INTRODUCTION
Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 84 divisions in 53 countries. As ofDecember 31, 2019 , the Company employed approximately 45,000 people. The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. 14 -------------------------------------------------------------------------------- Due to the large number of diverse businesses and the Company's decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the Company's corporate management collects data on several key measurements: operating revenue, operating income, operating margin, overhead costs, number of months on hand in inventory, days sales outstanding in accounts receivable, past due receivables and return on invested capital. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.
THE ITW BUSINESS MODEL
The powerful and highly differentiated ITW Business Model is the Company's core source of value creation. The ITW Business Model is the Company's competitive advantage and defines how ITW creates value for its shareholders. It is comprised of three unique elements: •ITW's 80/20 Front-to-Back process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the Company and its customers. Through the application of data driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the "80") and eliminates cost, complexity and distractions associated with the less profitable opportunities (the "20"). 80/20 enables ITW businesses to consistently achieve world-class operational excellence in product availability, quality, and innovation, while generating superior financial performance; •Customer-Back Innovation has fueled decades of profitable growth at ITW. The Company's unique innovation approach is built on insight gathered from the 80/20 Front-to-Back process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their "80" customers. ITW's innovation efforts are focused on understanding customer needs, particularly those in "80" markets with solid long-term growth fundamentals, and creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 18,000 granted and pending patents; •ITW's Decentralized, Entrepreneurial Culture enables ITW businesses to be fast, focused, and responsive. ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational structure that, combined with outstanding execution, delivers best-in-class services and solutions adapted to each business' customers and end markets.
ENTERPRISE STRATEGY
In late 2012, ITW began its strategic framework transitioning the Company on its current path to fully leverage the compelling performance potential of the ITW Business Model. The Company undertook a complete review of its performance, focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns, and developing a strategy to replicate that performance across its operations. ITW determined that solid and consistent above-market organic growth is the core growth engine to deliver world-class financial performance and compelling long-term returns for its shareholders. To shift its primary growth engine to organic, the Company began executing a multi-step approach. •The first step was to narrow the focus and improve the quality of ITW's business portfolio. As part of the Portfolio Management initiative, ITW exited businesses that were operating in commoditized market spaces and prioritized sustainable differentiation as a must-have requirement for all ITW businesses. This process included both divesting entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions. As a result of this work, ITW's business portfolio now has significantly higher organic growth potential. ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve operating margins and generate price/cost increases. The Company achieved this through product line simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers, while supporting and growing the businesses' largest / most profitable customers and product lines. 15 -------------------------------------------------------------------------------- •Step two, Business Structure Simplification, was implemented to simplify and scale up ITW's operating structure to support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 84 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation. •The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 through 2019 and continues to be a key contributor to the Company's ongoing enterprise strategy. •With the initial portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for and accelerating organic growth, reapplying the 80/20 Front-to-Back process to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth. ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company's operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
PATH TO FULL POTENTIAL - FINISHING THE JOB
Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly finish the job and reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential: •Portfolio discipline •80/20 Front-to-Back practice excellence •Full-potential organic growth
Portfolio Discipline
The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model. ITW businesses have the right "raw material" in terms of market and business attributes that best fit the ITW Business Model and have significant potential to drive above-market organic growth over the long-term. The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.
As part of its agenda to finish the job, the Company routinely evaluates its portfolio to ensure it delivers sustainable differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and assessing selective high-quality acquisitions to supplement ITW's long-term growth potential.
The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with revenues totaling up to$1 billion . In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases. Refer to Note 3. Divestitures in Item 1. Financial Statements for more information regarding divestitures.
80/20 Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products. ITW will continue its efforts to finish the job and drive 80/20 Front-to-Back practice excellence in every division in the Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company, 16 --------------------------------------------------------------------------------
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-potential Organic Growth
Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division, with specific focus on: •"80" focused Market Penetration - fully leveraging the considerable growth potential that resides in the Company's largest and most differentiated product offerings and customer relationships •Customer-Back Innovation - strengthening the Company's commitment to serial innovation and delivering a continuous flow of differentiated new products to its key customers •Strategic Sales Excellence - deploying a high-performance sales function in every division As the Company continues to make progress toward its full potential, the Company will explore opportunities to reinforce or further expand the long-term organic growth potential of ITW through the addition of selective high-quality acquisitions.
Near-term Priorities
There continues to be uncertainty around how severe the COVID-19 pandemic will be, how long its effects will last, or how quickly ITW's customers and end markets will recover. The COVID-19 pandemic has impacted, and is expected to continue to impact, the Company's organic revenue and profitability across all segments. However, at this very uncertain time, ITW believes that the strength and resilience of ITW's Business Model and its strong balance sheet put the Company in a favorable position to deal with the crisis as it unfolds. For the duration of the COVID-19 pandemic, the Company is focusing its efforts on the following priorities: (1) protect the health and support the well-being of ITW's colleagues; (2) continue to serve the Company's customers with excellence to the best of its ability; (3) maintain financial strength, liquidity and strategic optionality throughout the containment and recovery phases; and (4) leverage the Company's strengths to position it to fully participate in the recovery phase.
