Illinois Tool Works Inc. (the "Company" or "ITW") was founded in 1912 and incorporated in 1915. The Company's ticker symbol is ITW. The Company is a global manufacturer of a diversified range of industrial products and equipment with 8483 divisions in 5352 countries. As of December 31, 2019,2021, 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. The following is a description of the Company's seven segments:
fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
polyester coatings and patch and repair products for the marine industry.
The information set forth below is applicable to all segments of the Company unless otherwise noted.
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.
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.
ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company’sCompany's operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly finish the job and reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential:
Portfolio Discipline
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”"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’sITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.
As part of its agenda to finish the job, theThe 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’sITW's long-term growth potential.
The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. However, due to the COVID-19 pandemic, the Company deferred any further significant divestiture activity until 2022 or later. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases.intends to reinitiate the divestiture process in 2022 for certain businesses with combined annual revenues of approximately $0.5 billion. Refer to Note 2.4. Divestitures in Item 8. Financial Statements and Supplementary Data for morefurther information regarding divestitures.divestiture activity.
80/20 Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products.
ITW will continue its efforts to finish the job and drive 80/20 Front-to-Back practice excellence in every division in the Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company, division by division, will produce further customer-facing performance improvement in a number of the Company's divisions and additional structural margin expansion at the enterprise level.
Full-PotentialNear-term Priorities
While it was the challenges brought about by the COVID-19 pandemic that dominated the Company's attention starting in 2020, it was the collection of capabilities and competitive advantages that have been built and honed over the past nine years through the execution of ITW's enterprise strategy that provided the Company with the options to respond. This, coupled with the proprietary and powerful ITW Business Model, diversified high-quality business portfolio and diligent execution put the Company in a position of strength in dealing with the global pandemic.
As the global pandemic continues, the Company continues to focus its efforts on (1) protecting the health and support the well-being of ITW's colleagues; (2) serving the Company's customers with excellence; (3) maintain financial strength, liquidity and strategic optionality; and (4) leverage the Company's strengths to position it to fully participate in the recovery.
"Win the Recovery" is an execution component of the Company's enterprise strategy, not a separate initiative, with every one of the Company's divisions identifying specific opportunities presented by the pandemic to capture sustainable share gains that are aligned with the ITW long-term enterprise strategy. The Company expects these efforts to contribute meaningfully to accelerate its progress toward full-potential organic growth. The Company continues to focus on delivering strong results in any environment while executing its long-term strategy to achieve and sustain ITW's full potential performance.
Full-potential Organic Growth
Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division, with specific focus on:
•"80”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•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.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. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information regarding this acquisition.
Current Year Developments
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Distribution Methods
The Company’sCompany's businesses primarily distribute their products directly to industrial manufacturers and through independent distributors.
Backlog
Backlog generally is not considered a significant factor in the Company’sCompany's businesses as relatively short delivery periods and rapid inventory turnover are characteristic of most of their products. Total backlog was $1.5$2.9 billion and $1.6 billion as of December 31, 20192021 and 2018,2020, respectively. The increase in backlog as of December 31, 2021 was primarily due to increased customer orders and the global supply chain disruptions impacting the Company's customers, and the acquisition of the MTS Test & Simulation business. Refer to Note 3. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information regarding this acquisition. Due to the predominately short-term nature of the Company's arrangements with its customers, backlog orders scheduled for shipmentexpected to be completed beyond calendar year 2020 were2022 are not materialsignificant and represent approximately 5% of total backlog as of December 31, 2019.2021.
Competition
With operations in 5352 countries, the Company offers a wide range of products in a myriad of markets, many of which are fragmented, and the Company encounters a variety of competitors that vary by product line, end market and geographic area. The Company's competitors include many regional or specialized companies, as well as large U.S. and non-U.S. companies or divisions of large companies. Each of the Company's segments generally has several main competitors and numerous smaller ones in most of their end markets and geographic areas. In addition to numerous smaller regional competitors, the Welding segment competes globally with Lincoln Electric and ESAB.
In virtually all segments, the Company differentiates its businesses from its competitors based on product innovation, product quality, brand preference and service delivery. Technical capability is also a competitive factor in most segments. The Company believes that each segment's primary competitive advantages derive from the Company's business modelITW Business Model and decentralized operating structure, which creates a strong focus on end markets and customers at the local level, enabling its businesses to respond rapidly to market dynamics. This structure enables the Company's businesses to drive operational excellence utilizing the Company's 80/20 Front-to-Back process and leveraging its product innovation capabilities. The Company also believes that its global footprint is a competitive advantage in many of its markets, especially in its Automotive OEM segment.
Raw Materials
The Company uses raw materials of various types, primarily steel, resins and chemicals, that are available from numerous commercial sources. The availability of materials and energy has not resulted in any significant business interruptions or other major problems, and no such problems are currently anticipated.
Intellectual Property
The Company owns approximately 3,6003,900 unexpired U.S. patents and 8,7009,700 foreign patents covering articles, methods and machines. In addition, the Company has approximately 1,500 applications for patents pending in the U.S. Patent Office and 4,3004,200 applications pending in foreign patent offices. There is no assurance that any of these patents will be issued. The Company maintains a patent group for the administration of patents and processing of patent applications.
The Company believes that many of its patents are valuable and important; however, the expiration of any one of the Company's patents would not have a material effect on the Company's results of operations or financial position. The Company also credits its success in the markets it serves to engineering capability; manufacturing techniques; skills and efficiency; marketing and sales promotion; and service and delivery of quality products to its customers.
In addition to patents, many of the Company's products and services are sold under various owned or licensed trademarks, which are important to the Company in the aggregate. Some of the Company's more significant trademarks include ITW, which is also used in conjunction with the trademarks of many of the Company's businesses; Deltar and Shakeproof in the Automotive OEM segment; Hobart in the Food Equipment segment; Instron and MTS in the Test & Measurement and Electronics segment; Miller in the Welding segment; Rain-X and Permatex in the Polymers & Fluids segment; Paslode in the Construction Products segment; and Hi-Cone in the Specialty Products segment.
EnvironmentalGovernment Regulations
The Company believes that its businesses and operations, including its manufacturing plants and equipment, are in substantial compliance with all applicable government laws and regulations, including those related to environmental, regulations. Additionalconsumer protection, international trade, labor and employment, human rights, tax, anti-bribery and competition matters. Any additional measures to maintain compliance are not expected to materially affect the Company’sCompany's capital expenditures (including expenditures for environmental control facilities), competitive position, financial position or results of operations.
Various legislative and administrative regulations concerning environmental issuesapplicable to the Company in the matters noted above have become effective or are under consideration in many parts of the world relating to manufacturing processes and the sale or use of certain products.world. To date, such developments have not had a substantial adverse impact on the Company's revenues, earnings or cash flows. However, if new or amended laws or regulations impose significant operational restrictions and compliance requirements upon the Company or its products, the Company's business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted. Refer to Item 1A. Risk Factors for further information.
Human Capital Management
Employees
TheAs of December 31, 2021, the Company employed approximately 45,000 people, with approximately 17,000 people located in the United States and the remainder in multiple other countries where the Company's businesses operate. The Company strives to be a great employer through its demonstrated commitment to talent development, employee safety, workplace culture, compensation and benefits, and diversity and inclusion.
Talent Development. The Company's Great ITW Leader Framework defines the leadership capabilities and attributes that guide all leadership talent assessment, development and selection decisions. Great ITW Leaders are expected to be experts in the practice of the ITW Business Model, make great strategic choices, deliver great results, be great talent managers and provide strong leadership. Great ITW Leaders who have expertise in the ITW Business Model are the critical factor in translating the potential of the ITW Business Model into full performance. Because this expertise develops over time and through specific experiences, the Company focuses on developing and promoting its own talent to ensure the Company's sustained business success over the long term.
Employee Safety. The safety and well-being of ITW's colleagues around the world has been, and always will be, its top priority. Guided by the Company's Enterprise Safety Strategy and the philosophy that every accident is preventable, ITW strives every day to foster a proactive safety culture. ITW's Enterprise Safety Strategy is based on the following core principles: (i) a goal of zero accidents; (ii) shared ownership for safety (business and individual); (iii) proactive approach focused on accident prevention; and (iv) continuous improvement philosophy.
Consistent with these commitments, employee health and safety has been a top priority during the COVID-19 pandemic. 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 workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. Moreover, the Company's commitment to its employees was reinforced when the Company decided not to initiate any enterprise-wide employment reduction mandates or programs at any point in 2020 or 2021.
Workplace Culture. The Company operates under a decentralized, entrepreneurial culture that is crucial to the Company's performance and is one of the three unique elements of the ITW Business Model. ITW believes its colleagues around the world thrive in this culture, as it allows them to experience significant autonomy, a sense of December 31, 2019shared ownership with their colleagues, and a work atmosphere deeply rooted in the Company's core values of Integrity, Respect, Trust, Shared Risk and Simplicity.
Compensation and Benefits. As a global employer, the Company is committed to providing market-competitive compensation and benefits to attract and retain great talent across its global divisions. Specific compensation and benefits vary worldwide and are based on regional practices. In the U.S., the Company focuses on providing a comprehensive, competitive benefits package that supports the health and wellness, educational endeavors, community involvement and financial stability of its colleagues.
Diversity and Inclusion. ITW believes it is at its best when it brings together unique perspectives, experiences and ideas. Rooted in ITW's core values of Respect and Integrity, the Company is committed to equal employment opportunity, fair treatment and creating diverse and inclusive workplaces where all ITW colleagues can perform to their full potential. ITW remains committed to achieving its diversity and inclusion goals and enhancing the diversity of its global leadership teams. ITW drives progress through a comprehensive enterprise Diversity and Inclusion Framework, which focuses on (i) leadership commitment and accountability; (ii) attracting and retaining global, diverse talent; (iii) creating inclusive workplaces; and (iv) striving to be a great employer.
Labor Relations. Less than three percent of the Company's U.S. employees are represented by a labor union. Outside the U.S., employees in certain countries are represented by an employee representative organization, such as a union, works council or employee association. The Company considers its employee relations to be excellent.
The Company's Sustainability Report (formerly called the Corporate Social Responsibility Report), published annually and available on the Company's website (www.itw.com), contains more information about the Company's human capital and its programs, goals and progress. Information in the Sustainability Report or on the Company's website is not incorporated herein by reference.
Information About Our Executive Officers
The executive officers of the Company serve at the discretion of the Board of Directors. Set forth below is information regarding the principal occupations and employment and business experience over the past five years for each executive officer. Unless otherwise stated, employment is by the Company.
Executive Officers of the Company as of February 14, 202011, 2022 were as follows:
| | | | | | | | | | | | | | |
Name | Age | Present Position | Year Elected to Present Position | Other Positions Held During 2017-2021 |
E. Scott Santi | 60 | Chairman & Chief Executive Officer | 2015 | |
Axel Beck | 56 | Executive Vice President | 2020 | Group President, food equipment businesses, 2016-2020. |
Kenneth Escoe | 46 | Executive Vice President | 2020 | Vice President/General Manager, specialty products businesses, 2016-2019; Group President, specialty products businesses, 2019-2020. |
Javier Gracia Carbonell | 49 | Executive Vice President | 2022 | Vice President/General Manager, construction businesses, 2017-2020; Group President, construction businesses, 2020-2021. |
John R. Hartnett | 61 | Executive Vice President | 2012 | |
Patricia A. Hartzell | 45 | Executive Vice President | 2022 | Vice President/General Manager, test and measurement & electronics businesses, 2017-2020; Group President, test and measurement & electronics businesses, 2020-2021. |
Michael M. Larsen | 53 | Senior Vice President & Chief Financial Officer | 2013 | |
Mary K. Lawler | 56 | Senior Vice President & Chief Human Resources Officer | 2014 | |
Christopher O'Herlihy | 58 | Vice Chairman | 2015 | |
Randall J. Scheuneman | 54 | Vice President & Chief Accounting Officer | 2009 | |
Lei Schlitz | 55 | Executive Vice President | 2015 | |
Jennifer Schott | 48 | Senior Vice President, General Counsel & Secretary | 2021 | Vice President, Assistant General Counsel & Assistant Secretary, Discover Financial Services, 2016-2019; Deputy General Counsel & Assistant Secretary, Caterpillar, Inc. 2019-2021. |
Sharon Szafranski | 55 | Executive Vice President | 2020 | Vice President/General Manager, test & measurement and electronics businesses, 2016-2019; Group President, test & measurement and electronics businesses, 2019-2020. |
Michael R. Zimmerman | 61 | Executive Vice President | 2015 | |
|
| | | | |
Name | Age | Present Position | Year Elected to Present Position | Other Positions Held During 2015-2019 |
E. Scott Santi | 58 | Chairman & Chief Executive Officer | 2015 | President and Chief Executive Officer, 2012-2015 |
Axel Beck | 54 | Executive Vice President | 2020 | Vice President/General Manager, food equipment businesses, 2011-2016, Group President, food equipment businesses, 2016-2020 |
Kenneth Escoe | 44 | Executive Vice President | 2020 | Vice President/General Manager, welding businesses, 2014-2016, Vice President/General Manager, specialty products businesses, 2016-2019, Group President, specialty products businesses, 2019-2020 |
Norman D. Finch Jr. | 55 | Senior Vice President, General Counsel & Secretary | 2017 | Vice President, General Counsel and Secretary, Sealed Air Corporation, a global manufacturer of products related to food safety and security, facility hygiene and product protection, 2013-2017 |
John R. Hartnett | 59 | Executive Vice President | 2012 | |
Michael M. Larsen | 51 | Senior Vice President & Chief Financial Officer | 2013 | |
Mary K. Lawler | 54 | Senior Vice President & Chief Human Resources Officer | 2014 | |
Steven L. Martindale | 63 | Executive Vice President | 2008 | |
Christopher O’Herlihy | 56 | Vice Chairman | 2015 | Executive Vice President, 2010-2015 |
Randall J. Scheuneman | 52 | Vice President & Chief Accounting Officer | 2009 | |
Lei Schlitz | 53 | Executive Vice President | 2015 | Group President, food equipment businesses, 2011-2015 |
Sharon Szafranski | 53 | Executive Vice President | 2020 | Vice President/General Manager, food equipment businesses, 2010-2016, Vice President/General Manager, test & measurement and electronics businesses, 2016-2019, Group President, test & measurement and electronics businesses, 2019-2020 |
Michael R. Zimmerman | 59 | Executive Vice President | 2015 | Group President, welding businesses, 2010-2015 |
Available Information
The Company electronically files reports with the Securities and Exchange Commission ("SEC"(the "SEC"). The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge through the Company's website (www.itw.com), as soon as reasonably practicable after electronically filing with or otherwise furnishing such information to the SEC, and are available in print to any shareholder who requests them.SEC. The Company will furnish any exhibit not contained herein upon the payment of a fee representing the reasonable cost to the Company of furnishing the exhibit. Requests for exhibits may be sent to Illinois Tool Works Inc., 155 Harlem Avenue, Glenview, IL 60025, Attention: Secretary. Also posted on the Company’s website are the following:
Statement of Principles of Conduct;
Company's Code of Ethics for the CEO and key financial and accounting personnel;personnel is also posted on the Company's website.
Charters of the Audit, Corporate Governance and Nominating, and Compensation Committees of the Board of Directors;
Corporate Governance Guidelines;Global Anti-Corruption Policy;
Corporate Social Responsibility Reports;
Anti-Human Trafficking Disclosure;
Conflict Minerals Policy Statement;
Supplier Code of Conduct;
Government Affairs Information;
Environmental & Sustainability Policy;
Human Rights Policy;
Safety Policy; and
United Kingdom Tax Policy Document.
ITEM 1A. Risk Factors
The Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but not limited to, those set forth below, which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K.
Economic Risks
The COVID-19 pandemic has adversely affected the Company's business, financial condition and results of operations and could affect the Company's liquidity. The full and long-term extent of the effects of the COVID-19 pandemic on our business depend on future events that continue to be highly uncertain and cannot be predicted.
The COVID-19 pandemic and the continued measures taken globally to reduce its spread have negatively impacted the global economy, disrupted consumer/customer demand and global supply chains, and created significant volatility and disruption of financial markets. These measures and the continued volatility of the global economy adversely affected our results of operations for 2020, and while most of our segments achieved strong results in 2021, we are currently unable to quantify the full and long-term impact of the pandemic on our financial condition, results of operations and liquidity.
