Illinois Tool Works Inc 10-Q for FY2022 Q3
Illinois Tool Works Inc (ITW)
10-Q
2022-10-27
For: 2022-09-30
View Original
Added on
April 06, 2026
About this 10-Q
Illinois Tool Works Inc filed this 10-Q on October 27, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.01B
- up 12.8% from $3.56B a year earlier
- Net income
- $727M
- up 13.8% from net income of $639M a year earlier
- Diluted EPS
- $2.35
- up 16.3% from $2.02 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||||||||
| SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the quarterly period ended | ||||||||
| OR | ||||||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||||||||
| SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the transition period from _______________ to _______________ | ||||||||
Commission File Number: 1-4797
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
(Registrant's telephone number, including area code) 847 -724-7500
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| x | Accelerated filer | o | |||||||||
| Non-accelerated filer | o | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of registrant's common stock, $0.01 par value, outstanding at September 30, 2022: 307,186,379
2
PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
Illinois Tool Works Inc. and Subsidiaries
Statement of Income (Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions except per share amounts | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Operating Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Selling, administrative, and research and development expenses | |||||||||||||||||||||||
| Amortization and impairment of intangible assets | |||||||||||||||||||||||
| Operating Income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Income Before Taxes | |||||||||||||||||||||||
| Income Taxes | |||||||||||||||||||||||
| Net Income | $ | $ | $ | $ | |||||||||||||||||||
| Net Income Per Share: | |||||||||||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||||||||||
Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Shares of Common Stock Outstanding During the Period: | |||||||||||||||||||||||
| Average | |||||||||||||||||||||||
Average assuming dilution | |||||||||||||||||||||||
The Notes to Financial Statements are an integral part of this statement.
3
Illinois Tool Works Inc. and Subsidiaries
Statement of Comprehensive Income (Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net Income | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation adjustments, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Pension and other postretirement benefit adjustments, net of tax | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
| Comprehensive Income | $ | $ | $ | $ | |||||||||||||||||||
The Notes to Financial Statements are an integral part of this statement.
4
Illinois Tool Works Inc. and Subsidiaries
Statement of Financial Position (Unaudited)
| In millions except per share amounts | September 30, 2022 | December 31, 2021 | |||||||||
| Assets | |||||||||||
| Current Assets: | |||||||||||
| Cash and equivalents | $ | $ | |||||||||
| Trade receivables | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Assets held for sale | |||||||||||
| Total current assets | |||||||||||
| Net plant and equipment | |||||||||||
| Goodwill | |||||||||||
| Intangible assets | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| $ | $ | ||||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current Liabilities: | |||||||||||
| Short-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses | |||||||||||
| Cash dividends payable | |||||||||||
| Income taxes payable | |||||||||||
| Liabilities held for sale | |||||||||||
| Total current liabilities | |||||||||||
| Noncurrent Liabilities: | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Noncurrent income taxes payable | |||||||||||
| Other liabilities | |||||||||||
| Total noncurrent liabilities | |||||||||||
| Stockholders' Equity: | |||||||||||
Common stock (par value of $ | |||||||||||
Issued- Outstanding- | |||||||||||
| Additional paid-in-capital | |||||||||||
| Retained earnings | |||||||||||
| Common stock held in treasury | ( | ( | |||||||||
| Accumulated other comprehensive income (loss) | ( | ( | |||||||||
| Noncontrolling interest | |||||||||||
| Total stockholders' equity | |||||||||||
| $ | $ | ||||||||||
The Notes to Financial Statements are an integral part of this statement.
5
Illinois Tool Works Inc. and Subsidiaries
Statement of Changes in Stockholders' Equity (Unaudited)
| In millions except per share amounts | Common Stock | Additional Paid-in Capital | Retained Earnings | Common Stock Held in Treasury | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interest | Total | ||||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||
| Repurchases of common stock | — | — | — | ( | — | — | ( | ||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | — | ( | ||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | — | ( | ||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||
| Repurchases of common stock | — | — | — | ( | — | — | ( | ||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | — | ( | ||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | — | ( | ||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
Common stock issued for stock-based compensation | — | ( | — | — | — | ||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||
| Repurchases of common stock | — | — | — | ( | — | — | ( | ||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | — | ( | ||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | — | ( | ||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
Common stock issued for stock-based compensation | — | — | — | — | |||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||
| Repurchases of common stock | — | — | — | ( | — | — | ( | ||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | — | ( | ||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||
The Notes to Financial Statements are an integral part of this statement.
6
Illinois Tool Works Inc. and Subsidiaries
Statement of Cash Flows (Unaudited)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| In millions | 2022 | 2021 | |||||||||
| Cash Provided by (Used for) Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization and impairment of intangible assets | |||||||||||
| Change in deferred income taxes | ( | ( | |||||||||
| Provision for uncollectible accounts | |||||||||||
| (Income) loss from investments | ( | ( | |||||||||
| (Gain) loss on sale of plant and equipment | ( | ||||||||||
| (Gain) loss on sale of operations and affiliates | ( | ||||||||||
| Stock-based compensation expense | |||||||||||
| Other non-cash items, net | |||||||||||
| Change in assets and liabilities, net of acquisitions and divestitures: | |||||||||||
| (Increase) decrease in- | |||||||||||
| Trade receivables | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Increase (decrease) in- | |||||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Income taxes | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Provided by (Used for) Investing Activities: | |||||||||||
| Acquisition of businesses (excluding cash and equivalents) | ( | ||||||||||
| Additions to plant and equipment | ( | ( | |||||||||
| Proceeds from investments | |||||||||||
| Proceeds from sale of plant and equipment | |||||||||||
| Proceeds from sales of operations and affiliates | |||||||||||
| Other, net | ( | ( | |||||||||
| Net cash provided by (used for) investing activities | ( | ( | |||||||||
| Cash Provided by (Used for) Financing Activities: | |||||||||||
| Cash dividends paid | ( | ( | |||||||||
| Issuance of common stock | |||||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Net proceeds from (repayments of) debt with original maturities of three months or less | |||||||||||
| Proceeds from debt with original maturities of more than three months | |||||||||||
| Repayments of debt with original maturities of more than three months | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| Net cash provided by (used for) financing activities | ( | ( | |||||||||
| Effect of Exchange Rate Changes on Cash and Equivalents | ( | ( | |||||||||
| Cash and Equivalents: | |||||||||||
| Increase (decrease) during the period | ( | ( | |||||||||
| Beginning of period | |||||||||||
| End of period | $ | $ | |||||||||
| Supplementary Cash Flow Information: | |||||||||||
| Cash Paid During the Period for Interest | $ | $ | |||||||||
| Cash Paid During the Period for Income Taxes, Net of Refunds | $ | $ | |||||||||
The Notes to Financial Statements are an integral part of this statement.
7
Illinois Tool Works Inc. and Subsidiaries
Notes to Financial Statements (Unaudited)
(1) Significant Accounting Policies
(2) Novel Coronavirus (COVID-19)
(3) MTS Test & Simulation Acquisition
(4) Divestitures
8
In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. Due to the COVID-19 pandemic, the Company chose to defer any further significant divestiture activity in 2020 and 2021. The Company has reinitiated the divestiture process in 2022 for certain businesses with combined annual revenues of approximately $0.5 billion, subject to approval by the Company's Board of Directors.
In the second quarter of 2022, plans were approved to divest two businesses, including one business in the Polymers & Fluids segment and one business in the Food Equipment segment, with total combined revenues of $115 million for the year ended December 31, 2021. These two businesses were classified as held for sale beginning in the second quarter of 2022.
Subsequent to the third quarter, on October 3, 2022, the Company completed the sale of the one business in the Polymers & Fluids segment for $220 million, subject to certain closing adjustments. The sale is expected to result in a pre-tax gain of approximately $156 million in the fourth quarter of 2022. As of September 30, 2022, this business was presented as held for sale in the Statement of Financial Position.
As of September 30, 2022, the assets and liabilities related to the two businesses discussed above that were included in assets and liabilities held for sale in the Statement of Financial Position were as follows:
| In millions | September 30, 2022 | ||||
| Trade receivables | $ | ||||
| Inventories | |||||
| Net plant and equipment | |||||
| Goodwill and intangible assets | |||||
| Other | |||||
| Total assets held for sale | $ | ||||
| Accounts payable | $ | ||||
| Accrued expenses | |||||
| Other | |||||
| Total liabilities held for sale | $ | ||||
Operating revenue of the two businesses held for sale for the three and nine months ended September 30, 2022 and 2021 was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Operating revenue | $ | $ | $ | $ | |||||||||||||||||||
9
(5) Operating Revenue
The Company's 83 diversified operating divisions 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. Operating revenue by product category, which is consistent with the Company's segment presentation, for the three and nine months ended September 30, 2022 and 2021 was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Automotive OEM | $ | $ | $ | $ | |||||||||||||||||||
| Food Equipment | |||||||||||||||||||||||
| Test & Measurement and Electronics | |||||||||||||||||||||||
| Welding | |||||||||||||||||||||||
| Polymers & Fluids | |||||||||||||||||||||||
| Construction Products | |||||||||||||||||||||||
| Specialty Products | |||||||||||||||||||||||
| Intersegment revenue | ( | ( | ( | ( | |||||||||||||||||||
| Total operating revenue | $ | $ | $ | $ | |||||||||||||||||||
The following is a description of the product offerings, end markets and typical revenue transactions for each of the Company's seven segments:
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.