TERMS USED BY ITW
Management uses the following terms to describe the financial results of operations of the Company:
•Organic business - acquired businesses that have been included in the Company's results of operations for more than 12 months on a constant currency basis. •Operating leverage - the estimated effect of the organic revenue volume changes on organic operating income, assuming variable margins remain the same as the prior period. •Price/cost - represents the estimated net impact of increases or decreases in the cost of materials used in the Company's products versus changes in the selling price to the Company's customers. •Product line simplification (PLS) - focuses businesses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines. In the short-term, PLS may result in a decrease in revenue and overhead costs while improving operating margin. In the long-term, PLS is expected to result in growth in revenue, profitability, and returns. Unless otherwise stated, the changes in financial results in the consolidated results of operations and the results of operations by segment represent the current year period versus the comparable period in the prior year. The following discussion of operating results should be read in conjunction with Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2019 Annual Report on Form 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) occurred inChina and other jurisdictions. The COVID-19 outbreak was subsequently declared a global pandemic by theWorld Health Organization onMarch 11, 2020 . In response to the outbreak, governments around the globe have taken various actions to reduce its spread, including travel restrictions, shutdowns of businesses deemed nonessential, and stay-at-home or similar orders. The COVID-19 pandemic and the measures taken globally to reduce its spread have negatively impacted the global economy, causing significant disruptions in the Company's global operations starting primarily in the latter part of the first quarter of 2020 as COVID-19 continued to 17 -------------------------------------------------------------------------------- spread and impact the countries in which the Company operates and the markets the Company serves. Despite the 29 percent decline in operating revenue in the second quarter of 2020, due to the strength and resilience of ITW's Business Model, the Company generated$449 million in operating income, 17.5 percent in operating margin and$681 million in free cash flow. For the first half of 2020, operating revenue declined 19 percent, operating income was$1.2 billion , operating margin was 20.9 percent and free cash flow was$1.2 billion . For the duration of the COVID-19 pandemic, the Company is focusing on the following priorities: (1) protect the health and support the well-being of ITW's colleagues; (2) continue to serve the Company's customers with excellence to the best of its ability; (3) maintain financial strength, liquidity and strategic optionality throughout the containment and recovery phases; and (4) leverage the Company's strengths to position it to fully participate in the recovery phase. To support ITW's colleagues, among other initiatives, the Company has redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagueswho have child and elder care needs, and implemented aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. To support its customers, the Company has worked diligently to keep its factories open and operating safely. The Company has adapted customer service systems and practices to seamlessly serve its customers under "work from home" requirements in many parts of the world. In areas around the world where governments issued stay-at-home or similar orders, the vast majority of ITW's businesses were designated as critical or essential businesses and, as such, they remained open and operational. In some cases, this is because the Company's products directly impact the COVID-19 response effort. In other cases, the Company's businesses are designated as critical because they play a vital role in serving and supporting industries that are deemed essential to the physical and economic health of our communities. As ofJune 30, 2020 , all of the Company's facilities are open and operational; however, many of these facilities are operating at a reduced capacity and the Company expects the customer demand disruptions caused by the COVID-19 outbreak to continue to have an adverse impact on the Company's operating results across all segments in the second half of 2020, with more pronounced impacts in the Automotive OEM, Food Equipment and Welding segments. Although the Company expects demand levels in the third quarter of 2020 to be better than the second quarter of 2020, the full extent of the COVID-19 outbreak in 2020 and its impact on the markets served by the Company and on the Company's operations and financial position is highly uncertain. A prolonged outbreak will continue to interrupt the operations of the Company and its customers and suppliers. A description of the risks relating to the impact of the COVID-19 outbreak on the Company's business, operations and financial condition is contained in Part II - Other Information, Item 1A. Risk Factors. Separately, the Company does not believe that tariffs imposed in the prior year have had a material impact on its operating results. The Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to mitigate the impact of any raw material cost increases resulting from these tariffs.
The Company's consolidated results of operations for the second quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended Dollars in millions June 30, Components of Increase (Decrease) Acquisition/ Foreign 2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 2,564 $ 3,609 (29.0) % (26.5) % (1.0) % - % (1.5) % (29.0) % Operating income$ 449 $ 871 (48.4) % (49.3) % (0.4) % 2.3 % (1.0) % (48.4) % Operating margin % 17.5 % 24.1 % (660) bps (750) bps 10 bps 80 bps - (660) bps Six Months Ended Dollars in millions June 30, Components of Increase (Decrease) Acquisition/ 2020 2019 Inc (Dec) Organic Divestiture Restructuring Foreign Currency Total Operating revenue$ 5,792 $ 7,161 (19.1) % (16.6) % (1.0) % - % (1.5) % (19.1) % Operating income$ 1,210 $ 1,710 (29.2) % (30.5) % (0.3) % 2.8 % (1.2) % (29.2) % Operating margin % 20.9 % 23.9 % (300) bps (400) bps 20 bps 80 bps - (300) bps 18