The Company has implemented numerous actions in order to focus on the needs of its colleagues and customers, such as redesigning production processes, adjusting shift schedules and assignments and implementing aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. Further actions may be required in response to evolving conditions such as renewed travel restrictions, quarantine, and stay-at-home orders as well as uncertainty regarding the emergence of new variants and the timing of widespread availability of testing, vaccines and treatments. We cannot predict whether there will be pandemic-related facility closures in the future.
The COVID-19 pandemic continues to have the potential to significantly and extendedly alter demand for our products and to disrupt our supply chain as a result of shifts in demand, illness, quarantine, travel restrictions, transportation disruptions, increased border controls or closures, or financial hardship. We have been able to procure the critical raw materials and components necessary to continue production, but prices for some raw materials have increased significantly and there is no guarantee that we will be able to procure critical raw materials in the future without materially adversely impacting our operating margins. A prolonged extension of the conditions resulting from the pandemic could force both customer and supplier bankruptcies, which we expect would adversely impact our results; however, given the uncertainty around the continued duration and breadth of the COVID-19 pandemic, we cannot reasonably estimate the extent of these adverse effects on our operations.
The Company has sought to implement a differentiated strategy to manage through the pandemic, including a focus on thoughtful cost management and continued investment in areas of strategic importance in order to maintain optionality and fully participate in the recovery phase. Although some opportunities have already emerged from this strategy, the Company cannot estimate the extent or the timing of the benefits from this strategy, if any. If the Company's strategy does not generate the expected benefits, the Company's long-term financial results could be adversely impacted.
Furthermore, the COVID-19 pandemic has the potential to impact the proper functioning of financial and capital markets. If the economic recovery is protracted, we may not be able to access our short-term credit facilities and may be required to seek additional financing sources, which may not be available on reasonable terms or at all. If the Company suffers a liquidity shortage, we may be forced to reduce our workforce, decrease or suspend dividend payments or share repurchases, or adopt other measures. We cannot predict the likelihood, timing or the consequences of a future liquidity shortage in our business.
The ultimate significance of the COVID-19 pandemic on our business will depend on events that are beyond our control and that we cannot predict. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business, financial condition or results of operations.
The Company's results are impacted by global economic conditions. Downturns in the markets served by the Company could adversely affect its businesses, results of operations or financial condition.
The Company's businesses are impacted by economic conditions around the globe. Slower economic growth, financial market instability, inflation, natural disasters, public health crises high unemployment,(such as the COVID-19 pandemic), labor market challenges, supply chain disruptions, government deficit reduction, sequestration and other austerity measures impacting the
markets the Company serves can adversely affect the Company’sCompany's businesses by reducing demand for the Company's products and services, limiting financing available to the Company's customers, causing production delays, increasing order cancellations and the difficulty in collecting accounts receivable, increasing price competition, or increasing the risk that counterparties to the Company's contractual arrangements will become insolvent or otherwise unable to fulfill their obligations.
The global nature of the Company's operations subjects it to political, economic and economicsocial risks that could adversely affect its business, results of operations or financial condition.
Over 50% of the Company's net sales are derived from customers outside the United States, and the Company currently operates in 5352 countries. The risks inherent in the Company's global operations include:
•fluctuation in currency exchange rates;
•limitations on ownership or participation in local enterprises;
•price controls, exchange controls and limitations on repatriation of earnings;
•transportation delays and interruptions;disruptions;
•political, social and economic instability and disruptions;
•acts of terrorism;
•the impact of widespread public health crises;crises (such as the COVID-19 pandemic);
•government embargoes or foreign trade restrictions;
•the imposition of duties and tariffs and other trade barriers and retaliatory countermeasures;
•government actions impacting international trade agreements;agreements, including the EU-UK Trade and Cooperation Agreement;
•import and export controls;
•social and labor unrest and current and changing regulatory environments;
•the potential for expropriation or nationalization of enterprises;
•difficulties in staffing and managing multi-national operations;
•multiple and potentially conflicting laws, regulations and policies that are subject to change;
•limitations on its ability to enforce legal rights and remedies; and
•potentially adverse tax consequences.
The current global geopolitical and trade environment has resulted in raw material inflation and potential for increased escalation of domestic and international tariffs and retaliatory trade policies. Further changes in U.S. trade policy (including new or additional increases in duties or tariffs) and additional retaliatory actions by U.S. trade partners could result in a worsening of economic conditions. Additionally, in early 2020, an outbreak of the coronavirus occurred in China and other jurisdictions. The extent of the outbreak and its impact on the markets served by the Company and on its operations is uncertain. A prolonged outbreak could interrupt the operations of the Company and its customers and suppliers. If the Company is unable to successfully manage these and otherthe risks associated with managing and expanding its international businesses, the risks could have a material adverse effect on the Company's business, results of operations or financial condition.
The benefits from the Company’s Enterprise Strategycondition may not be as expected and the Company's financial results could be adversely impacted, or the Company may not meet its long-term financial performance targets.impacted.
As the Company continues to execute on its Enterprise Strategy initiatives, it remains focused on the core principles of portfolio discipline, 80/20 Front-to-Back practice excellence, and organic growth. Product line and customer base simplification activities, which are core elements of the Company’s 80/20 Front-to-Back process, continue to be applied by the Company’s operating divisions and are active elements of the Enterprise Strategy. Although these activities are expected to improve future operating margins and organic revenue growth, they are also expected to have a negative impact on the Company’s overall organic revenue growth in the short term. Additionally, other core activities of the Enterprise Strategy related to portfolio discipline and organic growth, including customer-back innovation and strategic sales excellence, may not have the desired impact on future operating results. If the Company is unable to realize the expected benefits from its Enterprise Strategy initiatives, the Company's financial results could be adversely impacted, or the Company may not meet its long-term financial performance targets.
The timing and amount of the Company’s share repurchases are subject to a number of uncertainties.
Share repurchases constitute a significant component of the Company’s capital allocation strategy. The Company funds its share repurchases with free cash flow and short-term borrowings. The amount and timing of share repurchases will be based on a variety of factors. Important factors that could cause the Company to limit, suspend or delay its share repurchases include unfavorable trading market conditions, the price of the Company's common stock, the nature of other investment opportunities presented to the Company from time to time, the ability to obtain financing at attractive rates and the availability of U.S. cash.
The Company may incur fines or penalties, damage to its reputation or other adverse consequences if its employees, agents or business partners violate anti-bribery, competition, export and import, environmental or other laws.
The Company has a decentralized operating structure under which its individual businesses are allowed significant decision-making autonomy within the Company’s strategic framework and internal financial and compliance controls. The Company cannot ensure that its internal controls will always protect against reckless or criminal acts committed by its employees, agents or business partners that might violate U.S. and/or non-U.S. laws, including anti-bribery, competition, export and import, and environmental laws. Any such improper actions could subject the Company to civil or criminal investigations, could lead to substantial civil or criminal monetary and non-monetary penalties against the Company or its subsidiaries, or could damage its reputation.
A significant fluctuation between the U.S. Dollar and other currencies could adversely impact the Company's operating income.
Although the Company's financial results are reported in U.S. Dollars, a significant portion of its sales and operating costs are realized in other currencies, with the largest concentration of foreign sales occurring in Europe. The Company's profitability is affected by movements of the U.S. Dollar against the Euro and other foreign currencies in which it generates revenues and incurs expenses. Significant long-term fluctuations in relative currency values, and in particular, an increase in the value of the U.S. Dollar against foreign currencies, has had and could have an adverse effect on profitability and financial condition.
Business and Operational Risks
The benefits from the Company's enterprise strategy may not be as expected and the Company's financial results could be adversely impacted, or the Company may not meet its long-term financial performance targets.
As the Company continues to execute on its enterprise strategy initiatives, it remains focused on the core principles of portfolio discipline, 80/20 Front-to-Back practice excellence, and organic growth. Product line and customer base simplification activities, which are core elements of the Company's 80/20 Front-to-Back process, continue to be applied by the Company's operating divisions and are active elements of the enterprise strategy. Although these activities are expected to improve future operating margins and organic revenue growth, they are also expected to have a negative impact on the Company's overall organic revenue growth in the short term. Additionally, other core activities of the enterprise strategy related to portfolio discipline and organic growth, including customer-back innovation and strategic sales excellence, may not
have the desired impact on future operating results. If the Company is unable to realize the expected benefits from its enterprise strategy initiatives, the Company's financial results could be adversely impacted, or the Company may not meet its long-term financial performance targets.
The timing and amount of the Company's share repurchases are subject to a number of uncertainties.
Share repurchases constitute a significant component of the Company's capital allocation strategy. The Company has historically funded its share repurchases with free cash flow and short-term borrowings. The amount and timing of share repurchases will be based on a variety of factors. Important factors that could cause the Company to limit, suspend or delay its share repurchases include unfavorable trading market conditions, the price of the Company's common stock, the nature of other investment opportunities presented to the Company from time to time, regulatory developments relating to share repurchase programs, the ability to obtain financing at attractive rates and the availability of U.S. cash.
If the Company is unable to successfully introduce new products, its future growth may be adversely affected.
The Company's ability to develop new products based on innovation can affect its competitive position and sometimes requires the investment of significant time and resources. Difficulties or delays in research, development, production or commercialization of new products and services may reduce future revenues and adversely affect the Company's competitive position. If the Company is unable to create sustainable product differentiation, its organic growth may be adversely affected.
If the Company is unable to adequately protect its intellectual property, its competitive position and results of operations may be adversely impacted.
Protecting the Company's intellectual property is critical to its innovation efforts. The Company owns patents, trade secrets, copyrights, trademarks and/or other intellectual property rights related to many of its products, and also has exclusive and non-exclusive license rights under intellectual property owned by others. The Company's intellectual property rights may be challenged or infringed upon by third parties, particularly in countries where property rights are not highly developed or protected, or the Company may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. Unauthorized use of the Company's intellectual property rights by third parties, particularly in countries where property rights are not highly developed or protected, or inability to preserve existing intellectual property rights could adversely impact the Company's competitive position and results of operations.
The Company has significant goodwill and other intangible assets, and future impairment of these assets could have a material adverse impact on the Company's financial results.
The Company has recorded significant goodwill and other identifiable intangible assets on its balance sheet as a result of acquisitions, including the acquisition of the MTS Test & Simulation business in 2021. A number of factors may result in impairments to goodwill and other intangible assets, including significant negative industry or economic trends, disruptions to our business, increased competition and significant changes in the use of the assets. Impairment charges could adversely affect the Company's financial condition or results of operations in the periods recognized.
Raw material price increases and supply shortages could adversely affect results.
The supply of raw materials to the Company and to its component parts suppliers could be interrupted for a variety of reasons, including availability and pricing. The Company has experienced supply chain disruptions related to the COVID-19 pandemic, and continued disruptions to the supply chain could adversely affect the Company's ability to meet commitments to customers. Prices for raw materials necessary for production have fluctuated significantly in the past and the Company is currently experiencing upward pricing pressure on raw materials such as steel, resins and chemicals. Significant price increases could adversely affect the Company's results of operations and operating margins. In particular, inflation, changes in trade policies, the imposition of duties and tariffs, potential retaliatory countermeasures, public health crises (such as the COVID-19 pandemic) and severe weather events could adversely impact the price or availability of raw materials. The Company may not be able to pass along increased raw material and components parts prices to its customers in the form of price increases or its ability to do so could be delayed. Consequently, its results of operations and financial condition may be adversely affected.
The Company's defined benefit pension plans are subject to financial market risks that could adversely affect its results of operations and cash flows.
The performance of financial markets and interest rates impact the Company's funding obligations under its defined benefit pension plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
If the Company is unable to protect its information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, or if there is a violation of data privacy laws, there could be a negative impact on operating results or the Company may suffer financial or reputational damage.
The Company relies on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including procurement, manufacturing, distribution, invoicing and collection. These technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages; hardware failures; computer viruses; employee error or malfeasance; and attacks by computer hackers, which have continued to increase on a global scale in both magnitude and frequency, taken on novel and unprecedented forms and become more difficult to detect. Minor security breaches have occurred from time to time and are expected to occur in the future. Although the cyber-attacks experienced to date have not had a material impact, future security breaches could result in unauthorized disclosure of confidential information or personal data belonging to our employees, partners, customers or suppliers, which could cause reputational and legal harm as we are subject to data privacy laws, including the EU General Data Protection Regulation, in the various countries in which we operate. If our information technology systems suffer severe damage, disruption, or shutdown, and business continuity plans do not effectively resolve the issues in a timely manner, or if we violate data privacy laws, there could be a negative impact on operating results or the Company may suffer financial or reputational damage.
Strategic Transaction Risks
The Company's acquisition of businesses could negatively impact its profitability and returns.
The Company has engaged in various acquisitions in the past, such as the recently completed acquisition of the MTS Test & Simulation business, and could choose to acquire additional businesses in the future. Acquisitions involve a number of risks and financial, accounting, managerial and operational challenges, including the following, any of which could adversely affect the Company's profitability and returns:
•The acquired businessbusiness' inability to adapt to the ITW Business Model or otherwise perform in accordance with the Company's anticipated results or timetable, could cause it to under-perform relative to the Company’sCompany's expectations and the price paid for it, or not perform in accordance with the Company’s anticipated timetable.it.
•The acquired business could cause the Company's financial results to differ from expectations in any given fiscal period, or over the long term.
•Acquisition-related earnings charges could adversely impact operating results.
•The acquired business could place unanticipated demands on the Company's management, operational resources and financial and internal control systems.
•The Company may assume unknown liabilities, known contingent liabilities that become realized or known liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions resulting from the activities of the acquired business. The realization of any of these liabilities or deficiencies may increase the Company's expenses, adversely affect its financial position or cause noncompliance with its financial reporting obligations.
•As a result of acquisitions, the Company has in the past recorded significant goodwill and other identifiable intangible assets on its balance sheet. If the Company is not able to realize the value of these assets, it may recognize charges relating to the impairment of these assets.
Divestitures pose the risk of retained liabilities that could adversely affect the Company's financial results.
The Company has had significant divestiture activity in 2012, 2013 and 2014the past in accordance with its portfolio management initiative, and it divested additional businesses in 2019 as it continues portfolio refinements to maintain portfolio discipline. The Company has retained certain liabilities directly or through indemnifications made to the buyers against known and unknown contingent liabilities such as lawsuits, tax liabilities, product liability claims and environmental matters, which could adversely affect the Company's financial results.
Tax, Legal and Regulatory Risks
The Company has significant goodwill and other intangible assets, and future impairment of these assets could have a material adverse impact on the Company's financial results.
The Company has recorded significant goodwill and other identifiable intangible assets on its balance sheet as a result of acquisitions. A number of factors may result in impairments to goodwill and other intangible assets, including significant negative industry or economic trends, disruptions to our business, increased competition and significant changes in the use of the assets. Impairment charges could adversely affect the Company's financial condition or results of operations in the periods recognized.
Disruptions or volatility in global financial markets or changes in the Company's credit ratings could increase the Company's funding costs or reduce the availability of credit.
Global economic conditions may cause volatility and disruptions in the financial markets. The Company’s continued ability to meet its cash requirements requires substantial liquidity and access to the financial markets. In addition, the Company’s borrowing costs can be affected by short and long-term ratings assigned by independent rating agencies. If conditions in the financial markets decline or the Company’s credit ratings are negatively impacted, its funding costs could be increased or the availability of credit could be diminished.
Raw material price increases and supply shortages could adversely affect results.
The supply of raw materials to the Company and to its component parts suppliers could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect the Company's results of operations and profit margins. In particular, changes in trade policies, the imposition of duties and tariffs, potential retaliatory countermeasures and severe weather events could adversely impact the price or availability of raw materials. Due to pricing pressure or other factors, the Company may not be able to pass along increased raw material and components parts prices to its customers in the form of price increases or its ability to do so could be delayed. Consequently, its results of operations and financial condition may be adversely affected.
Unfavorable tax law changes and tax authority rulings may adversely affect results.
The Company is subject to income taxes in the U.S. and in various foreign jurisdictions. Domestic and international tax liabilities are based on the income and expenses in various tax jurisdictions. The Company's effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or changes in tax laws. The amount of income taxes is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments.
In December 2017, the U.S. government enacted comprehensive tax legislation that included significant changes to the taxation of business entities. The Company’s accounting for the tax effects of the Act may be subject to change due to subsequent clarification of the tax law which could adversely affect the Company's operating results or financial condition.
The Company's defined benefit pension plans are subject to financial market risks that could adversely affect its results of operations and cash flows.
The performance of financial markets and interest rates impact the Company's funding obligations under its defined benefit pension plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
Potential adverseAdverse outcomes in legal proceedings or enforcement actions may adversely affect results.