Products sold in this segment are primarily manufactured to the customer's specifications and are sold under long-term supply agreements with OEM auto manufacturers and other top tier auto parts suppliers. The Company typically recognizes revenue for products in this segment at the time of shipment. Certain products may be produced utilizing tooling that is owned by the customer that the Company developed and is reimbursed by the customer for the associated cost. In these arrangements, the Company typically retains a contractual right to use the customer-owned tooling for the purpose of fulfilling its obligations under the supply agreement. The Company records reimbursements for the cost of customer-owned tooling as a cost offset rather than operating revenue as tooling is not considered a product offering central to the Company's operations.
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.
Revenue for equipment sold in this segment is typically recognized at the time of product shipment. In limited circumstances involving installation of equipment and customer acceptance, the Company may recognize revenue upon completion of installation and acceptance by the customer. Annual service contracts are typically sold separate from equipment and the related revenue is recognized on a straight-line basis over the annual service period. Operating revenue for on-demand service repairs and parts is recorded upon completion and customer acceptance of the work performed.
10
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.
Revenue for products sold in this segment is typically recognized at the time of shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue recognition is deferred until such obligations have been completed. In other limited arrangements involving the sale of highly specialized systems that include a high degree of customization and installation at the customer site, revenue is recognized over time if the product does not have an alternative use and the Company has an enforceable right to payment for work performed to date. Revenue for transactions meeting these criteria is recognized over time as work is performed based on the costs incurred to date relative to the total estimated costs at completion.
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.
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.
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.
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.
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.
11
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.
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:
•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.
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue is recognized when such obligations have been completed.
(6) Income Taxes
The Company's effective tax rate for the three months ended September 30, 2022 and 2021 was 23.9 % and 20.8 %, respectively, and 21.8 % and 17.7 % for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate for the nine months ended September 30, 2022 included a discrete income tax benefit of $51 21 112 1 9 million and $14 million for the nine months ended September 30, 2022 and 2021, respectively.
The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions, including the Internal Revenue Service ("IRS"), HM Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. The Company believes it is reasonably possible that within the next twelve months the amount of the Company's unrecognized tax benefits may be decreased by approximately $22 million related predominantly to the potential resolution of income tax examinations. The Company has recorded its best estimate of the potential exposure for these issues.
(7) Goodwill and Intangible Assets
12
(8) Inventories
Inventories as of September 30, 2022 and December 31, 2021 were as follows:
| In millions | September 30, 2022 | December 31, 2021 | |||||||||
| Raw material | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| LIFO reserve | ( | ( | |||||||||
| Total inventories | $ | $ | |||||||||
(9) Pension and Other Postretirement Benefits
Pension and other postretirement benefit costs for the three and nine months ended September 30, 2022 and 2021 were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| Pension | Other Postretirement Benefits | Pension | Other Postretirement Benefits | ||||||||||||||||||||||||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||
| Components of net periodic benefit cost: | |||||||||||||||||||||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Amortization of actuarial loss (gain) | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Amortization of prior service cost | |||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | |||||||||||||||||||||||||||||||||||||||||||||||
| Total net periodic benefit cost (income) | $ | $ | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
The service cost component of net periodic benefit cost is presented within Cost of revenue and Selling, administrative, and research and development expenses in the Statement of Income while the other components of net periodic benefit cost are presented within Other income (expense).
The Company expects to contribute approximately $14 million to its pension plans and $4 million to its other postretirement benefit plans in 2022. As of September 30, 2022, contributions of $8 million to pension plans and $3 million to other postretirement benefit plans have been made.
(10) Debt
Total debt as of September 30, 2022 and December 31, 2021 was as follows:
| In millions | September 30, 2022 | December 31, 2021 | |||||||||
| Short-term debt | $ | $ | |||||||||
| Long-term debt | |||||||||||
| Total debt | $ | $ | |||||||||
Short-term debt included commercial paper of $1.2 billion and $210 million as of September 30, 2022 and December 31, 2021, respectively. The weighted-average interest rate on commercial paper as of September 30, 2022 and December 31, 2021 was 2.68 % and 0.14 %, respectively. Short-term debt as of September 30, 2022 also included $490 million related to the 1.25 % Euro notes due May 22, 2023, which were reclassified from Long-term debt to Short-term debt in the second quarter of 2022. As of December 31, 2021, Short-term debt also included $568 million related to the 1.75 % Euro notes due May 20, 2022, which were
13
redeemed in full at face value on February 22, 2022. Additionally, the $350 million of 3.375 % notes due September 15, 2021 were redeemed in full at face value on June 15, 2021.
The Company has a $2.5 billion revolving credit facility with a termination date of September 27, 2024, which is available to provide additional liquidity, including to support the potential issuances of commercial paper. No 2.5
On October 21, 2022, the Company entered into a $3.0 billion revolving credit facility with a termination date of October 21, 2027. This agreement replaced the existing $2.5 billion revolving credit facility discussed above.
The approximate fair value and related carrying value of the Company's total long-term debt, including current maturities of long-term debt presented as short-term debt, as of September 30, 2022 and December 31, 2021 were as follows:
| In millions | September 30, 2022 | December 31, 2021 | |||||||||
| Fair value | $ | $ | |||||||||
| Carrying value | |||||||||||
The approximate fair values of the Company's long-term debt, including current maturities, were based on a valuation model using Level 2 observable inputs which included market rates for comparable instruments for the respective periods.
(11) Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes in Accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Foreign currency translation adjustments during the period | ( | ( | ( | ||||||||||||||||||||
Foreign currency translation adjustments reclassified to income | |||||||||||||||||||||||
| Income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Total foreign currency translation adjustments, net of tax | ( | ( | ( | ( | |||||||||||||||||||
Pension and other postretirement benefit adjustments reclassified to income | |||||||||||||||||||||||
| Income taxes | ( | ( | ( | ( | |||||||||||||||||||
Total pension and other postretirement benefit adjustments, net of tax | |||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Foreign currency translation adjustments reclassified to income related to the exit of immaterial foreign operations. Pension and other postretirement benefit adjustments reclassified to income represented settlements and the amortization of actuarial gains and losses. Refer to Note 9. Pension and Other Postretirement Benefits for additional information.
The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May 2015 and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of this debt resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). On February 22, 2022, €500 million of the Euro notes issued in May 2014 were redeemed in full. Refer to Note 10. Debt for additional information regarding the redemption of these notes. The carrying values of the 2019, 2015 and 2014 Euro notes were $1.6 billion, $1.0 billion and $481 million, respectively, as of September 30, 2022. The cumulative unrealized pre-tax gain (loss) recorded in Accumulated other comprehensive income
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(loss) related to the net investment hedge was a gain of $667 million and $183 million as of September 30, 2022 and December 31, 2021, respectively.
As of September 30, 2022 and 2021, the ending balance of Accumulated other comprehensive income (loss) consisted of after-tax cumulative translation adjustment losses of $1.7 billion and $1.3 billion, respectively, and after-tax unrecognized pension and other postretirement benefit costs of $182 million and $298 million, respectively.
(12) Segment Information
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 83 divisions in 52 countries. As of December 31, 2021, the Company employed approximately 45,000 people.
The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.
Due to the large number of diverse businesses and the Company's decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the Company's corporate management collects data on several key measurements: operating revenue, operating income, operating margin, overhead costs, number of months on hand in inventory, days sales outstanding in accounts receivable, past due receivables and return on invested capital. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.
THE ITW BUSINESS MODEL
The powerful and highly differentiated ITW Business Model is the Company's core source of value creation. It is the Company's competitive advantage and defines how ITW creates value for its shareholders. The ITW Business Model is comprised of three unique elements:
•ITW's 80/20 Front-to-Back process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the Company and its customers. Through the application of data driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the "80") and eliminates cost, complexity and distractions associated with the less profitable opportunities (the "20"). 80/20 enables ITW businesses to consistently achieve world-class operational excellence in product availability, quality, and innovation, while generating superior financial performance;
•Customer-back Innovation has fueled decades of profitable growth at ITW. The Company's unique innovation approach is built on insight gathered from the 80/20 Front-to-Back process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their "80" customers. ITW's innovation efforts are focused on understanding customer needs, particularly those in "80" markets with solid long-term growth fundamentals, and creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 19,300 granted and pending patents;
•ITW's Decentralized, Entrepreneurial Culture enables ITW businesses to be fast, focused, and responsive. ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational structure that, combined with outstanding execution, delivers best-in-class services and solutions adapted to each business' customers and end markets.
ENTERPRISE STRATEGY
In late 2012, ITW began its strategic framework transitioning the Company on its current path to fully leverage the compelling performance potential of the ITW Business Model. The Company undertook a complete review of its performance, focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns, and developing a strategy to replicate that performance across its operations.
ITW determined that solid and consistent above-market organic growth is the core growth engine to deliver world-class financial performance and compelling long-term returns for its shareholders. To shift its primary growth engine to organic, the Company began executing a multi-step approach.
•The first step was to narrow the focus and improve the quality of ITW's business portfolio. As part of the Portfolio Management initiative, ITW exited businesses that were operating in commoditized market spaces and prioritized sustainable differentiation as a must-have requirement for all ITW businesses. This process included both divesting
16
entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions.
As a result of this work, ITW's business portfolio now has significantly higher organic growth potential. ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve operating margins and generate price/cost increases. The Company achieved this through product line simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers, while supporting and growing the businesses' largest / most profitable customers and product lines.
•Step two, Business Structure Simplification, was implemented to simplify and scale up ITW's operating structure to support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 83 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.
