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(Exact Name of Registrant as Specified in its Charter)
iDelaware
i36-1258310
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i155 Harlem Avenue
iGlenview
iIllinois
i60025
(Address
of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (i847) i724-7500
Securities registered pursuant to Section 12(b) of the Act:
Title
of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
iCommon Stock
iITW
iNew
York Stock Exchange
i1.75% Euro Notes due 2022
iITW22
iNew
York Stock Exchange
i1.25% Euro Notes due 2023
iITW23
iNew
York Stock Exchange
i0.250% Euro Notes due 2024
iITW24A
iNew
York Stock Exchange
i0.625% Euro Notes due 2027
iITW27
iNew
York Stock Exchange
i2.125% Euro Notes due 2030
iITW30
iNew
York Stock Exchange
i1.00% Euro Notes due 2031
iITW31
iNew
York Stock Exchange
i3.00% Euro Notes due 2034
iITW34
iNew
York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
iYes☒ No ☐
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐iNo☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in
Rule 12b-2 of the Exchange Act. (Check one):
iLarge accelerated filer
☒
Accelerated filer
☐
Non-accelerated
filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. i☒
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2021 was approximately $i70.1 billion
based on the New York Stock Exchange closing sales price as of June 30, 2021.
Shares of common stock outstanding at January 31, 2022: i312,926,939.
Illinois Tool Works Inc. (the "Company" or "ITW") was founded in 1912 and incorporated in 1915. The Company's ticker symbol is ITW. The Company is a global manufacturer of a diversified range of industrial products and equipment with 83 divisions in 52 countries. As of December 31, 2021, the
Company employed approximately 45,000 people.
The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. The following is a description of the Company's seven segments:
Automotive OEM— This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems. Businesses in this segment produce components and
fasteners for automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers market. Products in this segment include:
•plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.
Food Equipment— This segment is a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food retail and food institutional/restaurant markets. Products in this segment include:
•warewashing equipment;
•cooking
equipment, including ovens, ranges and broilers;
•refrigeration equipment, including refrigerators, freezers and prep tables;
•food processing equipment, including slicers, mixers and scales;
•kitchen exhaust, ventilation and pollution control systems; and
•food equipment service, maintenance and repair.
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.
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.
3
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.
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.
Specialty Products— This segment is focused on diversified niche market opportunities with substantial patent protection producing
beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, consumer durables, general industrial, industrial capital goods and printing and publishing markets. Products in this segment include:
•line integration, conveyor systems and line automation for the food and beverage industries;
•plastic consumables that multi-pack cans and bottles and related equipment;
•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 information set forth below is applicable to all segments of the Company unless otherwise noted.
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
19,300 granted and pending patents;
4
•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.
•Step two, Business Structure Simplification, was implemented to simplify and scale up ITW's operating structure to support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of which were critical
to driving accelerated organic growth. ITW now has 83 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.
•The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 through 2021 and continues to be a key contributor to the Company's ongoing enterprise strategy.
•With the initial portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for and accelerating
organic growth, reapplying the 80/20 Front-to-Back process to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.
ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company's operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
Path to Full Potential
Since the launch of the enterprise strategy, the
Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential:
•Portfolio discipline
•80/20 Front-to-Back practice excellence
•Full-potential organic growth
5
Portfolio
Discipline
The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model. ITW businesses have the right "raw material" in terms of market and business attributes that best fit the ITW Business Model and have significant potential to drive above-market organic growth over the long-term.
The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW's portfolio operates in highly diverse end markets and geographies which makes the
Company more resilient in the face of uncertain or volatile market environments.
The Company routinely evaluates its portfolio to ensure it delivers sustainable differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and assessing selective high-quality acquisitions to supplement ITW's long-term growth potential.
The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion. In the fourth quarter of 2019, the Company completed the divestitures
of three businesses and continues to evaluate options for certain other businesses. However, due to the COVID-19 pandemic, the Company deferred any further significant divestiture activity until 2022 or later. The Company intends to reinitiate the divestiture process in 2022 for certain businesses with combined annual revenues of approximately $0.5 billion. Refer to Note 4. Divestitures in Item 8. Financial Statements and Supplementary Data for further information regarding divestiture activity.
80/20 Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the
Company has true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products.
ITW will continue to drive 80/20 Front-to-Back practice excellence in every division in the Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company, division by division, will produce further customer-facing performance improvement in a number of divisions and additional structural margin expansion at the enterprise level.
Near-term
Priorities
While it was the challenges brought about by the COVID-19 pandemic that dominated the Company's attention starting in 2020, it was the collection of capabilities and competitive advantages that have been built and honed over the past nine years through the execution of ITW's enterprise strategy that provided the Company with the options to respond. This, coupled with the proprietary and powerful ITW Business Model, diversified high-quality business portfolio and diligent execution put the Company in a position of strength in dealing with the global pandemic.
As the global pandemic continues,
the Company continues to focus its efforts on (1) protecting the health and support the well-being of ITW's colleagues; (2) serving the Company's customers with excellence; (3) maintain financial strength, liquidity and strategic optionality; and (4) leverage the Company's strengths to position it to fully participate in the recovery.
"Win the Recovery" is an execution component of the Company's enterprise strategy, not a separate initiative, with every one of the Company's divisions identifying
specific opportunities presented by the pandemic to capture sustainable share gains that are aligned with the ITW long-term enterprise strategy. The Company expects these efforts to contribute meaningfully to accelerate its progress toward full-potential organic growth. The Company continues to focus on delivering strong results in any environment while executing its long-term strategy to achieve and sustain ITW's full potential performance.
6
Full-potential Organic Growth
Reaching full potential means that every division is positioned
for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division, with specific focus on:
•"80" focused Market Penetration - fully leveraging the considerable growth potential that resides in the Company's largest and most differentiated product offerings and customer relationships
•Customer-back Innovation - strengthening the Company's commitment to serial innovation and delivering a continuous flow of
differentiated new products to its key customers
•Strategic Sales Excellence - deploying a high-performance sales function in every division
As the Company continues to make progress toward its full potential, the Company will explore opportunities to reinforce or further expand the long-term organic growth potential of ITW through the addition of selective high-quality acquisitions, such as the acquisition of the Test & Simulation business of MTS Systems Corporation ("MTS") from Amphenol Corporation on December 1, 2021. The operating results of the MTS Test & Simulation business were reported within the
Company's Test & Measurement and Electronics segment. Refer to Note 3. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information regarding this acquisition.
Current Year Developments
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Distribution Methods
The Company's businesses primarily distribute their products directly to industrial manufacturers and through independent distributors.
Backlog
Backlog generally is not considered
a significant factor in the Company's businesses as relatively short delivery periods and rapid inventory turnover are characteristic of most of their products. Total backlog was $2.9 billion and $1.6 billion as of December 31, 2021 and 2020, respectively. The increase in backlog as of December 31, 2021 was primarily due to increased customer orders and the global supply chain disruptions impacting the Company's customers, and the acquisition of the MTS Test & Simulation business. Refer to Note 3. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information regarding this acquisition. Due to the predominately short-term nature
of the Company's arrangements with its customers, backlog orders expected to be completed beyond calendar year 2022 are not significant and represent approximately 5% of total backlog as of December 31, 2021.
Competition
With operations in 52 countries, the Company offers a wide range of products in a myriad of markets, many of which are fragmented, and the Company encounters a variety of competitors that vary by product line, end market and geographic area. The Company's
competitors include many regional or specialized companies, as well as large U.S. and non-U.S. companies or divisions of large companies. Each of the Company's segments generally has several main competitors and numerous smaller ones in most of their end markets and geographic areas. In addition to numerous smaller regional competitors, the Welding segment competes globally with Lincoln Electric and ESAB.
In virtually all segments, the Company differentiates its businesses from its competitors based on product innovation, product quality, brand preference and service delivery. Technical capability is also a competitive factor in most segments. The Company believes
that each segment's primary competitive advantages derive from the ITW Business Model and decentralized operating structure, which creates a strong focus on end markets and customers at the local level, enabling its businesses to respond rapidly to market dynamics. This structure enables the Company's businesses to drive operational excellence utilizing the Company's 80/20 Front-to-Back process and leveraging its product innovation capabilities. The Company also believes that its global footprint is a competitive advantage in many of its markets, especially in its Automotive OEM segment.
7
Raw
Materials
The Company uses raw materials of various types, primarily steel, resins and chemicals, that are available from numerous commercial sources. The availability of materials and energy has not resulted in any significant business interruptions or other major problems, and no such problems are currently anticipated.
Intellectual Property
The Company owns approximately 3,900 unexpired U.S. patents and 9,700 foreign patents covering articles, methods and machines. In addition, the
Company has approximately 1,500 applications for patents pending in the U.S. Patent Office and 4,200 applications pending in foreign patent offices. There is no assurance that any of these patents will be issued. The Company maintains a patent group for the administration of patents and processing of patent applications.
The Company believes that many of its patents are valuable and important; however, the expiration of any one of the Company's patents would not have a material effect on the
Company's results of operations or financial position. The Company also credits its success in the markets it serves to engineering capability; manufacturing techniques; skills and efficiency; marketing and sales promotion; and service and delivery of quality products to its customers.
In addition to patents, many of the Company's products and services are sold under various owned or licensed trademarks, which are important to the Company in the aggregate. Some of the Company's more significant trademarks include ITW, which is also used in conjunction with the trademarks of many
of the Company's businesses; Deltar and Shakeproof in the Automotive OEM segment; Hobart in the Food Equipment segment; Instron and MTS in the Test & Measurement and Electronics segment; Miller in the Welding segment; Rain-X and Permatex in the Polymers & Fluids segment; Paslode in the Construction Products segment; and Hi-Cone in the Specialty Products segment.
Government Regulations
The Company believes that its businesses and operations, including its manufacturing plants and equipment, are in substantial compliance with all applicable government laws and regulations, including those related to environmental, consumer protection, international trade, labor and employment,
human rights, tax, anti-bribery and competition matters. Any additional measures to maintain compliance are not expected to materially affect the Company's capital expenditures (including expenditures for environmental control facilities), competitive position, financial position or results of operations.
Various legislative and administrative regulations applicable to the Company in the matters noted above have become effective or are under consideration in many parts of the world. To date, such developments have not had a substantial adverse impact on the Company's revenues, earnings or cash flows. However, if new or amended laws or regulations impose significant
operational restrictions and compliance requirements upon the Company or its products, the Company's business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted. Refer to Item 1A. Risk Factors for further information.
Human Capital Management
As of December 31, 2021, the Company employed approximately 45,000 people, with approximately 17,000 people located in the United States and the remainder in multiple other countries where the
Company's businesses operate. The Company strives to be a great employer through its demonstrated commitment to talent development, employee safety, workplace culture, compensation and benefits, and diversity and inclusion.
Talent Development. The Company's Great ITW Leader Framework defines the leadership capabilities and attributes that guide all leadership talent assessment, development and selection decisions. Great ITW Leaders are expected to be experts in the practice of the ITW Business Model, make great strategic choices, deliver great results, be great talent managers and provide strong leadership. Great ITW Leaders who have expertise in the ITW Business Model are the critical factor in translating the potential
of the ITW Business Model into full performance. Because this expertise develops over time and through specific experiences, the Company focuses on developing and promoting its own talent to ensure the Company's sustained business success over the long term.
8
Employee Safety. The safety and well-being of ITW's colleagues around the world has been, and always will be, its top priority. Guided by the Company's Enterprise Safety Strategy and the philosophy that every accident is preventable,
ITW strives every day to foster a proactive safety culture. ITW's Enterprise Safety Strategy is based on the following core principles: (i) a goal of zero accidents; (ii) shared ownership for safety (business and individual); (iii) proactive approach focused on accident prevention; and (iv) continuous improvement philosophy.
Consistent with these commitments, employee health and safety has been a top priority during the COVID-19 pandemic. Among its many actions and initiatives, the Company redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagues who have child and elder care needs, and implemented aggressive workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. Moreover,
the Company's commitment to its employees was reinforced when the Company decided not to initiate any enterprise-wide employment reduction mandates or programs at any point in 2020 or 2021.
Workplace Culture. The Company operates under a decentralized, entrepreneurial culture that is crucial to the Company's performance and is one of the three unique elements of the ITW Business Model. ITW believes its colleagues around the world thrive in this culture, as it allows them to experience significant autonomy, a sense of shared ownership with their colleagues,
and a work atmosphere deeply rooted in the Company's core values of Integrity, Respect, Trust, Shared Risk and Simplicity.
Compensation and Benefits. As a global employer, the Company is committed to providing market-competitive compensation and benefits to attract and retain great talent across its global divisions. Specific compensation and benefits vary worldwide and are based on regional practices. In the U.S., the Company focuses on providing a comprehensive, competitive benefits package that supports the health and wellness, educational endeavors, community involvement and financial stability of its colleagues.
Diversity
and Inclusion. ITW believes it is at its best when it brings together unique perspectives, experiences and ideas. Rooted in ITW's core values of Respect and Integrity, the Company is committed to equal employment opportunity, fair treatment and creating diverse and inclusive workplaces where all ITW colleagues can perform to their full potential. ITW remains committed to achieving its diversity and inclusion goals and enhancing the diversity of its global leadership teams. ITW drives progress through a comprehensive enterprise Diversity and Inclusion Framework, which focuses on (i) leadership commitment and accountability; (ii) attracting and retaining global, diverse talent; (iii) creating inclusive workplaces; and (iv) striving to be a great employer.
Labor Relations. Less than
three percent of the Company's U.S. employees are represented by a labor union. Outside the U.S., employees in certain countries are represented by an employee representative organization, such as a union, works council or employee association. The Company considers its employee relations to be excellent.
The executive officers of the Company
serve at the discretion of the Board of Directors. Set forth below is information regarding the principal occupations and employment and business experience over the past five years for each executive officer. Unless otherwise stated, employment is by the Company.
Vice President/General Manager, construction businesses, 2017-2020; Group President, construction businesses, 2020-2021.
John R. Hartnett
61
Executive
Vice President
2012
Patricia A. Hartzell
45
Executive Vice President
2022
Vice President/General Manager, test and measurement & electronics businesses, 2017-2020; Group President, test and measurement & electronics businesses, 2020-2021.
Senior Vice President, General Counsel & Secretary
2021
Vice President, Assistant General Counsel & Assistant Secretary, Discover Financial Services, 2016-2019; Deputy General Counsel & Assistant Secretary, Caterpillar, Inc. 2019-2021.
Sharon Szafranski
55
Executive
Vice President
2020
Vice President/General Manager, test & measurement and electronics businesses, 2016-2019; Group President, test & measurement and electronics businesses, 2019-2020.
Michael R. Zimmerman
61
Executive Vice President
2015
Available Information
The Company electronically files reports with the Securities and Exchange Commission (the "SEC"). The SEC maintains
a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge through the Company's website (www.itw.com),
as soon as reasonably practicable after electronically filing with or otherwise furnishing such information to the SEC. The Company's Code of Ethics for the CEO and key financial and accounting personnel is also posted on the Company's website.
10
ITEM 1A.Risk Factors
The
Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but not limited to, those set forth below, which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K.
