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, 2020 , the Company employed approximately 43,000 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. 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 18,500 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.
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•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.
•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 2020 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 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. 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 . The Company expects any earnings per share dilution from divestitures would be 20 -------------------------------------------------------------------------------- offset by incremental share repurchases. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. However, due to the COVID-19 pandemic in 2020, the Company has deferred any further significant divestiture activity until market conditions normalize. Refer to Note 3. Divestitures in Item 8. Financial Statements and Supplementary Data for more 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 the Company's divisions and additional structural margin expansion at the enterprise level. Near-term Priorities While it was the challenges brought about by the COVID-19 pandemic that dominated the Company's attention in 2020, it was the collection of capabilities and competitive advantages that have been built and honed over the past eight years through the execution of ITW's enterprise strategy that provided the Company with the options to respond. This, coupled with the proprietary and powerful ITW Business Model, diversified high-quality business portfolio and diligent execution put the Company in a position of strength in dealing with the global pandemic. From the early days of the pandemic, the Company focused 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. "Win the Recovery" is an execution component of the Company's enterprise strategy, not a separate initiative, with every one of the Company's divisions identifying specific opportunities presented by the pandemic to capture sustainable share gains that are aligned with the ITW long-term enterprise strategy. These efforts are just beginning to take hold and the Company expects them to contribute meaningfully to accelerate its progress toward full-potential organic growth. The Company continues to focus on delivering strong results in any environment while executing its long-term strategy to achieve and sustain ITW's full potential performance.
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 recently announced agreement with Amphenol Corporation
("Amphenol"), whereby the Company will acquire the Test & Simulation business of
MTS Systems Corporation ("MTS") following the closing of Amphenol's acquisition
of MTS. Upon completion of this acquisition, this business will be reported
within the Company's Test & Measurement and Electronics segment.
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--------------------------------------------------------------------------------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.
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 continued to spread and impact the countries in which the Company operates and the markets the Company serves. The Company delivered solid financial results in 2020 despite the extraordinary challenges posed by the COVID-19 pandemic, as the Company experienced solid recovery progress in many of its end markets in the third and fourth quarters of 2020 versus the second quarter. The primary driver of the Company's financial performance is the continued successful execution of enterprise initiatives and continued focus on the highly differentiated ITW Business Model. In 2020, despite the decline in operating revenue of 10.9 percent, the Company generated operating income of$2.9 billion , operating margin was 22.9 percent, free cash flow was$2.6 billion and after-tax return on average invested capital was 26.2 percent. Additionally, all segments, other than the Food Equipment, Automotive OEM and Welding segments, which had more pronounced impacts from the COVID-19 pandemic, had operating margins that improved compared to the prior year. Refer to the Cash Flow and After-tax Return onAverage Invested Capital sections of Liquidity and Capital Resources for a reconciliation of these non-GAAP measures. 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 its many actions and initiatives, the Company redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagues who have child and elder care needs, and implemented aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. To support its customers, the Company has worked diligently to keep its facilities open and operating safely. The Company has adapted customer service systems and practices to seamlessly serve its customers under "work from home" requirements in many parts of the world. In areas around the world where governments issued stay-at-home or similar orders, the vast majority of ITW's businesses were designated as critical or essential businesses and, as such, they remained open and operational. In some cases, this is because the Company's products directly impact the COVID-19 response effort. In other cases, the Company's businesses are designated as critical because they play a vital role in serving and supporting industries that are deemed essential to the physical and economic health of our communities. 22 -------------------------------------------------------------------------------- While the vast majority of the Company's facilities remained open and operational during the pandemic in 2020, many of these facilities were operating at a reduced capacity. 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 I, Item 1A. Risk Factors. Separately, the Company does not believe that tariffs imposed in recent years 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 2020, 2019 and 2018 were as follows: 2020 compared to 2019 For the Years Ended Dollars in millions December 31, Components of Increase (Decrease) Acquisition/ Foreign 2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 12,574 $ 14,109 (10.9) % (9.8) % (0.9) % - % (0.2) % (10.9) % Operating income$ 2,882 $ 3,402 (15.3) % (16.0) % (0.3) % 1.1 % (0.1) % (15.3) % Operating margin % 22.9 % 24.1 % (120) bps (160) bps 10 bps 30 bps - (120) bps •Operating revenue decreased due to lower organic revenue, the impact of 2019 divestitures and the unfavorable effect of foreign currency translation. •Organic revenue decreased 9.8% primarily due to disruptions in the Company's global operations resulting from the COVID-19 pandemic as organic revenue declined in six of the seven segments. The Construction Products segment grew 1.5% primarily due to growth inNorth America . Product line simplification activities reduced the Company's organic revenue by 30 basis points. •North American organic revenue decreased 9.7% 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 andAfrica organic revenue decreased 13.8% as all seven segments had a decline in organic revenue primarily driven by the Automotive OEM and Food Equipment segments. •Asia Pacific organic