•The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 through 2021 and continues to be a key contributor to the Company's ongoing enterprise strategy.
•With the initial portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for and accelerating organic growth, reapplying the 80/20 Front-to-Back process to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.
ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company's operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
PATH TO FULL POTENTIAL
Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential:
•Portfolio discipline
•80/20 Front-to-Back practice excellence
•Full-potential organic growth
Portfolio Discipline
The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model. ITW businesses have the right "raw material" in terms of market and business attributes that best fit the ITW Business Model and have significant potential to drive above-market organic growth over the long-term.
The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.
The Company routinely evaluates its portfolio to ensure it delivers sustainable differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and assessing selective high-quality acquisitions to supplement ITW's long-term growth potential.
The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with annual revenues totaling up to $1.0 billion. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. Due to the COVID-19 pandemic, the Company chose to defer any further significant divestiture activity in 2020 and 2021. The Company has reinitiated the divestiture process in 2022 for certain businesses with combined annual revenues of approximately $0.5 billion, subject to approval by the Company's Board of Directors. In the second quarter of 2022, plans were approved to divest two businesses, including one business in the
17
Polymers & Fluids segment and one business in the Food Equipment segment, with total combined revenues of $115 million for the year ended December 31, 2021. These two businesses were classified as held for sale beginning in the second quarter of 2022. Subsequent to the third quarter, on October 3, 2022, the Company completed the sale of the one business in the Polymers & Fluids segment for $220 million, subject to certain closing adjustments. The sale is expected to result in a pre-tax gain of approximately $156 million in the fourth quarter of 2022. Refer to Note 4. Divestitures in Item 1. Financial Statements for further information regarding the Company's divestitures.
80/20 Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products.
ITW will continue to drive 80/20 Front-to-Back practice excellence in every division in the Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company, division by division, will produce further customer-facing performance improvement in a number of divisions and additional structural margin expansion at the enterprise level.
Full-potential Organic Growth
Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division, with specific focus on:
•"80" focused Market Penetration - fully leveraging the considerable growth potential that resides in the Company's largest and most differentiated product offerings and customer relationships
•Customer-back Innovation - strengthening the Company's commitment to serial innovation and delivering a continuous flow of differentiated new products to its key customers
•Strategic Sales Excellence - deploying a high-performance sales function in every division
As the Company continues to make progress toward its full potential, the Company will explore opportunities to reinforce or further expand the long-term organic growth potential of ITW through the addition of selective high-quality acquisitions, such as the acquisition of the Test & Simulation business of MTS Systems Corporation ("MTS") from Amphenol Corporation on December 1, 2021. The operating results of the MTS Test & Simulation business were reported within the Company's Test & Measurement and Electronics segment. Refer to Note 3. MTS Test & Simulation Acquisition in Item 1. Financial Statements for further information regarding this acquisition.
TERMS USED BY ITW
Management uses the following terms to describe the financial results of operations of the Company:
•Organic business - acquired businesses that have been included in the Company's results of operations for more than 12 months on a constant currency basis.
•Operating leverage - the estimated effect of the organic revenue volume changes on organic operating income, assuming variable margins remain the same as the prior period.
•Price/cost - represents the estimated net impact of increases or decreases in the cost of materials used in the Company's products versus changes in the selling price to the Company's customers.
•Product line simplification (PLS) - focuses businesses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines. In the short-term, PLS may result in a decrease in revenue and overhead costs while improving operating margin. In the long-term, PLS is expected to result in growth in revenue, profitability, and returns.
Unless otherwise stated, the changes in financial results in the consolidated results of operations and the results of operations by segment represent the current year period versus the comparable period in the prior year. The following discussion of operating results should be read in conjunction with Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2021 Annual Report on Form 10-K.
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CONSOLIDATED RESULTS OF OPERATIONS
In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) occurred in China and other jurisdictions. The COVID-19 outbreak was subsequently declared a global pandemic by the World Health Organization on March 11, 2020. In response to the outbreak, governments around the globe have taken various actions to reduce its spread, including travel restrictions, shutdowns of businesses deemed nonessential, and stay-at-home or similar orders. The COVID-19 pandemic and the measures taken globally to reduce its spread have negatively impacted the global economy, causing significant disruptions in the Company's global operations starting primarily in the latter part of the first quarter of 2020 as COVID-19 spread and impacted the countries in which the Company operates and the markets the Company serves.
For the duration of the COVID-19 pandemic, the Company is focusing on the following priorities: (1) protect the health and support the well-being of ITW's colleagues; (2) continue to serve the Company's customers with excellence to the best of its ability; (3) maintain financial strength, liquidity and strategic optionality; and (4) leverage the Company's strengths to position it to fully participate in the recovery. To support ITW's colleagues, among its many actions and initiatives, the Company redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagues who have child and elder care needs, and implemented aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. To support its customers, the Company has worked diligently to keep its facilities open and operating safely. The Company has adapted customer service systems and practices to seamlessly serve its customers under "work from home" requirements in many parts of the world.
In areas around the world where governments issued stay-at-home or similar orders, the vast majority of ITW's businesses were designated as critical or essential businesses and, as such, they remained open and operational. In some cases, this is because the Company's products directly impact the COVID-19 response effort. In other cases, the Company's businesses are designated as critical because they play a vital role in serving and supporting industries that are deemed essential to the physical and economic health of our communities.
While the vast majority of the Company's facilities have remained open and operational during the pandemic, many of these facilities were operating at a reduced capacity at various times since the outset of the pandemic. The full extent of the COVID-19 outbreak and its impact on the markets served by the Company and on the Company's operations and financial position continues to be highly uncertain as conditions continue to fluctuate around the world, with vaccine administration rising in certain regions, spikes in infections (including the spread of variants) continuing to be experienced and certain jurisdictions continuing to impose stay-at-home orders. The pandemic and resurgence of outbreaks could continue to adversely impact the operations of the Company and its customers and suppliers. A description of the risks relating to the impact of the COVID-19 outbreak on the Company's business, operations and financial condition is contained in Part I - Item 1A - Risk Factors in the Company's 2021 Annual Report on Form 10-K.
During the first quarter of 2022, Russian military forces invaded Ukraine. In response, the United States and several other countries imposed economic and other sanctions on Russia. The Company has four immaterial Russian subsidiaries with total assets of approximately $29 million as of September 30, 2022. The revenue for these four subsidiaries for the year ended December 31, 2021 was approximately $31 million. Sales to customers in Russia represented less than one percent of ITW’s total consolidated revenue and were not material to the Company’s results of operations or financial position.
In a challenging and dynamic environment, the Company delivered strong financial results in the third quarter and year-to-date periods of 2022 primarily due to the continued successful execution of enterprise initiatives, including the "Win the Recovery" actions initiated over the course of the past year, and continued focus on the highly differentiated ITW Business Model. Despite rising costs and a challenging global supply chain environment, the Company generated operating revenue growth of 12.8 percent and 11.0 percent in the third quarter and year-to-date periods of 2022, respectively, as six of seven segments achieved worldwide organic revenue growth. Operating income was $983 million in the third quarter and $2.8 billion in the year-to-date period of 2022. Operating margin was 24.5 percent and 23.4 percent in the third quarter and year-to-date periods of 2022, respectively.
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The Company's consolidated results of operations for the third quarter and year-to-date periods of 2022 and 2021 were as follows:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | |||||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 4,011 | $ | 3,556 | 12.8 | % | 15.7 | % | 2.8 | % | — | % | (5.7) | % | 12.8 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 983 | $ | 845 | 16.4 | % | 22.0 | % | 0.2 | % | 0.2 | % | (6.0) | % | 16.4 | % | ||||||||||||||||||||||||||||
| Operating margin % | 24.5 | % | 23.8 | % | 70 bps | 120 bps | (60) bps | 10 bps | — | 70 bps | ||||||||||||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | |||||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 11,961 | $ | 10,776 | 11.0 | % | 12.2 | % | 2.9 | % | — | % | (4.1) | % | 11.0 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 2,804 | $ | 2,643 | 6.1 | % | 11.0 | % | 0.1 | % | (0.9) | % | (4.1) | % | 6.1 | % | ||||||||||||||||||||||||||||
| Operating margin % | 23.4 | % | 24.5 | % | (110) bps | (20) bps | (60) bps | (20) bps | (10) bps | (110) bps | ||||||||||||||||||||||||||||||||||
•Operating revenue increased in the third quarter and year-to-date periods due to higher organic revenue and the MTS Test & Simulation acquisition, which was completed on December 1, 2021, partially offset by the unfavorable effect of foreign currency translation.
•Organic revenue grew 15.7% and 12.2% in the third quarter and year-to-date periods, respectively, with growth in six of seven segments. Additionally, product line simplification activities reduced organic revenue by 70 basis points in the third quarter and 40 basis points in the year-to-date period.
◦North American organic revenue increased 16.6% in the third quarter with growth in six segments, partially offset by a decline in the Specialty Products segment. In the year-to-date period, organic revenue increased 14.8% with growth in all seven segments primarily driven by the Food Equipment, Construction Products and Welding segments.
◦Europe, Middle East and Africa organic revenue increased 13.9% in the third quarter due to growth in six segments, partially offset by a decline in the Construction Products segment. In the year-to-date period, organic revenue grew 9.1% due to growth in six segments, partially offset by a decline in the Specialty Products segment.