-------------------------------------------------------------------------------- •Operating revenue declined in the second quarter and year-to-date periods primarily due to lower organic revenue, the unfavorable effect of foreign currency translation and the impact of 2019 divestitures. •Organic revenue decreased 26.5% and 16.6% in the second quarter and year-to-date periods, respectively, primarily due to disruptions in the Company's global operations resulting from the spread of COVID-19 across all major regions. Product line simplification activities reduced organic revenue by 40 basis points in both the second quarter and year-to-date periods. •North American organic revenue decreased 25.5% in the second quarter and 15.4% in the year-to-date period as six segments declined primarily driven by the Automotive OEM, Food Equipment and Welding segments, partially offset by growth in the Construction Products segment. •Europe,Middle East andAfrica organic revenue decreased 37.1% and 22.1% in the second quarter and year-to-date periods, respectively, as all seven segments declined primarily driven by the Automotive OEM and Food Equipment segments. •Asia Pacific organic revenue decreased 6.9% in the second quarter as a decline in six segments, primarily the Automotive OEM and Food Equipment segments, was partially offset by growth in the Test & Measurement and Electronics segment. In the year-to-date period, organic revenue declined 9.4% as all seven segments decreased primarily driven by the Automotive OEM, Food Equipment and Construction Products segments.China organic revenue grew 1.2% in the second quarter primarily due to an increase in the Automotive OEM, Test & Measurement and Electronics and Polymers & Fluids segments, partially offset by a decline in the Food Equipment and Specialty Products segments. In the year-to-date period,China organic revenue declined 11.2% as a decline in six segments, primarily the Food Equipment and Automotive OEM segments, was partially offset by growth in the Construction Products segment. •Operating income of$449 million and$1.2 billion in the second quarter and year-to-date periods, respectively, decreased 48.4% and 29.2% in the respective periods, primarily due to lower organic revenue and unfavorable foreign currency translation, partially offset by lower restructuring expenses. •Operating margin was 17.5% in the second quarter. The decrease of 660 basis points was primarily driven by negative operating leverage of 750 basis points and unfavorable price/cost of 10 basis points, partially offset by benefits from the Company's enterprise initiatives of 100 basis points. •In the year-to-date period, operating margin of 20.9% decreased 300 basis points primarily driven by negative operating leverage of 430 basis points, partially offset by benefits from the Company's enterprise initiatives of 120 basis points and favorable price/cost of 10 basis points. •The effective tax rate for the second quarter of 2020 and 2019 was 21.3% and 24.5%, respectively, and 22.4% and 24.5% in the year-to-date periods of 2020 and 2019, respectively. The effective tax rate included discrete income tax benefits related to excess tax benefits from stock-based compensation of$5 million and$4 million for the second quarter of 2020 and 2019, respectively, and$12 million and$9 million for the year-to-date periods of 2020 and 2019, respectively. •Diluted earnings per share (EPS) were$1.01 for the second quarter and$2.78 for the year-to-date period of 2020. •Free cash flow was$681 million and$1.2 billion for the second quarter and year-to-date periods of 2020, respectively. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. •The Company repurchased approximately 4.2 million shares of its common stock in the year-to-date period of 2020 for approximately$706 million . The Company did not repurchase any shares of its common stock in the second quarter of 2020, as the Company temporarily suspended its share repurchase program starting inMarch 2020 due to the COVID-19 pandemic. •After-tax return on average invested capital was 16.8% for the second quarter and 22.0% for the year-to-date period of 2020. Refer to the After-Tax Return onAverage Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. 19 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS BY SEGMENT
Total operating revenue and operating income for the second quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months ended June 30, Six Months Ended June 30, Dollars in millions Operating Revenue Operating Income Operating Revenue Operating Income 2020 2019 2020 2019 2020 2019 2020 2019 Automotive OEM$ 361 $ 788 $ (28) $ 174 $ 1,057 $ 1,594 $ 117 $ 341 Food Equipment 336 548 31 140 819 1,066 148 269 Test & Measurement and Electronics 455 533 117 131 940 1,057 238 257 Welding 298 422 64 122 670 849 173 242 Polymers & Fluids 354 427 82 97 747 843 175 186 Construction Products 376 424 90 106 766 825 181 193 Specialty Products 387 473 98 124 801 938 207 247 Intersegment revenue (3) (6) - - (8) (11) - - Unallocated - - (5) (23) - - (29) (25) Total$ 2,564 $ 3,609 $ 449
$ 871 $ 5,792 $ 7,161 $ 1,210 $ 1,710 Segments are allocated a fixed overhead charge based on the segment's revenue. Expenses not charged to the segments are reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuations on a quarterly and annual basis.
AUTOMOTIVE OEM
This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers market. Products in this segment include:
•plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.
The results of operations for the Automotive OEM segment for the second quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended Components of Increase Dollars in millions June 30, (Decrease) Acquisition/ Foreign 2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 361 $ 788 (54.1) % (52.6) % - % - % (1.5) % (54.1) % Operating income$ (28) $ 174 (116.1) % (118.9) % - % 2.8 % - % (116.1) % Operating margin % (7.8) % 22.1 % (2990) bps (3090) bps - 130 bps (30) bps (2990) bps Six Months Ended Components of Increase Dollars in millions June 30, (Decrease) Acquisition/ 2020 2019 Inc (Dec) Organic Divestiture Restructuring
Foreign Currency Total Operating revenue$ 1,057 $ 1,594 (33.7) % (32.0) % - % - % (1.7) % (33.7) % Operating income$ 117 $ 341 (65.6) % (70.3) % - % 5.5 % (0.8) % (65.6) % Operating margin % 11.1 % 21.4 % (1030) bps (1210) bps - 180 bps - (1030) bps 20
-------------------------------------------------------------------------------- •Operating revenue declined in the second quarter and year-to-date periods due to lower organic revenue and the unfavorable effect of foreign currency translation. •Organic revenue declined 52.6% in the second quarter and 32.0% in the year-to-date period versus worldwide auto builds which decreased 45% in the second quarter and 33% in the year-to-date period due to customer and geographic region mix. Product line simplification activities reduced organic revenue by 80 basis points in the second quarter and 90 basis points in the year-to-date period. •North American organic revenue decreased 62.1% and 37.4% in the second quarter and year-to-date periods, respectively, compared to North American auto builds which declined 69% in the second quarter and 40% in the year-to-date period. Auto builds for theDetroit 3, where the Company has higher content, decreased 70% and 42% in the second quarter and year-to-date periods, respectively. •European organic revenue was down 59.3% and 33.7% in the second quarter and year-to-date periods, respectively, compared to European auto builds which decreased 62% and 40% in the respective periods. •Asia Pacific organic revenue decreased 11.8% in the second quarter and 14.3% in the year-to-date period.China organic revenue grew 6.4% in the second quarter versusChina auto builds which increased 9% due to customer mix, as auto builds of foreign automotive manufacturers inChina , where the Company has higher content, increased at a lower rate than the China OEMs. In the year-to-date period, organic revenue declined 7.8% versusChina auto builds which decreased 20%. •Operating margin was negative 7.8% in the second quarter. The decrease was primarily driven by negative operating leverage of 1,880 basis points, product mix and unfavorable price/cost of 60 basis points, partially offset by lower restructuring expenses and benefits from the Company's enterprise initiatives. •In the year-to-date period, operating margin of 11.1% decreased primarily due to negative operating leverage of 840 basis points and product mix, partially offset by lower restructuring expenses and benefits from the Company's enterprise initiatives.