revenue decreased 2.0% as a decline in the Food Equipment, Welding, Specialty Products and Construction Products segments was offset by growth in the Automotive OEM, Test & Measurement and Electronics and Polymers & Fluids segments.China organic revenue grew 0.3% as an increase in the Automotive OEM, Polymers & Fluids and Test & Measurement and Electronics segments was partially offset by a decline in the Food Equipment, Welding, Specialty Products and Construction Products segments. •Operating income of$2.9 billion decreased 15.3% primarily due to lower organic revenue. Additionally, operating income for 2019 included$11.8 million related to the businesses divested in 2019. •Operating margin of 22.9% decreased 120 basis points primarily driven by negative operating leverage of 230 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives of 120 basis points and lower overhead expenses, such as travel and bonuses, and lower restructuring expenses. •The effective tax rate was 22.0% in 2020 compared to 23.3% in 2019. The 2019 effective tax rate benefited from a discrete tax benefit of$21 million in the third quarter for theU.S. federal provision to return adjustment resulting primarily from changes in estimates related to the "Tax Cuts and Jobs Act." Additionally, the effective tax rates for 2020 and 2019 included$27 million and$28 million , respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information. •Diluted earnings per share (EPS) were$6.63 for 2020. •Free cash flow was$2.6 billion for 2020. 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 2020 for approximately$706 million . The Company temporarily suspended its share repurchase program starting inMarch 2020 due to the COVID-19 pandemic. 23 -------------------------------------------------------------------------------- •The Company increased the quarterly dividend on common stock from$1.07 to$1.14 per share in 2020, or from$4.28 to$4.56 per share on an annualized basis. Total cash dividends of approximately$1.4 billion were paid in 2020. •After-tax return on average invested capital was 26.2% for 2020. Refer to the After-tax Return onAverage Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
2019 compared to 2018
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
Acquisition/ Foreign
2019 2018 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 14,109 $ 14,768 (4.5) % (1.9) % (0.3) % - % (2.3) % (4.5) %
Operating income $ 3,402 $ 3,584 (5.1) % (1.3) % (0.1) % (1.4) % (2.3) % (5.1) %
Operating margin % 24.1 % 24.3 % (20) bps 10 bps - (30) bps - (20) bps
•Operating revenue declined due to the unfavorable effect of foreign currency
translation, lower organic revenue and divestitures.
•Organic revenue decreased 1.9% primarily driven by a decline in the Automotive
OEM, Specialty Products, Welding and Construction Products segments. Product
line simplification activities reduced organic revenue by 60 basis points.
•North American organic revenue decreased 1.8% as a decline in the Automotive
OEM, Specialty Products, Welding and Polymers & Fluids segments was partially
offset by growth in the Food Equipment, Test & Measurement and Electronics and
Construction Products segments.
•Europe, Middle East and Africa organic revenue decreased 2.2% as five segments
declined, partially offset by growth in the Food Equipment and Construction
Products segments.
•Asia Pacific organic revenue declined 1.6% as a decrease in the Construction
Products, Automotive OEM, Food Equipment and Test & Measurement and Electronics
segments was partially offset by an increase in the Welding, Polymers & Fluids
and Specialty Products segments.
•Operating income of $3.4 billion decreased 5.1% primarily due to unfavorable
foreign currency translation, higher restructuring expenses and lower organic
revenue.
•Operating margin of 24.1% decreased 20 basis points. Excluding the unfavorable
impact of higher restructuring expenses of 30 basis points, operating margin
increased 10 basis points primarily due to benefits from the Company's
enterprise initiatives that contributed 120 basis points and favorable
price/cost of 10 basis points, partially offset by negative operating leverage
of 50 basis points, product mix and higher employee-related expenses.
•The effective tax rate for 2019 was 23.3% compared to 24.5% in 2018. The 2019
effective tax rate benefited from a discrete tax benefit of $21 million in the
third quarter for the U.S. federal provision to return adjustment resulting
primarily from changes in estimates related to the "Tax Cuts and Jobs Act." The
2018 effective tax rate benefited from a discrete tax benefit of $37 million in
the third quarter related to the release of a valuation allowance against the
deferred tax assets of a non-U.S. subsidiary, which was partially offset by a
discrete tax charge of $22 million in the third quarter related to foreign tax
credits. Additionally, the effective tax rates for 2019 and 2018 included $28
million and $10 million , respectively, related to excess tax benefits from
stock-based compensation. Refer to Note 6. Income Taxes in Item 8. Financial
Statements and Supplementary Data for further information.
•Diluted earnings per share (EPS) of $7.74 , an increase of 1.8%, included a
$0.09 gain in 2019 from the disposal of businesses.
•Free cash flow was $2.7 billion for 2019. Refer to the Cash Flow section of
Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
•The Company repurchased approximately 9.8 million shares of its common stock in
2019 for approximately $1.5 billion .
•The Company increased the quarterly dividend by 7.0% in 2019. Total cash
dividends of approximately $1.3 billion were paid in 2019.
•After-tax return on average invested capital was 28.7% for 2019. Refer to the
After-tax Return on Average Invested Capital section of Liquidity and Capital
Resources for a reconciliation of this non-GAAP measure.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS BY SEGMENT
The reconciliation of segment operating revenue and operating income to total operating revenue and operating income is as follows:
Operating Revenue
In millions 2020 2019 2018
Automotive OEM $ 2,571 $ 3,063 $ 3,338
Food Equipment 1,739 2,188 2,214Test & Measurement and Electronics 1,963 2,121
2,171
Welding 1,384 1,638 1,691
Polymers & Fluids 1,622 1,669 1,724
Construction Products 1,652 1,625 1,700
Specialty Products 1,660 1,825 1,951
Intersegment revenue (17) (20) (21)
Total $ 12,574 $ 14,109 $ 14,768
Operating Income
In millions 2020 2019 2018
Automotive OEM $ 457 $ 659 $ 751
Food Equipment 342 578 572
Test & Measurement and Electronics 507 542 523
Welding 376 453 474
Polymers & Fluids 402 381 369
Construction Products 421 383 414
Specialty Products 432 472 522
Total Segments 2,937 3,468 3,625
Unallocated (55) (66) (41)
Total $ 2,882 $ 3,402 $ 3,584
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 2020, 2019 and 2018
were as follows:
2020 compared to 2019
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 2,571 $ 3,063 (16.1) % (16.0) % - % - % (0.1) % (16.1) %
Operating income $ 457 $ 659 (30.6) % (32.3) % - % 1.5 % 0.2 % (30.6) %
Operating margin % 17.8 % 21.5 % (370) bps (420) bps - 40 bps 10 bps (370) bps
•Operating revenue declined due to lower organic revenue.
