year-to-date period of 2020. Refer to the 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 third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months ended September 30, Nine Months Ended September 30,
Dollars in millions Operating Revenue Operating Income Operating Revenue Operating Income
2020 2019 2020 2019 2020 2019 2020 2019
Automotive OEM $ 714 $ 744 $ 149 $ 164 $ 1,771 $ 2,338 $ 266 $ 505
Food Equipment 449 551 88 152 1,268 1,617 236 421
Test & Measurement and
Electronics 489 512 116 130 1,429 1,569 354 387
Welding 346 402 96 113 1,016 1,251 269 355
Polymers & Fluids 438 418 116 101 1,185 1,261 291 287
Construction Products 456 416 128 105 1,222 1,241 309 298
Specialty Products 420 441 106 116 1,221 1,379 313 363
Intersegment revenue (5) (5) - - (13) (16) - -
Unallocated - - (10) (13) - - (39) (38)
Total $ 3,307 $ 3,479 $ 789 $ 868 $ 9,099 $ 10,640 $ 1,999 $ 2,578
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.
The results of operations for the Automotive OEM segment for the third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 714 $ 744 (4.1) % (4.8) % - % - % 0.7 % (4.1) %
Operating income $ 149 $ 164 (9.5) % (3.3) % - % (6.3) % 0.1 % (9.5) %
Operating margin % 20.8 % 22.1 % (130) bps 30 bps - (150) bps (10) bps (130) bps
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Nine Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 1,771 $ 2,338 (24.2) % (23.3) % - % - % (0.9) % (24.2) %
Operating income $ 266 $ 505 (47.4) % (48.5) % - % 1.7 % (0.6) % (47.4) %
Operating margin % 15.0 % 21.6 % (660) bps (710) bps - 50 bps - (660) bps
•Operating revenue declined in the third quarter due to lower organic revenue,
partially offset by the favorable effect of foreign currency translation. In the
year-to-date period, operating revenue declined due to lower organic revenue and
the unfavorable effect of foreign currency translation.
•Organic revenue declined 4.8% in the third quarter and 23.3% in the
year-to-date period versus worldwide auto builds which decreased 3% in the third
quarter and 23% in the year-to-date period due to customer and geographic region
mix. Product line simplification activities reduced organic revenue by 80 basis
points in both the third quarter and year-to-date periods.
•North American organic revenue decreased 10.3% and 28.6% in the third quarter
and year-to-date periods, respectively, compared to North American auto builds
which grew 1% in the third quarter and declined 26% in the year-to-date periods.
Auto builds for the Detroit 3, where the Company has higher content, decreased
1% and 28% in the third quarter and year-to-date periods, respectively.
•European organic revenue was down 5.3% and 25.0% in the third quarter and
year-to-date periods, respectively, compared to European auto builds which
decreased 8% and 30% in the respective periods.
•Asia Pacific organic revenue increased 10.5% in the third quarter and declined
6.1% in the year-to-date periods. China organic revenue grew 15.2% and 0.2% in
the third quarter and year-to-date periods, respectively, versus China auto
builds which increased 11% in the third quarter and decreased 9% in the
year-to-date period.
•Operating margin was 20.8% in the third quarter. The decrease of 130 basis
points was primarily driven by higher restructuring expenses of 150 basis
points, negative operating leverage of 90 basis points and unfavorable
price/cost of 20 basis points, partially offset by benefits from the Company's
enterprise initiatives.
•In the year-to-date period, operating margin of 15.0% decreased 660 basis
points primarily due to negative operating leverage of 530 basis points and
product mix, partially offset by benefits from the Company's enterprise
initiatives and lower restructuring expenses.