FOOD EQUIPMENT
This segment is a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food institutional/restaurant and food retail markets. Products in this segment include: •warewashing equipment; •cooking equipment, including ovens, ranges and broilers; •refrigeration equipment, including refrigerators, freezers and prep tables; •food processing equipment, including slicers, mixers and scales; •kitchen exhaust, ventilation and pollution control systems; and •food equipment service, maintenance and repair.
The results of operations for the Food Equipment segment for the second quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended Components of Increase Dollars in millions June 30, (Decrease) Acquisition/ Foreign 2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 336 $ 548 (38.6) % (37.6) % - % - % (1.0) % (38.6) % Operating income$ 31 $ 140 (77.9) % (80.7) % - % 3.0 % (0.2) % (77.9) % Operating margin % 9.2 % 25.6 % (1640) bps (1770) bps - 120 bps 10 bps (1640) bps Six Months Ended Components of Increase Dollars in millions June 30, (Decrease) Acquisition/ Foreign 2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 819 $ 1,066 (23.2) % (22.0) % - % - % (1.2) % (23.2) % Operating income$ 148 $ 269 (45.1) % (46.9) % - % 2.4 % (0.6) % (45.1) % Operating margin % 18.1 % 25.3 % (720) bps (810) bps - 80 bps 10 bps (720) bps 21
-------------------------------------------------------------------------------- •Operating revenue declined in the second quarter and year-to-date periods due to lower organic revenue and the unfavorable effect of foreign currency translation. •Organic revenue decreased 37.6% in the second quarter as equipment and service organic revenue declined 38.0% and 36.6%, respectively. In the year-to-date period, organic revenue declined 22.0% as equipment and service organic revenue decreased 23.5% and 19.3%, respectively. •North American organic revenue declined 32.8% in the second quarter and 18.8% in the year-to-date period as equipment organic revenue declined 33.2% and 20.0%, respectively, primarily driven by lower demand in the restaurant, institutional and food retail end markets. Service organic revenue decreased 32.0% and 16.9% in the second quarter and year-to-date periods, respectively. •International organic revenue decreased 43.9% and 26.4% in the second quarter and year-to-date periods, respectively. Equipment organic revenue declined 43.7% in the second quarter and 27.8% in the year-to-date period primarily due to lower demand in the European warewash, refrigeration and cooking end markets and lower demand inAsia . Service organic revenue decreased 44.2% and 23.4% in the second quarter and year-to-date periods, respectively. •Operating margin of 9.2% in the second quarter decreased 1,640 basis points primarily due to negative operating leverage of 1,300 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives, lower restructuring expenses and favorable price/cost of 50 basis points. •In the year-to-date period, operating margin was 18.1%. The decrease of 720 basis points was primarily due to negative operating leverage of 630 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives, lower restructuring expenses and favorable price/cost of 60 basis points.
TEST & MEASUREMENT AND ELECTRONICS
This segment is a branded and innovative producer of test and measurement and electronic manufacturing and maintenance, repair, and operations, or "MRO" solutions that improve efficiency and quality for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, automotive original equipment manufacturers and tiers, industrial capital goods, energy and consumer durables markets. Products in this segment include: •equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids; •electronic assembly equipment; •electronic components and component packaging; •static control equipment and consumables used for contamination control in clean room environments; and •pressure sensitive adhesives and components for electronics, medical, transportation and telecommunications applications. The results of operations for the Test & Measurement and Electronics segment for the second quarter and year-to-date periods of 2020 and 2019 were as follows: Three Months Ended Dollars in millions June 30, Components of Increase (Decrease) Acquisition/ 2020 2019 Inc (Dec) Organic Divestiture Restructuring Foreign Currency Total Operating revenue$ 455 $ 533 (14.7) % (10.6) % (3.0) % - % (1.1) % (14.7) % Operating income$ 117 $ 131 (10.3) % (7.4) % (1.6) % (0.3) % (1.0) % (10.3) % Operating margin % 25.7 % 24.5 % 120 bps 80 bps 40 bps - - 120 bps Six Months Ended Dollars in millions June 30, Components of Increase (Decrease) Acquisition/ 2020 2019 Inc (Dec) Organic Divestiture Restructuring Foreign Currency Total Operating revenue$ 940 $ 1,057 (11.1) % (7.0) % (3.1) % - % (1.0) % (11.1) % Operating income$ 238 $ 257 (7.1) % (4.9) % (1.4) % 0.2 % (1.0) % (7.1) % Operating margin % 25.4 % 24.3 % 110 bps 50 bps 50 bps 10 bps - 110 bps 22
-------------------------------------------------------------------------------- •Operating revenue declined in the second quarter and year-to-date periods due to lower organic revenue, the impact of a 2019 divestiture and the unfavorable effect of foreign currency translation. •Organic revenue decreased 10.6% in the second quarter and 7.0% in the year-to-date period. •Organic revenue for the test and measurement businesses decreased 12.2% and 7.3% in the second quarter and year-to-date periods, respectively, primarily driven by lower end market demand inEurope , partially offset by higher semi-conductor demand inNorth America .Instron , where demand is more closely tied to the capital spending environment, had an organic revenue decline of 15.0% in the second quarter and 15.2% in the year-to-date period. •Electronics organic revenue declined 8.6% in the second quarter and 6.5% in the year-to-date period. The electronics assembly businesses decreased 13.8% and 12.0% in the second quarter and year-to-date periods, respectively, primarily due to lower demand inNorth America . The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, declined 5.4% and 3.1% in the second quarter and year-to-date periods, respectively, primarily due to a decrease inEurope andAsia Pacific , partially offset by growth inNorth America . •Operating margin of 25.7% in the second quarter increased 120 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, lower intangible asset amortization expense, the impact of a divestiture and favorable price/cost of 30 basis points, partially offset by negative operating leverage of 300 basis points. •In the year-to-date period, operating margin was 25.4%. The increase of 110 basis points was primarily due to the net benefits from the Company's enterprise initiatives and cost management, lower intangible asset amortization expense, the impact of a divestiture and favorable price/cost of 30 basis points, partially offset by negative operating leverage of 200 basis points.