Economic Risks
The COVID-19 pandemic has adversely affected the Company's business, financial condition and results of operations and could affect the Company's liquidity. The full and long-term extent of the effects of the COVID-19 pandemic on our business depend on future events that continue
to be highly uncertain and cannot be predicted.
The COVID-19 pandemic and the continued measures taken globally to reduce its spread have negatively impacted the global economy, disrupted consumer/customer demand and global supply chains, and created significant volatility and disruption of financial markets. These measures and the continued volatility of the global economy adversely affected our results of operations for 2020, and while most of our segments achieved strong results in 2021, we are currently unable to quantify the full and long-term impact of the pandemic on our financial condition, results of operations and liquidity.
The Company has implemented numerous actions in order to focus on the needs of its colleagues and customers, such as redesigning
production processes, adjusting shift schedules and assignments and implementing aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. Further actions may be required in response to evolving conditions such as renewed travel restrictions, quarantine, and stay-at-home orders as well as uncertainty regarding the emergence of new variants and the timing of widespread availability of testing, vaccines and treatments. We cannot predict whether there will be pandemic-related facility closures in the future.
The COVID-19 pandemic continues to have the potential to significantly and extendedly alter demand for our products and to disrupt our supply chain as a result of shifts in demand, illness, quarantine, travel restrictions, transportation disruptions, increased border controls or closures, or financial hardship. We
have been able to procure the critical raw materials and components necessary to continue production, but prices for some raw materials have increased significantly and there is no guarantee that we will be able to procure critical raw materials in the future without materially adversely impacting our operating margins. A prolonged extension of the conditions resulting from the pandemic could force both customer and supplier bankruptcies, which we expect would adversely impact our results; however, given the uncertainty around the continued duration and breadth of the COVID-19 pandemic, we cannot reasonably estimate the extent of these adverse effects on our operations.
The Company has sought to implement a differentiated strategy to manage through the pandemic, including a focus on thoughtful cost management and continued
investment in areas of strategic importance in order to maintain optionality and fully participate in the recovery phase. Although some opportunities have already emerged from this strategy, the Company cannot estimate the extent or the timing of the benefits from this strategy, if any. If the Company's strategy does not generate the expected benefits, the Company's long-term financial results could be adversely impacted.
Furthermore, the COVID-19 pandemic has the potential to impact the proper functioning of financial and capital markets. If the economic recovery is protracted, we may not be able to access our short-term credit facilities and may be required to
seek additional financing sources, which may not be available on reasonable terms or at all. If the Company suffers a liquidity shortage, we may be forced to reduce our workforce, decrease or suspend dividend payments or share repurchases, or adopt other measures. We cannot predict the likelihood, timing or the consequences of a future liquidity shortage in our business.
The ultimate significance of the COVID-19 pandemic on our business will depend on events that are beyond our control and that we cannot predict. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business, financial condition or results of operations.
The
Company's results are impacted by global economic conditions. Downturns in the markets served by the Company could adversely affect its businesses, results of operations or financial condition.
The Company's businesses are impacted by economic conditions around the globe. Slower economic growth, financial market instability, inflation, natural disasters, public health crises (such as the COVID-19 pandemic), labor market challenges, supply chain disruptions, government deficit reduction, sequestration and other austerity measures impacting the
11
markets
the Company serves can adversely affect the Company's businesses by reducing demand for the Company's products and services, limiting financing available to the Company's customers, causing production delays, increasing order cancellations and the difficulty in collecting accounts receivable, increasing price competition, or increasing the risk that counterparties to the Company's contractual arrangements will become insolvent or otherwise unable to fulfill their obligations.
The global nature of the
Company's operations subjects it to political, economic and social risks that could adversely affect its business, results of operations or financial condition.
Over 50% of the Company's net sales are derived from customers outside the United States, and the Company currently operates in 52 countries. The risks inherent in the Company's global operations include:
•fluctuation in currency exchange rates;
•limitations on ownership or participation in local enterprises;
•price
controls, exchange controls and limitations on repatriation of earnings;
•transportation delays and disruptions;
•political, social and economic instability and disruptions;
•acts of terrorism;
•the impact of widespread public health crises (such as the COVID-19 pandemic);
•government embargoes or foreign trade restrictions;
•the imposition of duties and tariffs and other trade barriers and retaliatory countermeasures;
•government actions impacting international trade agreements, including the
EU-UK Trade and Cooperation Agreement;
•import and export controls;
•social and labor unrest and current and changing regulatory environments;
•the potential for expropriation or nationalization of enterprises;
•difficulties in staffing and managing multi-national operations;
•multiple and potentially conflicting laws, regulations and policies that are subject to change;
•limitations on its ability to enforce legal rights and remedies; and
•potentially adverse tax consequences.
The
global geopolitical and trade environment has resulted in raw material inflation and potential for increased escalation of domestic and international tariffs and retaliatory trade policies. Further changes in U.S. trade policy (including new or additional increases in duties or tariffs) and retaliatory actions by U.S. trade partners could result in a worsening of economic conditions. If the Company is unable to successfully manage the risks associated with managing and expanding its international businesses, the Company's business, results of operations or financial condition may be adversely impacted.
A significant fluctuation between the U.S. Dollar and other currencies could adversely impact the
Company's operating income.
Although the Company's financial results are reported in U.S. Dollars, a significant portion of its sales and operating costs are realized in other currencies, with the largest concentration of foreign sales occurring in Europe. The Company's profitability is affected by movements of the U.S. Dollar against the Euro and other foreign currencies in which it generates revenues and incurs expenses. Significant long-term fluctuations in relative currency values, and in particular, an increase in the value of the U.S. Dollar against foreign currencies, has had and could have an adverse effect on profitability and financial condition.
Business and Operational
Risks
The benefits from the Company's enterprise strategy may not be as expected and the Company's financial results could be adversely impacted, or the Company may not meet its long-term financial performance targets.
As the Company continues to execute on its enterprise strategy initiatives, it remains focused on the core principles of portfolio discipline, 80/20 Front-to-Back practice excellence, and organic growth. Product line and customer base simplification activities, which are core elements of the
Company's 80/20 Front-to-Back process, continue to be applied by the Company's operating divisions and are active elements of the enterprise strategy. Although these activities are expected to improve future operating margins and organic revenue growth, they are also expected to have a negative impact on the Company's overall organic revenue growth in the short term. Additionally, other core activities of the enterprise strategy related to portfolio discipline and organic growth, including customer-back innovation and strategic sales excellence, may not
12
have the desired impact on future operating results. If the
Company is unable to realize the expected benefits from its enterprise strategy initiatives, the Company's financial results could be adversely impacted, or the Company may not meet its long-term financial performance targets.
The timing and amount of the Company's share repurchases are subject to a number of uncertainties.
Share repurchases constitute a significant component of the Company's capital allocation strategy. The Company
has historically funded its share repurchases with free cash flow and short-term borrowings. The amount and timing of share repurchases will be based on a variety of factors. Important factors that could cause the Company to limit, suspend or delay its share repurchases include unfavorable trading market conditions, the price of the Company's common stock, the nature of other investment opportunities presented to the Company from time to time, regulatory developments relating to share repurchase programs, the ability to obtain financing at attractive rates and the availability of U.S. cash.
If the
Company is unable to successfully introduce new products, its future growth may be adversely affected.
The Company's ability to develop new products based on innovation can affect its competitive position and sometimes requires the investment of significant time and resources. Difficulties or delays in research, development, production or commercialization of new products and services may reduce future revenues and adversely affect the Company's competitive position. If the Company is unable to create sustainable product differentiation, its organic growth may be adversely affected.
If the
Company is unable to adequately protect its intellectual property, its competitive position and results of operations may be adversely impacted.
Protecting the Company's intellectual property is critical to its innovation efforts. The Company owns patents, trade secrets, copyrights, trademarks and/or other intellectual property rights related to many of its products, and also has exclusive and non-exclusive license rights under intellectual property owned by others. The Company's intellectual property rights may be challenged or the Company may be unable to maintain, renew or
enter into new license agreements with third-party owners of intellectual property on reasonable terms. Unauthorized use of the Company's intellectual property rights by third parties, particularly in countries where property rights are not highly developed or protected, or inability to preserve existing intellectual property rights could adversely impact the Company's competitive position and results of operations.
The Company has significant goodwill and other intangible assets, and future impairment of these assets could have a material adverse impact on the Company's financial
results.
The Company has recorded significant goodwill and other identifiable intangible assets on its balance sheet as a result of acquisitions, including the acquisition of the MTS Test & Simulation business in 2021. A number of factors may result in impairments to goodwill and other intangible assets, including significant negative industry or economic trends, disruptions to our business, increased competition and significant changes in the use of the assets. Impairment charges could adversely affect the Company's financial condition or results of operations in the periods recognized.
Raw material price increases and supply shortages could adversely affect results.
The
supply of raw materials to the Company and to its component parts suppliers could be interrupted for a variety of reasons, including availability and pricing. The Company has experienced supply chain disruptions related to the COVID-19 pandemic, and continued disruptions to the supply chain could adversely affect the Company's ability to meet commitments to customers. Prices for raw materials necessary for production have fluctuated significantly in the past and the Company is currently experiencing upward pricing pressure on raw materials such as steel, resins and chemicals. Significant price increases could adversely affect the
Company's results of operations and operating margins. In particular, inflation, changes in trade policies, the imposition of duties and tariffs, potential retaliatory countermeasures, public health crises (such as the COVID-19 pandemic) and severe weather events could adversely impact the price or availability of raw materials. The Company may not be able to pass along increased raw material and components parts prices to its customers in the form of price increases or its ability to do so could be delayed. Consequently, its results of operations and financial condition may be adversely affected.
13
The
Company's defined benefit pension plans are subject to financial market risks that could adversely affect its results of operations and cash flows.
The performance of financial markets and interest rates impact the Company's funding obligations under its defined benefit pension plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
If the Company is unable to protect its information technology infrastructure against
service interruptions, data corruption, cyber-based attacks or network security breaches, or if there is a violation of data privacy laws, there could be a negative impact on operating results or the Company may suffer financial or reputational damage.
The Company relies on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including procurement, manufacturing, distribution, invoicing and collection. These technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages;
hardware failures; computer viruses; employee error or malfeasance; and attacks by computer hackers, which have continued to increase on a global scale in both magnitude and frequency, taken on novel and unprecedented forms and become more difficult to detect. Minor security breaches have occurred from time to time and are expected to occur in the future. Although the cyber-attacks experienced to date have not had a material impact, future security breaches could result in unauthorized disclosure of confidential information or personal data belonging to our employees, partners, customers or suppliers, which could cause reputational and legal harm as we are subject to data privacy laws, including the EU General Data Protection Regulation, in the various countries in which we operate. If our information technology systems suffer severe damage, disruption, or shutdown, and business continuity plans do not effectively resolve the issues in a timely manner, or if we violate
data privacy laws, there could be a negative impact on operating results or the Company may suffer financial or reputational damage.
Strategic Transaction Risks
The Company's acquisition of businesses could negatively impact its profitability and returns.
The Company has engaged in various acquisitions in the past, such as the recently completed acquisition of the MTS Test & Simulation business, and could choose to acquire additional businesses in the future. Acquisitions involve a number of risks and financial, accounting, managerial
and operational challenges, including the following, any of which could adversely affect the Company's profitability and returns:
•The acquired business' inability to adapt to the ITW Business Model or otherwise perform in accordance with the Company's anticipated results or timetable, could cause it to under-perform relative to the Company's expectations and the price paid for it.
•The acquired business could cause the Company's financial results to differ from expectations in
any given fiscal period, or over the long term.
•Acquisition-related earnings charges could adversely impact operating results.
•The acquired business could place unanticipated demands on the Company's management, operational resources and financial and internal control systems.
•The Company may assume unknown liabilities, known contingent liabilities that become realized or known liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions resulting from the activities of the acquired business. The realization of any of these liabilities or deficiencies
may increase the Company's expenses, adversely affect its financial position or cause noncompliance with its financial reporting obligations.
•As a result of acquisitions, the Company has in the past recorded significant goodwill and other identifiable intangible assets on its balance sheet. If the Company is not able to realize the value of these assets, it may recognize charges relating to the impairment of these assets.
Divestitures pose the risk of retained liabilities that could adversely affect the Company's
financial results.
The Company has had significant divestiture activity in the past in accordance with its portfolio management initiative, and it continues portfolio refinements to maintain portfolio discipline. The Company has retained certain liabilities directly or through indemnifications made to the buyers against known and unknown contingent liabilities such as lawsuits, tax liabilities, product liability claims and environmental matters, which could adversely affect the Company's financial results.
14
Tax,
Legal and Regulatory Risks
Unfavorable tax law changes and tax authority rulings may adversely affect results.
The Company is subject to income taxes in the U.S. and in various foreign jurisdictions. Domestic and international tax liabilities are based on the income and expenses in various tax jurisdictions. The Company's effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or changes in tax laws. The amount of income taxes is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result
in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments.
Adverse outcomes in legal proceedings or enforcement actions may adversely affect results.
The Company's businesses expose it to potential costs and adverse rulings associated with commercial, intellectual property, toxic tort and other product liability claims. The Company's global operations also subject it to government investigations in numerous countries. We cannot predict the outcome of claims, investigations and lawsuits and we may incur costs, judgments or fines or enter into settlements that could adversely impact our businesses, reputation or future financial
results. The Company currently maintains insurance programs consisting of self-insurance up to certain limits and excess insurance coverage for claims over established limits. There can be no assurance that the Company will be able to obtain insurance on acceptable terms or that its insurance programs will provide adequate protection against actual losses. In addition, the Company is subject to the risk that one or more of its insurers may become insolvent and become unable to pay claims that may be made in the future. Even if it maintains adequate insurance programs, claims, judgements, fines or settlements could have a material adverse effect on the
Company's financial condition, liquidity and results of operations and on its ability to obtain suitable, adequate or cost-effective insurance in the future.
Uncertainty related to environmental regulation and industry standards, as well as physical risks of climate change, could impact the Company's results of operations and financial position.
Increased public awareness and concern regarding environmental risks, including global climate change, may result in more international, regional and/or federal requirements or industry standards to reduce or mitigate global warming and other environmental risks. These regulations or standards could mandate even more restrictive requirements, such as stricter limits on greenhouse gas emissions and production of single
use plastics, than the voluntary commitments that the Company has made or require such changes on a more accelerated time frame. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. In addition, the physical risks of climate change may impact the availability and cost of materials and natural resources, sources and supply of energy, product demand and manufacturing and could increase insurance and other operating costs, including, potentially, to repair damage incurred as a result of extreme weather events or to renovate or retrofit facilities to better withstand extreme weather events. If environmental laws or regulations or industry standards are either changed or adopted and impose significant operational restrictions and compliance requirements upon the
Company or its products, or the Company's operations are disrupted due to physical impacts of climate change, the Company's business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted.
The Company may incur fines or penalties, damage to its reputation or other adverse consequences if its employees, agents or business partners violate anti-bribery, competition, export and import, environmental, human rights or other laws.