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 institutional/restaurant and food retail 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 third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 449 $ 551 (18.6) % (19.5) % - % - % 0.9 % (18.6) %
Operating income $ 88 $ 152 (41.7) % (37.4) % - % (5.0) % 0.7 % (41.7) %
Operating margin % 19.6 % 27.5 % (790) bps (610) bps - (180) bps - (790) bps
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Nine Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 1,268 $ 1,617 (21.6) % (21.2) % - % - % (0.4) % (21.6) %
Operating income $ 236 $ 421 (43.9) % (43.5) % - % (0.2) % (0.2) % (43.9) %
Operating margin % 18.6 % 26.0 % (740) bps (730) bps - (10) bps - (740) bps
•Operating revenue declined in the third quarter due to lower organic revenue,
partially offset by the favorable effect of foreign currency translation. In the
year-to-date period, operating revenue declined due to lower organic revenue and
the unfavorable effect of foreign currency translation.
•Organic revenue decreased 19.5% in the third quarter as equipment and service
organic revenue declined 20.9% and 17.1%, respectively. In the year-to-date
period, organic revenue declined 21.2% as equipment and service organic revenue
decreased 22.6% and 18.6%, respectively.
•North American organic revenue declined 19.2% in the third quarter and 18.9% in
the year-to-date period as equipment organic revenue declined 19.6% and 19.8%,
respectively, primarily driven by lower demand in the restaurant and
institutional end markets, partially offset by growth in the food retail end
markets. Service organic revenue decreased 18.7% and 17.5% in the third quarter
and year-to-date periods, respectively.
•International organic revenue decreased 20.0% and 24.2% in the third quarter
and year-to-date periods, respectively. Equipment organic revenue declined 22.5%
in the third quarter and 26.0% in the year-to-date period primarily due to lower
demand in the European warewash, cooking and refrigeration end markets and lower
demand in Asia . Service organic revenue decreased 14.5% and 20.4% in the third
quarter and year-to-date periods, respectively.
•Operating margin of 19.6% in the third quarter decreased 790 basis points
primarily due to negative operating leverage of 490 basis points, higher
restructuring expenses of 180 basis points and product mix, partially offset by
benefits from the Company's enterprise initiatives and favorable price/cost of
50 basis points.
•In the year-to-date period, operating margin was 18.6%. The decrease of 740
basis points was primarily due to negative operating leverage of 580 basis
points and product mix, partially offset by benefits from the Company's
enterprise initiatives and favorable price/cost of 60 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.
The results of operations for the Test & Measurement and Electronics segment for the third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 489 $ 512 (4.3) % (2.4) % (3.0) % - % 1.1 % (4.3) %
Operating income $ 116 $ 130 (11.5) % (10.1) % (1.6) % (0.6) % 0.8 % (11.5) %
Operating margin % 23.7 % 25.6 % (190) bps (200) bps 30 bps (20) bps - (190) bps
22
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Nine Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 1,429 $ 1,569 (8.9) % (5.5) % (3.0) % - % (0.4) % (8.9) %
Operating income $ 354 $ 387 (8.6) % (6.7) % (1.5) % (0.1) % (0.3) % (8.6) %
Operating margin % 24.8 % 24.7 % 10 bps (30) bps 40 bps - - 10 bps
•Operating revenue declined in the third quarter due to the impact of a 2019
divestiture and lower organic revenue, partially offset by the favorable effect
of foreign currency translation. In the year-to-date period, operating revenue
declined due to lower organic revenue, the impact of a 2019 divestiture and the
unfavorable effect of foreign currency translation.
•Organic revenue decreased 2.4% in the third quarter and 5.5% in the
year-to-date period.
•Organic revenue for the test and measurement businesses decreased 6.1% and 6.9%
in the third quarter and year-to-date periods, respectively, primarily driven by
the impact of a soft capital spending environment in North America and Europe ,
partially offset by higher semi-conductor demand in North America . Instron ,
where demand is more closely tied to the capital spending environment, had an
organic revenue decline of 12.2% in the third quarter and 14.2% in the
year-to-date period.