WELDING
This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and industrial capital goods markets. Products in this segment include: •arc welding equipment; and •metal arc welding consumables and related accessories.
The results of operations for the Welding segment for the second quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended Dollars in millionsJune 30 , Components of Increase (Decrease) Acquisition/ 2020 2019 Inc (Dec) Organic Divestiture Restructuring Foreign Currency Total Operating revenue$ 298 $ 422 (29.4) % (24.9) % (3.9) % - % (0.6) % (29.4) % Operating income$ 64 $ 122 (47.0) % (47.0) % (1.6) % 1.9 % (0.3) % (47.0) % Operating margin % 21.6 % 28.8 % (720) bps (850) bps 60 bps 70 bps - (720) bps Six Months Ended Dollars in millions June 30, Components of Increase (Decrease) Acquisition/ 2020 2019 Inc (Dec) Organic Divestiture Restructuring Foreign Currency Total Operating revenue$ 670 $ 849 (21.1) % (16.9) % (3.7) % - % (0.5) % (21.1) % Operating income$ 173 $ 242 (28.5) % (28.7) % (1.2) % 1.6 % (0.2) % (28.5) % Operating margin % 25.8 % 28.5 % (270) bps (410) bps 70 bps 60 bps 10 bps (270) bps •Operating revenue decreased in the second quarter and year-to-date periods due to lower organic revenue, the impact of a 2019 divestiture and the unfavorable effect of foreign currency translation. 23 -------------------------------------------------------------------------------- •Organic revenue declined 24.9% and 16.9% in the second quarter and year-to-date periods, respectively, driven by decreases in equipment of 27.9% and 18.7% and consumables of 20.5% and 14.2%, respectively, primarily due to lower demand across all end markets. •North American organic revenue decreased 26.7% in the second quarter primarily due to a decline in the industrial and commercial end markets of 39.6% and 10.6%, respectively. In the year-to-date period, organic revenue declined 16.7% primarily due to a decline in the industrial and commercial end markets of 25.0% and 7.2%, respectively. •International organic revenue decreased 16.3% in the second quarter and 17.6% in the year-to-date period primarily due to a decline in the European oil and gas end markets of 26.9% and 22.7%, respectively. •Operating margin of 21.6% in the second quarter decreased 720 basis points primarily driven by negative operating leverage of 520 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives, lower restructuring expenses and the impact of a divestiture. •In the year-to-date period, operating margin was 25.8%. The decrease of 270 basis points was primarily driven by negative operating leverage of 330 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives, the impact of a divestiture and lower restructuring expenses.
POLYMERS & FLUIDS
This segment is a branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial, MRO and construction markets. Products in this segment include: •adhesives for industrial, construction and consumer purposes; •chemical fluids which clean or add lubrication to machines; •epoxy and resin-based coating products for industrial applications; •hand wipes and cleaners for industrial applications; •fluids, polymers and other supplies for auto aftermarket maintenance and appearance; •fillers and putties for auto body repair; and •polyester coatings and patch and repair products for the marine industry.
The results of operations for the Polymers & Fluids segment for the second quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended Dollars in millions June 30, Components of Increase (Decrease) Acquisition/ 2020 2019 Inc (Dec) Organic Divestiture Restructuring Foreign Currency Total Operating revenue$ 354 $ 427 (17.2) % (14.4) % - % - % (2.8) % (17.2) % Operating income$ 82 $ 97 (16.2) % (16.8) % - % 3.0 % (2.4) % (16.2) % Operating margin % 23.1 % 22.8 % 30 bps (60) bps - 80 bps 10 bps 30 bps Six Months Ended Dollars in millions June 30, Components of Increase (Decrease) Acquisition/ 2020 2019 Inc (Dec) Organic Divestiture Restructuring Foreign Currency Total Operating revenue$ 747 $ 843 (11.4) % (8.9) % - % - % (2.5) % (11.4) % Operating income$ 175 $ 186 (6.1) % (6.5) % - % 2.6 % (2.2) % (6.1) % Operating margin % 23.4 % 22.1 % 130 bps 50 bps - 70 bps 10 bps 130 bps •Operating revenue decreased in the second quarter and year-to-date periods due to lower organic revenue and the unfavorable effect of foreign currency translation. •Organic revenue declined 14.4% in the second quarter and 8.9% in the year-to-date period. Product line simplification activities reduced organic revenue by 60 basis points in both respective periods. •Organic revenue for the automotive aftermarket businesses declined 14.4% in the second quarter and 8.6% in the year-to-date period primarily driven by a decrease in the car care and body repair businesses inNorth America and the additives businesses inEurope . 24 -------------------------------------------------------------------------------- •Organic revenue for the polymers businesses decreased 19.9% and 12.5% in the second quarter and year-to-date periods, respectively, primarily driven by a decline in the heavy industrial end markets inNorth America andEurope . •Organic revenue for the fluids businesses decreased 4.8% and 3.5% in the second quarter and year-to-date periods, respectively, primarily due to a decline in the industrial maintenance, repair, and operations end markets inNorth America , partially offset by growth inEurope . •Operating margin of 23.1% increased 30 basis points primarily driven by the net benefits from the Company's enterprise initiatives and cost management, lower restructuring expenses and favorable price/cost of 60 basis points, partially offset by negative operating leverage of 380 basis points. •In the year-to-date period, operating margin was 23.4%. The increase of 130 basis points was primarily due to the net benefits from the Company's enterprise initiative and cost management, lower restructuring expenses and favorable price/cost of 70 basis points, partially offset by negative operating leverage of 230 basis points. CONSTRUCTION PRODUCTS This segment is a branded supplier of innovative engineered fastening systems and solutions. This segment primarily serves the residential construction, renovation/remodel and commercial construction markets. Products in this segment include:
•fasteners and related fastening tools for wood and metal applications; •anchors, fasteners and related tools for concrete applications; •metal plate truss components and related equipment and software; and •packaged hardware, fasteners, anchors and other products for retail.