The Company's businesses expose it to potential costs and adverse rulings associated with commercial, intellectual property, toxic tort and other types of product liability claims. The Company's global operations also subject it to government investigations in numerous countries. We cannot predict the outcome of claims, investigations and lawsuits and we may incur costs, judgments or fines or enter into settlements that are inherent in the design, manufacture and sale of its products and the products of third-party vendors.could adversely impact our businesses, reputation or future financial results. The Company currently maintains insurance programs consisting of self-insurance up to certain limits and excess insurance coverage for claims over established limits. There can be no assurance that the Company will be able to obtain insurance on acceptable terms or that its insurance programs will provide adequate protection against actual losses. In addition, the Company is subject to the risk that one or more of its insurers may become insolvent and become unable to pay claims that may be made in the future. Even if it maintains adequate insurance programs, claims, judgements, fines or settlements could have a material adverse effect on the Company's financial condition, liquidity and results of operations and on its ability to obtain suitable, adequate or cost-effective insurance in the future.
Uncertainty related to environmental regulation and industry standards, as well as physical risks of climate change, could impact the Company's results of operations and financial position.
Increased public awareness and concern regarding environmental risks, including global climate change, may result in more international, regional and/or federal requirements or industry standards to reduce or mitigate global warming and other environmental risks. These regulations or standards could mandate even more restrictive requirements, such as stricter limits on greenhouse gas emissions and production of single use plastics, than the voluntary commitments that the Company has made or require such changes on a more accelerated time frame. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. In addition, the physical risks of climate change may impact the availability and cost of materials and natural resources, sources and supply of energy, product demand and manufacturing.manufacturing and could increase insurance and other operating costs, including, potentially, to repair damage incurred as a result of extreme weather events or to renovate or retrofit facilities to better withstand extreme weather events. If environmental laws or regulations or industry standards are either changed or adopted and impose significant operational restrictions and compliance requirements upon the Company or its products, or the Company's operations are disrupted due to physical impacts of climate change, the Company’sCompany's business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted.
If the Company is unable to protect its information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, or if there is a violation of data privacy laws, there could be a negative impact on operating results or the Company may suffer financial or reputational damage.
The Company relies on information technology networksmay incur fines or penalties, damage to its reputation or other adverse consequences if its employees, agents or business partners violate anti-bribery, competition, export and systems, includingimport, environmental, human rights or other laws.
The Company has a decentralized operating structure under which its individual businesses are allowed significant decision-making autonomy within the Internet, to process, transmitCompany's strategic framework and store electronic information,internal financial and to managecompliance controls. The Company cannot ensure that its internal controls will always protect against reckless or support a variety ofcriminal acts committed by its employees, agents or business processes and activities, including procurement, manufacturing, distribution, invoicing and collection. These technology networks and systems may be susceptible to damage, disruptions partners that might violate U.S. and/or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages; hardware failures; attacks by computer hackers; computer viruses; employee error or malfeasance. In addition, security breaches could result in unauthorized disclosure of confidential information or personal data belonging to our employees, partners, customers or suppliers. We are also subject to data privacynon-U.S. laws, including the EU General Data Protection Regulation,anti-bribery, competition, export and import, environmental and human rights laws. As recent years have seen a substantial increase in the various countries in which we operate. If our information technology systems suffer severe damage, disruption, or shutdown,global enforcement of anti-corruption laws and business continuity plans do not effectively resolve the issues in a timely manner, or if we violate data privacyadoption of new human rights laws, thereany such improper actions could be a negative impact on operating results orsubject the Company may suffer financialto civil or reputational damage.criminal investigations, could lead to substantial civil or criminal monetary and non-monetary penalties against the Company or its subsidiaries, or could damage its reputation.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe," "expect," "plans," "intends,"intend," "may," "strategy," "prospects," "estimate," "will," "should," "could," "project," "target," "anticipate,
"anticipate," "guidance," "forecast," and other similar words, including,and may include, without limitation, statements regarding the expectedduration and potential effects of the COVID-19 pandemic and global supply chain challenges, related government actions and the Company's strategy in response thereto on the Company's business, future financial and operating performance, of acquired businesses and impact of divested businesses, the impact of tariffs and raw material cost inflation,free cash flow, economic and regulatory conditions in various geographic regions, the timing and amountimpact of share repurchases,foreign currency fluctuations, the timing and amount of benefits from the Company's enterprise strategy initiatives, the timing and amount of dividends and share repurchases, the protection of the Company's intellectual property, the likelihood of future goodwill or intangible asset impairment charges, the impact of adopting new accounting pronouncements, the adequacy of internally generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency of U.S. generated cash to fund cash requirements in the U.S., the impact of the recently enacted U.S. tax legislation, the cost and availability of additional financing, the availability of raw materials and energy and the impact of raw material cost inflation, enterprise initiatives, the Company's portion of future benefit payments related to pension and postretirement benefits, the availabilityCompany's information technology infrastructure, potential acquisitions and divestitures and the expected performance of raw materialsacquired businesses and energy,impact of divested businesses, the expirationimpact of any oneU.S. and global tax legislation and the estimated timing and amount related to the resolution of the Company's patents,tax matters, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the impact of failure of the Company's employees to comply with applicable laws and regulations, the impact of foreign currency fluctuations,and the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the resolution of tax matters.proceedings. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include those risks described above. 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-
publicnon-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 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Due to the Company’sCompany's decentralized operating structure and global operations, the Company operates out of a large number of facilities worldwide, none of which are individually significant to the Company or its segments. As of December 31, 2019,2021, the Company operated approximately 440460 plants and office facilities, excluding regional sales offices and warehouse facilities. Approximately 280300 of the facilities were located outside of the United States. Principal foreign countries include Germany, China, Germany,France, and the United Kingdom and France.Kingdom.
The Company’sCompany's properties are well suited for the purposes for which they were designed and are maintained in good operating condition. Production capacity, in general, currently exceeds operating levels. Capacity levels are somewhat flexible based on the number of shifts operated and on the number of overtime hours worked. The Company adds production capacity from time to time as required by increased demand. Additions to capacity can be made within a reasonable period of time due to the nature of the Company’sCompany's businesses.
ITEM 3. 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 4. Mine Safety Disclosures
None.
PART II
ITEM 5. Market For Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Data— The Company's common stock is listed on the New York Stock Exchange. There were approximately 5,5134,967 holders of record of common stock as of January 31, 2020.2022. This number does not include beneficial owners of the Company's securities held in the name of nominees.
*Assumes $100 invested on 12/31/1416 in stock or index, including reinvestment of dividends. Fiscal years ended December 31.
Copyright© 20202022 Standard & Poor's, a division of S&P Global. All rights reserved.
The 2019 peer group2021 Peer Group consists of the following 17 public companies, consistent with the peer group included in the Company's Proxy statement:
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3M Company | Ecolab Inc. | Parker-Hannifin Corporation |
Caterpillar Inc. | Emerson Electric Co. | Parker-Hannifin Corporation |
Caterpillar Inc. | Fortive Corporation | PPG Industries, Inc. |
Cummins Inc. | Fortive Corporation | Rockwell Automation, Inc. |
Deere & Company | General Dynamics Corporation | Raytheon Company |
Deere & Company | Honeywell International Inc. | Rockwell Automation, Inc. |
Dover Corporation | Ingersoll-Rand plc | Stanley Black & Decker, Inc. |
Dover Corporation | Honeywell International Inc. | Trane Technologies plc |
Eaton Corporation plc | Johnson Controls Inc.International plc | |
The Compensation Committee of the Board of Directors of the Company reviews the peer group annually and from time to time it changes the composition of the Company’s peer group where changes are appropriate. AlthoughThe 2021 Peer Group is consistent with the 2020 Peer Group. Fortive Corporation was added to the Company’sCompany's peer group in 2017 itand was excluded from the five year2020 Peer Group five-year cumulative total return as there was insufficient historical data due to its spin-off from Danaher Corporation in 2016. For the 2021 Peer Group, Fortive Corporation was included in the five-year cumulative total return above.
Repurchases of Common Stock— On February 13, 2015,August 3, 2018, the Company’sCompany's Board of Directors authorized a stock repurchase program which providedprovides for the repurchase of up to $6.0$3.0 billion of the Company’sCompany's common stock over an open-ended period
of time (the "2015"2018 Program"). The 2015 Program was completed inAs of December 31, 2021, there were approximately $240 million of authorized repurchases remaining under the second quarter of 2019.2018 Program.
On August 3, 2018,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 "2018"2021 Program"). As of December 31, 2019,2021, there were approximately $1.9$3.0 billion of authorized repurchases remaining under the 2018 program.2021 Program.
Share repurchase activity under the Company's share repurchase programprograms for the fourth quarter of 20192021 was as follows:
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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 |
October 2021 | — | | | $ | 227.47 | | | — | | | $ | 3,480 | |
November 2021 | 0.7 | | | $ | 236.12 | | | 0.7 | | | $ | 3,336 | |
December 2021 | 0.4 | | | $ | 239.66 | | | 0.4 | | | $ | 3,240 | |
Total | 1.1 | | | | | 1.1 | | | |
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In millions except per share amounts | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Value of Shares That May Yet Be Purchased Under Programs |
October 2019 | 0.1 |
| | $ | 167.78 |
| | 0.1 |
| | $ | 2,301 |
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November 2019 | 0.3 |
| | $ | 173.98 |
| | 0.3 |
| | $ | 2,256 |
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December 2019 | 1.8 |
| | $ | 175.67 |
| | 1.8 |
| | $ | 1,946 |
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Total | 2.2 |
| | | | 2.2 |
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ITEM 6. Selected Financial Data[Reserved]
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In millions except per share amounts | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Operating revenue | $ | 14,109 |
| | $ | 14,768 |
| | $ | 14,314 |
| | $ | 13,599 |
| | $ | 13,405 |
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Income from continuing operations | 2,521 |
| | 2,563 |
| | 1,687 |
| | 2,035 |
| | 1,899 |
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Income per share from continuing operations: | | | | |
Basic | 7.78 |
| | 7.65 |
| | 4.90 |
| | 5.73 |
| | 5.16 |
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Diluted | 7.74 |
| | 7.60 |
| | 4.86 |
| | 5.70 |
| | 5.13 |
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Total assets at year-end | 15,068 |
| | 14,870 |
| | 16,780 |
| | 15,201 |
| | 15,729 |
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Long-term debt at year-end | 7,754 |
| | 6,029 |
| | 7,478 |
| | 7,177 |
| | 6,896 |
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Cash dividends declared per common share | 4.14 |
| | 3.56 |
| | 2.86 |
| | 2.40 |
| | 2.07 |
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In 2017, the Company recorded a one-time additional income tax expense of $658 million, or $1.90 per diluted share, related to the enactment of the United States "Tax Cuts and Jobs Act." Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.
Certain reclassifications of prior year data have been made to conform to current year reporting, including the adoption of new accounting guidance as discussed below.
In March 2016, the FASB issued authoritative guidance that included several changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification of tax benefits in the statement of cash flows. Among the more significant changes, the new guidance requires that the income tax effects associated with the settlement of stock-based awards after adoption of the guidance be recognized through income tax expense rather than directly in equity. Additionally, the income tax effects related to excess tax benefits should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax benefits recognized in equity under the prior guidance were $29 million and $20 million for the years ended December 31, 2016 and 2015, respectively. The Company adopted the new guidance effective January 1, 2017 and applied the new guidance prospectively. Excess tax benefits of $28 million, $10 million and $50 million were included in Income taxes in the statement of income for the years ended December 31, 2019, 2018 and 2017, respectively. The expected effect on income tax expense or net cash provided from operating activities related to future stock-based award settlements will vary each period and will depend on inputs such as the stock price at the time of settlement and the number of awards settled in the period presented.
Additional information on the comparability of results is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7. 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 8483 divisions in 5352 countries. As of December 31, 2019,2021, 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’sCompany's core source of value creation. The ITW Business Model is the Company’sCompany's competitive advantage and defines how ITW creates value for its shareholders. It is comprised of three unique elements:
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• | 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;
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• | Customer-back Innovation has fueled decades of profitable growth at ITW. The Company’s unique innovation approach is built on insight gathered from the 80/20 Front-to-Back process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their “80” customers. ITW’s innovation efforts are focused on understanding customer needs, particularly those in “80” markets with solid long-term growth fundamentals, and creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 18,000 granted and pending patents;
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• | 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.
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•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 entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions.
As a result of this work, ITW's business portfolio now has significantly higher organic growth potential. ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve operating margins and generate price/cost increases. The Company achieved this through product line simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers, while supporting and growing the businesses' largest / most profitable customers and product lines.
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• | Step two, Business Structure Simplification, was implemented to simplify and scale up ITW’s operating structure to support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 84•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.
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• | The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 through 2019 and continues to be a key contributor to the Company's ongoing enterprise strategy.
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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’sCompany's operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
PATH TO FULL POTENTIAL - FINISHING THE JOB
Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage,
but for the Company to truly finish the job and reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential:
80/20 Front-to-Back practice excellence
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• | •Full-potential organic growth
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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”"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’sITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.
As part of its agenda to finish the job, theThe 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’sITW's long-term growth potential.
The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. However, due to the COVID-19 pandemic, the Company deferred any further significant divestiture activity until 2022 or later. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases.intends to reinitiate the divestiture process in 2022 for certain businesses with combined annual revenues of approximately $0.5 billion. Refer to Note 2.4. Divestitures in Item 8. Financial Statements and Supplementary Data for morefurther information regarding divestitures.divestiture activity.
80/20 Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products.
ITW will continue its efforts to finish the job and drive 80/20 Front-to-Back practice excellence in every division in the Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company, division by division, will produce further customer-facing performance improvement in a number of the Company's divisions and additional structural margin expansion at the enterprise level.
Full-potentialNear-term Priorities
While it was the challenges brought about by the COVID-19 pandemic that dominated the Company's attention starting in 2020, it was the collection of capabilities and competitive advantages that have been built and honed over the past nine years through the execution of ITW's enterprise strategy that provided the Company with the options to respond. This, coupled with the proprietary and powerful ITW Business Model, diversified high-quality business portfolio and diligent execution put the Company in a position of strength in dealing with the global pandemic.
As the global pandemic continues, the Company continues to focus its efforts on (1) protecting the health and support the well-being of ITW's colleagues; (2) serving the Company's customers with excellence; (3) maintain financial strength, liquidity and strategic optionality; and (4) leverage the Company's strengths to position it to fully participate in the recovery.
"Win the Recovery" is an execution component of the Company's enterprise strategy, not a separate initiative, with every one of the Company's divisions identifying specific opportunities presented by the pandemic to capture sustainable share gains that are aligned with the ITW long-term enterprise strategy. The Company expects these efforts to contribute meaningfully to
accelerate its progress toward full-potential organic growth. The Company continues to focus on delivering strong results in any environment while executing its long-term strategy to achieve and sustain ITW's full potential performance.
Full-Potential Organic Growth
Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division, with specific focus on:
•"80”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•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.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. Acquisitions in Item 8. Financial Statements and Supplementary Data 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:
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• | •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.
- acquired businesses that have been included in the Company's results of operations for more than 12 months on a constant currency basis.
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• | 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.
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• | 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.
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• | 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.
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Unless otherwise stated, the changes in financial results in the consolidated results of operations and the results of operations by segment represent the current year period versus the comparable period in the prior year.
CONSOLIDATED RESULTS OF OPERATIONS
In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) occurred 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 continued to spread and impact 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 delivered solid financial resultshas adapted
customer service systems and practices to seamlessly serve its customers under "work from home" requirements in 2019 despite a contracting industrial demand environment. Withmany 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 diversified high-quality business portfolio, highly differentiated ITW Business Modelproducts 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 continued strong executionsupporting 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 enterprise initiatives throughout the year,markets served by the Company grew diluted earnings per share and returned approximately $2.8 billionon the Company's operations and financial position continues to shareholdersbe highly uncertain as conditions continue to fluctuate around the world, with vaccine administration rising in certain regions and spikes in infections (including the formspread of dividendsvariants) also being experienced. A prolonged outbreak could continue to interrupt the operations of the Company and share repurchasesits 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 2019. Additionally, all segments had operating margin at or above 21.5% for 2019.Part I, Item 1A. Risk Factors.
TheSeparately, the Company does not believe that tariffs imposed in the past yearrecent years have had a material impact on its operating results. TheAs the global trade environment, including the regulatory environment, continues to evolve, the Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to mitigate the impact of any raw material cost increases resulting from these tariffs.