The Company has a decentralized
operating structure under which its individual businesses are allowed significant decision-making autonomy within the Company's strategic framework and internal financial and compliance controls. The Company cannot ensure that its internal controls will always protect against reckless or criminal acts committed by its employees, agents or business partners that might violate U.S. and/or non-U.S. laws, including anti-bribery, competition, export and import, environmental and human rights laws. As recent years have seen a substantial increase in the global enforcement of anti-corruption laws and adoption of new human rights laws, any such improper actions could subject the Company to civil or criminal investigations, could lead
to substantial civil or criminal monetary and non-monetary penalties against the Company or its subsidiaries, or could damage its reputation.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe,""expect,""plans,""intend,""may,""strategy,""prospects,""estimate,""will,""should,""could,""project,""target,"
15
"anticipate,""guidance,""forecast," and other similar words, and may include, without limitation, statements regarding the duration and potential effects of the COVID-19 pandemic and global supply chain challenges, related government actions and the Company's strategy in response thereto on the Company's business, future financial and operating performance, free cash flow, economic and regulatory conditions in various geographic regions, the impact of foreign currency fluctuations, the timing and amount of benefits from the Company's enterprise strategy initiatives, the timing and amount of dividends and share repurchases, the protection of the
Company's intellectual property, the likelihood of future goodwill or intangible asset impairment charges, the impact of adopting new accounting pronouncements, the adequacy of internally generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency of U.S. generated cash to fund cash requirements in the U.S., the cost and availability of additional financing, the availability of raw materials and energy and the impact of raw material cost inflation, enterprise initiatives, the Company's portion of future benefit payments related to pension and postretirement benefits, the Company's information technology infrastructure, potential acquisitions and divestitures
and the expected performance of acquired businesses and impact of divested businesses, the impact of U.S. and global tax legislation and the estimated timing and amount related to the resolution of tax matters, the cost of compliance with environmental regulations, the impact of failure of the Company's employees to comply with applicable laws and regulations, and the outcome of outstanding legal proceedings. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include those risks described above. These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Any
forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.
ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-public information or other confidential commercial information. Investors should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
ITEM 1B.Unresolved Staff Comments
None.
ITEM 2.Properties
Due to the Company's decentralized operating structure and global operations, the Company operates out of a large number of facilities worldwide, none of which are individually significant to the Company or its segments. As of December 31, 2021, the
Company operated approximately 460 plants and office facilities, excluding regional sales offices and warehouse facilities. Approximately 300 of the facilities were located outside of the United States. Principal foreign countries include Germany, China, France, and the United Kingdom.
The Company's properties are well suited for the purposes for which they were designed and are maintained in good operating condition. Production capacity, in general, currently exceeds operating levels. Capacity levels are somewhat flexible based on the number of shifts operated and on the number of overtime hours worked. The Company adds production capacity from time to time as required by increased demand. Additions to capacity can be made within a reasonable
period of time due to the nature of the Company's businesses.
ITEM 3.Legal Proceedings
None.The Company's threshold for disclosing environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million.
ITEM 4.Mine
Safety Disclosures
None.
16
PART II
ITEM 5.Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Data— The Company's common stock
is listed on the New York Stock Exchange. There were approximately 4,967 holders of record of common stock as of January 31, 2022. This number does not include beneficial owners of the Company's securities held in the name of nominees.
*Assumes $100 invested on 12/31/16 in stock or index, including reinvestment of dividends. Fiscal years ended December 31.
The 2021 Peer Group consists
of the following 17 public companies:
3M Company
Ecolab Inc.
Parker-Hannifin Corporation
Caterpillar Inc.
Emerson Electric Co.
PPG Industries, Inc.
Cummins Inc.
Fortive Corporation
Rockwell Automation, Inc.
Deere &
Company
General Dynamics Corporation
Stanley Black & Decker, Inc.
Dover Corporation
Honeywell International Inc.
Trane Technologies plc
Eaton Corporation plc
Johnson Controls International plc
The Compensation Committee of the Board of Directors of the Company reviews the peer group annually and from time to time changes the composition of the peer group where changes are appropriate. The 2021 Peer
Group is consistent with the 2020 Peer Group. Fortive Corporation was added to the Company's peer group in 2017 and was excluded from the 2020 Peer Group five-year cumulative total return as there was insufficient historical data due to its spin-off from Danaher Corporation in 2016. For the 2021 Peer Group, Fortive Corporation was included in the five-year cumulative total return above.
Repurchases of Common Stock— On August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which provides for the repurchase of up to $3.0 billion of the Company's common stock over
an open-ended period
17
of time (the "2018 Program"). As of December 31, 2021, there were approximately $240 million of authorized repurchases remaining under the 2018 Program.
On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2021 Program"). As of December 31,
2021, there were $3.0 billion of authorized repurchases remaining under the 2021 Program.
Share repurchase activity under the Company's share repurchase programs for the fourth quarter of 2021 was as follows:
In millions except per share amounts
Period
Total
Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs
Maximum Value of Shares That May Yet Be Purchased Under Programs
October 2021
—
$
227.47
—
$
3,480
November
2021
0.7
$
236.12
0.7
$
3,336
December 2021
0.4
$
239.66
0.4
$
3,240
Total
1.1
1.1
ITEM 6.[Reserved]
ITEM 7.Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 83 divisions in 52 countries. As of December 31, 2021, the Company
employed approximately 45,000 people.
The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.
Due to the large number of diverse businesses and the Company's decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the
Company's corporate management collects data on several key measurements: operating revenue, operating income, operating margin, overhead costs, number of months on hand in inventory, days sales outstanding in accounts receivable, past due receivables and return on invested capital. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.
THE ITW BUSINESS MODEL
The powerful and highly differentiated ITW Business Model is the Company's core source of value creation. 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
18
focused
on understanding customer needs, particularly those in "80" markets with solid long-term growth fundamentals, and creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 19,300 granted and pending patents;
•ITW's Decentralized, Entrepreneurial Culture enables ITW businesses to be fast, focused, and responsive. ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to execute the Company's strategy and values. As a result, the
Company maintains a focused and simple organizational structure that, combined with outstanding execution, delivers best-in-class services and solutions adapted to each business' customers and end markets.
ENTERPRISE STRATEGY
In late 2012, ITW began its strategic framework transitioning the Company on its current path to fully leverage the compelling performance potential of the ITW Business Model. The Company undertook a complete review of its performance, focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns,
and developing a strategy to replicate that performance across its operations.
ITW determined that solid and consistent above-market organic growth is the core growth engine to deliver world-class financial performance and compelling long-term returns for its shareholders. To shift its primary growth engine to organic, the Company began executing a multi-step approach.
•The first step was to narrow the focus and improve the quality of ITW's business portfolio. As part of the Portfolio Management initiative, ITW exited businesses that were operating in commoditized market spaces and prioritized sustainable differentiation as a must-have requirement for all ITW businesses. This process included both divesting entire businesses and
exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions.
As a result of this work, ITW's business portfolio now has significantly higher organic growth potential. ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve operating margins and generate price/cost increases. The Company achieved this through product line simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers, while supporting and growing the businesses' largest / most profitable customers and product lines.
•Step two, Business Structure Simplification, was implemented
to simplify and scale up ITW's operating structure to support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 83 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.
•The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 through 2021 and continues to be a key contributor to the Company's ongoing enterprise strategy.
•With the initial portfolio realignment
and scale-up work largely complete, the Company shifted its focus to preparing for and accelerating organic growth, reapplying the 80/20 Front-to-Back process to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.
ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company's operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
PATH
TO FULL POTENTIAL
Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage,
19
but for the Company to truly reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position
ITW to perform to its full potential:
•Portfolio discipline
•80/20 Front-to-Back practice excellence
•Full-potential organic growth
Portfolio Discipline
The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model. ITW businesses have the right "raw material" in terms of market and business attributes that best fit the ITW Business Model and have significant potential to drive above-market organic growth over the long-term.
The
Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.
The Company routinely evaluates its portfolio to ensure it delivers sustainable differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and assessing selective high-quality acquisitions to supplement ITW's long-term growth potential.
The
Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. However, due to the COVID-19 pandemic, the Company deferred any further significant divestiture activity until 2022 or later. The Company intends to reinitiate the divestiture process in 2022 for certain businesses with combined annual revenues of approximately $0.5 billion. Refer to Note 4. Divestitures in Item 8. Financial Statements and Supplementary Data for further information regarding divestiture activity.
80/20
Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products.
ITW will continue to drive 80/20 Front-to-Back practice excellence in every division in the Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back
practice across the Company, division by division, will produce further customer-facing performance improvement in a number of divisions and additional structural margin expansion at the enterprise level.
Near-term Priorities
While it was the challenges brought about by the COVID-19 pandemic that dominated the Company's attention starting in 2020, it was the collection of capabilities and competitive advantages that have been built and honed over the past nine years through the execution of ITW's enterprise strategy that provided the Company with the options to respond. This, coupled with the proprietary
and powerful ITW Business Model, diversified high-quality business portfolio and diligent execution put the Company in a position of strength in dealing with the global pandemic.
As the global pandemic continues, the Company continues to focus its efforts on (1) protecting the health and support the well-being of ITW's colleagues; (2) serving the Company's customers with excellence; (3) maintain financial strength, liquidity and strategic optionality; and (4) leverage the Company's strengths to position it to fully participate in the recovery.
"Win
the Recovery" is an execution component of the Company's enterprise strategy, not a separate initiative, with every one of the Company's divisions identifying specific opportunities presented by the pandemic to capture sustainable share gains that are aligned with the ITW long-term enterprise strategy. The Company expects these efforts to contribute meaningfully to
20
accelerate its progress toward full-potential organic growth. The Company continues
to focus on delivering strong results in any environment while executing its long-term strategy to achieve and sustain ITW's full potential performance.
Full-Potential Organic Growth
Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division, with specific focus on:
•"80" focused Market Penetration - fully leveraging the considerable growth potential that resides in the
Company's largest and most differentiated product offerings and customer relationships
•Customer-back Innovation - strengthening the Company's commitment to serial innovation and delivering a continuous flow of differentiated new products to its key customers
•Strategic Sales Excellence - deploying a high-performance sales function in every division
As the Company continues to make progress toward its full potential, the Company will explore opportunities to reinforce or further expand the long-term organic growth potential
of ITW through the addition of selective high-quality acquisitions, such as the acquisition of the Test & Simulation business of MTS Systems Corporation ("MTS") from Amphenol Corporation on December 1, 2021. The operating results of the MTS Test & Simulation business were reported within the Company's Test & Measurement and Electronics segment. Refer to Note 3. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information regarding this acquisition.
TERMS USED BY ITW
Management uses the following terms to describe the financial results of operations
of the Company:
•Organic business - acquired businesses that have been included in the Company's results of operations for more than 12 months on a constant currency basis.
•Operating leverage - the estimated effect of the organic revenue volume changes on organic operating income, assuming variable margins remain the same as the prior period.
•Price/cost -represents the estimated net impact of increases or decreases in the cost of materials used in the
Company's products versus changes in the selling price to the Company's customers.
•Product line simplification (PLS) - focuses businesses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines. In the short-term, PLS may result in a decrease in revenue and overhead costs while improving operating margin. In the long-term, PLS is expected to result in growth in revenue, profitability, and returns.
Unless otherwise stated, the changes in financial results in the consolidated results of operations and the results of operations by segment represent the current year period versus the comparable period
in the prior year.
CONSOLIDATED RESULTS OF OPERATIONS
In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) occurred in China and other jurisdictions. The COVID-19 outbreak was subsequently declared a global pandemic by the World Health Organization on March 11, 2020. In response to the outbreak, governments around the globe have taken various actions to reduce its spread, including travel restrictions, shutdowns of businesses deemed nonessential, and stay-at-home or similar orders. The COVID-19 pandemic and the measures taken globally to reduce its spread have negatively impacted the global economy, causing significant disruptions in the Company's global operations starting primarily in the latter
part of the first quarter of 2020 as COVID-19 continued to spread and impact the countries in which the Company operates and the markets the Company serves.
For the duration of the COVID-19 pandemic, the Company is focusing on the following priorities: (1) protect the health and support the well-being of ITW's colleagues; (2) continue to serve the Company's customers with excellence to the best of its ability; (3) maintain financial strength, liquidity and strategic optionality; and (4) leverage the Company's
strengths to position it to fully participate in the recovery. To support ITW's colleagues, among its many actions and initiatives, the Company redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagues who have child and elder care needs, and implemented aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. To support its customers, the Company has worked diligently to keep its facilities open and operating safely. The Company has adapted
21
customer
service systems and practices to seamlessly serve its customers under "work from home" requirements in many parts of the world.
In areas around the world where governments issued stay-at-home or similar orders, the vast majority of ITW's businesses were designated as critical or essential businesses and, as such, they remained open and operational. In some cases, this is because the Company's products directly impact the COVID-19 response effort. In other cases, the Company's businesses are designated as critical because they play a vital role in serving and supporting industries that are deemed essential to the physical and economic health of our communities.
While the vast
majority of the Company's facilities have remained open and operational during the pandemic, many of these facilities were operating at a reduced capacity at various times since the outset of the pandemic. The full extent of the COVID-19 outbreak and its impact on the markets served by the Company and on the Company's operations and financial position continues to be highly uncertain as conditions continue to fluctuate around the world, with vaccine administration rising in certain regions and spikes in infections (including the spread of variants) also being experienced. A prolonged outbreak could continue to interrupt the operations of the Company
and its customers and suppliers. A description of the risks relating to the impact of the COVID-19 outbreak on the Company's business, operations and financial condition is contained in Part I, Item 1A. Risk Factors.
Separately, the Company does not believe that tariffs imposed in recent years have had a material impact on its operating results. As the global trade environment, including the regulatory environment, continues to evolve, the Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to mitigate the impact of any raw material cost increases resulting from these tariffs.
The
Company delivered strong financial results in 2021 primarily due to the continued successful execution of enterprise initiatives, including the "Win the Recovery" actions initiated over the course of the past year, and continued focus on the highly differentiated ITW Business Model. Despite rising raw material costs and a challenging global supply chain environment, the Company generated operating revenue growth of 15.0 percent and organic revenue growth of 12.3 percent, as all segments had organic revenue growth in 2021. Organic revenue for the Automotive OEM segment grew mid-single digits, but was adversely impacted by auto production reductions associated with the supply chain challenges affecting its customers, especially during the second half of 2021. Operating income grew 20.6 percent in 2021. Operating margin was 24.1 percent in 2021 as all segments achieved margin expansion
compared to the prior year period.
On December 1, 2021, the Company completed the acquisition of the MTS Test & Simulation business for a purchase price of $750 million, subject to certain closing adjustments. The MTS Test & Simulation business had operating revenue of $46 million for the one month ended December 31, 2021. The Company expects the MTS Test & Simulation business to be neutral to diluted earnings per share in the next twelve months, but expects improved earnings and operating margin performance in later years through the application of the Company's
80/20 Front-to-Back process. The operating results of the MTS Test & Simulation business were reported within the Test & Measurement and Electronics segment. The acquisition of the MTS Test & Simulation business did not have a material impact on the Company's results of operations or financial position for any period presented. Refer to Note 3. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information.