The results of operations for the Construction Products segment for the second quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended Components of Increase Dollars in millions June 30, (Decrease) Acquisition/ Foreign 2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 376 $ 424 (11.4) % (9.1) % - % - % (2.3) % (11.4) % Operating income$ 90 $ 106 (15.9) % (15.0) % - % 0.8 % (1.7) % (15.9) % Operating margin % 23.7 % 25.0 % (130) bps (160) bps - 20 bps 10 bps (130) bps Six Months Ended Components of Increase Dollars in millions June 30, (Decrease) Acquisition/ Foreign 2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 766 $ 825 (7.1) % (4.6) % - % - % (2.5) % (7.1) % Operating income$ 181 $ 193 (6.5) % (7.4) % - % 3.0 % (2.1) % (6.5) % Operating margin % 23.6 % 23.4 % 20 bps (70) bps - 80 bps 10 bps 20 bps •Operating revenue decreased in the second quarter and year-to-date periods due to lower organic revenue and the unfavorable effect of foreign currency translation. •Organic revenue declined 9.1% and 4.6% in the second quarter and year-to-date periods, respectively, as growth inNorth America was offset by declines inEurope andAsia Pacific . •North American organic revenue increased 0.8% in the second quarter as an increase of 11.8% inthe United States residential end markets was partially offset by a decrease of 20.5% in the commercial end markets. In the year-to-date period, organic revenue increased 4.6% as an increase of 10.9% inthe United States residential end markets was partially offset by a decrease of 12.6% in the commercial end markets. •International organic revenue declined 16.6% in the second quarter and 11.4% in the year-to-date period.Asia Pacific organic revenue decreased 2.9% and 4.5% in the second quarter and year-to-date periods, respectively, primarily due to a decline inAustralia and New Zealand . European organic revenue decreased 27.9% and 17.1% in the second quarter and year-to-date periods, respectively, driven by a decline in continentalEurope and theUnited Kingdom . 25 -------------------------------------------------------------------------------- •Operating margin was 23.7% in the second quarter. The decrease of 130 basis points was primarily driven by negative operating leverage of 200 basis points and unfavorable price/cost of 120 basis points, partially offset by the net benefits from the Company's enterprise initiatives and cost management and lower restructuring expenses. •In the year-to-date period, operating margin of 23.6% increased 20 basis points primarily driven by the net benefits from the Company's enterprise initiatives and cost management and lower restructuring expenses, partially offset by negative operating leverage of 90 basis points and unfavorable price/cost of 70 basis points. SPECIALTY PRODUCTS This segment is focused on diversified niche market opportunities with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, general industrial, consumer durables, industrial capital goods and printing and publishing markets. Products in this segment include: •line integration, conveyor systems and line automation for the food and beverage industries; •plastic consumables that multi-pack cans and bottles and related equipment; •foil, film and related equipment used to decorate consumer products; •product coding and marking equipment and related consumables; •plastic and metal closures and components for appliances; •airport ground support equipment; and •components for medical devices.
The results of operations for the Specialty Products segment for the second quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended Components of Increase Dollars in millions June 30, (Decrease) Acquisition/ Foreign 2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 387 $ 473 (18.2) % (16.1) % (0.8) % - % (1.3) % (18.2) % Operating income$ 98 $ 124 (20.4) % (23.1) % 0.8 % 3.1 % (1.2) % (20.4) % Operating margin % 25.4 % 26.1 % (70) bps (220) bps 50 bps 100 bps - (70) bps Six Months Ended Components of Increase Dollars in millions June 30, (Decrease) Acquisition/ Foreign 2020 2019 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 801 $ 938 (14.6) % (12.4) % (1.0) % - % (1.2) % (14.6) % Operating income$ 207 $ 247 (16.1) % (18.5) % 1.0 % 2.5 % (1.1) % (16.1) % Operating margin % 25.9 % 26.3 % (40) bps (180) bps 60 bps 80 bps - (40) bps •Operating revenue decreased in the second quarter and year-to-date periods due to lower organic revenue, the impact of 2019 divestitures and the unfavorable effect of foreign currency translation. •Organic revenue decreased 16.1% in the second quarter as consumables and equipment sales declined 12.0% and 28.7%, respectively, primarily due to lower demand inNorth America andEurope . In the year-to-date period, organic revenue decreased 12.4% as consumables declined 10.1% and equipment sales declined 20.3%. Product line simplification activities reduced organic revenue by 40 basis points in the second quarter and 50 basis points in the year-to-date period. •North American organic revenue decreased 14.7% and 11.4% in the second quarter and year-to-date periods, respectively, primarily due to a decline in the appliance, consumer packaging, ground support equipment and marking coding businesses. •International organic revenue decreased 18.5% and 14.2% in the second quarter and year-to-date periods, respectively, primarily due to a decline in the appliance, ground support equipment, consumer packaging and marking coding businesses inEurope . •Operating margin was 25.4% in the second quarter. The decrease of 70 basis points was primarily driven by negative operating leverage of 380 basis points and unfavorable price/cost of 20 basis points, partially offset by the net benefits 26 -------------------------------------------------------------------------------- from the Company's enterprise initiatives and cost management, lower restructuring expenses and the impact of divestitures. •In the year-to-date period, operating margin of 25.9% decreased 40 basis points primarily due to negative operating leverage of 270 basis points and unfavorable price/cost of 30 basis points, partially offset by the net benefits from the Company's enterprise initiatives and cost management, lower restructuring expenses and the impact of divestitures.