In early 2020, an outbreakThe Company delivered strong financial results in 2021 primarily due to the continued successful execution of enterprise initiatives, including the "Win the Recovery" actions initiated over the course of the coronavirus occurredpast year, and continued focus on the highly differentiated ITW Business Model. Despite rising raw material costs and a challenging global supply chain environment, the Company generated operating revenue growth of 15.0 percent and organic revenue growth of 12.3 percent, as all segments had organic revenue growth in China and other jurisdictions. The extent2021. Organic revenue for the Automotive OEM segment grew mid-single digits, but was adversely impacted by auto production reductions associated with the supply chain challenges affecting its customers, especially during the second half of 2021. Operating income grew 20.6 percent in 2021. Operating margin was 24.1 percent in 2021 as all segments achieved margin expansion compared to the prior year period.
On December 1, 2021, the Company completed the acquisition of the outbreakMTS Test & Simulation business for a purchase price of $750 million, subject to certain closing adjustments. The MTS Test & Simulation business had operating revenue of $46 million for the one month ended December 31, 2021. The Company expects the MTS Test & Simulation business to be neutral to diluted earnings per share in the next twelve months, but expects improved earnings and itsoperating margin performance in later years through the application of the Company's 80/20 Front-to-Back process. The operating results of the MTS Test & Simulation business were reported within the Test & Measurement and Electronics segment. The acquisition of the MTS Test & Simulation business did not have a material impact on the markets served by the CompanyCompany's results of operations or financial position for any period presented. Refer to Note 3. Acquisitions in Item 8. Financial Statements and on its operations is uncertain. A prolonged outbreak could interrupt the operations of the Company and its customers and suppliers.Supplementary Data for further information.
The Company presents certain financial measures in fiscal year 2017 excluding the $658 million tax charge related to the "Tax Cuts and Jobs Act" and the benefit of a favorable $95 million legal settlement. These non-GAAP measures are consistent with the way management analyzes and assesses the Company's operating performance. The Company believes these non-GAAP measures enhance investors' understanding of the Company's underlying financial performance, as well as their ability to compare the Company's financial results and overall performance to that of its peers.
The Company’s consolidated results of operations for 2019, 20182021, 2020 and 20172019 were as follows:
20192021 compared to 20182020
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| For the Years Ended | | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2021 | | 2020 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 14,455 | | | $ | 12,574 | | | | | 15.0 | % | | 12.3 | % | 0.4 | % | — | % | | 2.3 | % | 15.0 | % |
Operating income | $ | 3,477 | | | $ | 2,882 | | | | | 20.6 | % | | 17.0 | % | 0.2 | % | 0.8 | % | | 2.6 | % | 20.6 | % |
Operating margin % | 24.1 | % | | 22.9 | % | | | | 120 bps | | 100 bps | — | | 20 bps | | — | | 120 bps |
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| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2019 | | 2018 | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 14,109 |
| | $ | 14,768 |
| | (4.5 | )% | | (1.9 | )% | (0.3 | )% | — | % | (2.3 | )% | (4.5 | )% |
Operating income | $ | 3,402 |
| | $ | 3,584 |
| | (5.1 | )% | | (1.3 | )% | (0.1 | )% | (1.4 | )% | (2.3 | )% | (5.1 | )% |
Operating margin % | 24.1 | % | | 24.3 | % | | (20) bps |
| | 10 bps |
| — |
| (30) bps |
| — |
| (20) bps |
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•Operating revenue declinedincreased due to higher organic and acquisition revenue and the unfavorablefavorable effect of foreign currency translation, lower organic revenue and divestitures.translation.
•Organic revenue decreased 1.9% primarily driven by a declineincreased 12.3% as the Company saw continued improvement in both the Automotive OEM, Specialty Products, Weldingbreadth and Construction Products segments. Productpace of the recovery. Additionally, product line simplification activities reduced organic revenue by 6020 basis points.
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◦ | North American organic revenue decreased 1.8% as a decline in the Automotive OEM, Specialty Products, Welding and Polymers & Fluids segments was partially offset by growth in the Food Equipment, Test & Measurement and Electronics and Construction Products segments. |
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◦ | Europe, Middle East and Africa organic revenue decreased 2.2% as five segments declined, partially offset by growth in the Food Equipment and Construction Products segments. |
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◦ | Asia Pacific organic revenue declined 1.6% as a decrease in the Construction Products, Automotive OEM, Food Equipment and Test & Measurement and Electronics segments was partially offset by an increase in the Welding, Polymers & Fluids and Specialty Products segments. |
◦North American organic revenue increased 13.5% due to growth in all segments, primarily driven by the Welding, Test & Measurement and Electronics and Food Equipment segments.
◦Europe, Middle East and Africa organic revenue increased 8.7% due to growth in six segments, primarily driven by the Food Equipment and Construction Products segments. The Automotive OEM segment was essentially flat.
◦Asia Pacific organic revenue increased 13.5% due to growth in all segments. China organic revenue grew 15.1% with growth in six segments, partially offset by a decline in the Construction Products segment.
•Operating income of $3.4$3.5 billion decreased 5.1%increased 20.6% primarily due to unfavorable foreign currency translation, higher restructuring expenses and lower organic revenue.
•Operating margin of 24.1% decreased 20 basis points. Excluding the unfavorable impact of higher restructuring expenses of 30 basis points, operating margin increased 10120 basis points primarily due to positive operating leverage of 250 basis points and benefits from the Company's enterprise initiatives that contributed 120 basis points and favorable price/cost of 10110 basis points, partially offset by unfavorable price/cost of 150 basis points and higher overhead expenses, including employee-related expenses.
•The Company's effective tax rate was 19.0% in 2021 compared to 22.0% in 2020. The 2021 effective tax rate benefited from a discrete income tax benefit of $21 million in the third quarter related to the utilization of capital losses and 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% effective April 1, 2023. Additionally, the effective tax rate included discrete income tax benefits related to excess tax benefits from stock-based compensation of $17 million and $27 million for 2021 and 2020, respectively.
•Diluted earnings per share (EPS) of $8.51 increased 28.4%. Excluding the favorable impact of the $21 million discrete income tax benefit in the third quarter of 2021 and the $112 million discrete income tax benefit in the second quarter of 2021, EPS increased 22.0%.
•Operating cash flow was $2.6 billion and free cash flow was $2.3 billion for 2021. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of free cash flow, which is a non-GAAP measure.
•The Company repurchased approximately 4.4 million shares of its common stock in 2021 for approximately $1.0 billion.
•The Company increased the quarterly dividend on common stock from $1.14 to $1.22 per share in 2021, or from $4.56 to $4.88 per share on an annualized basis. Total cash dividends of approximately $1.5 billion were paid in 2021.
2020 compared to 2019
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| For the Years Ended | | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2020 | | 2019 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 12,574 | | | $ | 14,109 | | | | | (10.9) | % | | (9.8) | % | (0.9) | % | — | % | | (0.2) | % | (10.9) | % |
Operating income | $ | 2,882 | | | $ | 3,402 | | | | | (15.3) | % | | (16.0) | % | (0.3) | % | 1.1 | % | | (0.1) | % | (15.3) | % |
Operating margin % | 22.9 | % | | 24.1 | % | | | | (120) bps | | (160) bps | 10 bps | 30 bps | | — | | (120) bps |
•Operating revenue decreased due to lower organic revenue, the impact of 2019 divestitures and the unfavorable effect of foreign currency translation.
•Organic revenue decreased 9.8% primarily due to disruptions in the Company's global operations resulting from the COVID-19 pandemic as organic revenue declined in six of the seven segments. The Food Equipment, Automotive OEM and Welding segments had more pronounced unfavorable impacts from the COVID-19 pandemic in 2020. The Construction Products segment grew 1.5% primarily due to growth in North America. Product line simplification activities reduced the Company's organic revenue by 30 basis points.
◦North American organic revenue decreased 9.7% as a decline in six segments, primarily driven by the Automotive OEM, Food Equipment and Welding segments, was partially offset by growth in the Construction Products segment.
◦Europe, Middle East and Africa organic revenue decreased 13.8% as all seven segments had a decline in organic revenue primarily driven by the Automotive OEM and Food Equipment segments.
◦Asia Pacific organic revenue decreased 2.0% as a decline in the Food Equipment, Welding, Specialty Products and Construction Products segments was offset by growth in the Automotive OEM, Test & Measurement and Electronics and Polymers & Fluids segments. China organic revenue grew 0.3% as an increase in the Automotive OEM, Polymers & Fluids and Test & Measurement and Electronics segments was partially offset by a decline in the Food Equipment, Welding, Specialty Products and Construction Products segments.
•Operating income of $2.9 billion decreased 15.3% primarily due to lower organic revenue. Additionally, operating income for 2019 included $11.8 million related to the businesses divested in 2019.
•Operating margin of 22.9% decreased 120 basis points primarily driven by negative operating leverage of 50230 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives of 120 basis points and higher employee-relatedlower overhead expenses, such as travel and bonuses, and lower restructuring expenses.
•The effective tax rate for 2019 was 23.3%22.0% in 2020 compared to 24.5%23.3% in 2018. The 2019 and 2018 effective tax rates benefited from the lower U.S. corporate federal tax rate and discrete items.2019. The 2019 effective tax rate benefited from a discrete tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment resulting primarily from changes in estimates related to the "Tax Cuts and Jobs Act." The 2018 effective tax rate benefited from a discrete tax benefit of $37 million in the third quarter related to the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary, which was partially offset by a discrete tax charge of $22 million in the third quarter related to foreign tax credits. Additionally, the effective tax raterates for 2020 and 2019 and 2018 included $28$27 million and $10$28 million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6.7. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.
•Diluted earnings per share (EPS) of $7.74, an increase of 1.8%, included a $0.09 gain in 2019 from the disposal of businesses.were $6.63 for 2020.
Free•Operating cash flow was $2.7$2.8 billion and free cash flow was $2.6 billion for 2019.2020. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of thisfree cash flow, which is a non-GAAP measure.
•The Company repurchased approximately 9.84.2 million shares of its common stock in 20192020 for approximately $1.5 billion.$706 million. The Company temporarily suspended its share repurchase program starting in March 2020 due to the COVID-19 pandemic, and resumed share repurchases in 2021.
•The Company increased the quarterly dividend by 7.0%on common stock from $1.07 to $1.14 per share in 2019.2020, or from $4.28 to $4.56 per share on an annualized basis. Total cash dividends of approximately $1.3$1.4 billion were paid in 2019.
Adjusted after-tax return on average invested capital was 28.7% for 2019. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
2020.
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| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2018 | | 2017 | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 14,768 |
| | $ | 14,314 |
| | 3.2 | % | | 2.2 | % | (0.1 | )% | — | % | 1.1 | % | 3.2 | % |
Operating income | $ | 3,584 |
| | $ | 3,485 |
| | 2.8 | % | | 1.2 | % | — | % | 0.5 | % | 1.1 | % | 2.8 | % |
Operating margin % | 24.3 | % | | 24.3 | % | | — |
| | (20) bps |
| — |
| 10 bps |
| 10 bps |
| — |
|
Operating revenue increased due to an increase in organic revenue and the favorable effect of foreign currency translation.
Organic revenue grew 2.2% primarily due to penetration gains, higher end market demand and product innovation. Product line simplification activities reduced organic revenue growth by 70 basis points.
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◦ | North American organic revenue increased 4.0% as all seven segments had revenue growth. |
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◦ | Asia Pacific organic revenue grew 0.4% primarily driven by growth in the Welding, Test & Measurement and Electronics, Food Equipment and Polymers & Fluids segments, partially offset by a decline in the Specialty Products, Automotive OEM and Construction Products segments. |
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◦ | Europe, Middle East and Africa organic revenue decreased 0.2% primarily driven by the Automotive OEM, Specialty Products and Polymers & Fluids segments. |
In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income.
Operating income of $3.6 billion increased 2.8%. Excluding the favorable impact of the 2017 confidential legal settlement, operating income would have increased 5.7%.
Operating margin of 24.3% was flat with the prior year. Excluding the 60 basis points of favorability from the 2017 confidential legal settlement, operating margin increased 60 basis points primarily due to the benefits of the Company's enterprise initiatives that contributed 110 basis points and positive operating leverage of 50 basis points, partially offset by unfavorable price/cost of 50 basis points and higher freight and employee-related expenses.
The effective tax rate was 24.5% and 48.4% for 2018 and 2017, respectively. Included in the effective tax rate for 2017 was a one-time additional income tax expense of $658 million related to the enactment of the "Tax Cuts and Jobs Act" in the United States. Excluding the tax charge of $658 million, the 2017 effective tax rate would have been 28.3%. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.
Diluted earnings per share (EPS) of $7.60 increased 56.4%. Excluding the 2017 unfavorable impact of $1.90 for the previously discussed one-time tax charge and the favorable impact of $0.17 for the confidential legal settlement, EPS increased 15.3%.
Free cash flow was $2.4 billion for 2018. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
The Company repurchased approximately 13.9 million shares of its common stock in 2018 for approximately $2.0 billion.
The Company increased the quarterly dividend by 28.2% in 2018. Total cash dividends of approximately $1.1 billion were paid in 2018.
Adjusted after-tax return on average invested capital was 28.2%, an increase of 390 basis points, primarily due to the new U.S. tax rules and regulations. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
RESULTS OF OPERATIONS BY SEGMENT
The reconciliation of segment operating revenue and operating income to total operating revenue and operating income is as follows:
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| Operating Revenue |
In millions | 2021 | | 2020 | | 2019 |
Automotive OEM | $ | 2,800 | | | $ | 2,571 | | | $ | 3,063 | |
Food Equipment | 2,078 | | | 1,739 | | | 2,188 | |
Test & Measurement and Electronics | 2,346 | | | 1,963 | | | 2,121 | |
Welding | 1,650 | | | 1,384 | | | 1,638 | |
Polymers & Fluids | 1,804 | | | 1,622 | | | 1,669 | |
Construction Products | 1,945 | | | 1,652 | | | 1,625 | |
Specialty Products | 1,854 | | | 1,660 | | | 1,825 | |
Intersegment revenue | (22) | | | (17) | | | (20) | |
Total | $ | 14,455 | | | $ | 12,574 | | | $ | 14,109 | |
|
| | | | | | | | | | | |
| Operating Revenue |
In millions | 2019 | | 2018 | | 2017 |
Automotive OEM | $ | 3,063 |
| | $ | 3,338 |
| | $ | 3,271 |
|
Food Equipment | 2,188 |
| | 2,214 |
| | 2,123 |
|
Test & Measurement and Electronics | 2,121 |
| | 2,171 |
| | 2,069 |
|
Welding | 1,638 |
| | 1,691 |
| | 1,538 |
|
Polymers & Fluids | 1,669 |
| | 1,724 |
| | 1,724 |
|
Construction Products | 1,625 |
| | 1,700 |
| | 1,672 |
|
Specialty Products | 1,825 |
| | 1,951 |
| | 1,938 |
|
Intersegment revenue | (20 | ) | | (21 | ) | | (21 | ) |
Total | $ | 14,109 |
| | $ | 14,768 |
| | $ | 14,314 |
|
| | | | | | | | | | | | | | | | | |
| Operating Income |
In millions | 2021 | | 2020 | | 2019 |
Automotive OEM | $ | 545 | | | $ | 457 | | | $ | 659 | |
Food Equipment | 469 | | | 342 | | | 578 | |
Test & Measurement and Electronics | 643 | | | 507 | | | 542 | |
Welding | 490 | | | 376 | | | 453 | |
Polymers & Fluids | 457 | | | 402 | | | 381 | |
Construction Products | 530 | | | 421 | | | 383 | |
Specialty Products | 504 | | | 432 | | | 472 | |
Total Segments | 3,638 | | | 2,937 | | | 3,468 | |
| | | | | |
Unallocated | (161) | | | (55) | | | (66) | |
Total | $ | 3,477 | | | $ | 2,882 | | | $ | 3,402 | |
|
| | | | | | | | | | | |
| Operating Income |
In millions | 2019 | | 2018 | | 2017 |
Automotive OEM | $ | 659 |
| | $ | 751 |
| | $ | 747 |
|
Food Equipment | 578 |
| | 572 |
| | 556 |
|
Test & Measurement and Electronics | 542 |
| | 523 |
| | 464 |
|
Welding | 453 |
| | 474 |
| | 415 |
|
Polymers & Fluids | 381 |
| | 369 |
| | 357 |
|
Construction Products | 383 |
| | 414 |
| | 399 |
|
Specialty Products | 472 |
| | 522 |
| | 527 |
|
Total Segments | 3,468 |
| | 3,625 |
| | 3,465 |
|
Unallocated | (66 | ) | | (41 | ) | | 20 |
|
Total | $ | 3,402 |
| | $ | 3,584 |
| | $ | 3,485 |
|
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 annualannual basis. Unallocated expenses in 2017 includes the favorable impact from2021 are higher primarily due to higher employee-related expenses and transaction costs related to the previously discussed confidential legal settlement.acquisition of the MTS Test & Simulation business.