The Company's consolidated results of operations for 2021, 2020 and 2019 were as follows:
2021 compared to 2020
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2021
2020
Inc (Dec)
Organic
Acquisition/ Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
14,455
$
12,574
15.0
%
12.3
%
0.4
%
—
%
2.3
%
15.0
%
Operating
income
$
3,477
$
2,882
20.6
%
17.0
%
0.2
%
0.8
%
2.6
%
20.6
%
Operating
margin %
24.1
%
22.9
%
120 bps
100 bps
—
20 bps
—
120 bps
•Operating revenue increased due to higher organic and acquisition revenue and
the favorable effect of foreign currency translation.
22
•Organic revenue increased 12.3% as the Company saw continued improvement in both the breadth and pace of the recovery. Additionally, product line simplification activities reduced organic revenue by 20 basis points.
◦North American organic revenue increased 13.5% due to growth in all segments, primarily driven by the Welding, Test & Measurement and Electronics and Food Equipment segments.
◦Europe, Middle East and Africa organic revenue increased 8.7% due to
growth in six segments, primarily driven by the Food Equipment and Construction Products segments. The Automotive OEM segment was essentially flat.
◦Asia Pacific organic revenue increased 13.5% due to growth in all segments. China organic revenue grew 15.1% with growth in six segments, partially offset by a decline in the Construction Products segment.
•Operating income of $3.5 billion increased 20.6% primarily due to higher organic revenue.
•Operating margin of 24.1% increased 120 basis points primarily due to positive operating leverage of 250 basis points and benefits from the Company's enterprise initiatives of 110 basis points, partially offset by unfavorable price/cost of
150 basis points and higher overhead expenses, including employee-related expenses.
•The Company's effective tax rate was 19.0% in 2021 compared to 22.0% in 2020. The 2021 effective tax rate benefited from a discrete income tax benefit of $21 million in the third quarter related to the utilization of capital losses and a discrete income tax benefit of $112 million in the second quarter of 2021 related to the remeasurement of net deferred tax assets due to the enactment of the U.K. Finance Bill 2021, which increases the U.K. income tax rate from 19% to 25% effective April 1, 2023. Additionally, the effective tax rate included discrete income tax benefits related to excess tax benefits from stock-based compensation of $17 million and $27 million for 2021 and 2020, respectively.
•Diluted
earnings per share (EPS) of $8.51 increased 28.4%. Excluding the favorable impact of the $21 million discrete income tax benefit in the third quarter of 2021 and the $112 million discrete income tax benefit in the second quarter of 2021, EPS increased 22.0%.
•Operating cash flow was $2.6 billion and free cash flow was $2.3 billion for 2021. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of free cash flow, which is a non-GAAP measure.
•The Company repurchased approximately 4.4 million shares of its common stock in 2021 for approximately $1.0 billion.
•The Company
increased the quarterly dividend on common stock from $1.14 to $1.22 per share in 2021, or from $4.56 to $4.88 per share on an annualized basis. Total cash dividends of approximately $1.5 billion were paid in 2021.
2020 compared to 2019
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2020
2019
Inc (Dec)
Organic
Acquisition/ Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
12,574
$
14,109
(10.9)
%
(9.8)
%
(0.9)
%
—
%
(0.2)
%
(10.9)
%
Operating
income
$
2,882
$
3,402
(15.3)
%
(16.0)
%
(0.3)
%
1.1
%
(0.1)
%
(15.3)
%
Operating
margin %
22.9
%
24.1
%
(120) bps
(160) bps
10 bps
30 bps
—
(120) bps
•Operating revenue decreased due to lower organic revenue, the impact of 2019 divestitures
and the unfavorable effect of foreign currency translation.
•Organic revenue decreased 9.8% primarily due to disruptions in the Company's global operations resulting from the COVID-19 pandemic as organic revenue declined in six of the seven segments. The Food Equipment, Automotive OEM and Welding segments had more pronounced unfavorable impacts from the COVID-19 pandemic in 2020. The Construction Products segment grew 1.5% primarily due to growth in North America. Product line simplification activities reduced the Company's organic revenue by 30 basis points.
◦North American organic revenue decreased 9.7% as a decline in six segments, primarily driven by the Automotive
OEM, Food Equipment and Welding segments, was partially offset by growth in the Construction Products segment.
◦Europe, Middle East and Africa organic revenue decreased 13.8% as all seven segments had a decline in organic revenue primarily driven by the Automotive OEM and Food Equipment segments.
◦Asia Pacific organic revenue decreased 2.0% as a decline in the Food Equipment, Welding, Specialty Products and Construction Products segments was offset by growth in the Automotive OEM, Test & Measurement and Electronics and Polymers & Fluids segments. China organic revenue grew 0.3% as an increase in the Automotive OEM, Polymers & Fluids and Test & Measurement and Electronics segments was partially offset by a decline in the Food Equipment, Welding, Specialty Products and Construction Products segments.
23
•Operating
income of $2.9 billion decreased 15.3% primarily due to lower organic revenue. Additionally, operating income for 2019 included $11.8 million related to the businesses divested in 2019.
•Operating margin of 22.9% decreased 120 basis points primarily driven by negative operating leverage of 230 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives of 120 basis points and lower overhead expenses, such as travel and bonuses, and lower restructuring expenses.
•The effective tax rate was 22.0% in 2020 compared to 23.3% in 2019. The 2019 effective tax rate benefited from a discrete tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment resulting primarily from changes
in estimates related to the "Tax Cuts and Jobs Act." Additionally, the effective tax rates for 2020 and 2019 included $27 million and $28 million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 7. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.
•Diluted earnings per share (EPS) were $6.63 for 2020.
•Operating cash flow was $2.8 billion and free cash flow was $2.6 billion for 2020. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of free cash flow, which is a non-GAAP measure.
•The Company repurchased approximately 4.2 million shares of its common stock
in 2020 for approximately $706 million. The Company temporarily suspended its share repurchase program starting in March 2020 due to the COVID-19 pandemic, and resumed share repurchases in 2021.
•The Company increased the quarterly dividend on common stock from $1.07 to $1.14 per share in 2020, or from $4.28 to $4.56 per share on an annualized basis. Total cash dividends of approximately $1.4 billion were paid in 2020.
RESULTS OF OPERATIONS BY SEGMENT
The reconciliation of segment operating revenue
and operating income to total operating revenue and operating income is as follows:
Operating Revenue
In millions
2021
2020
2019
Automotive
OEM
$
2,800
$
2,571
$
3,063
Food Equipment
2,078
1,739
2,188
Test & Measurement and Electronics
2,346
1,963
2,121
Welding
1,650
1,384
1,638
Polymers
& Fluids
1,804
1,622
1,669
Construction Products
1,945
1,652
1,625
Specialty Products
1,854
1,660
1,825
Intersegment
revenue
(22)
(17)
(20)
Total
$
14,455
$
12,574
$
14,109
Operating
Income
In millions
2021
2020
2019
Automotive OEM
$
545
$
457
$
659
Food Equipment
469
342
578
Test
& Measurement and Electronics
643
507
542
Welding
490
376
453
Polymers & Fluids
457
402
381
Construction
Products
530
421
383
Specialty Products
504
432
472
Total Segments
3,638
2,937
3,468
Unallocated
(161)
(55)
(66)
Total
$
3,477
$
2,882
$
3,402
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
24
on a quarterly and annual basis. Unallocated expenses in 2021 are higher primarily due to higher employee-related expenses and transaction costs related to the previously discussed acquisition of the MTS Test & Simulation business.
AUTOMOTIVE OEM
This segment is a global, niche
supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers market. Products in this segment include:
•plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.
The results of operations for the Automotive OEM segment for 2021, 2020 and 2019 were as follows:
2021 compared to 2020
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2021
2020
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
2,800
$
2,571
8.9
%
5.8
%
—
%
—
%
3.1
%
8.9
%
Operating
income
$
545
$
457
19.3
%
13.0
%
—
%
3.0
%
3.3
%
19.3
%
Operating
margin %
19.5
%
17.8
%
170 bps
120 bps
—
50 bps
—
170 bps
•Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic
revenue increased 5.8%. The impact of Automotive OEM customers adjusting production schedules to account for the shortage of semiconductor chips and other components negatively impacted organic revenue in 2021, especially during the second half of the year. Worldwide auto builds increased 2%. Auto builds for North America, Europe and China, where the Company has a higher concentration of revenue as compared to the other geographic regions, were flat.
◦North American organic revenue increased 5.3% compared to North American auto builds which were flat. Auto builds for the Detroit 3, where the Company has higher content, decreased 5%.
◦European organic revenue
was essentially flat compared to European auto builds which declined 5%.
◦Asia Pacific organic revenue increased 17.2%. China organic revenue grew 13.9% versus China auto builds which increased 4%. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, declined 8%.
•Operating margin was 19.5%. The increase of 170 basis points was primarily driven by positive operating leverage of 120 basis points, the net benefits from the Company's enterprise initiatives and cost management, and lower restructuring expenses, partially offset by unfavorable price/cost of 250 basis points.
2020
compared to 2019
For the Years Ended
Dollars
in millions
December 31,
Components of Increase (Decrease)
2020
2019
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
2,571
$
3,063
(16.1)
%
(16.0)
%
—
%
—
%
(0.1)
%
(16.1)
%
Operating
income
$
457
$
659
(30.6)
%
(32.3)
%
—
%
1.5
%
0.2
%
(30.6)
%
Operating
margin %
17.8
%
21.5
%
(370) bps
(420) bps
—
40 bps
10 bps
(370) bps
•Operating revenue declined due to lower organic revenue.
•Organic
revenue declined 16.0% versus worldwide auto builds which decreased 16%. Product line simplification activities reduced organic revenue by 80 basis points.
◦North American organic revenue decreased 22.3% compared to North American auto builds which declined 20% due to customer mix. Auto builds for the Detroit 3, where the Company has higher content, decreased 23%.
25
◦European organic revenue was down 16.8% compared to European auto builds which decreased 22%.
◦Asia Pacific organic revenue increased 0.7%. China
organic revenue grew 6.1% versus China auto builds which decreased 4%. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, decreased 8%.
•Operating margin of 17.8% in 2020 decreased 370 basis points primarily due to negative operating leverage of 330 basis points, product mix and unfavorable price/cost of 20 basis points, partially offset by benefits from the Company's enterprise initiatives and lower restructuring expenses.
FOOD EQUIPMENT
This segment is
a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food retail and food institutional/restaurant markets. Products in this segment include:
•warewashing equipment;
•cooking equipment, including ovens, ranges and broilers;
•refrigeration equipment, including refrigerators, freezers and prep tables;
•food processing equipment, including slicers, mixers and scales;
•kitchen exhaust, ventilation and pollution control systems; and
•food
equipment service, maintenance and repair.
The results of operations for the Food Equipment segment for 2021, 2020 and 2019 were as follows:
2021 compared to 2020
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2021
2020
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
2,078
$
1,739
19.5
%
16.7
%
—
%
—
%
2.8
%
19.5
%
Operating
income
$
469
$
342
37.4
%
31.7
%
—
%
2.4
%
3.3
%
37.4
%
Operating
margin %
22.6
%
19.6
%
300 bps
260 bps
—
40 bps
—
300 bps
•Operating revenue grew due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic
revenue increased 16.7% as equipment and service organic revenue grew 21.4% and 8.5%, respectively.
◦North American organic revenue increased 16.2%. Equipment organic revenue grew 20.1% primarily due to growth in the restaurant and institutional end markets, partially offset by a decline in the food retail end markets. Service organic revenue increased 10.3%.
◦International organic revenue increased 17.4%. Equipment organic revenue grew 22.9% primarily due to higher demand in the European warewash, refrigeration and cooking end markets. Service organic revenue increased 5.5%.
•Operating margin was 22.6%. The increase of 300 basis points was primarily driven by positive operating leverage of 370 basis points, benefits from the
Company's enterprise initiatives and lower restructuring expenses, partially offset by unfavorable price/cost of 90 basis points and higher overhead expenses.
2020 compared to 2019
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2020
2019
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
1,739
$
2,188
(20.5)
%
(20.6)
%
—
%
—
%
0.1
%
(20.5)
%
Operating
income
$
342
$
578
(40.9)
%
(41.1)
%
—
%
(0.1)
%
0.3
%
(40.9)
%
Operating
margin %
19.6
%
26.4
%
(680) bps
(680) bps
—
—
—
(680) bps
•Operating revenue declined due to lower organic revenue.
26
•Organic
revenue declined 20.6% as equipment and service organic revenue decreased 21.8% and 18.5%, respectively.
◦North American organic revenue declined 19.2% as equipment organic revenue decreased 20.4%, primarily driven by lower demand in the restaurant and institutional end markets, partially offset by growth in the food retail end markets. Service organic revenue decreased 17.3%.
◦International organic revenue decreased 22.5%. Equipment organic revenue declined 23.5% primarily due to lower demand in the European warewash, cooking and refrigeration end markets and lower demand in Asia. Service organic revenue decreased 20.4%.
•Operating margin of 19.6% in 2020 decreased 680 basis points primarily due to negative operating leverage of 540 basis points and product
mix, partially offset by benefits from the Company's enterprise initiatives and favorable price/cost of 50 basis points.
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 2021, 2020 and 2019 were as follows:
2021 compared to 2020
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2021
2020
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
2,346
$
1,963
19.5
%
15.3
%
2.3
%
—
%
1.9
%
19.5
%
Operating
income
$
643
$
507
26.9
%
23.1
%
0.9
%
0.8
%
2.1
%
26.9
%
Operating
margin %
27.4
%
25.8
%
160 bps
180 bps
(40) bps
20 bps
—
160 bps
•Operating revenue grew due to higher organic revenue, the MTS Test & Simulation acquisition
and the favorable effect of foreign currency translation.
•Organic revenue increased 15.3%.
◦Organic revenue for the test and measurement businesses increased 14.8% primarily driven by higher semiconductor demand in North America, the impact of a stronger capital spending environment, and higher demand in the oil and gas end markets in North America. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 14.0%.
◦Electronics organic revenue increased 15.9% driven by higher demand in consumer electronics, automotive applications and semiconductor end markets. The electronics assembly businesses grew 26.6% primarily due to higher demand in North America and Asia Pacific. The other electronics businesses,
which include the contamination control, static control and pressure sensitive adhesives businesses, increased 10.8% with growth in all major regions.
•On December 1, 2021, the Company completed the acquisition of the MTS Test & Simulation business, which had operating revenue of $46 million for the one month ended December 31, 2021 and increased Test & Measurement and Electronics operating revenue by 2.3%.
•Operating margin was 27.4%. The increase of 160 basis points was primarily driven by positive operating leverage of 340 basis points and benefits from the Company's
enterprise initiatives, partially offset by unfavorable price/cost of 40 basis points, the dilutive impact from the MTS acquisition, higher overhead expenses and higher freight costs.
27
Additionally, the prior year included the recapture of amortization and depreciation expense related to a business previously classified as held for sale.