OTHER FINANCIAL HIGHLIGHTS
•Interest expense in the second quarter of 2020 decreased to$51 million versus$55 million in the second quarter of 2019 and$102 million in the year-to-date period of 2020 versus$118 million in the prior year period. The decrease in both respective periods was partially driven by outstanding commercial paper in 2019. Additionally, the decrease in the year-to-date period was driven by the repayment of the$700 million notes dueApril 1, 2019 and the$650 million notes dueMarch 1, 2019 , partially offset by the issuance of the Euro notes in June of 2019. •Other income (expense) was income of$8 million in the second quarter of 2020 versus$9 million in the prior year period and$33 million in the year-to-date period of 2020 versus$23 million in the prior year period. The year-to-date period included the impact of foreign currency translation gains in the first quarter of 2020 versus losses in 2019.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1. Significant Accounting Policies of Item 1. Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are free cash flow and short-term credit facilities. As ofJune 30, 2020 , the Company had$1.8 billion of cash and equivalents on hand, no outstanding borrowings under its$2.5 billion revolving credit facility, and no commercial paper outstanding. In addition, other than$4 million of short-term debt, the Company has no corporate debt maturities in the next 12 months. The Company also has maintained strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include: •internal investments to support organic growth and sustain core businesses; •payment of an attractive dividend to shareholders; and •external investments in selective strategic acquisitions that support the Company's organic growth focus, and an active share repurchase program that the Company temporarily suspended starting inMarch 2020 due to the COVID-19 pandemic. Also, for the duration of the COVID-19 crisis, the Company has made the strategic decision to aggressively manage its discretionary costs and working capital, while staying invested in its businesses, people and strategies, so that the Company is positioned to fully support its customers in the recovery phase and can return to executing its long-term strategy to deliver differentiated long-term performance and returns as soon as possible. The Company believes that, based on its operating revenue, operating margin, free cash flow, and credit ratings, it could readily obtain additional financing if necessary. A description of the risks related to the impact of the COVID-19 outbreak on the financial and capital markets and the related potential risks to the Company is contained in Part II - Other Information, Item 1A. Risk Factors. 27 --------------------------------------------------------------------------------
Cash Flow
The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company's financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the second quarter and year-to-date periods of 2020 and 2019 was as follows: Three Months Ended Six Months Ended June 30, June 30, In millions 2020 2019 2020 2019 Net cash provided by operating activities$ 737 $ 685 $ 1,351 $ 1,301 Additions to plant and equipment (56) (77) (116) (154) Free cash flow$ 681 $ 608 $ 1,235 $ 1,147 Cash dividends paid$ (338) $ (326) $ (680) $ (654) Repurchases of common stock - (375) (706) (750) Acquisition of businesses (excluding cash and equivalents) - - - (4)
Net proceeds from (repayments of) debt with original maturities of three months or less
- (1,060) - (2)
Proceeds from debt with original maturities of more than three months
- 1,774 - 1,774
Repayments of debt with original maturities of more than three months
- (700) - (1,350) Other, net 16 10 24 19 Effect of exchange rate changes on cash and equivalents 23 (9) (42) (7) Net increase (decrease) in cash and equivalents$ 382 $
(78)
In the second quarter of 2020, the Company elected to defer payment of
Stock Repurchase Program
OnFebruary 13, 2015 , the Company's Board of Directors authorized a stock repurchase program which provided for the repurchase of up to$6.0 billion of the Company's common stock over an open-ended period of time (the "2015 Program"). Under the 2015 Program, the Company repurchased approximately 6.1 million shares of its common stock at an average price of$91.78 per share during 2015, approximately 18.7 million shares of its common stock at an average price of$107.17 per share during 2016, approximately 7.1 million shares of its common stock at an average price of$140.56 per share during 2017, approximately 13.9 million shares of its common stock at an average price of$143.66 per share during 2018, approximately 2.7 million shares of its common stock at an average price of$141.34 in the first quarter of 2019 and approximately 0.5 million shares of its common stock at an average price of$154.21 in the second quarter of 2019. The 2015 Program was completed in the second quarter of 2019. OnAugust 3, 2018 , the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional$3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). Under the 2018 Program, the Company repurchased approximately 2.0 million shares of its common stock at an average price of$149.04 in the second quarter of 2019, approximately 2.4 million shares of its common stock at an average price of$150.97 in the third quarter of 2019, approximately 2.2 million shares of its common stock at an average price of$175.02 in the fourth quarter of 2019 and approximately 4.2 million shares of its common stock at an average price of$167.69 in the first quarter of 2020. As ofJune 30, 2020 , there were$1.2 billion of authorized repurchases remaining under the 2018 Program. Due to the COVID-19 pandemic, the Company temporarily suspended its share repurchase program starting inMarch 2020 . 28 --------------------------------------------------------------------------------
After-Tax Return on
The Company uses after-tax return on average invested capital ("ROIC") to measure the effectiveness of its operations' use of invested capital to generate profits. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company's financial performance and may be different than the method used by other companies to calculate ROIC. Average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations. Average invested capital is calculated using balances at the start of the period and at the end of each quarter. ROIC for the second quarter and year-to-date periods of 2020 and 2019 was as follows: Three Months Ended Six Months Ended June 30, June 30, Dollars in millions 2020 2019 2020 2019 Operating income$ 449 $ 871 $ 1,210 $ 1,710 Tax rate 21.3 % 24.5 % 22.4 % 24.5 % Income taxes (96) (213) (271) (418) Operating income after taxes$ 353 $ 658 $ 939 $ 1,292 Invested capital: Trade receivables$ 2,156 $ 2,629 $ 2,156 $ 2,629 Inventories 1,167 1,256 1,167 1,256 Net assets held for sale 181 346 181 346 Net plant and equipment 1,711 1,717 1,711 1,717 Goodwill and intangible assets 5,244 5,431 5,244 5,431 Accounts payable and accrued expenses (1,508) (1,719) (1,508) (1,719) Other, net (636) (433) (636) (433) Total invested capital$ 8,315 $ 9,227 $ 8,315 $ 9,227 Average invested capital$ 8,431 $ 9,206 $ 8,557 $ 9,182 Return on average invested capital 16.8 % 28.6 % 22.0 % 28.1 % Working Capital Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as ofJune 30, 2020 andDecember 31, 2019 is summarized as follows: Increase/ In millions June 30, 2020 December 31, 2019 (Decrease) Current assets: Cash and equivalents$ 1,812 $ 1,981$ (169) Trade receivables 2,156 2,461 (305) Inventories 1,167 1,164 3 Assets held for sale 221 351 (130) Other 253 296 (43) Total current assets 5,609 6,253 (644) Current liabilities: Short-term debt 4 4 - Accounts payable and accrued expenses 1,508 1,689 (181) Liabilities held for sale 40 71 (31) Other 490 390 100 Total current liabilities 2,042 2,154 (112) Net working capital$ 3,567 $ 4,099$ (532) 29
-------------------------------------------------------------------------------- As ofJune 30, 2020 , a majority of the Company's cash and equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to theU.S. Cash and equivalents held internationally are typically used for international operating needs or reinvested to fund expansion of existing international businesses. International funds may also be used to fund international acquisitions or, if not considered permanently invested, may be repatriated to theU.S. The Company has accrued for foreign withholding taxes related to foreign held cash and equivalents that are not permanently invested. In theU.S. , the Company utilizes cash flows from operations to fund domestic cash needs and the Company's capital allocation priorities. This includes operating needs of theU.S. businesses, dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existingU.S. businesses and general corporate needs. The Company may also use its commercial paper program, which is backed by long-term credit facilities, for short-term liquidity needs. The Company believes cash generated by operations and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in theU.S.