•Organic revenue declined 16.0% versus worldwide auto builds which decreased
16%. Product line simplification activities reduced organic revenue by 80 basis
points.
•North American organic revenue decreased 22.3% compared to North American auto
builds which declined 20% due to customer mix. Auto builds for the Detroit 3,
where the Company has higher content, decreased 23%.
•European organic revenue was down 16.8% compared to European auto builds which
decreased 22%.
•Asia Pacific organic revenue increased 0.7%. China organic revenue grew 6.1%
versus China auto builds which decreased 4%. Auto builds of foreign automotive
manufacturers in China , where the Company has higher content, decreased 8%.
•Operating margin of 17.8% in 2020 decreased 370 basis points primarily due to
negative operating leverage of 330 basis points, product mix and unfavorable
price/cost of 20 basis points, partially offset by benefits from the Company's
enterprise initiatives and lower restructuring expenses.
2019 compared to 2018
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2019 2018 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 3,063 $ 3,338 (8.2) % (5.4) % - % - % (2.8) % (8.2) %
Operating income $ 659 $ 751 (12.2) % (7.0) % - % (2.6) % (2.6) % (12.2) %
Operating margin % 21.5 % 22.5 % (100) bps (40) bps - (60) bps - (100) bps
•Operating revenue declined due to lower organic revenue and the unfavorable
effect of foreign currency translation.
•Organic revenue declined 5.4% versus worldwide auto builds which decreased 6%.
Auto builds for North America , Europe and China , where the Company has a higher
concentration of revenue as compared to other geographic regions, declined 6%.
Product line simplification activities reduced organic revenue by 120 basis
points. Additionally, organic revenue was negatively impacted by approximately
100 basis points due to unexpected customer shutdowns in North America in the
second half of 2019.
•North American organic revenue decreased 7.8% compared to North American auto
builds which were down 4% due to customer mix. Auto builds for the Detroit 3,
where the Company has higher content, decreased 8%. Additionally, 2019 was
negatively impacted by unexpected customer shutdowns.
•European organic revenue declined 4.5% compared to European auto builds which
declined 4% in 2019 due to customer mix.
•Asia Pacific organic revenue declined 2.2% in 2019. China organic revenue
declined 1.0% versus Chinese auto builds which declined 8% in 2019.
•Operating margin was 21.5% in 2019. The decrease of 100 basis points was
primarily due to negative operating leverage of 90 basis points, unfavorable
price/cost of 60 basis points, higher restructuring expenses and product mix,
partially offset by benefits from the Company's enterprise initiatives.
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--------------------------------------------------------------------------------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;
•kitchen exhaust, ventilation and pollution control systems; and
•food equipment service, maintenance and repair.
The results of operations for the Food Equipment segment for 2020, 2019 and 2018
were as follows:
2020 compared to 2019
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,739 $ 2,188 (20.5) % (20.6) % - % - % 0.1 % (20.5) %
Operating income $ 342 $ 578 (40.9) % (41.1) % - % (0.1) % 0.3 % (40.9) %
Operating margin % 19.6 % 26.4 % (680) bps (680) bps - - - (680) bps
•Operating revenue declined due to lower organic revenue.
•Organic revenue declined 20.6% as equipment and service organic revenue
decreased 21.8% and 18.5%, respectively.
•North American organic revenue declined 19.2% as equipment organic revenue
decreased 20.4%, 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 17.3%.
•International organic revenue decreased 22.5%. Equipment organic revenue
declined 23.5% primarily due to lower demand in the European warewash, cooking
and refrigeration end markets and lower demand in Asia . Service organic revenue
decreased 20.4%.
•Operating margin of 19.6% in 2020 decreased 680 basis points primarily due to
negative operating leverage of 540 basis points and product mix, partially
offset by benefits from the Company's enterprise initiatives and favorable
price/cost of 50 basis points.
2019 compared to 2018
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2019 2018 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 2,188 $ 2,214 (1.2) % 1.1 % - % - % (2.3) % (1.2) %
Operating income $ 578 $ 572 1.1 % 4.5 % - % (1.2) % (2.2) % 1.1 %
Operating margin % 26.4 % 25.8 % 60 bps 90 bps - (30) bps - 60 bps
•Operating revenue declined due to the unfavorable effect of foreign currency
translation, partially offset by higher organic revenue.
•Organic revenue increased 1.1% as equipment organic revenue decreased 0.2% and
service organic revenue increased 3.5%.
•North American organic revenue grew 1.1%. Equipment organic revenue declined
0.4% primarily driven by lower demand in the restaurant and institutional end
markets, partially offset by higher demand in food retail. Service organic
revenue increased 3.6%.
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•International organic revenue grew 1.1% as equipment organic revenue increased
0.2% primarily due to higher demand in the European warewash, cooking and retail
end markets, partially offset by lower demand in Asia . Service organic revenue
increased 3.5%.