◦Asia Pacific organic revenue increased 14.6% and 7.9% in the third quarter and year-to-date periods, respectively, due to growth in six segments, partially offset by a decline in the Specialty Products segment. China organic revenue increased 14.5% in the third quarter and 3.9% in the year-to-date period as growth in the Automotive OEM, Test & Measurement and Electronics, Polymers & Fluids and Welding segments was partially offset by a decline in the Specialty Products, Construction Products and Food Equipment segments. The results in 2022 were negatively impacted by the COVID-19 outbreak and government stay-at-home orders in China.
•Operating income of $983 million and $2.8 billion in the third quarter and year-to-date periods increased 16.4% and 6.1%, respectively, primarily due to higher organic revenue, partially offset by unfavorable foreign currency translation.
•Operating margin was 24.5% in the third quarter. The increase of 70 basis points was primarily driven by positive operating leverage of 290 basis points and benefits from the Company's enterprise initiatives of 110 basis points, partially offset by the dilutive impact of 60 basis points from the MTS Test & Simulation acquisition, unfavorable price/cost of 40 basis points and higher operating expenses, including employee-related expenses.
•In the year-to-date period, operating margin of 23.4% decreased 110 basis points primarily driven by unfavorable price/cost of 150 basis points, the dilutive impact of 60 basis points from the MTS Test & Simulation acquisition and higher operating expenses, including employee-related expenses and freight costs, partially offset by positive operating leverage of 220 basis points and benefits from the Company's enterprise initiatives of 90 basis points.
•The Company's effective tax rate for the third quarter of 2022 and 2021 was 23.9% and 20.8%, respectively, and 21.8% and 17.7% for the year-to-date periods of 2022 and 2021, respectively. The effective tax rate for the year-to-date period of 2022 included a discrete income tax benefit of $51 million in the second quarter of 2022 related to a decrease in unrecognized tax benefits resulting from the resolution of a U.S. tax audit. The effective tax rate for the third quarter and year-to-date periods of 2021 included a discrete income tax benefit of $21 million related to the utilization of capital losses. The effective tax rate for the year-to-date period of 2021 also benefited from a discrete income tax benefit of $112 million in the second quarter of 2021 related to the remeasurement of net deferred tax assets due to the enactment of the U.K. Finance Bill 2021, which increases the U.K. income tax rate from 19% to 25%
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effective April 1, 2023. Additionally, the effective tax rates for 2022 and 2021 included discrete income tax benefits related to excess tax benefits from stock-based compensation of $1 million for the third quarter of 2022 and 2021, and $9 million and $14 million for the year-to-date periods of 2022 and 2021, respectively.
•Diluted earnings per share (EPS) of $2.35 for the third quarter of 2022 increased 16.3%. Excluding the favorable impact of the third quarter 2021 discrete income tax benefit of $0.06 related to the utilization of capital losses, EPS increased 19.9%. In the year-to-date period, EPS of $6.83 increased 3.8%. Excluding the favorable impact of the $21 million discrete income tax benefit in the third quarter of 2021, the $112 million discrete income tax benefit in the second quarter of 2021 and the $51 million discrete income tax benefit in the second quarter of 2022, EPS increased 8.1%.
•The Company repurchased approximately 2.4 million and 6.0 million shares of its common stock in the third quarter and year-to-date periods of 2022, respectively, for approximately $500 million and $1.2 billion, respectively.
RESULTS OF OPERATIONS BY SEGMENT
Total operating revenue and operating income for the third quarter and year-to-date periods of 2022 and 2021 were as follows:
| Three Months ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | Operating Revenue | Operating Income | Operating Revenue | Operating Income | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||
| Automotive OEM | $ | 753 | $ | 647 | $ | 132 | $ | 112 | $ | 2,224 | $ | 2,137 | $ | 371 | $ | 434 | |||||||||||||||||||||||||||||||
| Food Equipment | 633 | 544 | 167 | 130 | 1,813 | 1,509 | 445 | 339 | |||||||||||||||||||||||||||||||||||||||
| Test & Measurement and Electronics | 715 | 552 | 180 | 148 | 2,096 | 1,710 | 486 | 475 | |||||||||||||||||||||||||||||||||||||||
| Welding | 477 | 425 | 150 | 128 | 1,413 | 1,228 | 431 | 364 | |||||||||||||||||||||||||||||||||||||||
| Polymers & Fluids | 473 | 456 | 119 | 111 | 1,450 | 1,357 | 362 | 350 | |||||||||||||||||||||||||||||||||||||||
| Construction Products | 527 | 478 | 136 | 133 | 1,643 | 1,465 | 428 | 406 | |||||||||||||||||||||||||||||||||||||||
| Specialty Products | 438 | 459 | 121 | 126 | 1,337 | 1,387 | 362 | 380 | |||||||||||||||||||||||||||||||||||||||
| Intersegment revenue | (5) | (5) | — | — | (15) | (17) | — | — | |||||||||||||||||||||||||||||||||||||||
| Unallocated | — | — | (22) | (43) | — | — | (81) | (105) | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 4,011 | $ | 3,556 | $ | 983 | $ | 845 | $ | 11,961 | $ | 10,776 | $ | 2,804 | $ | 2,643 | |||||||||||||||||||||||||||||||
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 2022 and 2021 were as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 753 | $ | 647 | 16.5 | % | 24.7 | % | — | % | — | % | (8.2) | % | 16.5 | % | |||||||||||||||||||||||||
| Operating income | $ | 132 | $ | 112 | 17.8 | % | 26.1 | % | — | % | 0.3 | % | (8.6) | % | 17.8 | % | |||||||||||||||||||||||||
| Operating margin % | 17.5 | % | 17.3 | % | 20 bps | 20 bps | — | — | — | 20 bps | |||||||||||||||||||||||||||||||
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| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 2,224 | $ | 2,137 | 4.1 | % | 9.2 | % | — | % | — | % | (5.1) | % | 4.1 | % | |||||||||||||||||||||||||
| Operating income | $ | 371 | $ | 434 | (14.5) | % | (3.7) | % | — | % | (6.2) | % | (4.6) | % | (14.5) | % | |||||||||||||||||||||||||
| Operating margin % | 16.7 | % | 20.3 | % | (360) bps | (240) bps | — | (120) bps | — | (360) bps | |||||||||||||||||||||||||||||||
•Operating revenue grew in the third quarter and year-to-date periods due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
•Organic revenue increased 24.7% in the third quarter and 9.2% in the year-to-date period. Worldwide auto builds grew 27% in the third quarter and increased 7% in the year-to-date period. The impact of Automotive OEM customers adjusting production schedules to account for the shortage of semiconductor chips and other components continued to negatively impact operating results in 2022. Additionally, product line simplification activities reduced organic revenue by 40 basis points in the third quarter and 20 basis points in the year-to-date period.
◦North American organic revenue increased 21.5% and 13.8% in the third quarter and year-to-date periods, respectively, compared to North American auto builds which grew 24% in the third quarter due to customer mix and 11% in the year-to-date period.
◦European organic revenue grew 26.2% and 2.8% in the third quarter and year-to-date periods, respectively, compared to European auto builds which increased 20% in the third quarter and decreased 3% in the year-to-date period.
◦Asia Pacific organic revenue increased 27.8% in the third quarter and 12.2% in the year-to-date period. China organic revenue grew 29.3% and 10.4% in the third quarter and year-to-date periods, respectively, versus China auto builds which increased 31% in the third quarter and 11% in the year-to-date period due to customer mix. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, grew 31% and 5% in the third quarter and year-to-date periods, respectively.
•Operating margin was 17.5% in the third quarter. The increase of 20 basis points was primarily driven by positive operating leverage of 420 basis points and benefits from the Company's enterprise initiatives, partially offset by higher operating expenses, including costs related to continued investment in the business and employee-related expenses, and unfavorable price/cost of 130 basis points.
•In the year-to-date period, operating margin of 16.7% decreased 360 basis points primarily driven by unfavorable price/cost of 240 basis points, higher operating expenses, including costs related to continued investment in the business and employee-related expenses, and higher restructuring expenses, partially offset by positive operating leverage of 170 basis points and benefits from the Company's enterprise initiatives.
FOOD EQUIPMENT
This segment is a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food retail and food institutional/restaurant markets. Products in this segment include:
•warewashing equipment;
•cooking equipment, including ovens, ranges and broilers;
•refrigeration equipment, including refrigerators, freezers and prep tables;
•food processing equipment, including slicers, mixers and scales;
•kitchen exhaust, ventilation and pollution control systems; and
•food equipment service, maintenance and repair.
22
The results of operations for the Food Equipment segment for the third quarter and year-to-date periods of 2022 and 2021 were as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 633 | $ | 544 | 16.4 | % | 23.1 | % | — | % | — | % | (6.7) | % | 16.4 | % | |||||||||||||||||||||||||
| Operating income | $ | 167 | $ | 130 | 28.3 | % | 37.0 | % | — | % | (1.4) | % | (7.3) | % | 28.3 | % | |||||||||||||||||||||||||
| Operating margin % | 26.3 | % | 23.9 | % | 240 bps | 270 bps | — | (30) bps | — | 240 bps | |||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 1,813 | $ | 1,509 | 20.2 | % | 25.2 | % | — | % | — | % | (5.0) | % | 20.2 | % | |||||||||||||||||||||||||
| Operating income | $ | 445 | $ | 339 | 31.2 | % | 37.7 | % | — | % | (0.7) | % | (5.8) | % | 31.2 | % | |||||||||||||||||||||||||
| Operating margin % | 24.5 | % | 22.5 | % | 200 bps | 220 bps | — | (10) bps | (10) bps | 200 bps | |||||||||||||||||||||||||||||||
•Operating revenue grew in the third quarter and year-to-date periods due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
•Organic revenue increased 23.1% in the third quarter as equipment and service organic revenue grew 27.9% and 14.1%, respectively. In the year-to-date period, organic revenue increased 25.2% as equipment and service organic revenue grew 28.0% and 19.6%, respectively.