•Electronics organic revenue increased 1.7% in the third quarter. The
electronics assembly businesses decreased 0.8% in the third quarter primarily
due to lower demand in Asia Pacific . The other electronics businesses, which
include the contamination control, static control and pressure sensitive
adhesives businesses, increased 3.3% in the third quarter primarily due to an
increase in North America and Europe , partially offset by a decrease in Asia
Pacific . In the year-to-date period, electronics organic revenue declined 3.8%.
The electronics assembly businesses decreased 8.3% primarily due to lower demand
in North America . The other electronics businesses declined 1.0% primarily due
to a decrease in Europe and Asia Pacific , partially offset by growth in North
America .
•Operating margin of 23.7% in the third quarter decreased 190 basis points
primarily due to the recapture of amortization and depreciation expense related
to a business previously classified as held for sale, negative operating
leverage of 60 basis points and higher restructuring expenses, partially offset
by the net benefits from the Company's enterprise initiatives and cost
management, the impact of a 2019 divestiture and favorable price/cost of 40
basis points.
•In the year-to-date period, operating margin was 24.8%. The increase of 10
basis points was primarily due to the net benefits from the Company's enterprise
initiatives and cost management, the impact of a 2019 divestiture and favorable
price/cost of 30 basis points, partially offset by negative operating leverage
of 150 basis points, product mix and the recapture of amortization and
depreciation expense related to a business previously classified as held for
sale.
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.
The results of operations for the Welding segment for the third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 346 $ 402 (14.0) % (10.0) % (4.3) % - % 0.3 % (14.0) %
Operating income $ 96 $ 113 (14.9) % (11.7) % (2.3) % (1.0) % 0.1 % (14.9) %
Operating margin % 27.9 % 28.2 % (30) bps (60) bps 60 bps (30) bps - (30) bps
23
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Nine Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 1,016 $ 1,251 (18.8) % (14.7) % (3.9) % - % (0.2) % (18.8) %
Operating income $ 269 $ 355 (24.1) % (23.2) % (1.6) % 0.8 % (0.1) % (24.1) %
Operating margin % 26.5 % 28.4 % (190) bps (290) bps 70 bps 30 bps - (190) bps
•Operating revenue decreased in the third quarter due to lower organic revenue
and the impact of a 2019 divestiture, partially offset by the favorable effect
of foreign currency translation. In the year-to-date period, operating revenue
decreased due to lower organic revenue, the impact of a 2019 divestiture and the
unfavorable effect of foreign currency translation.
•Organic revenue declined 10.0% and 14.7% in the third quarter and year-to-date
periods, respectively, driven by a decrease in equipment of 10.3% and 16.0% and
consumables of 9.6% and 12.7%, respectively, primarily due to lower demand in
the industrial end markets.
•North American organic revenue decreased 8.8% in the third quarter primarily
due to a decline in the industrial end markets of 22.8%, partially offset by an
increase in the commercial end markets of 11.3%. In the year-to-date period,
organic revenue declined 14.2% primarily due to a decline in the industrial and
commercial end markets of 24.3% and 1.3%, respectively.
•International organic revenue decreased 15.8% in the third quarter and 17.0% in
the year-to-date period primarily due to a decline in the European oil and gas
end markets of 30.3% and 25.1%, respectively.
•Operating margin of 27.9% in the third quarter decreased 30 basis points
primarily driven by negative operating leverage of 180 basis points, product mix
and higher restructuring expenses, partially offset by benefits from the
Company's enterprise initiatives and the impact of a 2019 divestiture.
•In the year-to-date period, operating margin was 26.5%. The decrease of 190
basis points was primarily driven by negative operating leverage of 280 basis
points and product mix, partially offset by benefits from the Company's
enterprise initiatives, the impact of a 2019 divestiture and lower restructuring
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.