•Operating margin of 26.4% in 2019 increased 60 basis points primarily driven by
benefits from the Company's enterprise initiatives, favorable price/cost of 40
basis points and positive operating leverage of 30 basis points, partially
offset by product mix, higher employee-related expenses and higher restructuring
expenses.
TEST & MEASUREMENT AND ELECTRONICS
This segment is a branded and innovative producer of test and measurement and electronic manufacturing and maintenance, repair, and operations, or "MRO" solutions that improve efficiency and quality for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, industrial capital goods, automotive original equipment manufacturers and tiers, 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 2020, 2019 and 2018 were as follows:
2020 compared to 2019
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,963 $ 2,121 (7.4) % (4.9) % (2.8) % - % 0.3 % (7.4) %
Operating income $ 507 $ 542 (6.5) % (5.2) % (1.3) % (0.2) % 0.2 % (6.5) %
Operating margin % 25.8 % 25.6 % 20 bps (10) bps 40 bps (10) bps - 20 bps
•Operating revenue declined due to lower organic revenue and the impact of a
2019 divestiture, partially offset by the favorable effect of foreign currency
translation.
•Organic revenue decreased 4.9% in 2020.
•Organic revenue for the test and measurement businesses decreased 7.2%
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 14.1% in 2020.
•Electronics organic revenue declined 2.1%. The electronics assembly businesses
decreased 6.9% primarily due to lower demand in North America . The other
electronics businesses, which include the contamination control, static control
and pressure sensitive adhesives businesses, grew 0.9% primarily due to an
increase in North America , partially offset by a decrease in Europe and Asia
Pacific .
•Operating margin of 25.8% in 2020 increased 20 basis points 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 130 basis points and the
recapture of amortization and depreciation expense related to a business
previously classified as held for sale.
28
--------------------------------------------------------------------------------
2019 compared to 2018
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2019 2018 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total Operating revenue
$ 2,121 $ 2,171 (2.3) % (0.3) % (0.2) % - % (1.8) % (2.3) % Operating income$ 542 $ 523 3.7 % 5.7 % - % (0.2) % (1.8) % 3.7 % Operating margin % 25.6 % 24.1 % 150 bps 140 bps 10 bps - - 150 bps •Operating revenue declined due to the unfavorable effect of foreign currency translation, lower organic revenue and a divestiture. •Operating revenue for 2019 included$58 million related to the business divested in 2019. •Organic revenue decreased 0.3% in 2019. •Organic revenue for the test and measurement businesses decreased 0.8% primarily driven by lower semi-conductor end market demand inNorth America . Excluding semi-conductor, the test and measurement businesses increased 3.5%.Instron , where demand is more closely tied to the capital spending environment, had organic revenue growth of 6.4%. •Electronics organic revenue grew 0.4%. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 1.5% primarily due to growth inNorth America andAsia , partially offset by a decline inEurope . The electronics assembly businesses decreased 1.4% primarily due to lower demand inAsia . •Operating margin of 25.6% in 2019 increased 150 basis points primarily driven by benefits from the Company's enterprise initiatives, lower intangible asset amortization expense and favorable price/cost of 50 basis points.
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 2020, 2019 and 2018 were
as follows:
2020 compared to 2019
For the Years Ended
Dollars in millions December 31 ,
Components of Increase (Decrease)
Acquisition/
2020 2019 Inc (Dec) Organic Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,384 $ 1,638 (15.5) % (11.8) % (3.7) % - % - % (15.5) %
Operating income $ 376 $ 453 (17.1) % (16.8) % (1.6) % 1.4 % (0.1) % (17.1) %
Operating margin % 27.1 % 27.7 % (60) bps (160) bps 60 bps 40 bps - (60) bps
•Operating revenue decreased due to lower organic revenue and the impact of a
2019 divestiture.
•Organic revenue declined 11.8% driven by decreases in equipment of 12.2% and
consumables of 11.2%, primarily due to lower demand in the industrial end
markets.
•North American organic revenue decreased 10.8% primarily due to a decline in
the industrial end markets of 19.8%, partially offset by growth in the
commercial end markets of 2.1%.
29
--------------------------------------------------------------------------------
•International organic revenue decreased 16.4% primarily due to a decline in the
European oil and gas end markets.
•Operating margin of 27.1% in 2020 decreased 60 basis points primarily driven by
negative operating leverage of 220 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.
2019 compared to 2018
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2019 2018 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,638 $ 1,691 (3.1) % (1.2) % (1.1) % - % (0.8) % (3.1) %
Operating income $ 453 $ 474 (4.4) % (2.1) % (0.4) % (1.7) % (0.2) % (4.4) %
Operating margin % 27.7 % 28.0 % (30) bps (20) bps 20 bps (50) bps 20 bps (30) bps
•Operating revenue decreased due to lower organic revenue, the impact of
divestiture activity and the unfavorable effect of foreign currency translation.
•Operating revenue for 2019 included $62 million related to the business
divested in 2019.
•Organic revenue decreased 1.2% as equipment declined 2.6%, partially offset by
growth in consumables of 0.8%.
•North American organic revenue declined 1.1% as a decrease in the industrial
end markets was partially offset by growth in the commercial and oil and gas end
markets.
•International organic revenue decreased 1.6% primarily due to a decline in
Europe , partially offset by higher demand in Asia in the oil and gas end
markets.