◦North American organic revenue increased 30.0% in the third quarter and 26.6% in the year-to-date period. Equipment organic revenue grew 39.6% in the third quarter and 32.3% in the year-to-date period with growth in the restaurant, institutional and food retail end markets. Service organic revenue increased 15.0% and 17.2% in the third quarter and year-to-date periods, respectively.
◦International organic revenue increased 14.3% and 23.4% in the third quarter and year-to-date periods, respectively. Equipment organic revenue grew 15.0% and 22.9% in the third quarter and year-to-date periods, respectively, primarily due to higher demand in the European warewash, refrigeration and cooking end markets. Service organic revenue increased 12.7% and 24.0% in the third quarter and year-to-date periods, respectively.
•Operating margin was 26.3% in the third quarter. The increase of 240 basis points was primarily due to positive operating leverage of 420 basis points, favorable price/cost of 120 basis points and benefits from the Company's enterprise initiatives, partially offset by higher operating expenses, including employee-related expenses.
•In the year-to-date period, operating margin of 24.5% increased 200 basis points primarily due to positive operating leverage of 480 basis points, benefits from the Company's enterprise initiatives and favorable price/cost of 10 basis points, partially offset by higher operating expenses, including employee-related 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, 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.
23
The results of operations for the Test & Measurement and Electronics segment for the third quarter and year-to-date periods of 2022 and 2021 were as follows:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | |||||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 715 | $ | 552 | 29.5 | % | 17.1 | % | 18.3 | % | — | % | (5.9) | % | 29.5 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 180 | $ | 148 | 21.5 | % | 26.1 | % | 0.9 | % | 0.1 | % | (5.6) | % | 21.5 | % | ||||||||||||||||||||||||||||
| Operating margin % | 25.2 | % | 26.8 | % | (160) bps | 210 bps | (370) bps | — | — | (160) bps | ||||||||||||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | |||||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 2,096 | $ | 1,710 | 22.5 | % | 8.4 | % | 18.0 | % | — | % | (3.9) | % | 22.5 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 486 | $ | 475 | 2.3 | % | 4.9 | % | 0.5 | % | 0.3 | % | (3.4) | % | 2.3 | % | ||||||||||||||||||||||||||||
| Operating margin % | 23.2 | % | 27.8 | % | (460) bps | (90) bps | (380) bps | 10 bps | — | (460) bps | ||||||||||||||||||||||||||||||||||
•Operating revenue grew in the third quarter and year-to-date periods due to the MTS Test & Simulation acquisition and higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
•Organic revenue increased 17.1% in the third quarter and 8.4% in the year-to-date period.
◦Organic revenue for the test and measurement businesses increased 19.9% and 12.8% in the third quarter and year-to-date periods, respectively, primarily driven by higher semiconductor demand in North America and the impact of a stronger capital spending environment. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 12.9% and 8.1% in the third quarter and year-to-date periods, respectively.
◦Electronics organic revenue increased 13.8% in the third quarter primarily due to higher demand in the consumer electronics and semiconductor end markets. In the year-to-date period, organic revenue increased 3.7% primarily due to higher demand in the semiconductor end market, partially offset by a decline in the consumer electronics end market. The electronics assembly businesses increased 23.6% in the third quarter primarily due to higher demand in North America, and declined 1.5% in the year-to-date period primarily due to lower demand in North America in the first half of 2022, partially offset by growth in Asia Pacific. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, increased 9.2% and 6.6% in the third quarter and year-to-date periods, respectively, with growth across all major regions.
•Operating margin was 25.2% in the third quarter. The decrease of 160 basis points was primarily due to the dilutive impact of 370 basis points from the MTS Test & Simulation acquisition, unfavorable price/cost of 100 basis points, and higher operating expenses, including employee-related expenses, partially offset by positive operating leverage of 360 basis points and benefits from the Company's enterprise initiatives.
•In the year-to-date period, operating margin of 23.2% decreased 460 basis points primarily driven by the dilutive impact of 380 basis points from the MTS Test & Simulation acquisition, unfavorable price/cost of 170 basis points, and higher operating expenses, including employee-related expenses, partially offset by positive operating leverage of 180 basis points and benefits from the Company's enterprise initiatives.
WELDING
This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and industrial capital goods markets. Products in this segment include:
•arc welding equipment; and
•metal arc welding consumables and related accessories.
24
The results of operations for the Welding segment for the third quarter and year-to-date periods of 2022 and 2021 were as follows:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | |||||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 477 | $ | 425 | 12.4 | % | 13.9 | % | — | % | — | % | (1.5) | % | 12.4 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 150 | $ | 128 | 17.7 | % | 16.5 | % | — | % | 2.2 | % | (1.0) | % | 17.7 | % | ||||||||||||||||||||||||||||
| Operating margin % | 31.5 | % | 30.0 | % | 150 bps | 70 bps | — | 60 bps | 20 bps | 150 bps | ||||||||||||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | |||||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 1,413 | $ | 1,228 | 15.1 | % | 16.3 | % | — | % | — | % | (1.2) | % | 15.1 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 431 | $ | 364 | 18.6 | % | 18.8 | % | — | % | 0.5 | % | (0.7) | % | 18.6 | % | ||||||||||||||||||||||||||||
| Operating margin % | 30.5 | % | 29.6 | % | 90 bps | 60 bps | — | 20 bps | 10 bps | 90 bps | ||||||||||||||||||||||||||||||||||
•Operating revenue grew in the third quarter and year-to-date periods due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
•Organic revenue increased 13.9% and 16.3% in the third quarter and year-to-date periods, respectively, driven by growth in equipment of 13.4% and 15.9% and consumables of 14.7% and 16.9%, respectively. In both periods, organic revenue grew primarily due to higher demand in the industrial end markets related to heavy equipment for agriculture, infrastructure, and oil and gas and in the commercial end markets related to construction, light fabrication, and farm and ranch customers.
◦North American organic revenue increased 14.4% in the third quarter due to growth in the industrial end markets of 32.1%, partially offset by a decline in the commercial end market of 9.7%. In the year-to-date period, organic revenue grew 17.1% due to growth in the industrial and commercial end markets of 25.6% and 5.5%, respectively.
◦International organic revenue grew 11.5% and 12.1% in the third quarter and year-to-date periods, respectively, primarily due to higher equipment demand in the oil and gas end markets.
•Operating margin was 31.5% in the third quarter. The increase of 150 basis points was primarily due to positive operating leverage of 230 basis points, benefits from the Company's enterprise initiatives and lower restructuring expenses, partially offset by higher operating expenses, including employee-related expenses, and unfavorable price/cost of 90 basis points.
•In the year-to-date period, operating margin of 30.5% increased 90 basis points primarily driven by positive operating leverage of 230 basis points, benefits from the Company's enterprise initiatives and lower restructuring expenses, partially offset by higher operating expenses, including employee-related expenses and freight costs, and unfavorable price/cost of 110 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.
25
The results of operations for the Polymers & Fluids segment for the third quarter and year-to-date periods of 2022 and 2021 were as follows:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | |||||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 473 | $ | 456 | 3.5 | % | 8.4 | % | — | % | — | % | (4.9) | % | 3.5 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 119 | $ | 111 | 8.2 | % | 14.8 | % | — | % | (1.1) | % | (5.5) | % | 8.2 | % | ||||||||||||||||||||||||||||
| Operating margin % | 25.3 | % | 24.2 | % | 110 bps | 150 bps | — | (30) bps | (10) bps | 110 bps | ||||||||||||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | |||||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 1,450 | $ | 1,357 | 6.8 | % | 10.4 | % | — | % | — | % | (3.6) | % | 6.8 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 362 | $ | 350 | 3.5 | % | 7.5 | % | — | % | (0.1) | % | (3.9) | % | 3.5 | % | ||||||||||||||||||||||||||||
| Operating margin % | 25.0 | % | 25.8 | % | (80) bps | (70) bps | — | — | (10) bps | (80) bps | ||||||||||||||||||||||||||||||||||
•Operating revenue grew in the third quarter and year-to-date periods due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
•Organic revenue grew 8.4% and 10.4% in the third quarter and year-to-date periods, respectively, with growth across all major regions. Product line simplification activities reduced organic revenue by 40 basis points in the third quarter and 30 basis points in the year-to-date period.
◦Organic revenue for the automotive aftermarket businesses increased 1.6% in the third quarter primarily due to growth in the body repair and engine repair businesses in North America and growth in the European tire repair business, partially offset by a decline in the tire repair and car care businesses in North America and the European additives businesses. In the year-to-date period, organic revenue increased 7.1% with growth in the body repair, car care, engine repair and tire repair businesses in North America and growth in the European additives businesses.
◦Organic revenue for the polymers businesses increased 21.1% in the third quarter and 19.2% in the year-to-date period with growth across all major regions, primarily in the heavy industrial and wind end markets.
◦Organic revenue for the fluids businesses grew 4.8% and 4.5% in the third quarter and year-to-date periods, respectively, primarily due to an increase in the hygiene and industrial maintenance, repair and operations end markets in North America and Europe.