The results of operations for the Polymers & Fluids segment for the third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 438 $ 418 4.8 % 5.8 % - % - % (1.0) % 4.8 %
Operating income $ 116 $ 101 15.5 % 17.8 % - % (1.5) % (0.8) % 15.5 %
Operating margin % 26.6 % 24.1 % 250 bps 280 bps - (40) bps 10 bps 250 bps
24
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Nine Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 1,185 $ 1,261 (6.0) % (4.0) % - % - % (2.0) % (6.0) %
Operating income $ 291 $ 287 1.5 % 2.0 % - % 1.2 % (1.7) % 1.5 %
Operating margin % 24.6 % 22.8 % 180 bps 140 bps - 30 bps 10 bps 180 bps
•Operating revenue increased in the third quarter due to higher organic revenue,
partially offset by the unfavorable effect of foreign currency translation. In
the year-to-date period, operating revenue decreased due to lower organic
revenue and the unfavorable effect of foreign currency translation.
•Organic revenue increased 5.8% in the third quarter and declined 4.0% in the
year-to-date period. Product line simplification activities reduced organic
revenue by 60 basis points in both respective periods.
•Organic revenue for the automotive aftermarket businesses increased 10.0% in
the third quarter primarily driven by growth in the tire repair, engine repair
and car care businesses in North America . In the year-to-date period, organic
revenue declined 2.5% primarily driven by a decrease in the car care and body
repair businesses in North America and the additives businesses in Europe ,
partially offset by growth in the tire and engine repair businesses in North
America .
•Organic revenue for the fluids businesses increased 5.7% in the third quarter
primarily due to growth in the industrial maintenance, repair, and operations
end markets in North America and growth in Europe . In the year-to-date period,
organic revenue decreased 0.5% primarily due to a decline in the industrial
maintenance, repair, and operations end markets in North America , partially
offset by growth in Europe .
•Organic revenue for the polymers businesses was flat in the third quarter as
growth in South America , Asia Pacific and Europe was offset by a decline in
North America . In the year-to-date period, organic revenue declined 8.3%
primarily driven by a decline in the heavy industrial end markets in North
America and Europe .
•Operating margin of 26.6% in the third quarter increased 250 basis points
primarily driven by the net benefits from the Company's enterprise initiatives
and cost management, positive operating leverage of 130 basis points and
favorable price/cost of 40 basis points, partially offset by higher
restructuring expenses.
•In the year-to-date period, operating margin was 24.6%. The increase of 180
basis points was primarily due to the net benefits from the Company's enterprise
initiative and cost management, favorable price/cost of 60 basis points and
lower restructuring expenses, partially offset by negative operating leverage of
90 basis points.
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.
The results of operations for the Construction Products segment for the third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 456 $ 416 9.6 % 7.6 % - % - % 2.0 % 9.6 %
Operating income $ 128 $ 105 22.5 % 21.7 % - % (0.4) % 1.2 % 22.5 %
Operating margin % 28.1 % 25.1 % 300 bps 330 bps - (10) bps (20) bps 300 bps
25
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Nine Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 1,222 $ 1,241 (1.5) % (0.5) % - % - % (1.0) % (1.5) %
Operating income $ 309 $ 298 3.6 % 2.8 % - % 1.8 % (1.0) % 3.6 %
Operating margin % 25.3 % 24.0 % 130 bps 80 bps - 50 bps - 130 bps
•Operating revenue increased in the third quarter due to higher organic revenue
and the favorable effect of foreign currency translation. In the year-to-date
period, operating revenue decreased due to the unfavorable effect of foreign
currency translation and lower organic revenue.
•Organic revenue increased 7.6% in the third quarter with growth across all
major regions. Organic revenue declined 0.5% in the year-to-date period as
declines in Europe and Asia Pacific were partially offset by growth in North
America .
•North American organic revenue grew 11.9% in the third quarter as an increase
of 14.3% in the United States residential end markets was partially offset by a
decrease of 9.5% in the commercial end markets. In the year-to-date period,
organic revenue grew 7.1% as an increase of 10.7% in the United States
residential end markets was partially offset by a decrease of 11.6% in the
commercial end markets.