•Operating margin of 27.7% decreased 30 basis points compared to the prior year
primarily driven by higher restructuring expenses of 50 basis points, product
mix, negative operating leverage of 20 basis points and higher employee-related
expenses, partially offset by benefits from the Company's enterprise initiatives
and favorable price/cost of 70 basis points.
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 2020, 2019 and
2018 were as follows:
2020 compared to 2019
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,622 $ 1,669 (2.8) % (1.4) % - % - % (1.4) % (2.8) %
Operating income $ 402 $ 381 5.6 % 5.2 % - % 1.5 % (1.1) % 5.6 %
Operating margin % 24.8 % 22.8 % 200 bps 150 bps - 40 bps 10 bps 200 bps
30-------------------------------------------------------------------------------- •Operating revenue decreased due to lower organic revenue and the unfavorable effect of foreign currency translation. •Organic revenue declined 1.4% in 2020. Product line simplification activities reduced organic revenue by 50 basis points. •Organic revenue for the polymers businesses decreased 5.3% primarily driven by a decline in the heavy industrial end markets inNorth America andEurope . •Organic revenue for the automotive aftermarket businesses declined 0.5% primarily driven by a decrease in the car care and body repair businesses inNorth America and the additives businesses inEurope , partially offset by growth in the tire and engine repair businesses inNorth America . •Organic revenue for the fluids businesses grew 3.3% primarily due to an increase in the industrial maintenance, repair, and operations end markets inEurope andNorth America . •Operating margin of 24.8% in 2020 increased 200 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, favorable price/cost of 50 basis points and lower restructuring expenses, partially offset by negative operating leverage of 30 basis points. 2019 compared to 2018 For the Years Ended Dollars in millions December 31, Components of Increase (Decrease) 2019 2018 Inc (Dec) Organic Acquisition/Divestiture
Restructuring Foreign Currency Total Operating revenue
$ 1,669 $ 1,724 (3.2) % - % (0.4) % - % (2.8) % (3.2) % Operating income$ 381 $ 369 3.1 % 7.9 % (0.1) % (1.5) % (3.2) % 3.1 % Operating margin % 22.8 % 21.4 % 140 bps 170 bps - (30) bps - 140 bps •Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation. •Organic revenue was flat as growth in the polymers businesses was offset by declines in the automotive aftermarket and fluids businesses. •Organic revenue for the automotive aftermarket businesses declined 0.7% primarily due to lower demand in the tire repair businesses inNorth America and the additives businesses inEurope , partially offset by stronger demand in the car care businesses inNorth America . •Organic revenue for the polymers businesses increased 2.4% primarily driven by growth inAsia andNorth America , primarily in the heavy industrial end markets. •Organic revenue for the fluids businesses decreased 2.0% primarily due to a decline in the industrial maintenance, repair, and operations end markets inNorth America . •Operating margin of 22.8% increased 140 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, partially offset by higher restructuring expenses.
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.
31
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The results of operations for the Construction Products segment for 2020, 2019
and 2018 were as follows:
2020 compared to 2019
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,652 $ 1,625 1.7 % 1.5 % - % - % 0.2 % 1.7 %
Operating income $ 421 $ 383 10.0 % 8.4 % - % 1.5 % 0.1 % 10.0 %
Operating margin % 25.5 % 23.6 % 190 bps 160 bps - 30 bps - 190 bps
•Operating revenue increased due to higher organic revenue and the favorable
effect of foreign currency translation.
•Organic revenue grew 1.5% as an increase in North America was partially offset
by declines in Europe and Asia Pacific .
•North American organic revenue grew 7.8% as increases of 11.4% in the United
States residential end markets and 13.0% in Canada were partially offset by a
decrease of 11.4% in the commercial end markets.
•International organic revenue decreased 3.3% in 2020. Asia Pacific organic
revenue decreased 0.7% primarily due to a decline in the commercial end markets
in Australia and New Zealand . European organic revenue decreased 5.5% driven by
a decline in continental Europe and the United Kingdom .
•Operating margin of 25.5% in 2020 increased 190 basis points primarily driven
by the net benefits from the Company's enterprise initiatives and cost
management, positive operating leverage of 30 basis points and lower
restructuring expenses, partially offset by unfavorable price/cost of 50 basis
points.
2019 compared to 2018
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2019 2018 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,625 $ 1,700 (4.4) % (1.0) % - % - % (3.4) % (4.4) %
Operating income $ 383 $ 414 (7.4) % (3.1) % - % (1.2) % (3.1) % (7.4) %
Operating margin % 23.6 % 24.3 % (70) bps (50) bps - (30) bps 10 bps (70) bps
•Operating revenue decreased in 2019 due to the unfavorable effect of foreign
currency translation and lower organic revenue.
•Organic revenue declined 1.0% in 2019.
•North American organic revenue was flat as an increase of 1.9% in the United
States residential end markets was offset by a decline of 3.2% in the commercial
end markets and a decline in Canada .
•International organic revenue declined 1.8%. Asia Pacific organic revenue
decreased 5.1% primarily due to a decline in Australia and New Zealand across
all end markets. European organic revenue increased 1.3% driven by growth in
continental Europe .
•Operating margin of 23.6% decreased 70 basis points primarily driven by
unfavorable price/cost of 40 basis points, higher restructuring expenses,
product mix and negative operating leverage of 10 basis points, partially offset
by 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;
32
--------------------------------------------------------------------------------•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 2020, 2019 and
2018 were as follows:
2020 compared to 2019
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,660 $ 1,825 (9.1) % (8.2) % (0.8) % - % (0.1) % (9.1) %
Operating income $ 432 $ 472 (8.5) % (11.2) % 0.7 % 2.2 % (0.2) % (8.5) %
Operating margin % 26.0 % 25.9 % 10 bps (90) bps 40 bps 60 bps - 10 bps
•Operating revenue decreased primarily due to lower organic revenue and the
impact of 2019 divestitures.