•Operating margin was 25.3% in the third quarter. The increase of 110 basis points was primarily due to positive operating leverage of 150 basis points, benefits from the Company's enterprise initiatives and favorable price/cost of 70 basis points, partially offset by higher operating expenses, including employee-related expenses and freight costs, and higher restructuring expenses.
•In the year-to-date period, operating margin of 25.0% decreased 80 basis points primarily driven by higher operating expenses, including employee-related expenses and freight costs, and unfavorable price/cost of 100 basis points, partially offset by positive operating leverage of 180 basis points and benefits from the Company's enterprise initiatives.
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.
26
The results of operations for the Construction Products segment for the third quarter and year-to-date periods of 2022 and 2021 were as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 527 | $ | 478 | 10.2 | % | 17.1 | % | — | % | — | % | (6.9) | % | 10.2 | % | |||||||||||||||||||||||||
| Operating income | $ | 136 | $ | 133 | 1.9 | % | 8.1 | % | — | % | (0.8) | % | (5.4) | % | 1.9 | % | |||||||||||||||||||||||||
| Operating margin % | 25.7 | % | 27.8 | % | (210) bps | (210) bps | — | (20) bps | 20 bps | (210) bps | |||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 1,643 | $ | 1,465 | 12.1 | % | 17.7 | % | — | % | — | % | (5.6) | % | 12.1 | % | |||||||||||||||||||||||||
| Operating income | $ | 428 | $ | 406 | 5.4 | % | 10.4 | % | — | % | (0.1) | % | (4.9) | % | 5.4 | % | |||||||||||||||||||||||||
| Operating margin % | 26.0 | % | 27.7 | % | (170) bps | (170) bps | — | — | — | (170) bps | |||||||||||||||||||||||||||||||
•Operating revenue grew in the third quarter and year-to-date periods due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
•Organic revenue increased 17.1% in the third quarter primarily due to growth in North America and Asia Pacific, partially offset by a decline in Europe. In the year-to-date period, organic revenue grew 17.7% with growth across all major regions. Product line simplification activities reduced organic revenue by 50 basis points in the third quarter and year-to-date periods.
◦North American organic revenue grew 34.8% in the third quarter driven by higher demand in the United States residential and commercial end markets of 42.1% and 17.4%, respectively. In the year-to-date period, organic revenue increased 31.9% driven by higher demand in the United States residential and commercial end markets of 37.2% and 17.5%, respectively.
◦International organic revenue increased 2.7% and 6.6% in the third quarter and year-to-date periods, respectively. European organic revenue declined 0.9% in the third quarter primarily due to lower demand in the commercial and residential end markets. In the year-to-date period, European organic revenue increased 7.0% primarily driven by higher demand in the commercial and residential end markets in the first half of 2022. Asia Pacific organic revenue increased 6.9% in the third quarter and 6.2% in the year-to-date period primarily due to higher demand in the Australia and New Zealand residential end markets.
•Operating margin was 25.7% in the third quarter. The decrease of 210 basis points was primarily driven by unfavorable price/cost of 150 basis points and higher operating expenses, including employee-related expenses, partially offset by positive operating leverage of 260 basis points and benefits from the Company's enterprise initiatives.
•In the year-to-date period, operating margin of 26.0% decreased 170 basis points primarily driven by unfavorable price/cost of 390 basis points and higher operating expenses, including employee-related expenses, partially offset by positive operating leverage of 260 basis points and benefits from the Company's enterprise initiatives.
SPECIALTY PRODUCTS
This segment is focused on diversified niche market opportunities with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, consumer durables, general industrial, industrial capital goods and printing and publishing markets. Products in this segment include:
•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.
27
The results of operations for the Specialty Products segment for the third quarter and year-to-date periods of 2022 and 2021 were as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 438 | $ | 459 | (4.7) | % | (0.3) | % | — | % | — | % | (4.4) | % | (4.7) | % | |||||||||||||||||||||||||
| Operating income | $ | 121 | $ | 126 | (3.4) | % | (1.5) | % | — | % | 1.9 | % | (3.8) | % | (3.4) | % | |||||||||||||||||||||||||
| Operating margin % | 27.7 | % | 27.3 | % | 40 bps | (30) bps | — | 50 bps | 20 bps | 40 bps | |||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | September 30, | Components of Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Inc (Dec) | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||||||||||||||||||||||
| Operating revenue | $ | 1,337 | $ | 1,387 | (3.6) | % | (0.5) | % | — | % | — | % | (3.1) | % | (3.6) | % | |||||||||||||||||||||||||
| Operating income | $ | 362 | $ | 380 | (4.7) | % | (2.6) | % | — | % | 0.5 | % | (2.6) | % | (4.7) | % | |||||||||||||||||||||||||
| Operating margin % | 27.1 | % | 27.4 | % | (30) bps | (60) bps | — | 20 bps | 10 bps | (30) bps | |||||||||||||||||||||||||||||||
•Operating revenue declined in the third quarter and year-to-date periods due to the unfavorable effect of foreign currency translation and lower organic revenue.
•Organic revenue decreased 0.3% in the third quarter as equipment sales declined 10.8% and consumable sales grew 2.3%. In the year-to-date period, organic revenue declined 0.5% as equipment sales declined 15.9% and consumable sales increased 3.5%. Additionally, product line simplification activities reduced organic revenue by 370 basis points and 170 basis points in the third quarter and year-to-date periods, respectively.
◦North American organic revenue decreased 1.8% in the third quarter primarily driven by a decline in the appliance, consumer packaging and ground support equipment businesses, partially offset by growth in the foils and thermal films and specialty films businesses. In the year-to-date period, organic revenue increased 3.2% primarily due to growth in the consumer packaging, foils and thermal films, specialty films and filter medical businesses, partially offset by a decline in the appliance, ground support equipment and strength film businesses.
◦International organic revenue increased 3.7% in the third quarter primarily due to growth in Europe in the ground support equipment, specialty films, consumer packaging and filter medical businesses, partially offset by a decline in Asia Pacific in the appliance and strength film businesses. In the year-to-date period, organic revenue declined 6.6% primarily due to a decline in Europe in the consumer packaging, appliance, and ground support equipment businesses, partially offset by growth in the filter medical, specialty films, and foils and thermal films businesses. Additionally, Asia Pacific organic revenue in the year-to-date period decreased primarily due to a decline in the strength film, appliance, foils and thermal films, and graphics businesses.
•Operating margin was 27.7% in the third quarter. The increase of 40 basis points was primarily due to benefits from the Company's enterprise initiatives, lower restructuring expenses and favorable price/cost of 30 basis points, partially offset by higher operating expenses, including employee-related expenses.
•In the year-to-date period, operating margin of 27.1% decreased 30 basis points primarily driven by higher operating expenses, including employee-related expenses, and unfavorable price/cost of 10 basis points, partially offset by benefits from the Company's enterprise initiatives and lower restructuring expenses.
OTHER FINANCIAL HIGHLIGHTS
•Interest expense in the third quarter of 2022 increased to $52 million versus $49 million in the third quarter of 2021 primarily due to higher average outstanding commercial paper, partially offset by the repayment of notes due May 20, 2022. Interest expense in the year-to-date period of 2022 was $147 million versus $153 million in 2021 primarily due to the repayment of notes due September 15, 2021 and May 20, 2022, partially offset by higher average outstanding commercial paper. Refer to Note 10. Debt in Item 1. Financial Statements for further information regarding the repayment of notes.
•Other income (expense) was income of $26 million in the third quarter of 2022, an increase of $16 million compared to the third quarter of 2021 primarily due to higher foreign currency translation gains, other net periodic benefit income and interest income in 2022. Other income (expense) was income of $64 million in the year-to-date period of
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2022, an increase of $20 million compared to 2021 primarily due to foreign currency translation gains in 2022 compared to foreign currency translation losses in 2021, and higher other net periodic benefit income and interest income in 2022, partially offset by lower investment income in 2022.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are free cash flow and short-term credit facilities. As of September 30, 2022, the Company had $774 million of cash and equivalents on hand and no outstanding borrowings under its $2.5 billion revolving credit facility. The Company also has maintained strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:
•internal investments to support organic growth and sustain core businesses;
•payment of an attractive dividend to shareholders; and
•external investments in selective strategic acquisitions that support the Company's organic growth focus, such as the acquisition of the MTS Test & Simulation business, and an active share repurchase program. Refer to Note 3. MTS Test & Simulation Acquisition in Item 1. Financial Statements for further information regarding this acquisition.
The Company believes that, based on its operating revenue, operating margin, free cash flow, and credit ratings, it could readily obtain additional financing, if necessary.
Cash Flow
The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company's financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the third quarter and year-to-date periods of 2022 and 2021 was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net cash provided by operating activities | $ | 713 | $ | 619 | $ | 1,537 | $ | 1,783 | |||||||||||||||
| Additions to plant and equipment | (101) | (71) | (256) | (217) | |||||||||||||||||||
| Free cash flow | $ | 612 | $ | 548 | $ | 1,281 | $ | 1,566 | |||||||||||||||
| Cash dividends paid | $ | (377) | $ | (359) | $ | (1,139) | $ | (1,080) | |||||||||||||||
| Repurchases of common stock | (500) | (250) | (1,250) | (750) | |||||||||||||||||||
| Acquisition of businesses (excluding cash and equivalents) | — | — | (2) | — | |||||||||||||||||||
| Net proceeds from (repayments of) debt with original maturities of three months or less | 443 | 1 | 1,078 | 1 | |||||||||||||||||||
| Proceeds from debt with original maturities of more than three months | — | — | 454 | — | |||||||||||||||||||
| Repayments of debt with original maturities of more than three months | (247) | — | (1,110) | (350) | |||||||||||||||||||
| Other, net | 10 | 9 | 23 | 73 | |||||||||||||||||||
| Effect of exchange rate changes on cash and equivalents | (46) | (20) | (88) | (37) | |||||||||||||||||||
| Net increase (decrease) in cash and equivalents | $ | (105) | $ | (71) | $ | (753) | $ | (577) | |||||||||||||||
Free cash flow decreased in the year-to-date period of 2022 due to higher working capital investments to support revenue growth, including increased inventory levels to help mitigate supply chain risk and sustain customer service levels.