•International organic revenue increased 4.1% in the third quarter and decreased
6.4% in the year-to-date period. Asia Pacific organic revenue increased 2.1% in
the third quarter primarily due to an increase in Australia and New Zealand . In
the year-to-date period, Asia Pacific organic revenue decreased 2.2% primarily
due to a decline in Australia and New Zealand in the first half of 2020.
European organic revenue increased 6.0% in the third quarter driven by an
increase in continental Europe and the United Kingdom . In the year-to-date
period, European organic revenue decreased 9.9% driven by a decline in
continental Europe and the United Kingdom in the first half of 2020.
•Operating margin was 28.1% in the third quarter. The increase of 300 basis
points was primarily driven by positive operating leverage of 150 basis points
and net benefits from the Company's enterprise initiatives and cost management.
•In the year-to-date period, operating margin of 25.3% increased 130 basis
points primarily driven by the net benefits from the Company's enterprise
initiatives and cost management and lower restructuring expenses, partially
offset by unfavorable price/cost of 40 basis points and negative operating
leverage of 20 basis points.
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, general industrial, consumer durables, 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.
The results of operations for the Specialty Products segment for the third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 420 $ 441 (4.8) % (4.7) % (0.8) % - % 0.7 % (4.8) %
Operating income $ 106 $ 116 (8.4) % (11.6) % - % 2.9 % 0.3 % (8.4) %
Operating margin % 25.2 % 26.2 % (100) bps (190) bps 20 bps 80 bps (10) bps (100) bps
26
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Nine Months Ended
Dollars in millions September 30, Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 1,221 $ 1,379 (11.5) % (9.9) % (0.9) % - % (0.7) % (11.5) %
Operating income $ 313 $ 363 (13.6) % (16.3) % 0.7 % 2.6 % (0.6) % (13.6) %
Operating margin % 25.7 % 26.3 % (60) bps (190) bps 50 bps 80 bps - (60) bps
•Operating revenue decreased in the third quarter due to lower organic revenue
and the impact of 2019 divestitures, partially offset by the favorable effect of
foreign currency translation. In the year-to-date period, operating revenue
decreased due to lower organic revenue, the impact of 2019 divestitures and the
unfavorable effect of foreign currency translation.
•Organic revenue decreased 4.7% in the third quarter as equipment and
consumables sales declined 17.0% and 1.2%, respectively, primarily due to lower
demand in North America and Europe . In the year-to-date period, organic revenue
decreased 9.9% as consumables declined 7.2% and equipment sales declined 19.2%.
Additionally, product line simplification activities reduced organic revenue by
20 basis points in the third quarter and 40 basis points in the year-to-date
period.
•North American organic revenue decreased 3.5% in the third quarter primarily
due to a decline in the ground support equipment and appliance businesses,
partially offset by an increase in the consumer packaging businesses. In the
year-to-date period, North American organic revenue decreased 8.9% primarily due
to a decline in the appliance, ground support equipment, specialty films,
marking coding and consumer packaging businesses.
•International organic revenue decreased 6.9% the third quarter primarily due to
a decline in the consumer packaging and ground support equipment businesses in
Europe . In the year-to-date period, organic revenue declined 11.8% primarily due
to a decline in the consumer packaging, ground support equipment, appliance and
marking coding businesses in Europe .
•Operating margin was 25.2% in the third quarter. The decrease of 100 basis
points was primarily driven by negative operating leverage of 100 basis points,
unfavorable price/cost of 80 basis points and the unfavorable impact of a
one-time customer cost-sharing settlement, partially offset by benefits from the
Company's enterprise initiatives, lower restructuring expenses and the impact of
2019 divestitures.
•In the year-to-date period, operating margin of 25.7% decreased 60 basis points
primarily due to negative operating leverage of 220 basis points, unfavorable
price/cost of 50 basis points and the unfavorable impact of a one-time customer
cost-sharing settlement, partially offset by benefits from the Company's
enterprise initiatives, lower restructuring expenses and the impact of 2019
divestitures.