•Organic revenue decreased 8.2% as equipment sales declined 17.7% and
consumables declined 5.2%. Additionally, product line simplification activities
reduced organic revenue by 30 basis points.
•North American organic revenue decreased 7.3% primarily due to a decline in the
ground support equipment, appliance and specialty films businesses, partially
offset by an increase in the consumer packaging businesses.
•International organic revenue decreased 10.0% primarily due to a decline in the
consumer packaging, ground support equipment, appliance, specialty films and
marking coding businesses in Europe .
•Operating margin of 26.0% in 2020 increased 10 basis points primarily due to
benefits from the Company's enterprise initiatives, lower restructuring expenses
and the impact of 2019 divestitures, partially offset by negative operating
leverage of 180 basis points, unfavorable price/cost of 60 basis points and the
unfavorable impact of a one-time customer cost-sharing settlement.
2019 compared to 2018
For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2019 2018 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,825 $ 1,951 (6.5) % (4.1) % (0.6) % - % (1.8) % (6.5) %
Operating income $ 472 $ 522 (9.7) % (7.6) % - % (0.5) % (1.6) % (9.7) %
Operating margin % 25.9 % 26.8 % (90) bps (100) bps 20 bps (10) bps - (90) bps
•Operating revenue decreased in 2019 due to lower organic revenue, the
unfavorable effect of foreign currency translation and the impact of divestiture
activity.
•Operating revenue for 2019 included $14 million related to the businesses
divested in 2019.
•Organic revenue decreased 4.1% in 2019. Consumables declined 5.8% primarily due
to lower demand in North America and Europe . Equipment sales increased 2.2%
primarily due to higher demand in North America , partially offset by a decline
in Asia . Product line simplification activities reduced organic revenue by 100
basis points.
•North American organic revenue decreased 3.1% primarily due to a decrease in
the specialty films, labels and appliance businesses, partially offset by growth
in the ground support equipment business and consumer packaging businesses.
•International organic revenue decreased 5.6% primarily due to a decline in the
specialty films, graphics, appliance and foils businesses in Europe .
•Operating margin of 25.9% decreased 90 basis points primarily due to negative
operating leverage of 90 basis points, product mix and higher employee-related
expenses, partially offset by benefits from the Company's enterprise
initiatives.
33
--------------------------------------------------------------------------------OTHER FINANCIAL HIGHLIGHTS
•Interest expense was$206 million in 2020,$221 million in 2019 and$257 million in 2018. Interest expense in 2020 was$15 million lower than the previous year primarily driven by the repayment of the$700 million notes dueApril 1, 2019 and the$650 million notes dueMarch 1, 2019 , and outstanding commercial paper in 2019, partially offset by the issuance of the €1.6 billion Euro notes in June of 2019. Interest expense in 2019 was$36 million lower than 2018 primarily due to the repayment of the$700 million notes dueApril 1, 2019 and the$650 million notes dueMarch 1, 2019 . •Other income (expense) was income of$28 million in 2020,$107 million in 2019 and$67 million in 2018. The income in 2020 decreased$79 million compared to the previous year primarily due to the net pre-tax gain on the disposal of operations and affiliates of$44 million in 2019, lower interest and investment income, and lower pension other net periodic benefit income. The income in 2019 increased$40 million compared to 2018 primarily due to the net pre-tax gain on the disposal of operations and affiliates in 2019. •The effective tax rate was 22.0% in 2020, 23.3% in 2019 and 24.5% in 2018. The 2019 effective tax rate benefited from a discrete tax benefit of$21 million in the third quarter for theU.S. federal provision to return adjustment resulting primarily from changes in estimates related to the "Tax Cuts and Jobs Act." The 2018 effective tax rate benefited from a discrete tax benefit of$37 million in the third quarter related to the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary, which was partially offset by a discrete tax charge of$22 million in the third quarter related to foreign tax credits. Additionally, the effective tax rates for 2020, 2019 and 2018 included$27 million ,$28 million and$10 million , respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information. •The impact of the Euro and other foreign currencies against theU.S. Dollar in 2020 versus 2019 decreased operating revenue and income before taxes by approximately$20 million and$3 million , respectively. The impact of the Euro and other foreign currencies against theU.S. Dollar in 2019 versus 2018 decreased operating revenue and income before taxes by approximately$339 million and$84 million , respectively.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1. Description of Business and Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary Data.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are free cash flow and short-term credit facilities. As ofDecember 31, 2020 , the Company had$2.6 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; •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 inMarch 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 continue executing its long-term strategy to deliver differentiated long-term performance and returns. 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 I, Item 1A. Risk Factors. 34 --------------------------------------------------------------------------------
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 years endedDecember 31, 2020 , 2019 and 2018 was as follows: In millions 2020 2019 2018
Net cash provided by operating activities
2,995$ 2,811 Additions to plant and equipment (236) (326) (364) Free cash flow$ 2,571 $ 2,669 $ 2,447 Cash dividends paid$ (1,379) $ (1,321) $ (1,124) Repurchases of common stock (706) (1,500) (2,000) Acquisition of businesses (excluding cash and equivalents) - (4) - Proceeds from sale of operations and affiliates 1 120 1 Net proceeds (repayments) of debt (4) 422 (851) Other 61 100 49 Effect of exchange rate changes on cash and equivalents 39 (9) (112)
Net increase (decrease) in cash and equivalents
477$ (1,590) Stock Repurchase Programs 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 and approximately 3.1 million shares of its common stock at an average price of$143.23 per share during 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 6.7 million shares of its common stock at an average price of$158.11 per share during 2019 and approximately 4.2 million shares of its common stock at an average price of$167.69 per share in the first quarter of 2020. As ofDecember 31, 2020 , there were approximately$1.2 billion of authorized repurchases remaining under the 2018 program. In 2020, due to the COVID-19 pandemic, the Company temporarily suspended its share repurchase program starting in March and intends to resume purchases in 2021. 35 --------------------------------------------------------------------------------
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 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 After-tax ROIC. For comparability, the Company excluded
the third quarter 2019 discrete tax benefit of $21 million from the effective
tax rate for the year ended December 31, 2019 . Additionally, the Company
excluded the third quarter 2018 net discrete tax benefit of $15 million from the
effective tax rate for the year ended December 31, 2018 . 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.