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 2019, 20182021, 2020 and 20172019 were as follows:
20192021 compared to 20182020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2021 | | 2020 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 2,800 | | | $ | 2,571 | | | | | 8.9 | % | | 5.8 | % | — | % | — | % | 3.1 | % | 8.9 | % |
Operating income | $ | 545 | | | $ | 457 | | | | | 19.3 | % | | 13.0 | % | — | % | 3.0 | % | 3.3 | % | 19.3 | % |
Operating margin % | 19.5 | % | | 17.8 | % | | | | 170 bps | | 120 bps | — | | 50 bps | — | | 170 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2019 | | 2018 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 3,063 |
| | $ | 3,338 |
| | (8.2 | )% | | (5.4 | )% | — | % | — | % | (2.8 | )% | (8.2 | )% |
Operating income | $ | 659 |
| | $ | 751 |
| | (12.2 | )% | | (7.0 | )% | — | % | (2.6 | )% | (2.6 | )% | (12.2 | )% |
Operating margin % | 21.5 | % | | 22.5 | % | | (100) bps |
| | (40) bps |
| — |
| (60) bps |
| — |
| (100) bps |
|
•Operating revenue declinedincreased due to lowerhigher organic revenue and the unfavorablefavorable effect of foreign currency translation.
•Organic revenue declined 5.4% versus worldwideincreased 5.8%. The impact of Automotive OEM customers adjusting production schedules to account for the shortage of semiconductor chips and other components negatively impacted organic revenue in 2021, especially during the second half of the year. Worldwide auto builds which decreased 6%increased 2%. Auto builds for North America, Europe and China, where the Company has a higher concentration of revenue as compared to the other geographic regions, were flat.
◦North American organic revenue increased 5.3% compared to North American auto builds which were flat. Auto builds for the Detroit 3, where the Company has higher content, decreased 5%.
◦European organic revenue was essentially flat compared to European auto builds which declined 6%5%.
◦Asia Pacific organic revenue increased 17.2%. China organic revenue grew 13.9% versus China auto builds which increased 4%. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, declined 8%.
•Operating margin was 19.5%. The increase of 170 basis points was primarily driven by positive operating leverage of 120 basis points, the net benefits from the Company's enterprise initiatives and cost management, and lower restructuring expenses, partially offset by unfavorable price/cost of 250 basis points.
2020 compared to 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2020 | | 2019 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 2,571 | | | $ | 3,063 | | | | | (16.1) | % | | (16.0) | % | — | % | — | % | (0.1) | % | (16.1) | % |
Operating income | $ | 457 | | | $ | 659 | | | | | (30.6) | % | | (32.3) | % | — | % | 1.5 | % | 0.2 | % | (30.6) | % |
Operating margin % | 17.8 | % | | 21.5 | % | | | | (370) bps | | (420) bps | — | | 40 bps | 10 bps | (370) bps |
•Operating revenue declined due to lower organic revenue.
•Organic revenue declined 16.0% versus worldwide auto builds which decreased 16%. Product line simplification activities reduced organic revenue by 12080 basis points. Additionally,
◦North American organic revenue decreased 22.3% compared to North American auto builds which declined 20% due to customer mix. Auto builds for the Detroit 3, where the Company has higher content, decreased 23%.
◦European organic revenue was negatively impacted by approximately 100down 16.8% compared to European auto builds which decreased 22%.
◦Asia Pacific organic revenue increased 0.7%. China organic revenue grew 6.1% versus China auto builds which decreased 4%. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, decreased 8%.
•Operating margin of 17.8% in 2020 decreased 370 basis points due to unexpected customer shutdowns in North America in the second half of 2019.
| |
◦ | North American organic revenue decreased 7.8% compared to North American auto builds which were down 4% due to customer mix. Auto builds for the Detroit 3, where the Company has higher content, decreased 8%. Additionally, 2019 was negatively impacted by unexpected customer shutdowns. |
| |
◦ | European organic revenue declined 4.5% compared to European auto builds which declined 4% in 2019 due to customer mix. |
| |
◦ | Asia Pacific organic revenue declined 2.2% in 2019. China organic revenue declined 1.0% versus Chinese auto builds which declined 8% in 2019. |
Operating margin was 21.5% in 2019. The decrease of 100 basis points was primarily due to negative operating leverage of 90330 basis points, product mix and unfavorable price/cost of 60 basis points, higher restructuring expenses and product mix, partially offset by benefits from the Company's enterprise initiatives.
2018 compared to 2017
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2018 | | 2017 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 3,338 |
| | $ | 3,271 |
| | 2.0 | % | | — | % | — | % | — | % | 2.0 | % | 2.0 | % |
Operating income | $ | 751 |
| | $ | 747 |
| | 0.5 | % | | (2.0 | )% | — | % | 0.6 | % | 1.9 | % | 0.5 | % |
Operating margin % | 22.5 | % | | 22.8 | % | | (30) bps |
| | (40) bps |
| — |
| 10 bps |
| — |
| (30) bps |
|
Operating revenue increased due to the favorable effect of foreign currency translation.
Organic revenue was flat compared to worldwide auto builds which declined 1%. Product line simplification activities reduced organic revenue growth by 120 basis points.
| |
◦ | North American organic revenue increased 3.0% compared to North American auto builds which declined 1%. Auto builds for the Detroit 3, where the Company has higher content, were flat. |
| |
◦ | European organic revenue declined 2.7% compared to European auto builds which declined 1% due to customer mix. Organic revenue was negatively impacted by the new emissions testing requirements in Europe which disrupted auto production in the second half of 2018. |
| |
◦ | Asia Pacific organic revenue decreased 0.7%. China organic revenue grew 2.6% versus Chinese auto builds which declined 4%, as auto production in China softened during the second half of 2018. |
Operating margin was 22.5% in 2018. The decrease of 30 basis points was primarily due to unfavorable price/cost of 13020 basis points, partially offset by benefits from the Company's enterprise initiatives.initiatives and lower restructuring expenses.
FOOD EQUIPMENT
This segment is a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food institutional/restaurantretail and food retailinstitutional/restaurant markets. Products in this segment include:
•warewashing equipment;
•cooking equipment, including ovens, ranges and broilers;
•refrigeration equipment, including refrigerators, freezers and prep tables;
•food processing equipment, including slicers, mixers and scales;
•kitchen exhaust, ventilation and pollution control systems; and
•food equipment service, maintenance and repair.
The results of operations for the Food Equipment segment for 2019, 20182021, 2020 and 20172019 were as follows:
20192021 compared to 20182020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2021 | | 2020 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 2,078 | | | $ | 1,739 | | | | | 19.5 | % | | 16.7 | % | — | % | — | % | 2.8 | % | 19.5 | % |
Operating income | $ | 469 | | | $ | 342 | | | | | 37.4 | % | | 31.7 | % | — | % | 2.4 | % | 3.3 | % | 37.4 | % |
Operating margin % | 22.6 | % | | 19.6 | % | | | | 300 bps | | 260 bps | — | | 40 bps | — | | 300 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2019 | | 2018 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 2,188 |
| | $ | 2,214 |
| | (1.2 | )% | | 1.1 | % | — | % | — | % | (2.3 | )% | (1.2 | )% |
Operating income | $ | 578 |
| | $ | 572 |
| | 1.1 | % | | 4.5 | % | — | % | (1.2 | )% | (2.2 | )% | 1.1 | % |
Operating margin % | 26.4 | % | | 25.8 | % | | 60 bps |
| | 90 bps |
| — |
| (30) bps |
| — |
| 60 bps |
|
•Operating revenue declined due to the unfavorable effect of foreign currency translation, partially offset by higher organic revenue.
Organic revenue increased 1.1% as equipment organic revenue decreased 0.2% and service organic revenue increased 3.5%.
| |
◦ | North American organic revenue grew 1.1%. Equipment organic revenue declined 0.4% primarily driven by lower demand in the restaurant and institutional end markets, partially offset by higher demand in food retail. Service organic revenue increased 3.6%. |
| |
◦ | International organic revenue grew 1.1% as equipment organic revenue increased 0.2% primarily due to higher demand in the European warewash, cooking and retail end markets, partially offset by lower demand in Asia. Service organic revenue increased 3.5%. |
Operating margin of 26.4% in 2019 increased 60 basis points primarily driven by benefits from the Company's enterprise initiatives, favorable price/cost of 40 basis points and positive operating leverage of 30 basis points, partially offset by product mix, higher employee-related expenses and higher restructuring expenses.
2018 compared to 2017
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2018 | | 2017 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 2,214 |
| | $ | 2,123 |
| | 4.3 | % | | 2.8 | % | — | % | — | % | 1.5 | % | 4.3 | % |
Operating income | $ | 572 |
| | $ | 556 |
| | 2.9 | % | | 1.0 | % | — | % | 0.3 | % | 1.6 | % | 2.9 | % |
Operating margin % | 25.8 | % | | 26.2 | % | | (40) bps |
| | (50) bps |
| — |
| 10 bps |
| — |
| (40) bps |
|
Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic revenue increased 2.8%16.7% as equipment and service organic revenue increased 3.2%grew 21.4% and 2.1%8.5%, respectively.
| |
◦ | North American organic revenue increased 3.5%. Equipment organic revenue grew 4.6% as higher end market demand in cooking, refrigeration and warewash was offset by lower end market demand in food retail. Service organic revenue grew 1.9%. |
◦North American organic revenue increased 16.2%. Equipment organic revenue grew 20.1% primarily due to growth in the restaurant and institutional end markets, partially offset by a decline in the food retail end markets. Service organic revenue increased 10.3%.
◦International organic revenue increased 17.4%. Equipment organic revenue grew 22.9% primarily due to higher demand in the European warewash, refrigeration and cooking end markets. Service organic revenue increased 5.5%.
•Operating margin was 22.6%. The increase of 300 basis points was primarily driven by positive operating leverage of 370 basis points, benefits from the Company's enterprise initiatives and lower restructuring expenses, partially offset by unfavorable price/cost of 90 basis points and higher overhead expenses.
| |
◦ | International organic revenue increased 1.9%. Equipment organic revenue grew 1.8% primarily due to higher demand in the European warewash and cooking end markets, partially offset by lower end market demand in refrigeration. Service organic revenue increased 2.4%. |
2020 compared to 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2020 | | 2019 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,739 | | | $ | 2,188 | | | | | (20.5) | % | | (20.6) | % | — | % | — | % | 0.1 | % | (20.5) | % |
Operating income | $ | 342 | | | $ | 578 | | | | | (40.9) | % | | (41.1) | % | — | % | (0.1) | % | 0.3 | % | (40.9) | % |
Operating margin % | 19.6 | % | | 26.4 | % | | | | (680) bps | | (680) bps | — | | — | | — | | (680) bps |
•Operating revenue declined due to lower organic revenue.
•Organic revenue declined 20.6% as equipment and service organic revenue decreased 21.8% and 18.5%, respectively.
◦North American organic revenue declined 19.2% as equipment organic revenue decreased 20.4%, primarily driven by lower demand in the restaurant and institutional end markets, partially offset by growth in the food retail end markets. Service organic revenue decreased 17.3%.
◦International organic revenue decreased 22.5%. Equipment organic revenue declined 23.5% primarily due to lower demand in the European warewash, cooking and refrigeration end markets and lower demand in Asia. Service organic revenue decreased 20.4%.
•Operating margin of 25.8%19.6% in 2018 declined 402020 decreased 680 basis points primarily due to the unfavorable impactnegative operating leverage of 540 basis points and product mix, and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives and positive operating leveragefavorable price/cost of 6050 basis points.
TEST & MEASUREMENT AND ELECTRONICS
This segment is a branded and innovative producer of test and measurement and electronic manufacturing and maintenance, repair, and operations, or "MRO" solutions that improve efficiency and quality for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, automotive original equipment manufacturers and tiers, industrial capital goods, energy and consumer durables markets. Products in this segment include:
•equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;
•electronic assembly equipment;
•electronic components and component packaging;
•static control equipment and consumables used for contamination control in clean room environments; and
•pressure sensitive adhesives and components for electronics, medical, transportation and telecommunications applications.
The results of operations for the Test & Measurement and Electronics segment for 2019, 20182021, 2020 and 20172019 were as follows:
20192021 compared to 20182020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2021 | | 2020 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 2,346 | | | $ | 1,963 | | | | | 19.5 | % | | 15.3 | % | 2.3 | % | — | % | | 1.9 | % | 19.5 | % |
Operating income | $ | 643 | | | $ | 507 | | | | | 26.9 | % | | 23.1 | % | 0.9 | % | 0.8 | % | | 2.1 | % | 26.9 | % |
Operating margin % | 27.4 | % | | 25.8 | % | | | | 160 bps | | 180 bps | (40) bps | 20 bps | | — | | 160 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2019 | | 2018 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 2,121 |
| | $ | 2,171 |
| | (2.3 | )% | | (0.3 | )% | (0.2 | )% | — | % | (1.8 | )% | (2.3 | )% |
Operating income | $ | 542 |
| | $ | 523 |
| | 3.7 | % | | 5.7 | % | — | % | (0.2 | )% | (1.8 | )% | 3.7 | % |
Operating margin % | 25.6 | % | | 24.1 | % | | 150 bps |
| | 140 bps |
| 10 bps |
| — |
| — |
| 150 bps |
|
•Operating revenue declined due to the unfavorable effect of foreign currency translation, lower organic revenue and a divestiture.
Operating revenue for 2019 included $58 million related to the business divested in 2019.
Organic revenue decreased 0.3% in 2019.
| |
◦ | Organic revenue for the test and measurement businesses decreased 0.8% primarily driven by lower semi-conductor end market demand in North America. Excluding semi-conductor, the test and measurement businesses increased 3.5%. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 6.4%. |
| |
◦ | Electronics organic revenue grew 0.4%. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 1.5% primarily due to growth in North America and Asia, partially offset by a decline in Europe. The electronics assembly businesses decreased 1.4% primarily due to lower demand in Asia. |
Operating margin of 25.6% in 2019 increased 150 basis points primarily driven by benefits from the Company's enterprise initiatives, lower intangible asset amortization expense and favorable price/cost of 50 basis points.
2018 compared to 2017
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2018 | | 2017 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 2,171 |
| | $ | 2,069 |
| | 4.9 | % | | 3.5 | % | — | % | — | % | 1.4 | % | 4.9 | % |
Operating income | $ | 523 |
| | $ | 464 |
| | 12.7 | % | | 11.3 | % | — | % | — | % | 1.4 | % | 12.7 | % |
Operating margin % | 24.1 | % | | 22.4 | % | | 170 bps |
| | 170 bps |
| — |
| — |
| — |
| 170 bps |
|
Operating revenue increased due to higher organic revenue, the MTS Test & Simulation acquisition and the favorable effect of foreign currency translation.
•Organic revenue increased 3.5%15.3%.
◦Organic revenue for the test and measurement businesses increased 14.8% primarily driven by higher semiconductor demand in 2018.North America, the impact of a stronger capital spending environment, and higher demand in the oil and gas end markets in North America. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 14.0%.
| |
◦ | Organic revenue for the test and measurement businesses increased 5.5% with growth in all major regions primarily due to higher semi-conductor end market demand. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 7.1%. |
| |
◦ | Electronics organic revenue grew 1.2%. The electronics assembly businesses declined 4.3% due to lower demand across North America and Europe. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 5.0% primarily due to higher semi-conductor end market demand in North America. |
◦Electronics organic revenue increased 15.9% driven by higher demand in consumer electronics, automotive applications and semiconductor end markets. The electronics assembly businesses grew 26.6% primarily due to higher demand in North America and Asia Pacific. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, increased 10.8% with growth in all major regions.
•On December 1, 2021, the Company completed the acquisition of the MTS Test & Simulation business, which had operating revenue of $46 million for the one month ended December 31, 2021 and increased Test & Measurement and Electronics operating revenue by 2.3%.