2020 compared to 2019
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2020
2019
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
1,963
$
2,121
(7.4)
%
(4.9)
%
(2.8)
%
—
%
0.3
%
(7.4)
%
Operating
income
$
507
$
542
(6.5)
%
(5.2)
%
(1.3)
%
(0.2)
%
0.2
%
(6.5)
%
Operating
margin %
25.8
%
25.6
%
20 bps
(10) bps
40 bps
(10) bps
—
20 bps
•Operating revenue declined due to lower organic revenue and the impact of a 2019 divestiture,
partially offset by the favorable effect of foreign currency translation.
•Organic revenue decreased 4.9% in 2020.
◦Organic revenue for the test and measurement businesses decreased 7.2% primarily driven by the impact of a soft capital spending environment in North America and Europe, partially offset by higher semi-conductor demand in North America. Instron, where demand is more closely tied to the capital spending environment, had an organic revenue decline of 14.1% in 2020.
◦Electronics organic revenue declined 2.1%. The electronics assembly businesses decreased 6.9% primarily due to lower demand in North America. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew
0.9% primarily due to an increase in North America, partially offset by a decrease in Europe and Asia Pacific.
•Operating margin of 25.8% in 2020 increased 20 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, the impact of a 2019 divestiture and favorable price/cost of 30 basis points, partially offset by negative operating leverage of 130 basis points and the recapture of amortization and depreciation expense related to a business previously classified as held for sale.
WELDING
This segment is a branded value-added
equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and industrial capital goods markets. Products in this segment include:
•arc welding equipment; and
•metal arc welding consumables and related accessories.
The results of operations for the Welding segment for 2021, 2020 and 2019 were as follows:
2021
compared to 2020
For the Years Ended
Dollars
in millions
December 31,
Components of Increase (Decrease)
2021
2020
Inc (Dec)
Organic
Acquisition/ Divestiture
Restructuring
Foreign Currency
Total
Operating
revenue
$
1,650
$
1,384
19.2
%
18.1
%
—
%
—
%
1.1
%
19.2
%
Operating
income
$
490
$
376
30.5
%
29.8
%
—
%
(0.2)
%
0.9
%
30.5
%
Operating
margin %
29.7
%
27.1
%
260 bps
270 bps
—
—
(10) bps
260 bps
•Operating revenue grew due to higher organic revenue and the favorable effect
of foreign currency translation.
•Organic revenue grew 18.1% as equipment increased 20.5% and consumables increased 14.3% primarily due to higher demand in the industrial end markets related to heavy equipment for agriculture, infrastructure and mining and in the commercial end markets related to construction, light fabrication and farm and ranch customers.
28
◦North American organic revenue increased 19.6% primarily driven by growth in the industrial and commercial end markets of 22.6% and 17.0%, respectively.
◦International organic revenue grew 10.7% primarily due to higher equipment demand in the
oil and gas end markets in Europe and Asia.
•Operating margin was 29.7%. The increase of 260 basis points was primarily driven by positive operating leverage of 260 basis points and benefits from the Company's enterprise initiatives, partially offset by higher overhead expenses.
2020 compared to 2019
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2020
2019
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
1,384
$
1,638
(15.5)
%
(11.8)
%
(3.7)
%
—
%
—
%
(15.5)
%
Operating
income
$
376
$
453
(17.1)
%
(16.8)
%
(1.6)
%
1.4
%
(0.1)
%
(17.1)
%
Operating
margin %
27.1
%
27.7
%
(60) bps
(160) bps
60 bps
40 bps
—
(60) bps
•Operating revenue decreased due to lower organic revenue and the impact of a 2019 divestiture.
•Organic
revenue declined 11.8% driven by decreases in equipment of 12.2% and consumables of 11.2%, primarily due to lower demand in the industrial end markets.
◦North American organic revenue decreased 10.8% primarily due to a decline in the industrial end markets of 19.8%, partially offset by growth in the commercial end markets of 2.1%.
◦International organic revenue decreased 16.4% primarily due to a decline in the European oil and gas end markets.
•Operating margin of 27.1% in 2020 decreased 60 basis points primarily driven by negative operating leverage of 220 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives, the impact of
a 2019 divestiture and lower restructuring expenses.
POLYMERS & FLUIDS
This segment is a branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial, MRO and construction markets. Products in this segment include:
•adhesives for industrial, construction and consumer purposes;
•chemical fluids
which clean or add lubrication to machines;
•epoxy and resin-based coating products for industrial applications;
•hand wipes and cleaners for industrial applications;
•fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
•fillers and putties for auto body repair; and
•polyester coatings and patch and repair products for the marine industry.
The results of operations for the Polymers & Fluids segment for 2021, 2020 and 2019 were as follows:
2021 compared to 2020
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2021
2020
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
1,804
$
1,622
11.2
%
10.0
%
—
%
—
%
1.2
%
11.2
%
Operating
income
$
457
$
402
13.7
%
12.2
%
—
%
0.3
%
1.2
%
13.7
%
Operating
margin %
25.4
%
24.8
%
60 bps
50 bps
—
10 bps
—
60 bps
29
•Operating
revenue grew due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic revenue increased 10.0% driven by higher demand across all major regions. Additionally, product line simplification activities reduced organic revenue by 80 basis points.
◦Organic revenue for the automotive aftermarket businesses increased 11.4% primarily driven by growth in the car care, body repair and tire repair businesses in North America and growth in the European additives and tire repair businesses.
◦Organic revenue for the polymers businesses increased 15.5% with growth across all major regions and end markets.
◦Organic revenue for the fluids businesses decreased
1.0% primarily due to a decline in the industrial maintenance, repair and operations end markets in North America.
•Operating margin was 25.4%. The increase of 60 basis points was primarily due to positive operating leverage of 200 basis points, benefits from the Company's enterprise initiatives and lower intangible asset amortization expense, partially offset by unfavorable price/cost of 200 basis points, higher overhead expenses and higher freight costs.
2020 compared to 2019
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2020
2019
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
1,622
$
1,669
(2.8)
%
(1.4)
%
—
%
—
%
(1.4)
%
(2.8)
%
Operating
income
$
402
$
381
5.6
%
5.2
%
—
%
1.5
%
(1.1)
%
5.6
%
Operating
margin %
24.8
%
22.8
%
200 bps
150 bps
—
40 bps
10 bps
200 bps
•Operating revenue decreased due to lower organic revenue and the unfavorable effect of foreign
currency translation.
•Organic revenue declined 1.4% in 2020. Product line simplification activities reduced organic revenue by 50 basis points.
◦Organic revenue for the polymers businesses decreased 5.3% primarily driven by a decline in the heavy industrial end markets in North America and Europe.
◦Organic revenue for the automotive aftermarket businesses declined 0.5% primarily driven by a decrease in the car care and body repair businesses in North America and the additives businesses in Europe, partially offset by growth in the tire and engine repair businesses in North America.
◦Organic revenue for the fluids businesses grew 3.3% primarily due to an increase in the industrial
maintenance, repair, and operations end markets in Europe and North America.
•Operating margin of 24.8% in 2020 increased 200 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, favorable price/cost of 50 basis points and lower restructuring expenses, partially offset by negative operating leverage of 30 basis points.
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.
30
The results of operations for the Construction Products segment for 2021, 2020 and 2019 were as follows:
2021
compared to 2020
For the Years Ended
Dollars
in millions
December 31,
Components of Increase (Decrease)
2021
2020
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
1,945
$
1,652
17.7
%
13.6
%
(0.1)
%
—
%
4.2
%
17.7
%
Operating
income
$
530
$
421
25.7
%
20.9
%
—
%
0.2
%
4.6
%
25.7
%
Operating
margin %
27.2
%
25.5
%
170 bps
160 bps
—
10 bps
—
170 bps
•Operating revenue grew primarily due to higher organic revenue and the favorable effect of foreign currency
translation.
•Organic revenue increased 13.6% with growth across all major regions. Additionally, product line simplification activities reduced organic revenue by 40 basis points.
◦North American organic revenue grew 13.6% due to higher demand in the United States residential and commercial end markets of 12.7% and 14.7%, respectively, and growth in Canada.
◦International organic revenue increased 13.6%. European organic revenue grew 19.4% primarily driven by higher demand in the commercial and residential end markets. Asia Pacific organic revenue increased 7.3% primarily due to higher demand in Australia and New Zealand in the residential end markets.
•Operating margin was 27.2%. The
increase of 170 basis points was primarily due to positive operating leverage of 240 basis points and the net benefits from the Company's enterprise initiatives and cost management, partially offset by unfavorable price/cost of 250 basis points.
2020 compared to 2019
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2020
2019
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
1,652
$
1,625
1.7
%
1.5
%
—
%
—
%
0.2
%
1.7
%
Operating
income
$
421
$
383
10.0
%
8.4
%
—
%
1.5
%
0.1
%
10.0
%
Operating
margin %
25.5
%
23.6
%
190 bps
160 bps
—
30 bps
—
190 bps
•Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic
revenue grew 1.5% as an increase in North America was partially offset by declines in Europe and Asia Pacific.
◦North American organic revenue grew 7.8% as increases of 11.4% in the United States residential end markets and 13.0% in Canada were partially offset by a decrease of 11.4% in the commercial end markets.
◦International organic revenue decreased 3.3% in 2020. Asia Pacific organic revenue decreased 0.7% primarily due to a decline in the commercial end markets in Australia and New Zealand. European organic revenue decreased 5.5% driven by a decline in continental Europe and the United Kingdom.
•Operating margin of 25.5% in 2020 increased 190 basis points primarily driven by the net benefits from the
Company's enterprise initiatives and cost management, positive operating leverage of 30 basis points and lower restructuring expenses, partially offset by unfavorable price/cost of 50 basis points.
SPECIALTY PRODUCTS
This segment is focused on diversified niche market opportunities with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, consumer durables, general industrial, industrial capital goods and printing and publishing markets. Products in this segment include:
•line
integration, conveyor systems and line automation for the food and beverage industries;
•plastic consumables that multi-pack cans and bottles and related equipment;
31
•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 2021, 2020 and 2019 were as follows:
2021 compared to 2020
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2021
2020
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
1,854
$
1,660
11.7
%
9.8
%
—
%
—
%
1.9
%
11.7
%
Operating
income
$
504
$
432
16.6
%
15.6
%
—
%
(1.0)
%
2.0
%
16.6
%
Operating
margin %
27.2
%
26.0
%
120 bps
140 bps
—
(20) bps
—
120 bps
•Operating revenue grew due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic
revenue increased 9.8% as consumables increased 10.8% and equipment increased 6.4% primarily due to higher demand in North America. Additionally, product line simplification activities reduced organic revenue by 20 basis points.
◦North American organic revenue increased 11.2% primarily driven by growth in the consumer packaging, strength film, appliance, filter medical, and product coding and marking businesses.
◦International organic revenue increased 6.8% primarily due to growth in the appliance businesses in Europe and Asia Pacific and the ground support equipment businesses in Europe, partially offset by a decline in the consumer packaging businesses in Europe and the strength film businesses in Asia Pacific.
•Operating margin was 27.2%. The increase
of 120 basis points was primarily due to positive operating leverage of 190 basis points and benefits from the Company's enterprise initiatives, partially offset by unfavorable price/cost of 200 basis points, higher overhead expenses and higher freight costs. Additionally, the prior year included an unfavorable impact of a one-time customer cost-sharing settlement.
2020 compared to 2019
For
the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
2020
2019
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign
Currency
Total
Operating revenue
$
1,660
$
1,825
(9.1)
%
(8.2)
%
(0.8)
%
—
%
(0.1)
%
(9.1)
%
Operating
income
$
432
$
472
(8.5)
%
(11.2)
%
0.7
%
2.2
%
(0.2)
%
(8.5)
%
Operating
margin %
26.0
%
25.9
%
10 bps
(90) bps
40 bps
60 bps
—
10 bps
•Operating revenue decreased primarily due to lower organic revenue and the impact of 2019 divestitures.
•Organic
revenue decreased 8.2% as equipment sales declined 17.7% and consumables declined 5.2%. Additionally, product line simplification activities reduced organic revenue by 30 basis points.
◦North American organic revenue decreased 7.3% primarily due to a decline in the ground support equipment, appliance and specialty films businesses, partially offset by an increase in the consumer packaging businesses.
◦International organic revenue decreased 10.0% primarily due to a decline in the consumer packaging, ground support equipment, appliance, specialty films and marking coding businesses in Europe.
•Operating margin of 26.0% in 2020 increased 10 basis points primarily due to benefits from the
Company's enterprise initiatives, lower restructuring expenses and the impact of 2019 divestitures, partially offset by negative operating leverage of 180 basis points, unfavorable price/cost of 60 basis points and the unfavorable impact of a one-time customer cost-sharing settlement.
32
OTHER FINANCIAL HIGHLIGHTS
•Interest expense was $202 million in 2021, $206 million in 2020 and $221 million in 2019. Interest expense in 2020 was $15 million lower than 2019 primarily driven by the repayment of the $700 million notes due April
1, 2019 and the $650 million notes due March 1, 2019, and outstanding commercial paper in 2019, partially offset by the issuance of the €1.6 billion Euro notes in June of 2019.
•Other income (expense) was income of $51 million in 2021, $28 million in 2020 and $107 million in 2019. The income in 2021 increased $23 million compared to 2020 primarily due to higher investment income and higher other net periodic benefit income in 2021. The income in 2020 decreased $79 million compared to 2019 primarily due to the net pre-tax gain on the disposal of operations and affiliates of $44 million in 2019, lower interest and investment income, and lower other net periodic benefit income.
•The Company's effective
tax rate for 2021, 2020 and 2019 was 19.0%, 22.0% and 23.3%, respectively. The 2021 effective tax rate benefited from discrete income tax benefits of $21 million in the third quarter of 2021 related to the utilization of capital losses and $112 million in the second quarter of 2021 related to the remeasurement of net deferred tax assets due to the enactment of the U.K. Finance Bill 2021, which increases the U.K. income tax rate from 19% to 25% effective April 1, 2023. The 2019 effective tax rate benefited from a discrete income tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment. Additionally, the effective tax rates for 2021, 2020 and 2019 included discrete income tax benefits of $17 million, $27 million and $28 million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 7. Income Taxes in Item 8. Financial Statements and Supplementary
Data for further information.
•The impact of the Euro and other foreign currencies against the U.S. Dollar in 2021 versus 2020 increased operating revenue and income before taxes by approximately $301 million and $77 million, respectively. The impact of the Euro and other foreign currencies against the U.S. Dollar in 2020 versus 2019 decreased operating revenue and income before taxes by approximately $20 million and $3 million, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1. Description of Business and Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary
Data.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are free cash flow and short-term credit facilities. As of December 31, 2021, the Company had $1.5 billion of cash and equivalents on hand and no outstanding borrowings under its $2.5 billion revolving credit facility. The Company also has maintained strong access to public debt markets. Management believes that these sources are sufficient to service debt
and to finance the Company's capital allocation priorities, which include:
•internal investments to support organic growth and sustain core businesses;
•payment of an attractive dividend to shareholders; and
•external investments in selective strategic acquisitions that support the Company's organic growth focus, such as the recently completed acquisition of the MTS Test & Simulation business, and an active share repurchase program. Refer to Note 3. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information regarding this acquisition.