After-tax ROIC for the years ended December 31, 2020 , 2019, and 2018 was as
follows:
Dollars in millions 2020 2019 2018
Operating income $ 2,882 $ 3,402 $ 3,584
Tax rate 22.0 % 24.0 % 24.9 %
Income taxes (633) (815) (893)
Operating income after taxes $ 2,249 $ 2,587 $ 2,691
Invested capital:
Trade receivables $ 2,506 $ 2,461 $ 2,622
Inventories 1,189 1,164 1,318
Net assets held for sale - 280 -
Net plant and equipment 1,777 1,729 1,791
Goodwill and intangible assets 5,471 5,343 5,717
Accounts payable and accrued expenses (1,818) (1,689) (1,795) Other, net (385) (481) (519) Total invested capital$ 8,740 $ 8,807 $ 9,134 Average invested capital$ 8,576 $ 9,028 $ 9,533 After-tax return on average invested capital 26.2 % 28.7 %
28.2 %
After-tax ROIC decreased 250 basis points for the twelve month period endedDecember 31, 2020 compared to the prior year period as a result of a 13.1% decrease in after-tax operating income versus a 5.0% decrease in average invested capital. After-tax ROIC increased 50 basis points for the twelve month period endedDecember 31, 2019 compared to the prior year period as a result of a 5.3% decrease in average invested capital versus a 3.9% decrease in after-tax operating income.
A reconciliation of the 2019 effective tax rate excluding the third quarter 2019
discrete tax benefit of
Twelve Months Ended
December 31, 2019
Dollars in millions Income Taxes Tax Rate
As reported $ 767 23.3 %
Discrete tax benefit related to third quarter 21 0.7 %
As adjusted $ 788 24.0 %
36--------------------------------------------------------------------------------
A reconciliation of the 2018 effective tax rate excluding the third quarter 2018
net discrete tax benefit of
Twelve Months Ended
December 31, 2018
Dollars in millions Income Taxes Tax Rate
As reported $ 831 24.5 %
Net discrete tax benefit related to third quarter 15 0.4 %
As adjusted $ 846 24.9 %
Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information regarding the discrete tax items noted above.
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as ofDecember 31, 2020 and 2019 is summarized as follows: Increase Dollars in millions 2020 2019 (Decrease) Current Assets: Cash and equivalents$ 2,564 $ 1,981 $ 583 Trade receivables 2,506 2,461 45 Inventories 1,189 1,164 25
Prepaid expenses and other current assets 264 296
(32)
Assets held for sale - 351 (351)
6,523 6,253 270
Current Liabilities:
Short-term debt 350 4 346Accounts payable and accrued expenses 1,818 1,689
129
Liabilities held for sale - 71 (71)
Other 421 390 31
2,589 2,154 435
Net Working Capital $ 3,934 $ 4,099 $ (165)
As of December 31, 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
the U.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 the U.S. The Company has accrued for foreign withholding taxes
related to foreign held cash and equivalents that are not permanently invested.
In the U.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 the U.S. businesses, dividend payments, share repurchases,
acquisitions, servicing of domestic debt obligations, reinvesting to fund
expansion of existing U.S. businesses and general corporate needs. The Company
may also 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 the U.S.
37
--------------------------------------------------------------------------------Debt
Total debt as of
Increase
In millions 2020 2019 (Decrease)
Short-term debt $ 350 $ 4 $ 346
Long-term debt 7,772 7,754 18
Total debt $ 8,122 $ 7,758 $ 364
As of December 31, 2020 , short-term debt included $350 million related to the
3.375% notes due September 15, 2021 . As of December 31, 2019 , short-term debt
included $4 million related to the 4.88% notes due through December 31, 2020 ,
which were repaid by the due date. There was no commercial paper outstanding as
of December 31, 2020 and 2019. The increase in total debt as of December 31,
2020 was primarily due to the revaluation of the Company's Euro-denominated
notes. Refer to Note 10. Debt in Item 8. Financial Statements and Supplementary
Data for additional details regarding the Company's Euro notes.
The Company may issue commercial paper to fund general corporate needs, share
repurchases, and small and medium-sized acquisitions. During the third quarter
of 2019, the Company entered into a $2.5 billion , five-year revolving credit
facility with a termination date of September 27, 2024 to support the potential
issuances of commercial paper. No amounts were outstanding under the revolving
credit facility at December 31, 2020 . The Company did not have any commercial
paper outstanding during 2020.