•Operating margin was 24.1% in 2018.27.4%. The increase of 170160 basis points was primarily driven by positive operating leverage of 90340 basis points and benefits from the Company's enterprise initiatives.initiatives, partially offset by unfavorable price/cost of 40 basis points, the dilutive impact from the MTS acquisition, higher overhead expenses and higher freight costs.
Additionally, the prior year included the recapture of amortization and depreciation expense related to a business previously classified as held for sale.
2020 compared to 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2020 | | 2019 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 1,963 | | | $ | 2,121 | | | | | (7.4) | % | | (4.9) | % | (2.8) | % | — | % | | 0.3 | % | (7.4) | % |
Operating income | $ | 507 | | | $ | 542 | | | | | (6.5) | % | | (5.2) | % | (1.3) | % | (0.2) | % | | 0.2 | % | (6.5) | % |
Operating margin % | 25.8 | % | | 25.6 | % | | | | 20 bps | | (10) bps | 40 bps | (10) bps | | — | | 20 bps |
•Operating revenue declined due to lower organic revenue and the impact of a 2019 divestiture, partially offset by the favorable effect of foreign currency translation.
•Organic revenue decreased 4.9% in 2020.
◦Organic revenue for the test and measurement businesses decreased 7.2% primarily driven by the impact of a soft capital spending environment in North America and Europe, partially offset by higher semi-conductor demand in North America. Instron, where demand is more closely tied to the capital spending environment, had an organic revenue decline of 14.1% in 2020.
◦Electronics organic revenue declined 2.1%. The electronics assembly businesses decreased 6.9% primarily due to lower demand in North America. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 0.9% primarily due to an increase in North America, partially offset by a decrease in Europe and Asia Pacific.
•Operating margin of 25.8% in 2020 increased 20 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, the impact of a 2019 divestiture and favorable price/cost of 30 basis points, partially offset by negative operating leverage of 130 basis points and the recapture of amortization and depreciation expense related to a business previously classified as held for sale.
WELDING
This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and industrial capital goods markets. Products in this segment include:
•arc welding equipment; and
•metal arc welding consumables and related accessories.
The results of operations for the Welding segment for 2019, 20182021, 2020 and 20172019 were as follows:
20192021 compared to 20182020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2021 | | 2020 | | | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 1,650 | | | $ | 1,384 | | | | | 19.2 | % | | 18.1 | % | — | % | — | % | | 1.1 | % | 19.2 | % |
Operating income | $ | 490 | | | $ | 376 | | | | | 30.5 | % | | 29.8 | % | — | % | (0.2) | % | | 0.9 | % | 30.5 | % |
Operating margin % | 29.7 | % | | 27.1 | % | | | | 260 bps | | 270 bps | — | | — | | | (10) bps | 260 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2019 | | 2018 | | Inc (Dec) | | Organic | Acquisition/ Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,638 |
| | $ | 1,691 |
| | (3.1 | )% | | (1.2 | )% | (1.1 | )% | — | % | (0.8 | )% | (3.1 | )% |
Operating income | $ | 453 |
| | $ | 474 |
| | (4.4 | )% | | (2.1 | )% | (0.4 | )% | (1.7 | )% | (0.2 | )% | (4.4 | )% |
Operating margin % | 27.7 | % | | 28.0 | % | | (30) bps |
| | (20) bps |
| 20 bps |
| (50) bps |
| 20 bps |
| (30) bps |
|
•Operating revenue decreasedgrew due to lowerhigher organic revenue the impact of divestiture activity and the unfavorablefavorable effect of foreign currency translation.
Operating revenue for 2019 included $62 million related to the business divested in 2019.
•Organic revenue decreased 1.2%grew 18.1% as equipment declined 2.6%, partially offset by growth inincreased 20.5% and consumables of 0.8%.
| |
◦ | North American organic revenue declined 1.1% as a decrease in the industrial end markets was partially offset by growth in the commercial and oil and gas end markets. |
| |
◦ | International organic revenue decreased 1.6% primarily due to a decline in Europe, partially offset by higher demand in Asia in the oil and gas end markets. |
Operating margin of 27.7% decreased 30 basis points compared to the prior year primarily driven by higher restructuring expenses of 50 basis points, product mix, negative operating leverage of 20 basis points and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives and favorable price/cost of 70 basis points.
2018 compared to 2017
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2018 | | 2017 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,691 |
| | $ | 1,538 |
| | 9.9 | % | | 9.7 | % | — | % | — | % | 0.2 | % | 9.9 | % |
Operating income | $ | 474 |
| | $ | 415 |
| | 14.3 | % | | 13.1 | % | — | % | 1.0 | % | 0.2 | % | 14.3 | % |
Operating margin % | 28.0 | % | | 27.0 | % | | 100 bps |
| | 80 bps |
| — |
| 20 bps |
| — |
| 100 bps |
|
Operating revenue increased 14.3% primarily due to higher organic revenue.
Organic revenue grew 9.7% driven by growth in equipment of 11.0% and consumables of 7.9%. Organic revenue grew primarily due to increased demand in the industrial end markets related to heavy equipment for agriculture, infrastructure and mining and in the commercial end markets related to construction, light fabrication and farm and ranch customers,customers.
◦North American organic revenue increased 19.6% primarily driven by growth in the industrial and commercial end markets of 22.6% and 17.0%, respectively.
◦International organic revenue grew 10.7% primarily due to higher equipment demand in the oil and gas end markets.markets in Europe and Asia.
| |
◦ | North American organic revenue increased 10.6% primarily due to 14.7% and 5.8% growth in the industrial and commercial end markets, respectively. |
| |
◦ | International organic revenue increased 5.7% primarily due to higher demand in the oil and gas end markets. |
•Operating margin was 28.0% in 2018.29.7%. The increase of 100260 basis points was primarily due todriven by positive operating leverage of 150260 basis points and benefits from the Company's enterprise initiatives, partially offset by higher freightoverhead expenses.
2020 compared to 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2020 | | 2019 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,384 | | | $ | 1,638 | | | | | (15.5) | % | | (11.8) | % | (3.7) | % | — | % | — | % | (15.5) | % |
Operating income | $ | 376 | | | $ | 453 | | | | | (17.1) | % | | (16.8) | % | (1.6) | % | 1.4 | % | (0.1) | % | (17.1) | % |
Operating margin % | 27.1 | % | | 27.7 | % | | | | (60) bps | | (160) bps | 60 bps | 40 bps | — | | (60) bps |
•Operating revenue decreased due to lower organic revenue and employee-relatedthe impact of a 2019 divestiture.
•Organic revenue declined 11.8% driven by decreases in equipment of 12.2% and consumables of 11.2%, primarily due to lower demand in the industrial end markets.
◦North American organic revenue decreased 10.8% primarily due to a decline in the industrial end markets of 19.8%, partially offset by growth in the commercial end markets of 2.1%.
◦International organic revenue decreased 16.4% primarily due to a decline in the European oil and gas end markets.
•Operating margin of 27.1% in 2020 decreased 60 basis points primarily driven by negative operating leverage of 220 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives, the impact of a 2019 divestiture and lower restructuring expenses.
POLYMERS & FLUIDS
This segment is a branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial, MRO and construction markets. Products in this segment include:
•adhesives for industrial, construction and consumer purposes;
•chemical fluids which clean or add lubrication to machines;
•epoxy and resin-based coating products for industrial applications;
•hand wipes and cleaners for industrial applications;
•fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
•fillers and putties for auto body repair; and
•polyester coatings and patch and repair products for the marine industry.
The results of operations for the Polymers & Fluids segment for 2019, 20182021, 2020 and 20172019 were as follows:
20192021 compared to 20182020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2021 | | 2020 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 1,804 | | | $ | 1,622 | | | | | 11.2 | % | | 10.0 | % | — | % | — | % | | 1.2 | % | 11.2 | % |
Operating income | $ | 457 | | | $ | 402 | | | | | 13.7 | % | | 12.2 | % | — | % | 0.3 | % | | 1.2 | % | 13.7 | % |
Operating margin % | 25.4 | % | | 24.8 | % | | | | 60 bps | | 50 bps | — | | 10 bps | | — | | 60 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2019 | | 2018 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,669 |
| | $ | 1,724 |
| | (3.2 | )% | | — | % | (0.4 | )% | — | % | (2.8 | )% | (3.2 | )% |
Operating income | $ | 381 |
| | $ | 369 |
| | 3.1 | % | | 7.9 | % | (0.1 | )% | (1.5 | )% | (3.2 | )% | 3.1 | % |
Operating margin % | 22.8 | % | | 21.4 | % | | 140 bps |
| | 170 bps |
| — |
| (30) bps |
| — |
| 140 bps |
|
•Operating revenue grew due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic revenue increased 10.0% driven by higher demand across all major regions. Additionally, product line simplification activities reduced organic revenue by 80 basis points.
◦Organic revenue for the automotive aftermarket businesses increased 11.4% primarily driven by growth in the car care, body repair and tire repair businesses in North America and growth in the European additives and tire repair businesses.
◦Organic revenue for the polymers businesses increased 15.5% with growth across all major regions and end markets.
◦Organic revenue for the fluids businesses decreased 1.0% primarily due to a decline in the industrial maintenance, repair and operations end markets in North America.
•Operating margin was 25.4%. The increase of 60 basis points was primarily due to positive operating leverage of 200 basis points, benefits from the Company's enterprise initiatives and lower intangible asset amortization expense, partially offset by unfavorable price/cost of 200 basis points, higher overhead expenses and higher freight costs.
2020 compared to 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2020 | | 2019 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | | Foreign Currency | Total |
Operating revenue | $ | 1,622 | | | $ | 1,669 | | | | | (2.8) | % | | (1.4) | % | — | % | — | % | | (1.4) | % | (2.8) | % |
Operating income | $ | 402 | | | $ | 381 | | | | | 5.6 | % | | 5.2 | % | — | % | 1.5 | % | | (1.1) | % | 5.6 | % |
Operating margin % | 24.8 | % | | 22.8 | % | | | | 200 bps | | 150 bps | — | | 40 bps | | 10 bps | 200 bps |
•Operating revenue decreased primarily due to lower organic revenue and the unfavorable effect of foreign currency translation.
•Organic revenue was flat asdeclined 1.4% in 2020. Product line simplification activities reduced organic revenue by 50 basis points.
◦Organic revenue for the polymers businesses decreased 5.3% primarily driven by a decline in the heavy industrial end markets in North America and Europe.
◦Organic revenue for the automotive aftermarket businesses declined 0.5% primarily driven by a decrease in the car care and body repair businesses in North America and the additives businesses in Europe, partially offset by growth in the polymerstire and engine repair businesses was offset by declinesin North America.
◦Organic revenue for the fluids businesses grew 3.3% primarily due to an increase in the automotive aftermarketindustrial maintenance, repair, and fluids businesses.operations end markets in Europe and North America.
| |
◦ | Organic revenue for the automotive aftermarket businesses declined 0.7% primarily due to lower demand in the tire repair businesses in North America and the additives businesses in Europe, partially offset by stronger demand in the car care businesses in North America. |
| |
◦ | Organic revenue for the polymers businesses increased 2.4% primarily driven by growth in Asia and North America, primarily in the heavy industrial end markets. |
| |
◦ | Organic revenue for the fluids businesses decreased 2.0% primarily due to a decline in the industrial maintenance, repair, and operations end markets in North America. |
•Operating margin of 22.8%24.8% in 2020 increased 140200 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, favorable price/cost of 50 basis points and lower restructuring expenses, partially offset by higher restructuring expenses.
2018 compared to 2017
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2018 | | 2017 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,724 |
| | $ | 1,724 |
| | — | % | | 1.0 | % | (0.4 | )% | — | % | (0.6 | )% | — | % |
Operating income | $ | 369 |
| | $ | 357 |
| | 3.3 | % | | 2.1 | % | (0.2 | )% | 1.7 | % | (0.3 | )% | 3.3 | % |
Operating margin % | 21.4 | % | | 20.7 | % | | 70 bps |
| | 20 bps |
| — |
| 40 bps |
| 10 bps |
| 70 bps |
|
Operating revenue was flat as an increase in organic revenue was offset by the unfavorable effect of foreign currency translation and a divestiture.
Organic revenue increased 1.0% as higher demand in North America was partially offset by lower demand in Europe.
| |
◦ | Organic revenue for the automotive aftermarket businesses grew 2.3% as stronger demand in the car care and tire repair businesses in North America was partially offset by a decline in the engine and body repair businesses. |
| |
◦ | Organic revenue for the polymers businesses increased 0.9% primarily driven by an increase in North America and South America, partially offset by a decline in Europe. |
| |
◦ | Organic revenue for the fluids businesses declined 1.1% primarily due to decreased demand in Europe and South America, partially offset by growth in the industrial maintenance, repair, and operations end markets in North America. |
Operating margin of 21.4% increased 70 basis points primarily driven by benefits from the Company's enterprise initiatives, lower restructuring expenses and positivenegative operating leverage of 30 basis points, partially offset by unfavorable price/cost of 100 basis points.
CONSTRUCTION PRODUCTS
This segment is a branded supplier of innovative engineered fastening systems and solutions. This segment primarily serves the residential construction, renovation/remodel and commercial construction markets. Products in this segment include:
•fasteners and related fastening tools for wood and metal applications;
•anchors, fasteners and related tools for concrete applications;
•metal plate truss components and related equipment and software; and
•packaged hardware, fasteners, anchors and other products for retail.
The results of operations for the Construction Products segment for 2019, 20182021, 2020 and 20172019 were as follows:
20192021 compared to 20182020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2021 | | 2020 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,945 | | | $ | 1,652 | | | | | 17.7 | % | | 13.6 | % | (0.1) | % | — | % | 4.2 | % | 17.7 | % |
Operating income | $ | 530 | | | $ | 421 | | | | | 25.7 | % | | 20.9 | % | — | % | 0.2 | % | 4.6 | % | 25.7 | % |
Operating margin % | 27.2 | % | | 25.5 | % | | | | 170 bps | | 160 bps | — | | 10 bps | — | | 170 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2019 | | 2018 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,625 |
| | $ | 1,700 |
| | (4.4 | )% | | (1.0 | )% | — | % | — | % | (3.4 | )% | (4.4 | )% |
Operating income | $ | 383 |
| | $ | 414 |
| | (7.4 | )% | | (3.1 | )% | — | % | (1.2 | )% | (3.1 | )% | (7.4 | )% |
Operating margin % | 23.6 | % | | 24.3 | % | | (70) bps |
| | (50) bps |
| — |
| (30) bps |
| 10 bps |
| (70) bps |
|
•Operating revenue decreased in 2019grew primarily due to higher organic revenue and the unfavorablefavorable effect of foreign currency translation and lower organic revenue.translation.
•Organic revenue declined 1.0%increased 13.6% with growth across all major regions. Additionally, product line simplification activities reduced organic revenue by 40 basis points.
◦North American organic revenue grew 13.6% due to higher demand in 2019.the United States residential and commercial end markets of 12.7% and 14.7%, respectively, and growth in Canada.
| |
◦ | North American organic revenue was flat as an increase of 1.9% in the United States residential end markets was offset by a decline of 3.2% in the commercial end markets and a decline in Canada. |
| |
◦ | International organic revenue declined 1.8%. Asia Pacific organic revenue decreased 5.1% primarily due to a decline in Australia and New Zealand across all end markets. European organic revenue increased 1.3% driven by growth in continental Europe. |
◦International organic revenue increased 13.6%. European organic revenue grew 19.4% primarily driven by higher demand in the commercial and residential end markets. Asia Pacific organic revenue increased 7.3% primarily due to higher demand in Australia and New Zealand in the residential end markets.
•Operating margin was 27.2%. The increase of 23.6% decreased 70170 basis points was primarily drivendue to positive operating leverage of 240 basis points and the net benefits from the Company's enterprise initiatives and cost management, partially offset by unfavorable price/cost of 40250 basis points, higher restructuring expenses, product mix and negative operating leverage of 10 basis points, partially offset by benefits from the Company's enterprise initiatives.
points.