The
Company believes that, based on its operating revenue, operating margin, free cash flow, and credit ratings, it could readily obtain additional financing, if necessary. A description of the risks related to the impact of the COVID-19 outbreak on the financial and capital markets and the related potential risks to the Company is contained in Part I, Item 1A. Risk Factors.
The Company has certain contractual obligations, primarily noncurrent income taxes payable, operating leases and long-term debt. Refer to Note 7. Income Taxes, Note 10. Leases and Note 11. Debt in Item 8. Financial Statements and Supplementary Data for details related to the Company's contractual
obligations. The Company did not have any significant off-balance sheet commitments as of December 31, 2021.
Cash Flow
The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the
Company's financial performance and measures the Company's ability to generate cash internally to fund
33
Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the years ended December 31, 2021, 2020 and 2019 was as follows:
In
millions
2021
2020
2019
Net cash provided by operating activities
$
2,557
$
2,807
$
2,995
Additions to plant and equipment
(296)
(236)
(326)
Free
cash flow
$
2,261
$
2,571
$
2,669
Cash dividends paid
$
(1,463)
$
(1,379)
$
(1,321)
Repurchases
of common stock
(1,000)
(706)
(1,500)
Acquisition of businesses (excluding cash and equivalents)
(731)
—
(4)
Proceeds from sale of operations and affiliates
—
1
120
Net
proceeds from (repayments of) debt
(141)
(4)
422
Other
83
61
100
Effect of exchange rate changes on cash and equivalents
(46)
39
(9)
Net
increase (decrease) in cash and equivalents
$
(1,037)
$
583
$
477
Free cash flow decreased in 2021 due to higher working capital investments to support revenue growth, including increased inventory levels to help mitigate supply chain risk and sustain customer service levels.
Stock Repurchase Programs
On
February 13, 2015, the Company's Board of Directors authorized a stock repurchase program which provided for the repurchase of up to $6.0 billion of the Company's common stock over an open-ended period of time (the "2015 Program"). Under the 2015 Program, the Company repurchased approximately 6.1 million shares of its common stock at an average price of $91.78 per share during 2015, approximately 18.7 million shares of its common stock at an average price of $107.17 per share during 2016, approximately 7.1 million shares of its common stock at an average price of $140.56 per share during 2017, approximately 13.9 million shares of its common stock at an average price
of $143.66 per share during 2018 and approximately 3.1 million shares of its common stock at an average price of $143.23 per share during 2019. The 2015 Program was completed in the second quarter of 2019.
On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). Under the 2018 Program, the Company repurchased approximately 6.7 million shares of its common stock at an average price of $158.11 per share during 2019, approximately
4.2 million shares of its common stock at an average price of $167.69 per share during 2020 and repurchased approximately 4.4 million shares of its common stock at an average price of $227.29 per share during 2021. As of December 31, 2021, there were approximately $240 million of authorized repurchases remaining under the 2018 Program.
On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2021 Program"). As of December
31, 2021, there were $3.0 billion of authorized repurchases remaining under the 2021 Program.
After-tax Return on Average Invested Capital
The Company uses after-tax return on average invested capital ("After-tax ROIC") to measure the effectiveness of its operations' use of invested capital to generate profits. After-tax ROIC is not defined under U.S. generally accepted accounting principles ("GAAP"). After-tax ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the
Company's ability to generate returns from cash invested in its operations and may be different than the method used by other companies to calculate After-tax ROIC. The Company defines After-tax ROIC as operating income after taxes divided by average invested capital, which is annualized when presented in interim periods. Operating income after taxes is a non-GAAP measure consisting of net income before interest expense and other income (expense), on an after-tax basis, which are excluded as they do not represent returns generated by the Company's operations. For
34
comparability, the
Company also excluded the discrete tax benefit of $21 million in the third quarter of 2021 and the discrete tax benefit of $112 million in the second quarter of 2021 from net income and the effective tax rate for the year ended December 31, 2021. Additionally, for comparability, the Company excluded the discrete tax benefit of $21 million in the third quarter of 2019 from net income and the effective tax rate for the year ended December 31, 2019. Total invested capital represents the net assets of the Company, other than cash and equivalents and outstanding debt which do not represent capital investment in the Company's
operations. The most comparable GAAP measure to operating income after taxes is net income. Net income to average invested capital and After-tax ROIC for the years ended December 31, 2021, 2020, and 2019 were as follows:
Dollars in millions
2021
2020
2019
Numerator:
Net
income
$
2,694
$
2,109
$
2,521
Discrete tax benefit related to the third quarter 2021
(21)
—
—
Discrete tax benefit related to the second quarter 2021
(112)
—
—
Discrete
tax benefit related to the third quarter 2019
—
—
(21)
Interest expense, net of tax (1)
157
162
168
Other (income) expense, net of tax (1)
(40)
(22)
(81)
Operating
income after taxes
$
2,678
$
2,249
$
2,587
Denominator:
Invested capital:
Cash
and equivalents
$
1,527
$
2,564
$
1,981
Trade receivables
2,840
2,506
2,461
Inventories
1,694
1,189
1,164
Net
assets held for sale
—
—
280
Net plant and equipment
1,809
1,777
1,729
Goodwill and intangible assets
5,937
5,471
5,343
Accounts
payable and accrued expenses
(2,233)
(1,818)
(1,689)
Debt
(7,687)
(8,122)
(7,758)
Other, net
(261)
(385)
(481)
Total
net assets (stockholders' equity)
3,626
3,182
3,030
Cash and equivalents
(1,527)
(2,564)
(1,981)
Debt
7,687
8,122
7,758
Total
invested capital
$
9,786
$
8,740
$
8,807
Average invested capital (2)
$
9,087
$
8,576
$
9,028
Net
income to average invested capital
29.6
%
24.6
%
27.9
%
After-tax return on average invested capital
29.5
%
26.2
%
28.7
%
(1) Effective
tax rate used for interest expense and other (income) expense for the years ended December 31, 2021, 2020, and 2019 was 23.0%, 22.0% and 24.0%, respectively.
(2) Average invested capital is calculated using the total invested capital balances at the start of the period and at the end of each quarter within each of the periods presented.
After-tax ROIC increased 330 basis points for the twelve month period ended December 31, 2021 compared to the prior year period as a result of a 19.1% increase in after-tax operating income versus a 5.9% increase in average invested capital. After-tax ROIC decreased 250
basis points for the twelve month period ended December 31, 2020 compared to the prior year period as a result of a 13.1% decrease in after-tax operating income versus a 5.0% decrease in average invested capital.
35
A reconciliation of the 2021 effective tax rate excluding the third quarter 2021 discrete tax benefit of $21 million related to the utilization of capital losses and the second quarter 2021 discrete tax benefit of $112 million related to a change in the U.K. income tax rate is as follows:
Discrete tax benefit related to the third quarter 2021
21
0.6
%
Discrete
tax benefit related to the second quarter 2021
112
3.4
%
As adjusted
$
765
23.0
%
A reconciliation of the 2019 effective tax rate excluding the third quarter 2019 discrete tax benefit of $21 million for the U.S. federal provision to return adjustment is as follows:
Discrete tax benefit related to the third quarter 2019
21
0.7
%
As
adjusted
$
788
24.0
%
Refer to Note 7. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information regarding the discrete tax items noted above.
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as of December 31,
2021 and 2020 is summarized as follows:
In millions
2021
2020
Increase (Decrease)
Current Assets:
Cash
and equivalents
$
1,527
$
2,564
$
(1,037)
Trade receivables
2,840
2,506
334
Inventories
1,694
1,189
505
Prepaid
expenses and other current assets
313
264
49
6,374
6,523
(149)
Current Liabilities:
Short-term debt
778
350
428
Accounts
payable and accrued expenses
2,233
1,818
415
Other
459
421
38
3,470
2,589
881
Net
Working Capital
$
2,904
$
3,934
$
(1,030)
As of December 31, 2021, a significant portion of the Company's cash and equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to the U.S. Cash and equivalents
held internationally are typically used for international operating needs or reinvested to fund expansion of existing international businesses. International funds may also be used to fund international acquisitions or, if not considered permanently invested, may be repatriated to the U.S. The Company has accrued for foreign withholding taxes related to foreign held cash and equivalents that are not permanently invested.
36
In the U.S., the Company utilizes cash flows from operations to fund domestic cash needs and the
Company's capital allocation priorities. This includes operating needs of the U.S. businesses, dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existing U.S. businesses and general corporate needs. The Company may also use its commercial paper program, which is backed by a long-term credit facility, for short-term liquidity needs. The Company believes cash generated by operations and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.
As of December 31, 2021, short-term debt included $568 million related
to the 1.75% Euro notes due May 20, 2022, which the Company intends to redeem in full in February 2022, and commercial paper of $210 million. As of December 31, 2020, short-term debt included $350 million related to the 3.375% notes due September 15, 2021, which were redeemed in full on June 15, 2021. There was no commercial paper outstanding as of December 31, 2020.
The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions.
During the third quarter of 2019, the Company entered into a $2.5 billion, five-year revolving credit facility with a termination date of September 27, 2024, which is available to provide additional liquidity, including to support the potential issuances of commercial paper. On September 22, 2021, due to the anticipated LIBOR transition, the Company agreed to suspend its right to borrow in Euro, British Pounds Sterling and Japanese Yen currencies under the revolving credit facility, effective December 31, 2021. The Company may continue to borrow in U.S. Dollars under the credit
facility. This change is not expected to have a significant impact on the Company's liquidity or its commercial paper program. No amounts were outstanding under the revolving credit facility at December 31, 2021. The maximum outstanding commercial paper balance during 2021 was $300 million, while the average daily balance was $49 million.
As of December 31, 2021, the Company had unused capacity of approximately $201 million under international debt facilities. In the ordinary course of business, the Company also had approximately $210 million outstanding in guarantees,
letters of credit and other similar arrangements with financial institutions as of December 31, 2021. Refer to Note 11. Debt in Item 8. Financial Statements and Supplementary Data for additional details regarding the Company's outstanding debt obligations.
37
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA as a measure of its ability to
repay its outstanding debt obligations. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the years ended December 31, 2021, 2020 and 2019
was as follows:
Dollars in millions
2021
2020
2019
Total debt
$
7,687
$
8,122
$
7,758
Net
income
$
2,694
$
2,109
$
2,521
Add:
Interest expense
202
206
221
Other
(income) expense
(51)
(28)
(107)
Income taxes
632
595
767
Depreciation
277
273
267
Amortization
and impairment of intangible assets
133
154
159
EBITDA
$
3,887
$
3,309
$
3,828
Total debt to EBITDA ratio
2.0
2.5
2.0
Stockholders'
Equity
The changes to stockholders' equity during 2021 and 2020 were as follows:
In millions
2021
2020
Beginning balance
$
3,182
$
3,030
Net
income
2,694
2,109
Cash dividends declared
(1,483)
(1,398)
Repurchases of common stock
(1,000)
(706)
Other comprehensive income (loss)
140
63
Other
93
84
Ending
balance
$
3,626
$
3,182
CRITICAL ACCOUNTING ESTIMATES
The Company has three accounting estimates that it believes are most important to the Company's financial condition and results of operations, and which require the Company
to make judgments about matters that are inherently uncertain. Management bases its estimates on historical experience, and in some cases on observable market information. Various assumptions are also used that are believed to be reasonable under the circumstances and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The Company's critical accounting estimates are as follows:
Income Taxes— The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences
between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The Company's deferred and other tax balances are based on management's interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax expense, assets and liabilities recognized by the Company also reflect its best estimates and assumptions regarding, among other things, the level of future taxable income, the effect of the Company's various tax planning strategies and uncertain tax positions. Future tax authority rulings and changes in tax laws, changes in projected
38
levels
of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the Company.
Goodwill and Intangible Assets— The Company's business acquisitions typically result in recording goodwill and other intangible assets, which are a significant portion of the Company's total assets and affect the amount of amortization expense and impairment charges that the Company could incur in future periods. The Company
follows the guidance prescribed in the accounting standards to test goodwill and intangible assets for impairment. On an annual basis, or more frequently if triggering events occur, the Company compares the estimated fair value of its reporting units to the carrying value of each reporting unit to determine if a potential goodwill impairment exists. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment loss is recorded for the difference. In calculating the fair value of the reporting units or specific intangible assets, management relies on a number of factors, including business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and management's judgment in applying them in the impairment tests of goodwill and other intangible assets.
As
of December 31, 2021, the Company had total goodwill and intangible assets of approximately $5.9 billion allocated to its reporting units. Although there can be no assurance that the Company will not incur additional impairment charges related to its goodwill and other intangible assets, the Company generally believes the risk of significant impairment charges is lessened by the number of diversified businesses and end markets represented by its reporting units that have goodwill and other intangible assets. In addition, the individual businesses in many of the reporting units have been acquired over a long period of time, and in many cases have been able to improve their performance,
primarily as a result of the application of the Company's 80/20 Front-to-Back process. The amount of goodwill and other intangible assets allocated to individual reporting units ranges from approximately $222 million to $1.4 billion, with the average amount equal to $588 million. Fair value determinations require considerable judgment and are sensitive to changes in the factors described above. Due to the inherent uncertainties associated with these factors and economic conditions in the Company's global end markets, impairment charges related to one or more reporting units could occur in future periods.
Pension and Other Postretirement Benefits— The
Company has various company-sponsored defined benefit retirement plans covering a number of U.S. employees and many employees outside the U.S. Pension and other postretirement benefit expense and obligations are determined based on actuarial valuations. Pension benefit obligations are generally based on each participant's years of service, future compensation, and age at retirement or termination. Important assumptions in determining pension and postretirement expense and obligations are the discount rate, the expected long-term return on plan assets, life expectancy, and health care cost trend rates. Future changes in any of these assumptions could materially affect the amounts recorded related to the Company's pension and other postretirement benefit plans. See Note 12. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for additional
discussion of actuarial assumptions used in determining pension and postretirement health care liabilities and expenses.
The Company determines the discount rate used to measure plan liabilities as of the year-end measurement date for the U.S. primary pension plan. The discount rate reflects the current rate at which the associated liabilities could theoretically be effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. A 25 basis point decrease in the discount rate would increase the present value of the U.S. primary pension plan obligation by approximately $37 million. The
Company estimates the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate. See Note 12. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for information on the Company's pension and other postretirement benefit plans and related assumptions.
The expected long-term return on plan assets is based on historical and expected long-term returns for similar investment allocations among asset classes. For the U.S. primary pension plan, a 25 basis point decrease in the expected return on plan assets would increase the annual pension expense by approximately $4 million.
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
The Company is exposed to certain market risks that exist as part of its ongoing business operations, including fluctuations in currency exchange rates, price volatility for certain commodities and changes in interest rates. The Company does not engage in speculative or leveraged transactions and does not hold or issue financial instruments for trading purposes.
39
Interest
Rate Risk
The Company's exposure to market risk for changes in interest rates relates primarily to the fair value of the Company's fixed rate debt. Refer to Note 11. Debt in Item 8. Financial Statements and Supplemental Data for details related to the fair value of the Company's debt instruments.