Stock Repurchase Program
On August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which provided for the repurchase of up to $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program").
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Under the 2018 Program, the Company repurchased approximately 6.7 million shares of its common stock at an average price of $158.11 per share during 2019, approximately 4.2 million shares of its common stock at an average price of $167.69 per share during 2020, approximately 1.2 million shares of its common stock at an average price of $211.50 in the first quarter of 2021, approximately 1.1 million shares of its common stock at an average price of $233.29 in the second quarter of 2021, approximately 1.0 million shares of its common stock at an average price of $229.03 in the third quarter of 2021, approximately 1.1 million shares of its common stock at an average price of $237.11 in the fourth quarter of 2021, and approximately 1.2 million shares of its common stock at an average price of $216.62 in the first quarter of 2022. The 2018 Program was completed in the first quarter of 2022.
On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2021 Program"). Under the 2021 Program, the Company repurchased approximately 0.6 million shares of its common stock at an average price of $209.29 in the first quarter of 2022, approximately 1.8 million shares of its common stock at an average price of $205.03 in the second quarter of 2022, and approximately 2.4 million shares of its common stock at an average price of $204.54 in the third quarter of 2022. As of September 30, 2022, there were $2.0 billion of authorized repurchases remaining under the 2021 Program.
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After-tax Return on Average Invested Capital
The Company uses after-tax return on average invested capital ("After-tax ROIC") to measure the effectiveness of its operations' use of invested capital to generate profits. After-tax ROIC is not defined under U.S. generally accepted accounting principles ("GAAP"). After-tax ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company's ability to generate returns from cash invested in its operations and may be different than the method used by other companies to calculate After-tax ROIC. The Company defines After-tax ROIC as operating income after taxes divided by average invested capital, which is annualized when presented in interim periods. Operating income after taxes is a non-GAAP measure consisting of net income before interest expense and other income (expense), on an after-tax basis, which are excluded as they do not represent returns generated by the Company's operations. For comparability, the Company also excluded the discrete tax benefit of $51 million in the second quarter of 2022 from net income and the effective tax rate for the nine months ended September 30, 2022. Additionally, for comparability, the Company excluded the discrete tax benefit of $21 million in the third quarter of 2021 and the discrete tax benefit of $112 million in the second quarter of 2021 from net income and the effective tax rate for the three and nine month periods ended September 30, 2021. Total invested capital represents the net assets of the Company, other than cash and equivalents and outstanding debt which do not represent capital investment in the Company's operations. The most comparable GAAP measure to operating income after taxes is net income. Net income to average invested capital and After-tax ROIC for the third quarter and year-to-date periods of 2022 and 2021 were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| Dollars in millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net Income | $ | 727 | $ | 639 | $ | 2,127 | $ | 2,085 | |||||||||||||||
| Discrete tax benefit related to the second quarter 2022 | — | — | (51) | — | |||||||||||||||||||
| Discrete tax benefit related to the third quarter 2021 | — | (21) | — | (21) | |||||||||||||||||||
| Discrete tax benefit related to the second quarter 2021 | — | — | — | (112) | |||||||||||||||||||
Interest expense, net of tax (1) | 39 | 38 | 112 | 118 | |||||||||||||||||||
Other (income) expense, net of tax (1) | (20) | (9) | (49) | (34) | |||||||||||||||||||
| Operating income after taxes | $ | 746 | $ | 647 | $ | 2,139 | $ | 2,036 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Invested capital: | |||||||||||||||||||||||
| Cash and equivalents | $ | 774 | $ | 1,987 | $ | 774 | $ | 1,987 | |||||||||||||||
| Trade receivables | 3,031 | 2,729 | 3,031 | 2,729 | |||||||||||||||||||
| Inventories | 2,007 | 1,524 | 2,007 | 1,524 | |||||||||||||||||||
| Net assets held for sale | 75 | — | 75 | — | |||||||||||||||||||
| Net plant and equipment | 1,705 | 1,744 | 1,705 | 1,744 | |||||||||||||||||||
| Goodwill and intangible assets | 5,557 | 5,293 | 5,557 | 5,293 | |||||||||||||||||||
| Accounts payable and accrued expenses | (2,177) | (1,964) | (2,177) | (1,964) | |||||||||||||||||||
| Debt | (7,628) | (7,551) | (7,628) | (7,551) | |||||||||||||||||||
| Other, net | (330) | (269) | (330) | (269) | |||||||||||||||||||
| Total net assets (stockholders' equity) | 3,014 | 3,493 | 3,014 | 3,493 | |||||||||||||||||||
| Cash and equivalents | (774) | (1,987) | (774) | (1,987) | |||||||||||||||||||
| Debt | 7,628 | 7,551 | 7,628 | 7,551 | |||||||||||||||||||
| Total invested capital | $ | 9,868 | $ | 9,057 | $ | 9,868 | $ | 9,057 | |||||||||||||||
Average invested capital (2) | $ | 10,004 | $ | 9,084 | $ | 9,985 | $ | 8,912 | |||||||||||||||
Net income to average invested capital (3) | 29.1 | % | 28.1 | % | 28.4 | % | 31.2 | % | |||||||||||||||
After-tax return on average invested capital (3) | 29.9 | % | 28.5 | % | 28.6 | % | 30.5 | % | |||||||||||||||
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(1) Effective tax rate used for interest expense and other (income) expense for the three months ended September 30, 2022 and 2021 was 23.9% and 23.4%, respectively. Effective tax rate used for interest expense and other (income) expense for the nine months ended September 30, 2022 and 2021 was 23.7% and 22.9%, respectively.
(2) Average invested capital is calculated using the total invested capital balances at the start of the period and at the end of each quarter within each of the periods presented.
(3) Returns for the three months ended September 30, 2022 and 2021 were converted to an annual rate by multiplying the calculated return by 4. Returns for the nine months ended September 30, 2022 and 2021 were converted to an annual rate by dividing the calculated return by 3 and multiplying it by 4.
A reconciliation of the tax rate for the nine months ended September 30, 2022, excluding the second quarter 2022 discrete tax benefit of $51 million related to the resolution of a U.S. tax audit, is as follows:
| Nine Months Ended | |||||||||||
| September 30, 2022 | |||||||||||
| Dollars in millions | Income Taxes | Tax Rate | |||||||||
| As reported | $ | 594 | 21.8 | % | |||||||
| Discrete tax benefit related to the second quarter 2022 | 51 | 1.9 | % | ||||||||
| As adjusted | $ | 645 | 23.7 | % | |||||||
A reconciliation of the tax rate for the three and nine month periods ended September 30, 2021, excluding the third quarter 2021 discrete tax benefit of $21 million related to the utilization of capital losses and the second quarter 2021 discrete tax benefit of $112 million related to a change in the U.K. income tax rate, is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2021 | September 30, 2021 | ||||||||||||||||||||||
| Dollars in millions | Income Taxes | Tax Rate | Income Taxes | Tax Rate | |||||||||||||||||||
| As reported | $ | 167 | 20.8 | % | $ | 449 | 17.7 | % | |||||||||||||||
| Discrete tax benefit related to the third quarter 2021 | 21 | 2.6 | % | 21 | 0.8 | % | |||||||||||||||||
| Discrete tax benefit related to the second quarter 2021 | — | — | % | 112 | 4.4 | % | |||||||||||||||||
| As adjusted | $ | 188 | 23.4 | % | $ | 582 | 22.9 | % | |||||||||||||||
Refer to Note 6. Income Taxes in Item 1. Financial Statements for further information regarding the second quarter 2022 and second and third quarter 2021 discrete tax benefits.
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Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as of September 30, 2022 and December 31, 2021 is summarized as follows:
| In millions | September 30, 2022 | December 31, 2021 | Increase/ (Decrease) | ||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and equivalents | $ | 774 | $ | 1,527 | $ | (753) | |||||||||||
| Trade receivables | 3,031 | 2,840 | 191 | ||||||||||||||
| Inventories | 2,007 | 1,694 | 313 | ||||||||||||||
| Prepaid expenses and other current assets | 281 | 313 | (32) | ||||||||||||||
| Assets held for sale | 103 | — | 103 | ||||||||||||||
| Total current assets | 6,196 | 6,374 | (178) | ||||||||||||||
| Current liabilities: | |||||||||||||||||
| Short-term debt | 1,688 | 778 | 910 | ||||||||||||||
| Accounts payable and accrued expenses | 2,177 | 2,233 | (56) | ||||||||||||||
| Liabilities held for sale | 28 | — | 28 | ||||||||||||||
| Other | 499 | 459 | 40 | ||||||||||||||
| Total current liabilities | 4,392 | 3,470 | 922 | ||||||||||||||
| Net working capital | $ | 1,804 | $ | 2,904 | $ | (1,100) | |||||||||||
As of September 30, 2022, a significant portion of the Company's cash and equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to 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 a long-term credit facility, for short-term liquidity needs. The Company believes cash generated by operations and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.