2018
2020 compared to 20172019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2020 | | 2019 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,652 | | | $ | 1,625 | | | | | 1.7 | % | | 1.5 | % | — | % | — | % | 0.2 | % | 1.7 | % |
Operating income | $ | 421 | | | $ | 383 | | | | | 10.0 | % | | 8.4 | % | — | % | 1.5 | % | 0.1 | % | 10.0 | % |
Operating margin % | 25.5 | % | | 23.6 | % | | | | 190 bps | | 160 bps | — | | 30 bps | — | | 190 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2018 | | 2017 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,700 |
| | $ | 1,672 |
| | 1.6 | % | | 1.2 | % | — | % | — | % | 0.4 | % | 1.6 | % |
Operating income | $ | 414 |
| | $ | 399 |
| | 3.6 | % | | 3.1 | % | — | % | 0.3 | % | 0.2 | % | 3.6 | % |
Operating margin % | 24.3 | % | | 23.9 | % | | 40 bps |
| | 40 bps |
| — |
| 10 bps |
| (10) bps |
| 40 bps |
|
•Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic revenue increased 1.2%grew 1.5% as an increase in 2018.North America was partially offset by declines in Europe and Asia Pacific.
| |
◦ | North American organic revenue grew 1.6% as growth in the residential end markets of 3.2% was partially offset by a decline in the commercial end markets of 5.7%. |
| |
◦ | International organic revenue increased 0.9%. European organic revenue increased 2.7% primarily due to growth in continental Europe and the Nordic countries. Asia Pacific organic revenue declined 0.8% primarily due to a decrease in the Australia and New Zealand retail end markets in the second half of the year. |
◦North American organic revenue grew 7.8% as increases of 11.4% in the United States residential end markets and 13.0% in Canada were partially offset by a decrease of 11.4% in the commercial end markets.
◦International organic revenue decreased 3.3% in 2020. Asia Pacific organic revenue decreased 0.7% primarily due to a decline in the commercial end markets in Australia and New Zealand. European organic revenue decreased 5.5% driven by a decline in continental Europe and the United Kingdom.
•Operating margin was 24.3%of 25.5% in 2018. The increase of 402020 increased 190 basis points was primarily driven by the net benefits offrom the Company's enterprise initiatives and cost management, of 110 basis points and positive operating leverage of 2030 basis points and lower restructuring expenses, partially offset by unfavorable price/cost of 9050 basis points.
SPECIALTY PRODUCTS
This segment is focused on diversified niche market opportunities with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, consumer durables, general industrial, consumer durables, industrial capital goods and printing and publishing markets. Products in this segment include:
•line integration, conveyor systems and line automation for the food and beverage industries;
•plastic consumables that multi-pack cans and bottles and related equipment;
•foil, film and related equipment used to decorate consumer products;
•product coding and marking equipment and related consumables;
•plastic and metal closures and components for appliances;
•airport ground support equipment; and
•components for medical devices.
The results of operations for the Specialty Products segment for 2019, 20182021, 2020 and 20172019 were as follows:
20192021 compared to 20182020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2021 | | 2020 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,854 | | | $ | 1,660 | | | | | 11.7 | % | | 9.8 | % | — | % | — | % | 1.9 | % | 11.7 | % |
Operating income | $ | 504 | | | $ | 432 | | | | | 16.6 | % | | 15.6 | % | — | % | (1.0) | % | 2.0 | % | 16.6 | % |
Operating margin % | 27.2 | % | | 26.0 | % | | | | 120 bps | | 140 bps | — | | (20) bps | — | | 120 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2019 | | 2018 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,825 |
| | $ | 1,951 |
| | (6.5 | )% | | (4.1 | )% | (0.6 | )% | — | % | (1.8 | )% | (6.5 | )% |
Operating income | $ | 472 |
| | $ | 522 |
| | (9.7 | )% | | (7.6 | )% | — | % | (0.5 | )% | (1.6 | )% | (9.7 | )% |
Operating margin % | 25.9 | % | | 26.8 | % | | (90) bps |
| | (100) bps |
| 20 bps |
| (10) bps |
| — |
| (90) bps |
|
•Operating revenue decreased in 2019grew due to lowerhigher organic revenue and the unfavorablefavorable effect of foreign currency translation and the impact of divestiture activity.translation.
Operating revenue for 2019 included $14 million related to the businesses divested in 2019.
•Organic revenue decreased 4.1% in 2019. Consumables declined 5.8% primarily due to lower demand in North Americaincreased 9.8% as consumables increased 10.8% and Europe. Equipment salesequipment increased 2.2%6.4% primarily due to higher demand in North America, partially offset by a decline in Asia. ProductAmerica. Additionally, product line simplification activities reduced organic revenue by 10020 basis points.
| |
◦ | North American organic revenue decreased 3.1% primarily due to a decrease in the specialty films, labels and appliance businesses, partially offset by growth in the ground support equipment business and consumer packaging businesses. |
| |
◦ | International organic revenue decreased 5.6% primarily due to a decline in the specialty films, graphics, appliance and foils businesses in Europe. |
Operating margin of 25.9% decreased 90 basis points◦North American organic revenue increased 11.2% primarily driven by growth in the consumer packaging, strength film, appliance, filter medical, and product coding and marking businesses.
◦International organic revenue increased 6.8% primarily due to negativegrowth in the appliance businesses in Europe and Asia Pacific and the ground support equipment businesses in Europe, partially offset by a decline in the consumer packaging businesses in Europe and the strength film businesses in Asia Pacific.
•Operating margin was 27.2%. The increase of 120 basis points was primarily due to positive operating leverage of 90190 basis points product mix and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives.
initiatives, partially offset by unfavorable price/cost of 200 basis points, higher overhead expenses and higher freight costs. Additionally, the prior year included an unfavorable impact of a one-time customer cost-sharing settlement.
2018
2020 compared to 20172019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2020 | | 2019 | | | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,660 | | | $ | 1,825 | | | | | (9.1) | % | | (8.2) | % | (0.8) | % | — | % | (0.1) | % | (9.1) | % |
Operating income | $ | 432 | | | $ | 472 | | | | | (8.5) | % | | (11.2) | % | 0.7 | % | 2.2 | % | (0.2) | % | (8.5) | % |
Operating margin % | 26.0 | % | | 25.9 | % | | | | 10 bps | | (90) bps | 40 bps | 60 bps | — | | 10 bps |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | | | |
Dollars in millions | December 31, | | Components of Increase (Decrease) |
| 2018 | | 2017 | | Inc (Dec) | | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total |
Operating revenue | $ | 1,951 |
| | $ | 1,938 |
| | 0.7 | % | | (0.4 | )% | (0.1 | )% | — | % | 1.2 | % | 0.7 | % |
Operating income | $ | 522 |
| | $ | 527 |
| | (0.8 | )% | | (2.5 | )% | (0.1 | )% | 0.6 | % | 1.2 | % | (0.8 | )% |
Operating margin % | 26.8 | % | | 27.2 | % | | (40) bps |
| | (60) bps |
| — |
| 20 bps |
| — |
| (40) bps |
|
•Operating revenue increaseddecreased primarily due to lower organic revenue and the favorable effectimpact of foreign currency translation.2019 divestitures.
•Organic revenue decreased 0.4%8.2% as equipment sales declined 17.7% and consumables declined 2.9%, partially offset by growth in equipment sales of 9.9%5.2%. ProductAdditionally, product line simplification activities reduced organic revenue growth by 13030 basis points.
| |
◦ | North American organic revenue grew 1.8%◦North American organic revenue decreased 7.3% primarily due to a decline in the ground support equipment, appliance and specialty films businesses, partially offset by an increase in the consumer packaging businesses. ◦International organic revenue decreased 10.0% primarily due to a decline in the consumer packaging, ground support equipment, appliance, specialty films and marking coding businesses in Europe. •Operating margin of 26.0% in 2020 increased 10 basis points primarily due to increased demand in the consumer packaging and ground support businesses, partially offset by a decline in the labels, appliance and plastic films businesses. |
| |
◦ | International organic revenue decreased 3.8% primarily due to a decline in the graphics, appliance and plastic films businesses in Europe and Asia Pacific. |
Operating margin of 26.8% in 2018 decreased 40 basis points primarily driven by the unfavorable impact of product mix, higher freight and employee-related expenses, and unfavorable price/cost of 20 basis points, partially offset by benefits from the Company's enterprise initiatives, and lower restructuring expenses.
expenses and the impact of 2019 divestitures, partially offset by negative operating leverage of 180 basis points, unfavorable price/cost of 60 basis points and the unfavorable impact of a one-time customer cost-sharing settlement.
OTHER FINANCIAL HIGHLIGHTS
•Interest expense was $202 million in 2021, $206 million in 2020 and $221 million in 2019, $257 million in 2018 and $260 million in 2017.2019. Interest expense in 20192020 was $36$15 million lower than the previous year2019 primarily due todriven by the repayment of the $700 million notes due April 1, 2019 and the $650 million notes due March 1, 2019. Interest expense in 2018 was $3 million lower than 2017 primarily due to lower2019, and outstanding commercial paper in 2018.2019, partially offset by the issuance of the €1.6 billion Euro notes in June of 2019.
•Other income (expense) was income of $51 million in 2021, $28 million in 2020 and $107 million in 2019, $67 million in 2018 and $45 million in 2017.2019. The income in 20192021 increased $40$23 million compared to the previous year2020 primarily due to ahigher investment income and higher other net periodic benefit income in 2021. The income in 2020 decreased $79 million compared to 2019 primarily due to the net pre-tax gain on the disposal of operations and affiliates of $44 million in 2019. The2019, lower interest and investment income, in 2018 increased $22 million compared to 2017 primarily due toand lower other net periodic benefit income related to defined benefit pension and other postretirement plans and lower foreign currency translation losses.income.
•The Company's effective tax rate for 2021, 2020 and 2019 was 19.0%, 22.0% and 23.3%, respectively. The 2021 effective tax rate benefited from discrete income tax benefits of $21 million in 2019, 24.5%the third quarter of 2021 related to the utilization of capital losses and $112 million in 2018, and 48.4% in 2017.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% effective April 1, 2023. The 2019 effective tax rate benefited from a discrete income tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment resulting primarily from changes in estimates related to the "Tax Cuts and Jobs Act." The 2018 effective tax rate benefited from a discrete tax benefit of $37 million in the third quarter related to the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary, which was partially offset by a discrete tax charge of $22 million in the third quarter related to foreign tax credits. Included in the effective tax rate for 2017 was a one-time additional income tax expense of $658 million related to the United States "Tax Cuts and Jobs Act".adjustment. Additionally, the effective tax raterates for 2019, 20182021, 2020 and 20172019 included discrete income tax benefits of $28$17 million, $10$27 million and $50$28 million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6.7. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.
•The impact of the Euro and other foreign currencies against the U.S. Dollar decreasedin 2021 versus 2020 increased operating revenue and income before taxes by approximately $339$301 million and $84$77 million, in 2019 versus 2018, respectively. The impact of the Euro and other foreign currencies against the U.S. Dollar increasedin 2020 versus 2019 decreased operating revenue and income before taxes by approximately $150$20 million and $37$3 million, in 2018 versus 2017, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1. Description of Business and Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary Data.
LIQUIDITY AND CAPITAL RESOURCES
The Company’sCompany's primary sources of liquidity are free cash flow and short-term credit facilities. In addition,As of December 31, 2021, the Company had $2.0$1.5 billion of cash and equivalents on hand as of December 31, 2019 and no outstanding borrowings under its $2.5 billion revolving credit facility. The Company also maintainshas maintained strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:
•internal investments to support organic growth and sustain core businesses;
•payment of an attractive dividend to shareholders; and
•external investments in selective strategic acquisitions that support the Company's organic growth focus, such as the recently completed acquisition of the MTS Test & Simulation business, and an active share repurchase program. Refer to Note 3. Acquisitions in Item 8. Financial Statements and Supplementary Data 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. A description of the risks related to the impact of the COVID-19 outbreak on the financial and capital markets and the related potential risks to the Company is contained in Part I, Item 1A. Risk Factors.
The Company has certain contractual obligations, primarily noncurrent income taxes payable, operating leases and long-term debt. Refer to Note 7. Income Taxes, Note 10. Leases and Note 11. Debt in Item 8. Financial Statements and Supplementary Data for details related to the Company's contractual obligations. The Company did not have any significant off-balance sheet commitments as of December 31, 2021.
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’sCompany's financial performance and measures the Company's ability to generate cash internally to fund
Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the years ended December 31, 2019, 20182021, 2020 and 20172019 was as follows:
| | | | | | | | | | | | | | | | | |
In millions | 2021 | | 2020 | | 2019 |
Net cash provided by operating activities | $ | 2,557 | | | $ | 2,807 | | | $ | 2,995 | |
Additions to plant and equipment | (296) | | | (236) | | | (326) | |
Free cash flow | $ | 2,261 | | | $ | 2,571 | | | $ | 2,669 | |
| | | | | |
Cash dividends paid | $ | (1,463) | | | $ | (1,379) | | | $ | (1,321) | |
Repurchases of common stock | (1,000) | | | (706) | | | (1,500) | |
Acquisition of businesses (excluding cash and equivalents) | (731) | | | — | | | (4) | |
Proceeds from sale of operations and affiliates | — | | | 1 | | | 120 | |
Net proceeds from (repayments of) debt | (141) | | | (4) | | | 422 | |
Other | 83 | | | 61 | | | 100 | |
Effect of exchange rate changes on cash and equivalents | (46) | | | 39 | | | (9) | |
Net increase (decrease) in cash and equivalents | $ | (1,037) | | | $ | 583 | | | $ | 477 | |
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
Net cash provided by operating activities | | $ | 2,995 |
|
| $ | 2,811 |
| | $ | 2,402 |
|
Additions to plant and equipment | | (326 | ) |
| (364 | ) | | (297 | ) |
Free cash flow | | $ | 2,669 |
| | $ | 2,447 |
| | $ | 2,105 |
|
| | | | | | |
Cash dividends paid | | $ | (1,321 | ) | | $ | (1,124 | ) | | $ | (941 | ) |
Repurchases of common stock | | (1,500 | ) | | (2,000 | ) | | (1,000 | ) |
Acquisition of businesses (excluding cash and equivalents) | | (4 | ) | | — |
| | (3 | ) |
Proceeds from sale of operations and affiliates | | 120 |
| | 1 |
| | 2 |
|
Net proceeds (repayments) of debt | | 422 |
| | (851 | ) | | 197 |
|
Other | | 100 |
| | 49 |
| | 117 |
|
Effect of exchange rate changes on cash and equivalents | | (9 | ) | | (112 | ) | | 145 |
|
Net increase (decrease) in cash and equivalents | | $ | 477 |
| | $ | (1,590 | ) | | $ | 622 |
|
Free cash flow for the year ended December 31, 2017 included the impact of an additional $115 million discretionary pension contribution relateddecreased in 2021 due to the U.S. primary pension plan.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 Programs
On February 13, 2015, the Company's Board of Directors authorized a stock repurchase program which provided for the repurchase of up to $6.0 billion of the Company’sCompany's common stock over an open-ended period of time (the "2015 Program"). Under the 2015 Program, the Company repurchased approximately 6.1 million shares of its common stock at an average price of $91.78 per share during 2015, approximately 18.7 million shares of its common stock at an average price of $107.17 per share during 2016, approximately 7.1 million shares of its common stock at an average price of $140.56 per share during 2017, approximately 13.9 million shares of its common stock at an average price of $143.66 per share during 2018 and approximately 3.1 million shares of its common stock at an average price of $143.23 per share during 2019. The 2015 Program was completed in the second quarter of 2019.
On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). Under the 2018 Program, the Company repurchased approximately 6.7 million shares of its common stock at an average price of $158.11 per share during 2019.2019, approximately 4.2 million shares of its common stock at an average price of $167.69 per share during 2020 and repurchased approximately 4.4 million shares of its common stock at an average price of $227.29 per share during 2021. As of December 31, 2019,2021, there were approximately $1.9$240 million of authorized repurchases remaining under the 2018 Program.
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 December 31, 2021, there were $3.0 billion of authorized repurchases remaining under the 2018 program.2021 Program.