OTHER FINANCIAL HIGHLIGHTS
•Interest expense was$52 million in the third quarter of both 2020 and 2019. Interest expense of$154 million in the year-to-date period of 2020 decreased from$170 million in 2019. The year-to-date decrease was primarily driven by outstanding commercial paper in 2019 and the repayment of the$700 million notes dueApril 1, 2019 and the$650 million notes dueMarch 1, 2019 , partially offset by the issuance of the Euro notes in June of 2019. •Other income (expense) was income of$2 million in the third quarter of 2020 versus$26 million in the prior year period and$35 million in the year-to-date period of 2020 versus$49 million in the prior year period. The third quarter includes the impact of foreign currency translation losses in 2020 versus gains in 2019 and lower interest income.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1. Significant Accounting Policies of Item 1. Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are free cash flow and short-term credit facilities. As ofSeptember 30, 2020 , the Company had$2.2 billion of cash and equivalents on hand, no outstanding borrowings under its$2.5 billion revolving credit facility, and no commercial paper outstanding. 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;
27
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•payment of an attractive dividend to shareholders; and
•external investments in selective strategic acquisitions that support the
Company's organic growth focus, and an active share repurchase program that the
Company temporarily suspended starting in March 2020 due to the COVID-19
pandemic.
Also, for the duration of the COVID-19 pandemic, the Company has made the
strategic decision to aggressively manage its discretionary costs and working
capital, while staying invested in its businesses, people and strategies, so
that the Company is positioned to fully support its customers in the recovery
phase and can return to executing its long-term strategy to deliver
differentiated long-term performance and returns as soon as possible.
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. A description of the risks related to the impact of the COVID-19
outbreak on the financial and capital markets and the related potential risks to
the Company is contained in Part II - Other Information, Item 1A. Risk Factors.
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 third quarter and year-to-date periods ofSeptember 30, 2020 and 2019 was as follows: Three Months Ended Nine Months Ended September 30, September 30, In millions 2020 2019 2020 2019 Net cash provided by operating activities$ 683 $ 920 $ 2,034 $ 2,221 Additions to plant and equipment (52) (90) (168) (244) Free cash flow$ 631 $ 830 $ 1,866 $ 1,977 Cash dividends paid$ (339) $ (323) $ (1,019) $ (977) Repurchases of common stock - (375) (706) (1,125) Acquisition of businesses (excluding cash and equivalents) - - - (4)
Net proceeds from (repayments of) debt with original maturities of three months or less
- 1 - (1)
Proceeds from debt with original maturities of more than three months
- - - 1,774
Repayments of debt with original maturities of more than three months
- - - (1,350)
Other, net 37 47 61 66
Effect of exchange rate changes on cash and
equivalents 28 (32) (14) (39)
Net increase (decrease) in cash and equivalents $ 357
In the second quarter of 2020, the Company elected to defer payment of
Stock Repurchase Program
OnFebruary 13, 2015 , the Company's Board of Directors authorized a stock repurchase program which provided for the repurchase of up to$6.0 billion of the Company's common stock over an open-ended period of time (the "2015 Program"). Under the 2015 Program, the Company repurchased approximately 6.1 million shares of its common stock at an average price of$91.78 per share during 2015, approximately 18.7 million shares of its common stock at an average price of$107.17 per share during 2016, approximately 7.1 million shares of its common stock at an average price of$140.56 per share during 2017, approximately 13.9 million shares of its common stock at an average price of$143.66 per share during 2018, 28 -------------------------------------------------------------------------------- approximately 2.7 million shares of its common stock at an average price of$141.34 in the first quarter of 2019 and approximately 0.5 million shares of its common stock at an average price of$154.21 in the second quarter of 2019. The 2015 Program was completed in the second quarter of 2019. OnAugust 3, 2018 , 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 "2018 Program"). Under the 2018 Program, the Company repurchased approximately 2.0 million shares of its common stock at an average price of$149.04 in the second quarter of 2019, approximately 2.4 million shares of its common stock at an average price of$150.97 in the third quarter of 2019, approximately 2.2 million shares of its common stock at an average price of$175.02 in the fourth quarter of 2019 and approximately 4.2 million shares of its common stock at an average price of$167.69 in the first quarter of 2020. As ofSeptember 30, 2020 , there were$1.2 billion of authorized repurchases remaining under the 2018 Program. Due to the COVID-19 pandemic, the Company temporarily suspended its share repurchase program starting inMarch 2020 .