Debt
Total debt as of
In millions June 30, 2020 December 31, 2019 Short-term debt $ 4 $ 4 Long-term debt 7,765 7,754 Total debt$ 7,769 $ 7,758 There was no commercial paper outstanding as ofJune 30, 2020 andDecember 31, 2019 . As ofJune 30, 2020 andDecember 31, 2019 , short-term debt included$4 million related to the 4.88% notes due throughDecember 31, 2020 . The Company has a$2.5 billion line of credit agreement with a termination date ofSeptember 27, 2024 , which is available to provide additional liquidity, including to support the potential issuances of commercial paper. No amounts were outstanding under the$2.5 billion line of credit agreement as ofJune 30, 2020 .
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long-term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the trailing twelve month periods endedJune 30, 2020 andDecember 31, 2019 was as follows: Dollars in millions June 30, 2020 December 31, 2019 Total debt$ 7,769 $ 7,758 Net income$ 2,186 $ 2,521 Add: Interest expense 205 221 Other income (117) (107) Income taxes 628 767 Depreciation 267 267 Amortization and impairment of intangible assets 146 159 EBITDA$ 3,315 $ 3,828 Total debt to EBITDA ratio 2.3 2.0 30
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Stockholders' Equity
The changes to stockholders' equity during the six months ended
In millions Total stockholders' equity,December 31, 2019 $ 3,030 Net income 885 Repurchases of common stock (706) Dividends declared (676)
Foreign currency translation adjustments, net of tax (223) Other, net
48 Total stockholders' equity,June 30, 2020 $ 2,358
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe," "expect," "plans," "intends," "may," "strategy," "prospects," "estimate," "project," "target," "anticipate," "guidance," "forecast," and other similar words, including, without limitation, statements regarding the potential effects of the COVID-19 pandemic, related government actions and the Company's strategy in response thereto on the Company's business, potential acquisitions and divestitures and the expected performance of acquired businesses and impact of divested businesses, the impact of tariffs and raw material cost inflation, economic and regulatory conditions in various geographic regions, the timing and amount of share repurchases, if any, the timing and amount of benefits from the Company's enterprise strategy initiatives, the adequacy of internally generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency ofU.S. generated cash to fund cash requirements in theU.S. , the impact of enactedU.S. tax legislation, the cost and availability of additional financing, the Company's portion of future benefit payments related to pension and postretirement benefits, the availability of raw materials and energy, the expiration of any one of the Company's patents, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the impact of failure of the Company's employees to comply with applicable laws and regulations, the impact of foreign currency fluctuations, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the resolution of tax matters. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include (1) the impact of the COVID-19 pandemic, related government actions and the Company's strategy in response thereto on the Company's operating results, financial condition and liquidity, (2) weaknesses or downturns in the markets served by the Company, (3) changes or deterioration in international and domestic political and economic conditions, including as a result of the COVID-19 pandemic, (4) the timing and amount of benefits from the Company's enterprise strategy initiatives and their impact on organic revenue growth, including the ability to execute divestitures, (5) market conditions and availability of financing to fund the Company's share repurchases, if any, (6) failure of the Company's employees, agents or business partners to comply with anti-corruption and other laws, (7) the unfavorable impact of foreign currency fluctuations, (8) a delay or decrease in the introduction of new products into the Company's product lines, (9) failure to protect the Company's intellectual property, (10) the potential negative impact of acquisitions on the Company's profitability and returns, (11) negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (12) potential negative impact of impairments to goodwill and other intangible assets on the Company's return on invested capital, financial condition or results of operations, (13) increases in funding costs or decreases in credit availability due to market conditions or changes to the Company's credit ratings, (14) raw material price increases and supply shortages, (15) unfavorable tax law changes and tax authority rulings, (16) financial market risks to the Company's obligations under its defined benefit pension plans, (17) potential adverse outcomes in legal proceedings, (18) uncertainties related to environmental regulation and the physical risks of climate change, and (19) negative effects of service interruptions, data corruption, cyber-based attacks, network security breaches, or violations of data privacy laws. A more detailed description of these risks is contained under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Any forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.
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ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-public information or other confidential commercial information. Shareholders should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
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