Adjusted After-TaxAfter-tax Return on Average Invested Capital
The Company uses adjusted after-tax return on average invested capital ("After-tax ROIC") to measure the effectiveness of its operations’operations' use of invested capital to generate profits. After-tax ROIC is not defined under U.S. generally accepted accounting principles ("GAAP"). After-tax ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performanceCompany's ability to generate returns from cash invested in its operations and may be different than the method used by other companies to calculate After-tax ROIC. 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 third quarter 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 year ended December 31, 2021. Additionally, for comparability, the Company excluded the discrete tax benefit of $21 million in the third quarter of 2019 from net income and the effective tax rate for the year ended December 31, 2019. Additionally, the Company excluded the third quarter net discrete tax benefit of $15 million from the effective tax rate for the year ended December 31, 2018. The Company also excluded the $658 million income tax charge from the effective tax rate and the $95 million confidential legal settlement from the calculation of ROIC for the year ended December 31, 2017. AverageTotal invested capital represents the net assets of the Company, excludingother than cash and equivalents and outstanding debt which are excluded as they do not represent capital investment in the Company's operations. 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 years ended December 31, 2021, 2020, and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
Dollars in millions | 2021 | | 2020 | | 2019 |
Numerator: | | | | | |
Net income | $ | 2,694 | | | $ | 2,109 | | | $ | 2,521 | |
Discrete tax benefit related to the third quarter 2021 | (21) | | | — | | | — | |
Discrete tax benefit related to the second quarter 2021 | (112) | | | — | | | — | |
Discrete tax benefit related to the third quarter 2019 | — | | | — | | | (21) | |
Interest expense, net of tax (1) | 157 | | | 162 | | | 168 | |
Other (income) expense, net of tax (1) | (40) | | | (22) | | | (81) | |
Operating income after taxes | $ | 2,678 | | | $ | 2,249 | | | $ | 2,587 | |
| | | | | |
Denominator: | | | | | |
Invested capital: | | | | | |
Cash and equivalents | $ | 1,527 | | | $ | 2,564 | | | $ | 1,981 | |
Trade receivables | 2,840 | | | 2,506 | | | 2,461 | |
Inventories | 1,694 | | | 1,189 | | | 1,164 | |
Net assets held for sale | — | | | — | | | 280 | |
Net plant and equipment | 1,809 | | | 1,777 | | | 1,729 | |
Goodwill and intangible assets | 5,937 | | | 5,471 | | | 5,343 | |
Accounts payable and accrued expenses | (2,233) | | | (1,818) | | | (1,689) | |
Debt | (7,687) | | | (8,122) | | | (7,758) | |
Other, net | (261) | | | (385) | | | (481) | |
Total net assets (stockholders' equity) | 3,626 | | | 3,182 | | | 3,030 | |
Cash and equivalents | (1,527) | | | (2,564) | | | (1,981) | |
Debt | 7,687 | | | 8,122 | | | 7,758 | |
Total invested capital | $ | 9,786 | | | $ | 8,740 | | | $ | 8,807 | |
| | | | | |
Average invested capital (2) | $ | 9,087 | | | $ | 8,576 | | | $ | 9,028 | |
| | | | | |
Net income to average invested capital | 29.6 | % | | 24.6 | % | | 27.9 | % |
After-tax return on average invested capital | 29.5 | % | | 26.2 | % | | 28.7 | % |
(1) Effective tax rate used for interest expense and other (income) expense for the years ended December 31, 2021, 2020, and 2019 was 23.0%, 22.0% and 24.0%, respectively.
(2) Average invested capital is calculated using the total invested capital balances at the start of the period and at the end of each quarter. ROIC forquarter within each of the years ended December 31, 2019, 2018, and 2017 was as follows:periods presented.
|
| | | | | | | | | | | | |
Dollars in millions | | 2019 | | 2018 | | 2017 |
Operating income | | $ | 3,402 |
| | $ | 3,584 |
| | $ | 3,485 |
|
Less: Legal settlement income | | — |
| | — |
| | (95 | ) |
Adjusted operating income | | 3,402 |
| | 3,584 |
| | 3,390 |
|
Adjusted tax rate | | 24.0 | % |
| 24.9 | % | | 28.3 | % |
Income taxes | | (815 | ) |
| (893 | ) | | (958 | ) |
Operating income after taxes | | $ | 2,587 |
| | $ | 2,691 |
|
| $ | 2,432 |
|
| | | | | | |
Invested capital: | | | | | | |
Trade receivables | | $ | 2,461 |
|
| $ | 2,622 |
| | $ | 2,628 |
|
Inventories | | 1,164 |
|
| 1,318 |
| | 1,220 |
|
Net assets held for sale | | 280 |
| | — |
| | — |
|
Net plant and equipment | | 1,729 |
|
| 1,791 |
| | 1,778 |
|
Goodwill and intangible assets | | 5,343 |
|
| 5,717 |
| | 6,024 |
|
Accounts payable and accrued expenses | | (1,689 | ) |
| (1,795 | ) | | (1,848 | ) |
Other, net | | (481 | ) |
| (519 | ) | | 21 |
|
Total invested capital | | $ | 8,807 |
| | $ | 9,134 |
| | $ | 9,823 |
|
| | | | | | |
Average invested capital | | $ | 9,028 |
|
| $ | 9,533 |
| | $ | 10,005 |
|
Adjusted after-tax return on average invested capital | | 28.7 | % |
| 28.2 | % | | 24.3 | % |
After-tax ROIC increased 50330 basis points for the twelve month period ended December 31, 20192021 compared to the prior year period as a result of a 5.3%19.1% increase in after-tax operating income versus a 5.9% increase in average invested capital. After-tax ROIC decreased 250 basis points for the twelve month period ended December 31, 2020 compared to the prior year period as a result of a 13.1% decrease in after-tax operating income versus a 5.0% decrease in average invested capital versus a 3.9% decrease in after-tax operating income. ROIC increased 390 basis points in 2018 versus 2017 primarilycapital.
A reconciliation of the 2021 effective tax rate excluding the third quarter 2021 discrete tax benefit of $21 million related to the new U.S.utilization of capital losses and the second quarter 2021 discrete tax rules and regulations.benefit of $112 million related to a change in the U.K. income tax rate is as follows:
| | | | | | | | | | | |
| Twelve Months Ended |
| December 31, 2021 |
Dollars in millions | Income Taxes | | Tax Rate |
As reported | $ | 632 | | | 19.0 | % |
Discrete tax benefit related to the third quarter 2021 | 21 | | | 0.6 | % |
Discrete tax benefit related to the second quarter 2021 | 112 | | | 3.4 | % |
As adjusted | $ | 765 | | | 23.0 | % |
A reconciliation of the 2019 effective tax rate excluding the third quarter 2019 discrete tax benefit of $21 million for the U.S. federal provision to return adjustment is as follows:
| | | | | | | | | | | |
| Twelve Months Ended |
| December 31, 2019 |
Dollars in millions | Income Taxes | | Tax Rate |
As reported | $ | 767 | | | 23.3 | % |
Discrete tax benefit related to the third quarter 2019 | 21 | | | 0.7 | % |
As adjusted | $ | 788 | | | 24.0 | % |
|
| | | | | | |
| Twelve Months Ended |
| December 31, 2019 |
Dollars in millions | Income Taxes | | Tax Rate |
As reported | $ | 767 |
| | 23.3 | % |
Discrete tax benefit related to third quarter | 21 |
| | 0.7 | % |
As adjusted | $ | 788 |
| | 24.0 | % |
A reconciliation of the 2018 effective tax rate excluding the third quarter net discrete tax benefit of $15 million is as follows:
|
| | | | | | |
| Twelve Months Ended |
| December 31, 2018 |
Dollars in millions | Income Taxes | | Tax Rate |
As reported | $ | 831 |
| | 24.5 | % |
Net discrete tax benefit related to third quarter | 15 |
| | 0.4 | % |
As adjusted | $ | 846 |
| | 24.9 | % |
A reconciliation of the 2017 effective tax rate excluding the discrete tax charge of $658 million related to the 2017 U.S. tax legislation is as follows:
|
| | | | | | |
| Twelve Months Ended |
| December 31, 2017 |
Dollars in millions | Income Taxes | | Tax Rate |
As reported | $ | 1,583 |
| | 48.4 | % |
Discrete tax charge related to 2017 U.S. tax legislation | (658 | ) | | (20.1 | )% |
As adjusted | $ | 925 |
| | 28.3 | % |
Refer to Note 6.7. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information regarding the discrete tax items noted above.
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as of December 31, 20192021 and 20182020 is summarized as follows:
| | | | | | | | | | | | | | | | | |
In millions | 2021 | | 2020 | | Increase (Decrease) |
Current Assets: | | | | | |
Cash and equivalents | $ | 1,527 | | | $ | 2,564 | | | $ | (1,037) | |
Trade receivables | 2,840 | | | 2,506 | | | 334 | |
Inventories | 1,694 | | | 1,189 | | | 505 | |
Prepaid expenses and other current assets | 313 | | | 264 | | | 49 | |
| 6,374 | | | 6,523 | | | (149) | |
Current Liabilities: | | | | | |
Short-term debt | 778 | | | 350 | | | 428 | |
Accounts payable and accrued expenses | 2,233 | | | 1,818 | | | 415 | |
Other | 459 | | | 421 | | | 38 | |
| 3,470 | | | 2,589 | | | 881 | |
Net Working Capital | $ | 2,904 | | | $ | 3,934 | | | $ | (1,030) | |
|
| | | | | | | | | | | | |
Dollars in millions | | 2019 | | 2018 | | Increase (Decrease) |
Current Assets: | | | | | | |
Cash and equivalents | | $ | 1,981 |
| | $ | 1,504 |
| | $ | 477 |
|
Trade receivables | | 2,461 |
| | 2,622 |
| | (161 | ) |
Inventories | | 1,164 |
| | 1,318 |
| | (154 | ) |
Prepaid expenses and other current assets | | 296 |
| | 334 |
| | (38 | ) |
Assets held for sale | | 351 |
| | — |
| | 351 |
|
| | 6,253 |
| | 5,778 |
| | 475 |
|
Current Liabilities: | | | | | | |
Short-term debt | | 4 |
| | 1,351 |
| | (1,347 | ) |
Accounts payable and accrued expenses | | 1,689 |
| | 1,795 |
| | (106 | ) |
Liabilities held for sale | | 71 |
| | — |
| | 71 |
|
Other | | 390 |
| | 396 |
| | (6 | ) |
| | 2,154 |
| | 3,542 |
| | (1,388 | ) |
Net Working Capital | | $ | 4,099 |
| | $ | 2,236 |
| | $ | 1,863 |
|
The increase in net working capital as of December 31, 2019 was primarily driven by lower short-term debt. See Note 10. Debt in Item 8. Financial Statements and Supplementary Data for further information.
As of December 31, 2019, approximately half2021, 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 facilities,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 December 31, 20192021 and 20182020 was as follows:
| | | | | | | | | | | | | | | | | |
In millions | 2021 | | 2020 | | Increase (Decrease) |
Short-term debt | $ | 778 | | | $ | 350 | | | $ | 428 | |
Long-term debt | 6,909 | | | 7,772 | | | (863) | |
Total debt | $ | 7,687 | | | $ | 8,122 | | | $ | (435) | |
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | Increase (Decrease) |
Short-term debt | | $ | 4 |
| | $ | 1,351 |
| | $ | (1,347 | ) |
Long-term debt | | 7,754 |
| | 6,029 |
| | 1,725 |
|
Total debt | | $ | 7,758 |
| | $ | 7,380 |
| | $ | 378 |
|
As of December 31, 2019,2021, short-term debt included $4$568 million related to the 4.88%1.75% Euro notes due December 31, 2020.May 20, 2022, which the Company intends to redeem in full in February 2022, and commercial paper of $210 million. As of December 31, 2018,2020, short-term debt included $650$350 million related to the 1.95%3.375% notes due March 1, 2019 and $700 million related to the 6.25% notes due April 1, 2019, both ofSeptember 15, 2021, which were repaidredeemed in full on the due date.June 15, 2021. There was no commercial paper outstanding as of December 31, 2019 and December 31, 2018.2020.
The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions. During the third quarter of 2019, the Company entered into a $2.5 billion, five-year line ofrevolving credit agreementfacility with a termination date of September 27, 2024, which is available to provide additional liquidity, including to support the potential issuances of commercial paper. On September 22, 2021, due to the anticipated LIBOR transition, the Company agreed to suspend its right to borrow in Euro, British Pounds Sterling and Japanese Yen currencies under the revolving credit facility, effective December 31, 2021. The Company may continue to borrow in U.S. Dollars under the credit facility. This agreement replacedchange is not expected to have a significant impact on the existing $2.5 billion line of credit agreement with a termination date of May 9, 2021.Company's liquidity or its commercial paper program. No amounts were outstanding under the line ofrevolving credit agreementfacility at December 31, 2019.2021. The maximum outstanding commercial paper balance during 20192021 was $1.5 billion,$300 million, while the average daily balance was $306$49 million.
As of December 31, 2019,2021, the Company's foreign operationsCompany had authorized credit facilities with unused capacity of $206 million.
approximately $201 million under international debt facilities. In June 2019,the ordinary course of business, the Company issued €600also had approximately $210 million outstanding in guarantees, letters of 0.25% Euro notes duecredit and other similar arrangements with financial institutions as of December 5, 2024 at 99.662% of face value, €500 million of 0.625% Euro notes due December 5, 2027 at 99.343% of face value31, 2021. Refer to Note 11. Debt in Item 8. Financial Statements and €500 million of 1.00% Euro notes due June 5, 2031 at 98.982% of face value. Net proceeds fromSupplementary Data for additional details regarding the issuances were used to repay commercial paper and for general corporate purposes.Company's outstanding debt obligations.
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. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the years ended December 31, 2019, 20182021, 2020 and 20172019 was as follows:
| | | | | | | | | | | | | | | | | |
Dollars in millions | 2021 | | 2020 | | 2019 |
Total debt | $ | 7,687 | | | $ | 8,122 | | | $ | 7,758 | |
| | | | | |
Net income | $ | 2,694 | | | $ | 2,109 | | | $ | 2,521 | |
Add: | | | | | |
Interest expense | 202 | | | 206 | | | 221 | |
Other (income) expense | (51) | | | (28) | | | (107) | |
Income taxes | 632 | | | 595 | | | 767 | |
Depreciation | 277 | | | 273 | | | 267 | |
Amortization and impairment of intangible assets | 133 | | | 154 | | | 159 | |
EBITDA | $ | 3,887 | | | $ | 3,309 | | | $ | 3,828 | |
Total debt to EBITDA ratio | 2.0 | | 2.5 | | 2.0 |
levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the Company.
The Company determines the discount rate used to measure plan liabilities as of the year-end measurement date for the U.S. primary pension plan. The discount rate reflects the current rate at which the associated liabilities could theoretically be effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. A 25 basis point decrease in the discount rate would increase the present value of the U.S. primary pension plan obligation by approximately $41$37 million. The Company estimates the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate. See Note 11.12. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for information on the Company's pension and other postretirement benefit plans and related assumptions.
The expected long-term return on plan assets is based on historical and expected long-term returns for similar investment allocations among asset classes. For the U.S. primary pension plan, a 25 basis point decrease in the expected return on plan assets would increase the annual pension expense by approximately $4 million.
The Company is exposed to certain market risks that exist as part of its ongoing business operations, including fluctuations in currency exchange rates, price volatility for certain commodities and changes in interest rates. The Company does not engage in speculative or leveraged transactions and does not hold or issue financial instruments for trading purposes.
The Company operates in the U.S. and 5251 foreign countries. The funding for the foreign manufacturing operations is provided primarily through the permanent investment of equity capital. The Company’sCompany's products are typically manufactured and sold within the same country or economic union. Therefore, the Company's manufacturing operations generally do not have significant assets or liabilities denominated in currencies other than their functional currencies.
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). The cumulative unrealized pre-tax gain (loss) recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was $239 million and $187a gain of $183 million as of December 31, 20192021 and 2018, respectively.
The management of Illinois Tool Works Inc. (the "Company" or "ITW") is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). ITW’sITW's internal control system was designed to provide reasonable assurance to the Company’sCompany's management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
To the stockholders and the Board of Directors of Illinois Tool Works Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Illinois Tool Works Inc. and subsidiaries (the "Company") as of December 31, 20192021 and 2018,2020, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019,2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
The evaluation of each uncertain tax position requires management to apply specialized skill and knowledge related to the identified position. Management evaluates uncertain tax positions identified and a liability is established for unrecognized tax benefits when there is a more than 50% likelihood that its tax position will not be sustained upon examination by taxing authorities. There is additional judgment to determine the amount of the liability for the underlying tax position. The Company’sCompany's income tax expense for 20192021 was $767$632 million and the liability recorded for unrecognized tax benefits as of December 31, 2019,2021, was $296$360 million.
Given the number of taxing jurisdictions and the complex and subjective nature of the associated tax regulations and rulings, certain audit matters required a high degree of auditor judgment and increased extent of effort, including the need to involve our income tax specialists. These matters included the auditing of income tax expense, identification of uncertain tax positions, measurement of unrecognized tax benefits, and certain planning transactions with income tax expense implications.
With the assistance of our income tax specialists, our principal audit procedures related to income tax expense included the following, among others:
We have served as the Company's auditor since 2002.