After-Tax Return on
The Company uses after-tax return on average invested capital ("ROIC") to
measure the effectiveness of its operations' use of invested capital to generate
profits. ROIC is a non-GAAP financial measure that the Company believes is a
meaningful metric to investors in evaluating the Company's financial performance
and may be different than the method used by other companies to calculate ROIC.
For comparability, the Company excluded the third quarter 2019 discrete tax
benefit of $21 million from the effective tax rate for the three and nine months
ended September 30, 2019 . Average invested capital represents the net assets of
the Company, excluding cash and equivalents and outstanding debt, which are
excluded as they do not represent capital investment in the Company's
operations. Average invested capital is calculated using balances at the start
of the period and at the end of each quarter. ROIC for the third quarter and
year-to-date periods of September 30, 2020 and 2019 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in millions 2020 2019 2020 2019
Operating income $ 789 $ 868 $ 1,999 $ 2,578
Tax rate 21.3 % 24.1 % 22.0 % 24.3 %
Income taxes (168) (210) (439) (628)
Operating income after taxes $ 621 $ 658 $ 1,560 $ 1,950
Invested capital:
Trade receivables $ 2,494 $ 2,499 $ 2,494 $ 2,499
Inventories 1,149 1,209 1,149 1,209
Net assets held for sale - 324 - 324
Net plant and equipment 1,736 1,693 1,736 1,693
Goodwill and intangible assets 5,405 5,320 5,405 5,320
Accounts payable and accrued expenses (1,784) (1,722) (1,784) (1,722)
Other, net (527) (535) (527) (535)
Total invested capital $ 8,473 $ 8,788 $ 8,473 $ 8,788
Average invested capital $ 8,394 $ 9,007 $ 8,536 $ 9,083
Return on average invested capital 29.6 % 29.2 % 24.4 % 28.6 %
29-------------------------------------------------------------------------------- A reconciliation of the tax rate for the three and nine month periods endedSeptember 30, 2019 excluding the third quarter 2019 discrete tax benefit of$21 million related to aU.S. federal provision to return adjustment is as follows: Three Months Ended Nine Months Ended September 30, 2019 September 30, 2019 Dollars in millions Income Taxes Tax Rate Income Taxes Tax Rate As reported$ 182 21.6 %$ 577 23.5 % Discrete tax benefit 21 2.5 % 21 0.8 % As adjusted$ 203 24.1 %$ 598 24.3 %
Refer to Note 5. Income Taxes in Item 1. Financial Statements for further information regarding the third quarter 2019 discrete tax benefit.
