ILLINOIS TOOL WORKS

ITW
Delayed Quote. Delayed  - 09/18 04:10:00 pm
199.11USD -0.91%

ILLINOIS TOOL WORKS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/06/2020 | 05:29pm

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 of December 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
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
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 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 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 of June 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 and Africa 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 in March
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 on
Average 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 the Detroit 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
versus China auto builds which increased 9% due to customer mix, as auto builds
of foreign automotive manufacturers in China, 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% versus China 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 in Asia. 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 in 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
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 in North 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 in Europe and
Asia Pacific, partially offset by growth in North 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 millions June 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 in North America and the
additives businesses in Europe.
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 in North America and Europe.
•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 in North America,
partially offset by growth in Europe.
•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 in North America was offset by declines in
Europe and Asia Pacific.
•North American organic revenue increased 0.8% in the second quarter as an
increase of 11.8% in the 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% in the 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 in Australia 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 continental Europe and the United 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 in North America and Europe. 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 in Europe.
•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 due April 1, 2019 and the $650 million notes
due March 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 of June 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 in March 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) $ (169) $ 173



In the second quarter of 2020, the Company elected to defer payment of U.S.
income taxes of $158 million to the third quarter of 2020 in accordance with the
Coronavirus Aid, Relief and Economic Security (CARES) Act.



Stock Repurchase Program




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'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.

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
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 of June 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 in March 2020.

28
--------------------------------------------------------------------------------



After-Tax Return on Average Invested Capital




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 of June 30, 2020 and December 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 of June 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 the U.S. Cash and
equivalents held internationally are typically used for international operating
needs or reinvested to fund expansion of existing international businesses.
International funds may also be used to fund international acquisitions or, if
not considered permanently invested, may be repatriated to the U.S. The Company
has accrued for foreign withholding taxes related to foreign held cash and
equivalents that are not permanently invested.

In the U.S., the Company utilizes cash flows from operations to fund domestic
cash needs and the Company's capital allocation priorities. This includes
operating needs of the U.S. businesses, dividend payments, share repurchases,
acquisitions, servicing of domestic debt obligations, reinvesting to fund
expansion of existing U.S. businesses and general corporate needs. The Company
may also use its commercial paper program, which is backed by long-term credit
facilities, for short-term liquidity needs. The Company believes cash generated
by operations and liquidity provided by the Company's commercial paper program
will continue to be sufficient to fund cash requirements in the U.S.


Debt



Total debt as of June 30, 2020 and December 31, 2019 was as follows:




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 of June 30, 2020 and December 31,
2019
. As of June 30, 2020 and December 31, 2019, short-term debt included $4
million
related to the 4.88% notes due through December 31, 2020. The Company
has a $2.5 billion line of credit agreement with a termination date of September
27, 2024
, which is available to provide additional liquidity, including to
support the potential issuances of commercial paper. No amounts were outstanding
under the $2.5 billion line of credit agreement as of June 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 ended June 30, 2020 and December 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



--------------------------------------------------------------------------------



Stockholders' Equity



The changes to stockholders' equity during the six months ended June 30, 2020
were as follows:




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 of U.S. generated cash to fund cash requirements in
the U.S., the impact of enacted U.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 ended December 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.



31



--------------------------------------------------------------------------------




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.

© Edgar Online, source Glimpses

© Acquiremedia 2020
Copier lien
All news about ILLINOIS TOOL WORKS INC.
08/07
08/07
08/06
07/31
07/31