Debt
Total debt as of September 30, 2022 and December 31, 2021 was as follows:
| In millions | September 30, 2022 | December 31, 2021 | |||||||||
| Short-term debt | $ | 1,688 | $ | 778 | |||||||
| Long-term debt | 5,940 | 6,909 | |||||||||
| Total debt | $ | 7,628 | $ | 7,687 | |||||||
Short-term debt included commercial paper of $1.2 billion and $210 million as of September 30, 2022 and December 31, 2021, respectively. The weighted-average interest rate on commercial paper as of September 30, 2022 and December 31, 2021 was 2.68% and 0.14%, respectively. Short-term debt as of September 30, 2022 also included $490 million related to the 1.25% Euro notes due May 22, 2023, which were reclassified from Long-term debt to Short-term debt in the second quarter of 2022. As of December 31, 2021, Short-term debt also included $568 million related to the 1.75% Euro notes due May 20, 2022, which were redeemed in full at face value on February 22, 2022. Additionally, the $350 million of 3.375% notes due September 15, 2021 were redeemed in full at face value on June 15, 2021.
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The Company has a $2.5 billion revolving credit facility with a termination date of September 27, 2024, which is available to provide additional liquidity, including to support the potential issuances of commercial paper. No amounts were outstanding under the $2.5 billion revolving credit facility as of September 30, 2022 or December 31, 2021.
On October 21, 2022, the Company entered into a $3.0 billion revolving credit facility with a termination date of October 21, 2027. This agreement replaced the existing $2.5 billion revolving credit facility discussed above.
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the trailing twelve month periods ended September 30, 2022 and December 31, 2021 was as follows:
| Dollars in millions | September 30, 2022 | December 31, 2021 | |||||||||
| Total debt | $ | 7,628 | $ | 7,687 | |||||||
| Net income | $ | 2,736 | $ | 2,694 | |||||||
| Add: | |||||||||||
| Interest expense | 196 | 202 | |||||||||
| Other income | (71) | (51) | |||||||||
| Income taxes | 777 | 632 | |||||||||
| Depreciation | 280 | 277 | |||||||||
Amortization and impairment of intangible assets | 135 | 133 | |||||||||
| EBITDA | $ | 4,053 | $ | 3,887 | |||||||
| Total debt to EBITDA ratio | 1.9 | 2.0 | |||||||||
Stockholders' Equity
The changes to stockholders' equity during the nine months ended September 30, 2022 were as follows:
| In millions | |||||
Total stockholders' equity, December 31, 2021 | $ | 3,626 | |||
| Net income | 2,127 | ||||
| Repurchases of common stock | (1,250) | ||||
| Dividends declared | (1,160) | ||||
| Foreign currency translation adjustments, net of tax | (394) | ||||
| Other, net | 65 | ||||
Total stockholders' equity, September 30, 2022 | $ | 3,014 | |||
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe," "expect," "plans," "intend," "may," "strategy," "prospects," "estimate," "will," "should," "could," "project," "target," "anticipate," "guidance," "forecast," and other similar words, and may include, without limitation, statements regarding the duration and potential effects of the COVID-19 pandemic and global supply chain challenges, related government actions and the Company's strategy in response thereto on the Company's business, future financial and operating performance, free cash flow, economic and regulatory conditions in various geographic regions including inflation, the impact of foreign currency fluctuations, the timing and amount of benefits from the Company's enterprise strategy initiatives, the timing and amount of dividends and share repurchases, the protection of the Company's intellectual property, the likelihood of future goodwill or intangible asset
34
impairment charges, the impact of adopting new accounting pronouncements, the adequacy of internally generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency of U.S. generated cash to fund cash requirements in the U.S., the cost and availability of additional financing, the availability of raw materials and energy and the impact of raw material cost inflation, the Company's portion of future benefit payments related to pension and other postretirement benefits, the Company's information technology infrastructure, potential acquisitions and divestitures and the expected performance of acquired businesses and impact of divested businesses, the impact of U.S. and global tax legislation and the estimated timing and amount related to the resolution of tax matters, the cost of compliance with environmental regulations, the impact of failure of the Company's employees to comply with applicable laws and regulations, and the outcome of outstanding legal proceedings. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include (1) the COVID-19 pandemic, related government actions and the Company's strategy in response thereto, (2) weaknesses or downturns in the markets served by the Company, (3) changes or deterioration in international and domestic political and economic conditions, such as the Russian invasion of Ukraine and the impact of related economic and other sanctions imposed on Russia, (4) the unfavorable impact of foreign currency fluctuations, (5) the Company's enterprise strategy initiatives may not have the desired impact on organic revenue growth, (6) market conditions and cost and availability of financing to fund the Company's share repurchases, (7) a delay or decrease in the introduction of new products into the Company's product lines, (8) any failure to protect the Company's intellectual property, (9) potential negative impact of impairments to goodwill and other intangible assets on the Company's return on invested capital, financial condition or results of operations, (10) raw material price increases and supply shortages or delays, (11) financial market risks to the Company's obligations under its defined benefit pension plans, (12) negative effects of service interruptions, data corruption, cyber-based attacks, network security breaches, or violations of data privacy laws, (13) the potential negative impact of acquisitions on the Company's profitability and returns, (14) potential negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (15) impact of tax legislation and regulatory action and changing tax rates, (16) potential adverse outcomes in legal proceedings, (17) uncertainties related to environmental regulation and the physical risks of climate change, (18) potential failure of the Company's employees, agents or business partners to comply with anti-corruption, import/export, human rights and other laws, and (19) increases in inflation or interest rates and the possibility of economic recession. A more detailed description of these risks is contained under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. These risks are not all- inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Any forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.
ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-public information or other confidential commercial information. Investors should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
ITEM 4. Controls and Procedures
The Company's management, with the participation of the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e)) as of September 30, 2022. Based on such evaluation, the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer have concluded that, as of September 30, 2022, the Company's disclosure controls and procedures were effective.
In connection with the evaluation by management, including the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, no changes in the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended September 30, 2022 were identified that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
None. The Company's threshold for disclosing environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million.
ITEM 1A. Risk Factors
The Company's business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary materially from recent results or from anticipated future results. Refer to the description of the Company's risk factors previously disclosed in Part I - Item 1A - Risk Factors in the Company's 2021 Annual Report on Form 10-K. There have been no material changes to the risk factors described therein.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which provided for the repurchase of up to $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). The 2018 Program was completed in the first quarter of 2022.
On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2021 Program"). As of September 30, 2022, there were $2.0 billion of authorized repurchases remaining under the 2021 Program.
Share repurchase activity for the third quarter of 2022 was as follows:
| In millions except per share amounts | ||||||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Value of Shares That May Yet Be Purchased Under Programs | ||||||||||||||||||||||
| July 2022 | — | $ | — | — | $ | 2,490 | ||||||||||||||||||||
| August 2022 | 1.4 | $ | 207.03 | 1.4 | $ | 2,192 | ||||||||||||||||||||
| September 2022 | 1.0 | $ | 200.97 | 1.0 | $ | 1,990 | ||||||||||||||||||||
| Total | 2.4 | 2.4 | ||||||||||||||||||||||||
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ITEM 6. Exhibits | ||||||||||||||
| Exhibit Index | ||||||||||||||
| Exhibit Number | Exhibit Description | |||||||
| 101 | The following financial and related information from the Illinois Tool Works Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 is formatted in Inline Extensible Business Reporting Language (iXBRL) and submitted electronically herewith: (i) Statement of Income, (ii) Statement of Comprehensive Income, (iii) Statement of Financial Position, (iv) Statement of Changes in Stockholders' Equity, (v) Statement of Cash Flows, and (vi) related Notes to Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ILLINOIS TOOL WORKS INC. | |||||||||||
| Dated: | October 27, 2022 | By: | /s/ Randall J. Scheuneman | ||||||||
| Randall J. Scheuneman | |||||||||||
| Vice President & Chief Accounting Officer | |||||||||||
| (Principal Accounting Officer and Duly Authorized Officer) | |||||||||||
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Exhibit 31
Rule 13a-14(a) Certification
I, E. Scott Santi, certify that:
1.I have reviewed this report on Form 10-Q of Illinois Tool Works Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: | October 27, 2022 | /s/ E. Scott Santi | |||||||||
| E. Scott Santi | |||||||||||
| Chairman & Chief Executive Officer | |||||||||||
Exhibit 31
Rule 13a-14(a) Certification
I, Michael M. Larsen, certify that:
1.I have reviewed this report on Form 10-Q of Illinois Tool Works Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: | October 27, 2022 | /s/ Michael M. Larsen | |||||||||
| Michael M. Larsen | |||||||||||
| Senior Vice President & Chief Financial Officer | |||||||||||
Exhibit 32
Section 1350 Certification
The following statement is being made to the Securities and Exchange Commission solely for purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), which carries with it certain criminal penalties in the event of a knowing or willful misrepresentation.
Each of the undersigned hereby certifies that the Quarterly Report on Form 10-Q for the period ended September 30, 2022 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
| Dated: | October 27, 2022 | /s/ E. Scott Santi | |||||||||
| E. Scott Santi | |||||||||||
| Chairman & Chief Executive Officer | |||||||||||
| Dated: | October 27, 2022 | /s/ Michael M. Larsen | |||||||||
| Michael M. Larsen | |||||||||||
| Senior Vice President & Chief Financial Officer | |||||||||||