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as ofSeptember 30, 2020 andDecember 31, 2019 is summarized as follows: Increase/ In millions September 30, 2020 December 31, 2019 (Decrease) Current assets: Cash and equivalents $ 2,169 $ 1,981 $ 188 Trade receivables 2,494 2,461 33 Inventories 1,149 1,164 (15) Assets held for sale - 351 (351) Other 219 296 (77) Total current assets 6,031 6,253 (222) Current liabilities: Short-term debt 353 4 349 Accounts payable and accrued expenses 1,784 1,689 95 Liabilities held for sale - 71 (71) Other 403 390 13 Total current liabilities 2,540 2,154 386 Net working capital $ 3,491 $ 4,099 $ (608) As ofSeptember 30, 2020 , 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 long-term credit facilities, 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. 30 --------------------------------------------------------------------------------
Debt
Total debt as of
In millions September 30, 2020 December 31, 2019 Short-term debt $ 353 $ 4 Long-term debt 7,592 7,754 Total debt $ 7,945 $ 7,758 There was no commercial paper outstanding as ofSeptember 30, 2020 andDecember 31, 2019 . Short-term debt as ofSeptember 30, 2020 andDecember 31, 2019 included$4 million related to the 4.88% notes due throughDecember 31, 2020 . As ofSeptember 30, 2020 , Short-term debt also included$349 million related to the 3.375% notes dueSeptember 15, 2021 , which were reclassified from Long-term debt to Short-term debt in the third quarter of 2020. The Company has a$2.5 billion line of credit agreement 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 line of credit agreement as ofSeptember 30, 2020 orDecember 31, 2019 . 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. 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. 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 endedSeptember 30, 2020 andDecember 31, 2019 was as follows: Dollars in millions September 30, 2020 December 31, 2019 Total debt $ 7,945 $ 7,758 Net income $ 2,108 $ 2,521 Add: Interest expense 205 221 Other income (93) (107) Income taxes 603 767 Depreciation 271 267 Amortization and impairment of intangible assets 156 159 EBITDA $ 3,250 $ 3,828 Total debt to EBITDA ratio 2.4 2.0 31
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Stockholders' Equity
The changes to stockholders' equity during the nine months ended
In millions Total stockholders' equity,December 31, 2019 $ 3,030 Net income 1,467 Repurchases of common stock (706) Dividends declared (1,037)
Foreign currency translation adjustments, net of tax (160) Other, net
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Total stockholders' equity, September 30, 2020 $ 2,697 FORWARD-LOOKING STATEMENTS
This document 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," "may," "strategy," "prospects," "estimate," "project," "target," "anticipate," "guidance," "forecast," and other similar words, including, without limitation, statements regarding the potential effects of the COVID-19 pandemic, related government actions and the Company's strategy in response thereto on the Company's business, potential acquisitions and divestitures and the expected performance of acquired businesses and impact of divested businesses, the impact of tariffs and raw material cost inflation, economic and regulatory conditions in various geographic regions, the timing and amount of share repurchases, if any, the timing and amount of benefits from the Company's enterprise strategy initiatives, 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 impact of enactedU.S. tax legislation, the cost and availability of additional financing, the Company's portion of future benefit payments related to pension and postretirement benefits, the availability of raw materials and energy, the expiration of any one of the Company's patents, 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, 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. 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 impact of the COVID-19 pandemic, related government actions and the Company's strategy in response thereto on the Company's operating results, financial condition and liquidity, (2) weaknesses or downturns in the markets served by the Company, (3) changes or deterioration in international and domestic political and economic conditions, including as a result of the COVID-19 pandemic, (4) the timing and amount of benefits from the Company's enterprise strategy initiatives and their impact on organic revenue growth, including the ability to execute divestitures, (5) market conditions and availability of financing to fund the Company's share repurchases, if any, (6) failure of the Company's employees, agents or business partners to comply with anti-corruption and other laws, (7) the unfavorable impact of foreign currency fluctuations, (8) a delay or decrease in the introduction of new products into the Company's product lines, (9) failure to protect the Company's intellectual property, (10) the potential negative impact of acquisitions on the Company's profitability and returns, (11) negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (12) 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, (13) increases in funding costs or decreases in credit availability due to market conditions or changes to the Company's credit ratings, (14) raw material price increases and supply shortages, (15) unfavorable tax law changes and tax authority rulings, (16) financial market risks to the Company's obligations under its defined benefit pension plans, (17) potential adverse outcomes in legal proceedings, (18) uncertainties related to environmental regulation and the physical risks of climate change, and (19) negative effects of service interruptions, data corruption, cyber-based attacks, network security breaches, or violations of data privacy laws. A more detailed description of these risks is contained under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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.
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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. Shareholders 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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