Foreign Currency Risk
The Company operates in the U.S. and 51 foreign countries. The funding for the foreign manufacturing operations is provided primarily through
the permanent investment of equity capital. The Company's products are typically manufactured and sold within the same country or economic union. Therefore, the Company's manufacturing operations generally do not have significant assets or liabilities denominated in currencies other than their functional currencies.
The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May 2015 and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes
in the value of this debt resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). The cumulative unrealized pre-tax gain (loss) recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was a gain of $183 million as of December 31, 2021 and a loss of $120 million as of December 31, 2020.
40
ITEM 8.Financial Statements and Supplementary Data
MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Illinois Tool Works Inc. (the "Company" or "ITW") is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). ITW's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
ITW
management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2021. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our assessment we believe that, as of December 31, 2021, the Company's internal control over financial reporting is effective based on those criteria.
The effectiveness of the Company's internal control over financial reporting as of December 31,
2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Illinois Tool Works Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position
of Illinois Tool Works Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control
over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical
Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the
42
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income
Taxes — Refer to Note 7 to the financial statements
Critical Audit Matter Description
The Company's income tax expense is recognized and measured based on management's interpretation of the tax regulations and rulings in numerous taxing jurisdictions, which requires significant judgment. When calculating income tax expense management makes estimates and assumptions, including determination of the completeness of book income in each jurisdiction, calculation of taxable income through identification and classification of book to tax differences (either temporary or permanent items), consideration of applicable tax deductions or credits, and the identification of uncertain tax positions.
The evaluation of
each uncertain tax position requires management to apply specialized skill and knowledge related to the identified position. Management evaluates uncertain tax positions identified and a liability is established for unrecognized tax benefits when there is a more than 50% likelihood that its tax position will not be sustained upon examination by taxing authorities. There is additional judgment to determine the amount of the liability for the underlying tax position. The Company's income tax expense for 2021 was $632 million and the liability recorded for unrecognized tax benefits as of December 31, 2021, was $360 million.
Given the number of taxing jurisdictions and the complex and subjective nature of the associated tax regulations and rulings, certain audit matters required
a high degree of auditor judgment and increased extent of effort, including the need to involve our income tax specialists. These matters included the auditing of income tax expense, identification of uncertain tax positions, measurement of unrecognized tax benefits, and certain planning transactions with income tax expense implications.
How the Critical Audit Matter Was Addressed in the Audit
With the assistance of our income tax specialists, our principal audit procedures related to income tax expense included the following, among others:
•We tested the effectiveness of management's controls over income taxes, including those over income tax expense, unrecognized tax benefits, and certain planning transactions with income tax expense implications.
•We
evaluated management's significant estimates and judgments incorporated into the calculation of income tax expense by:
◦Selecting a sample of book to tax differences (temporary and permanent) and testing the accuracy, completeness, and classification of the selections, including evaluating that all impacts of significant transactions with income tax expense implications are considered.
◦Developing an expectation over the foreign income tax expense by jurisdiction and comparing it to the recorded balance.
◦Testing the accuracy of the income tax expense calculation.
•We evaluated management's significant judgments regarding the identification of uncertain tax positions by:
◦Evaluating
the reasonableness of a selection of certain planning transactions with income tax expense implications, including the completeness and accuracy of the underlying data supporting the transactions.
◦Assessing management's methods and assumptions used in identifying uncertain tax positions.
◦Comparing results of prior tax audits to ongoing and anticipated tax audits by tax authorities.
◦Evaluating external information including applicable tax law, new interpretations, and related changes to assess the completeness and reasonableness of management's considerations.
◦Determining if there was additional information not considered in management's assessment.
•We
evaluated a sample of the liabilities recorded for unrecognized tax benefits to assess the establishment and amount of the liability for the specific underlying tax position.
Adjustments
to reconcile net income to cash provided by operating activities:
Depreciation
i277
i273
i267
Amortization
and impairment of intangible assets
i133
i154
i159
Change
in deferred income taxes
(i148)
(i30)
i32
Provision
for uncollectible accounts
i3
i7
i6
(Income)
loss from investments
(i29)
(i8)
(i15)
(Gain)
loss on sale of plant and equipment
i—
i2
(i9)
(Gain)
loss on sale of operations and affiliates
i—
i—
(i44)
Stock-based
compensation expense
i53
i42
i41
Other
non-cash items, net
i13
i8
i9
Change
in assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in—
Trade receivables
(i240)
i95
i40
Inventories
(i450)
i43
i98
Prepaid
expenses and other assets
(i36)
i41
i11
Increase
(decrease) in—
Accounts payable
i37
i19
(i16)
Accrued
expenses and other liabilities
i202
i17
(i95)
Income
taxes
i49
i34
(i7)
Other,
net
(i1)
i1
(i3)
Net
cash provided by operating activities
i2,557
i2,807
i2,995
Cash
Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents)
(i731)
i—
(i4)
Additions
to plant and equipment
(i296)
(i236)
(i326)
Proceeds
from investments
i38
i14
i20
Proceeds
from sale of plant and equipment
i8
i10
i25
Proceeds
from sale of operations and affiliates
i—
i1
i120
Other,
net
(i3)
(i3)
(i18)
Net
cash provided by (used for) investing activities
(i984)
(i214)
(i183)
Cash
Provided by (Used for) Financing Activities:
Cash dividends paid
(i1,463)
(i1,379)
(i1,321)
Issuance
of common stock
i50
i66
i85
Repurchases
of common stock
(i1,000)
(i706)
(i1,500)
Net
proceeds from (repayments of) debt with original maturities of three months or less
i120
i—
(i1)
Proceeds
from debt with original maturities of more than three months
i90
i—
i1,774
Repayments
of debt with original maturities of more than three months
(i351)
(i4)
(i1,351)
Other,
net
(i10)
(i26)
(i12)
Net
cash provided by (used for) financing activities
(i2,564)
(i2,049)
(i2,326)
Effect
of Exchange Rate Changes on Cash and Equivalents
(i46)
i39
(i9)
Cash
and Equivalents:
Increase (decrease) during the year
(i1,037)
i583
i477
Beginning
of year
i2,564
i1,981
i1,504
End
of year
$
i1,527
$
i2,564
$
i1,981
Supplementary
Cash Flow Information:
Cash Paid During the Year for Interest
$
i197
$
i194
$
i223
Cash
Paid During the Year for Income Taxes, Net of Refunds
$
i731
$
i591
$
i742
The
Notes to Financial Statements are an integral part of this statement.
48
Notes to Financial Statements
(1) iDescription
of Business and Summary of Significant Accounting Policies
Description of business— Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with approximately i83 divisions in i52
countries.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 iseven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.
iConsolidation
and translation— The financial statements include the Company and its majority-owned subsidiaries. The Company follows the equity method of accounting for investments where the Company has a significant influence but not a controlling interest. Intercompany transactions are eliminated from the financial statements. Foreign subsidiaries' assets and liabilities are translated to U.S. dollars at end-of-period exchange rates. Revenues and expenses are translated at average rates for the period. Translation adjustments are reported
as a component of accumulated other comprehensive income (loss) in stockholders' equity.
iReclassifications— Certain reclassifications of prior year data have been made to conform to current year reporting.
iUse
of estimates— The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to financial statements. Actual results could differ from those estimates.
iAcquisitions— The Company accounts for acquisitions
under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired companies are included in the Company's consolidated financial statements from the date of acquisition. Refer to Note 3. Acquisitions for additional information regarding the Company's acquisitions.
iOperating
revenue— Operating revenue is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives the service performed. The Company's sales arrangements with customers are predominantly short-term in nature involving a single performance obligation related to the delivery of products and generally provide for transfer of control at the time of shipment. In limited circumstances, there may be significant obligations to the customer that are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance. In these circumstances, operating revenue may be deferred until all significant obligations have been completed. In other limited arrangements, the Company may recognize revenue
over time. This may include arrangements for service performed over time where operating revenue is recognized over time as the service is provided to the customer. It may also include the sale of highly specialized systems that include a high degree of customization and installation at the customer site which are recognized over time if the product does not have an alternative use and the Company has an enforceable right to payment for work performed to date. Revenue for transactions meeting these criteria is recognized over time as work is performed based on the costs incurred to date relative to the total estimated costs at completion. The amount of operating revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods or services and may include adjustments
for customer allowances and rebates. Customer allowances and rebates consist primarily of volume discounts and other short-term incentive programs, which are estimated at the time of sale based on historical experience and anticipated trends. Shipping and handling charges billed to customers are included in revenue and are recognized along with the related product revenue as they are considered a fulfillment cost. Sales commissions are expensed when incurred, which is generally at the time of revenue recognition. Contract liabilities associated with sales arrangements primarily relate to deferred revenue on equipment sales and prepaid service contracts. Total deferred revenue and customer deposits were $i394
million and $i222 million as of December 31, 2021 and 2020, respectively, and are short-term in nature. The deferred revenue and customer deposits as of December 31, 2021 included $i108 million
related to the MTS Test & Simulation business, which was acquired on December 1, 2021. Refer to Note 3. Acquisitions for additional information regarding this acquisition. Refer to Note 5. Operating Revenue for additional information regarding the Company's operating revenue.
iResearch and development expenses— Research
and development expenses are recorded as expense in the year incurred. These costs were $i239 million, $i214 million and $i221
million for the years ended December 31, 2021, 2020 and 2019, respectively.
49
iAdvertising expenses— Advertising expenses are recorded as expense in the year incurred. These costs were $i50
million, $i43 million and $i48 million for the years ended December 31, 2021, 2020 and 2019, respectively.
iIncome
taxes— The Company utilizes the asset and liability method of accounting for income taxes. Deferred income taxes are determined based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities given the provisions of the enacted tax laws. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized.
iCash and equivalents—
Cash and equivalents include cash on hand and instruments having original maturities of three months or less. Cash and equivalents are stated at cost, which approximates fair value.
iTrade receivables— Trade receivables are net of allowances for doubtful accounts. iThe
changes in the allowance for doubtful accounts for the years ended December 31, 2021, 2020 and 2019 were as follows:
In millions
2021
2020
2019
Beginning
balance
$
i29
$
i20
$
i21
Provision
charged to expense
i3
i7
i6
Acquisitions
and divestitures
i2
i—
i—
Write-offs,
net of recoveries
(i5)
(i4)
(i4)
Transfer
(to)/from assets held for sale
i—
i2
(i2)
Foreign
currency translation/other
(i1)
i4
(i1)
Ending
balance
$
i28
$
i29
$
i20
iInventories—
Inventories are stated at the lower of cost or net realizable value and include material, labor and factory overhead. The last-in, first-out ("LIFO") method is used to determine the cost of inventories at certain U.S. businesses. The first-in, first-out ("FIFO") method, which approximates current cost, is used for all other inventories. Inventories priced at LIFO were approximately ii19/%
of total inventories as of both December 31, 2021 and 2020. If the FIFO method was used for all inventories, total inventories would have been approximately $i118 million and $i82
million higher than reported at December 31, 2021 and 2020, respectively. iThe major classes of inventory at December 31, 2021 and 2020 were as follows:
In
millions
2021
2020
Raw material
$
i716
$
i454
Work-in-process
i208
i136
Finished
goods
i888
i681
LIFO
reserve
(i118)
(i82)
Total inventories
$
i1,694
$
i1,189
iNet
plant and equipment— Net plant and equipment are stated at cost, less accumulated depreciation. Renewals and improvements that increase the useful life of plant and equipment are capitalized. Maintenance and repairs are charged to expense as incurred. iNet plant and equipment consisted of the following at December 31, 2021 and 2020:
In
millions
2021
2020
Land
$
i198
$
i204
Buildings
and improvements
i1,462
i1,432
Machinery
and equipment
i3,898
i3,824
Construction
in progress
i142
i133
Gross
plant and equipment
i5,700
i5,593
Accumulated
depreciation
(i3,891)
(i3,816)
Net
plant and equipment
$
i1,809
$
i1,777
50
The
Company's U.S. businesses primarily compute depreciation on an accelerated basis. The majority of the Company's international businesses compute depreciation on a straight-line basis. The ranges of useful lives used to depreciate plant and equipment are as follows:
Buildings and improvements
i5—i50
years
Machinery and equipment
i3—i12 years
Depreciation
was $i277 million, $i273 million and $i267
million for the years ended December 31, 2021, 2020 and 2019, respectively.
i
Goodwill and intangible assets— Goodwill represents the excess cost over fair value of the net assets of acquired businesses. The Company does not amortize goodwill and intangible assets that have indefinite lives. Amortizable intangible
assets are being amortized on a straight-line basis over their estimated useful lives of i3 to i20 years.
The Company
performs an impairment assessment of goodwill and intangible assets with indefinite lives annually, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
When performing its annual impairment assessment, the Company evaluates the goodwill assigned to each of its reporting units for potential impairment by comparing the estimated fair value of the relevant reporting unit to the carrying value. The Company uses various Level 2 and Level 3 valuation techniques to determine the fair value of its reporting units,
including discounting estimated future cash flows based on a cash flow forecast prepared by the relevant reporting unit and market multiples of relevant public companies. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment loss is recorded for the difference.
The Company's indefinite-lived intangible assets consist of trademarks and brands. The estimated fair values of these intangible assets are determined based on a Level 3 valuation method using a relief-from-royalty income approach derived from internally forecasted revenues of the related products. If the fair value of the trademark or brand is less than its carrying value, an impairment loss is recorded for the difference between the estimated fair value and carrying value of the intangible asset.
/
iLeases—
The Company recognizes a lease liability and corresponding right-of-use asset for all operating leases with a noncancellable lease term of greater than one year. Rental expense for operating leases is recognized on a straight-line basis over the noncancellable lease term based on the minimum lease payments at lease inception. Changes in rent subsequent to commencement that were not included in minimum lease payments at inception are recognized as variable rent in the period incurred. Refer to Note 10. Leases for additional information regarding the Company's operating leases.
iAccrued
warranties— The Company accrues for product warranties based on historical experience. iThe changes in accrued warranties for the years ended December 31, 2021, 2020 and 2019 were as follows:
In
millions
2021
2020
2019
Beginning balance
$
i45
$
i45
$
i45
Charges
(i34)
(i34)
(i44)
Provision
charged to expense
i34
i33
i44
Acquisitions
and divestitures
i5
i—
i—
Foreign
currency translation/other
(i4)
i1
i—
Ending
balance
$
i46
$
i45
$
i45
i
New
Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance which changes the methodology used to measure credit losses for certain financial instruments. Under prior guidance, credit loss reserves were estimated based on historical information. The new guidance requires credit loss reserves to reflect the estimated credit losses expected to be incurred over the life of the financial asset. The Company adopted this new guidance effective January 1, 2020
51
and applied it prospectively, which did not have a material
impact on the Company's results of operations or financial position.
In January 2017, the FASB issued authoritative guidance which simplifies the assessment of goodwill for impairment. Under prior guidance, when the estimated fair value of a reporting unit was less than its carrying value, the fair value of the goodwill was determined by valuing the other assets and liabilities of the reporting unit. Under the new guidance, the requirement to determine the fair value of goodwill has been eliminated, and an impairment charge is recognized for the amount that the carrying value of the reporting unit exceeds its fair value. Effective January 1, 2020, the Company adopted the new guidance prospectively
and applied the new guidance during its annual assessment of goodwill in the third quarter of 2020 and 2021. The adoption of this new accounting guidance had no impact on the Company's results of operations or financial position. Refer to Note 9. Goodwill and Intangible Assets for additional information regarding the Company's annual assessment of goodwill.