As of
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the years endedDecember 31, 2020 , 2019 and 2018 was as follows: Dollars in millions 2020 2019 2018 Total debt$ 8,122 $ 7,758 $ 7,380 Net income$ 2,109 $ 2,521 $ 2,563 Add: Interest expense 206 221 257 Other income (28) (107) (67) Income taxes 595 767 831 Depreciation 273 267 272
Amortization and impairment of intangible assets 154 159
189
EBITDA $ 3,309 $ 3,828 $ 4,045
Total debt to EBITDA ratio 2.5 2.0 1.8
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Stockholders' Equity
The changes to stockholders' equity during 2020 and 2019 were as follows: In millions 2020 2019 Beginning balance$ 3,030 $ 3,258 Net income 2,109 2,521 Cash dividends declared (1,398) (1,335) Repurchases of common stock (706) (1,500) Other comprehensive income (loss) 63 (28) Other 84 114 Ending balance$ 3,182 $ 3,030
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The Company's significant contractual obligations as ofDecember 31, 2020 were as follows: 2026 and Future In millions 2021 2022 2023 2024 2025 Years Principal payments on long-term debt$ 350 $ 611 $ 611 $ 1,433 $ -$ 5,193 Interest payments on debt 199 187 176 156 142 1,537 Noncurrent income taxes payable 49 49 91 122 151 - Operating lease liability 58 49 37 25 14 15
Total contractual obligations
As ofDecember 31, 2020 , the Company had recorded noncurrent liabilities for unrecognized tax benefits of$216 million . The Company is not able to reasonably estimate the timing of payments related to the liabilities for unrecognized tax benefits. The Company did not have any significant off-balance sheet commitments atDecember 31, 2020 .
CRITICAL ACCOUNTING ESTIMATES
The Company has three accounting estimates that it believes are most important to the Company's financial condition and results of operations, and which require the Company to make judgments about matters that are inherently uncertain. Management bases its estimates on historical experience, and in some cases on observable market information. Various assumptions are also used that are believed to be reasonable under the circumstances and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The Company's critical accounting estimates are as follows:
Income Taxes-The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The Company's deferred and other tax balances are based on management's interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax expense, assets and liabilities recognized by the Company also reflect its best estimates and assumptions regarding, among other things, the level of future taxable income, the effect of the Company's various tax planning strategies and uncertain tax positions. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the Company.Goodwill and Intangible Assets-The Company's business acquisitions typically result in recording goodwill and other intangible assets, which are a significant portion of the Company's total assets and affect the amount of amortization expense and impairment charges that the Company could incur in future periods. The Company follows the guidance prescribed in the accounting standards to test goodwill and intangible assets for impairment. On an annual basis, or more frequently if triggering events occur, the Company compares the estimated fair value of its reporting units to the carrying value of each reporting unit to determine if a potential goodwill impairment exists. If the fair value of a reporting unit is less than its 39
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carrying value, a goodwill impairment loss is recorded for the difference. In calculating the fair value of the reporting units or specific intangible assets, management relies on a number of factors, including business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and management's judgment in applying them in the impairment tests of goodwill and other intangible assets. As ofDecember 31, 2020 , the Company had total goodwill and intangible assets of approximately$5.5 billion allocated to its reporting units. Although there can be no assurance that the Company will not incur additional impairment charges related to its goodwill and other intangible assets, the Company generally believes the risk of significant impairment charges is lessened by the number of diversified businesses and end markets represented by its reporting units that have goodwill and other intangible assets. In addition, the individual businesses in many of the reporting units have been acquired over a long period of time, and in many cases have been able to improve their performance, primarily as a result of the application of the Company's 80/20 Front-to-Back process. The amount of goodwill and other intangible assets allocated to individual reporting units ranges from approximately$238 million to$1.1 billion , with the average amount equal to$545 million . Fair value determinations require considerable judgment and are sensitive to changes in the factors described above. Due to the inherent uncertainties associated with these factors and economic conditions in the Company's global end markets, impairment charges related to one or more reporting units could occur in future periods. Pension and Other Postretirement Benefits-The Company has various company-sponsored defined benefit retirement plans covering a number ofU.S. employees and many employees outside theU.S. Pension and other postretirement benefit expense and obligations are determined based on actuarial valuations. Pension benefit obligations are generally based on each participant's years of service, future compensation, and age at retirement or termination. Important assumptions in determining pension and postretirement expense and obligations are the discount rate, the expected long-term return on plan assets, life expectancy, and health care cost trend rates. Future changes in any of these assumptions could materially affect the amounts recorded related to the Company's pension and other postretirement benefit plans. See Note 11. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for additional discussion of actuarial assumptions used in determining pension and postretirement health care liabilities and expenses. The Company determines the discount rate used to measure plan liabilities as of the year-end measurement date for theU.S. primary pension plan. The discount rate reflects the current rate at which the associated liabilities could theoretically be effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. A 25 basis point decrease in the discount rate would increase the present value of theU.S. primary pension plan obligation by approximately$40 million . The Company estimates the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate. See Note 11. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for information on the Company's pension and other postretirement benefit plans and related assumptions. The expected long-term return on plan assets is based on historical and expected long-term returns for similar investment allocations among asset classes. For theU.S. primary pension plan, a 25 basis point decrease in the expected return on plan assets would increase the annual pension expense by approximately$4 million .
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