In December 2019, the FASB issued authoritative guidance which simplifies certain aspects of the accounting for income taxes, including the elimination of an exception to the methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated full year loss. The Company
early adopted this new guidance effective January 1, 2020 and applied it prospectively, which did not have a material impact on the Company's results of operations or financial position.
In October 2021, the FASB issued authoritative guidance which improves the accounting for acquired revenue contracts with customers in a business combination. The new guidance provides an exception to measure contract assets and contract liabilities acquired in a business combination in accordance with existing revenue recognition
guidance rather than at fair value. The Company early adopted this new guidance in the fourth quarter of 2021. The new guidance is effective prospectively upon adoption and must also be applied retrospectively to all interim periods in the year of adoption. The adoption of this new accounting guidance did not have a material impact on the Company's results of operations or financial position. Refer to Note 3. Acquisitions for additional information regarding the Company's acquisitions.
(2) iNovel
Coronavirus (COVID-19)
In early 2020, an outbreak of a novel strain of coronavirus ("COVID-19") occurred in China and other jurisdictions. The COVID-19 outbreak was subsequently declared a global pandemic by the World Health Organization on March 11, 2020. In response to the outbreak, governments around the globe have taken various actions to reduce its spread, including travel restrictions, shutdowns of businesses deemed nonessential, and stay-at-home or similar orders. The COVID-19 pandemic and the measures taken globally to reduce its spread have negatively impacted the global economy, causing significant disruptions in the Company's global operations starting primarily in the latter part of the first quarter of 2020 as COVID-19 continued to spread and impact
the countries in which the Company operates and the markets the Company serves. During 2021, the Company experienced solid recovery progress in many of its end markets; however, the disruptions caused by the COVID-19 pandemic continue to have an adverse impact on the Company's global operations. The full extent of the COVID-19 outbreak and its impact on the markets served by the Company and on the Company's operations continues to be highly uncertain as conditions continue to fluctuate
around the world, with vaccine administration rising in certain regions and spikes in infections (including the spread of variants) also being experienced. A prolonged outbreak could continue to interrupt the operations of the Company and its customers and suppliers.
(3) iAcquisitions
Net
cash paid for acquisitions during 2021 and 2019 was $i731 million and $i4 million,
respectively. There were ino acquisitions in 2020. The cash paid in 2021 related to the acquisition of the Test & Simulation business of MTS Systems Corporation ("MTS") from Amphenol Corporation ("Amphenol"), as discussed below. Acquisitions, individually and in the aggregate, did not materially affect the Company's results of operations or financial position for any period presented.
On December
1, 2021, the Company completed the acquisition of the MTS Test & Simulation business for a purchase price of $i750 million, subject to certain closing adjustments. The MTS Test & Simulation business is a leading global supplier of high-performance testing and simulation systems and is highly complementary to the Company's existing Test & Measurement
and Electronics segment. The operating results of the MTS Test & Simulation business were reported within the Test & Measurement and Electronics segment from the date of acquisition, with operating revenue of $i46 million for the one month ended December 31, 2021. The Company is in process of allocating
the purchase price to the acquired assets and liabilities as of the acquisition date, including intangible assets and goodwill. Based on its initial allocation, the Company recorded goodwill of $i371 million and intangible assets of $i321 million.
The intangible assets included $i93 million related to
52
indefinite-lived trademarks and brands and $i228 million
related to amortizable intangible assets that are expected to be amortized on a straight-line basis over estimated useful lives ranging from i0.3 to i12 years, with a weighted-average life of i10
years. The Company does not expect any of the goodwill related to the transaction to be tax deductible. The fair values of the intangible assets were estimated based on discounted cash flow and market-based valuation models using Level 2 and Level 3 inputs and assumptions. Subsequent acquisition accounting adjustments may change the initial amounts recorded, including goodwill and intangible assets, primarily due to the completion of valuations. The allocation of purchase price will be completed as soon as practicable, but no later than one year from the acquisition date.
(4) iDivestitures
The
Company routinely reviews its portfolio of businesses relative to its business portfolio criteria and evaluates if further portfolio refinements may be needed. The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with annual revenues totaling up to $i1 billion. As such, the
Company may commit to a plan to exit or dispose of certain businesses and present them as held for sale in periods prior to the sale of the business.
In the second quarter of 2019, the Company approved plans to divest isix businesses, including itwo
businesses in the Test & Measurement and Electronics segment, ione business in the Automotive OEM segment, ione
business in the Welding segment, and itwo businesses in the Specialty Products segment. These isix
businesses were classified as held for sale beginning in the second quarter of 2019. In the fourth quarter of 2019, the Company divested ithree of the held for sale businesses which included ione
business in the Test & Measurement and Electronics segment, ione business in the Welding segment, and ione
business in the Specialty Products segment.
For the twelve months ended December 31, 2019, the Company recorded net pre-tax gains on disposal of businesses of $i44 million ($i30
million after-tax, or $i0.09 per diluted share) which was primarily due to the ithree
divestitures of held for sale businesses discussed above. The net pre-tax gain was included in Other income (expense) in the Statement of Income.
Operating revenue related to businesses divested in 2019 that was included in the Company's results of operations for the twelve months ended December 31, 2019 was $i134 million.
The operating revenue for the twelve months ended December 31, 2019 of $i134 million related to the businesses divested in 2019 included $ii62/
million in the Welding segment, $i58 million in the Test & Measurement and Electronics segment, and $i14
million in the Specialty Products segment.
As of December 31, 2019, ithree of the businesses discussed above continued to be held for sale, including ione
business in the Test & Measurement and Electronics segment, ione business in the Automotive OEM segment, and ione
business in the Specialty Products segment.
During 2020, the sales of the ithree remaining businesses held for sale were determined to no longer be probable of being completed within one year, primarily due to the disruptions and economic uncertainty resulting from the COVID-19 pandemic. Accordingly, these businesses were no longer presented as held for sale.
53
(5)
iOperating Revenue
The Company's i83 diversified operating
divisions are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following iseven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. iOperating
revenue by product category, which is consistent with the Company's segment presentation, for the twelve months ended December 31, 2021, 2020 and 2019 was as follows:
In millions
2021
2020
2019
Automotive
OEM
$
i2,800
$
i2,571
$
i3,063
Food
Equipment
i2,078
i1,739
i2,188
Test
& Measurement and Electronics
i2,346
i1,963
i2,121
Welding
i1,650
i1,384
i1,638
Polymers
& Fluids
i1,804
i1,622
i1,669
Construction
Products
i1,945
i1,652
i1,625
Specialty
Products
i1,854
i1,660
i1,825
Intersegment
revenue
(i22)
(i17)
(i20)
Total
$
i14,455
$
i12,574
$
i14,109
The
following is a description of the product offerings, end markets and typical revenue transactions for each of the Company's iseven segments:
Automotive OEM— This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners
for automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers market. Products in this segment include:
•plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.
Products sold in this segment are primarily manufactured to the customer's specifications and are sold under long-term supply agreements with OEM auto manufacturers and other top tier auto parts suppliers. The Company typically recognizes revenue for products in this segment at the time of shipment. Certain products may be produced utilizing tooling that is owned by the customer that the
Company developed and is reimbursed by the customer for the associated cost. In these arrangements, the Company typically retains a contractual right to use the customer-owned tooling for the purpose of fulfilling its obligations under the supply agreement. The Company records reimbursements for the cost of customer-owned tooling as a cost offset rather than operating revenue as tooling is not considered a product offering central to the Company's operations.
Food Equipment— This segment is a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integrated service
offerings. This segment primarily serves the food service, food retail and food institutional/restaurant markets. Products in this segment include:
•warewashing equipment;
•cooking equipment, including ovens, ranges and broilers;
•refrigeration equipment, including refrigerators, freezers and prep tables;
•food processing equipment, including slicers, mixers and scales;
•kitchen exhaust, ventilation and pollution control systems; and
•food equipment service, maintenance and repair.
Revenue
for equipment sold in this segment is typically recognized at the time of product shipment. In limited circumstances involving installation of equipment and customer acceptance, the Company may recognize revenue upon completion of installation and acceptance by the customer. Annual service contracts are typically sold separate from equipment and the related revenue is recognized on a straight-line basis over the annual service period. Operating revenue for on-demand service repairs and parts is recorded upon completion and customer acceptance of the work performed.
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
54
for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, automotive original equipment manufacturers and tiers, industrial capital goods, energy and consumer durables markets. Products in this segment include:
•equipment, consumables, and related software for testing and measuring
of materials, structures, gases and fluids;
•electronic assembly equipment;
•electronic components and component packaging;
•static control equipment and consumables used for contamination control in clean room environments; and
•pressure sensitive adhesives and components for electronics, medical, transportation and telecommunications applications.
Revenue for products sold in this segment is typically recognized at the time of shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue recognition
is deferred until such obligations have been completed. In other limited arrangements involving the sale of highly specialized systems that include a high degree of customization and installation at the customer site, revenue is recognized over time if the product does not have an alternative use, and the Company has an enforceable right to payment for work performed to date. Revenue for transactions meeting these criteria is recognized over time as work is performed based on the costs incurred to date relative to the total estimated costs at completion.
Welding— This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a
wide array of industrial and commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and industrial capital goods markets. Products in this segment include:
•arc welding equipment; and
•metal arc welding consumables and related accessories.
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.
Polymers
& Fluids— This segment is a branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial, MRO and construction markets. Products in this segment include:
•adhesives for industrial, construction and consumer purposes;
•chemical fluids which clean or add lubrication to machines;
•epoxy and resin-based coating products for industrial applications;
•hand
wipes and cleaners for industrial applications;
•fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
•fillers and putties for auto body repair; and
•polyester coatings and patch and repair products for the marine industry.
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.
Construction Products— This segment is a branded supplier of innovative engineered
fastening systems and solutions. This segment primarily serves the residential construction, renovation/remodel and commercial construction markets. Products in this segment include:
•fasteners and related fastening tools for wood and metal applications;
•anchors, fasteners and related tools for concrete applications;
•metal plate truss components and related equipment and software; and
•packaged hardware, fasteners, anchors and other products for retail.
55
Products
in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.
Specialty Products— This segment is focused on diversified niche market opportunities with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, consumer durables, general industrial, industrial capital goods and printing and publishing markets. Products in this segment include:
•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.
Products in this segment are primarily manufactured to meet anticipated customer demand. The
Company typically recognizes revenue for these products at the time of product shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue is recognized when such obligations have been completed.
(6) iOther Income (Expense)
i
Other
income (expense) for the twelve months ended December 31, 2021, 2020 and 2019 consisted of the following:
In millions
2021
2020
2019
Interest
income
$
i12
$
i17
$
i29
Other
net periodic benefit income
i23
i13
i24
Income
(loss) from investments
i29
i8
i15
Gain
(loss) on disposal of operations and affiliates
i—
i—
i44
Equity
income in Wilsonart
i—
i—
i—
Gain
(loss) on foreign currency transactions, net
(i9)
(i5)
(i10)
Other,
net
(i4)
(i5)
i5
Total
other income (expense)
$
i51
$
i28
$
i107
/
Refer
to Note 4. Divestitures for further information regarding the Gain (loss) on disposal of operations and affiliates of $i44 million for the twelve months ended December 31, 2019.
In the fourth quarter of 2012, the Company divested a i51%
majority interest in its former Decorative Surfaces segment to certain funds managed by Clayton, Dubilier & Rice, LLC ("CD&R"). As a result of the transaction, the Company owns common units (the "Common Units") of Wilsonart International Holdings LLC ("Wilsonart") initially representing approximately i49% (on an as-converted basis) of the total outstanding equity. CD&R owns cumulative convertible participating preferred units (the "Preferred Units") of Wilsonart
representing approximately i51% (on an as-converted basis) of the total outstanding equity. The Preferred Units rank senior to the Common Units as to dividends and liquidation preference, and accrue dividends at a rate of i10%
per annum. The ownership interest in Wilsonart is reported using the equity method of accounting. The Company's proportionate share in the income (loss) of Wilsonart is reported in Other income (expense) in the Statement of Income. As the Company's investment in Wilsonart is structured as a partnership for U.S. tax purposes, U.S. taxes are recorded separately from the equity investment. In 2016, the Company received a $i167
million dividend distribution from Wilsonart which exceeded the Company's equity investment balance and resulted in a $i54 million pre-tax gain in 2016. As a result of the dividend distribution, the equity investment balance in Wilsonart was reduced to izero
and any subsequent equity investment income will not be recognized until the gain is recaptured.
(7) iIncome Taxes
Noncurrent income taxes payable— On December 22, 2017, the "Tax Cuts and Jobs Act" (the "Act") was enacted in the United States. The provisions
of the Act significantly revised the U.S. corporate income tax rules. In connection with the
56
enactment of the Act, the Company recorded a one-time additional income tax expense of $i676 million in the fourth quarter of 2017 related to a one-time
repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. A portion of the resulting income taxes payable can be paid in installments over eight years. The noncurrent income taxes payable related to the one-time repatriation tax was $i365 million and $i413 million
as of December 31, 2021 and 2020, respectively.
Provision for income taxes— iThe components of the provision for income taxes for the twelve months ended December 31, 2021, 2020 and 2019 were
as follows:
In millions
2021
2020
2019
U.S. federal income taxes:
Current
$
i399
$
i301
$
i356
Deferred
(i95)
(i54)
(i26)
Total
U.S. federal income taxes
i304
i247
i330
Foreign
income taxes:
Current
i302
i276
i302
Deferred
(i57)
i15
i53
Total
foreign income taxes
i245
i291
i355
State
income taxes:
Current
i79
i48
i77
Deferred
i4
i9
i5
Total
state income taxes
i83
i57
i82
Total
provision for income taxes
$
i632
$
i595
$
i767
i
Income
before taxes for domestic and foreign operations for the twelve months ended December 31, 2021, 2020 and 2019 was as follows:
In millions
2021
2020
2019
Domestic
$
i1,667
$
i1,419
$
i1,774
Foreign
i1,659
i1,285
i1,514
Total
income before taxes
$
i3,326
$
i2,704
$
i3,288
/
i
The
reconciliation between the U.S. federal statutory tax rate and the effective tax rate for the twelve months ended December 31, 2021, 2020 and 2019 was as follows:
2021
2020
2019
U.S.
federal statutory tax rate
i21.0
%
i21.0
%
i21.0
%
U.S.
tax effect of foreign earnings
i1.2
i1.0
i1.1
Changes
in tax law
(i3.4)
(i1.5)
i—
State
income taxes, net of U.S. federal tax benefit
i2.1
i1.9
i1.7
Differences
between U.S. federal statutory and foreign tax rates
i1.9
i2.0
i2.0
Nontaxable
foreign interest income
(i1.6)
(i2.0)
(i1.4)
Tax
effect of foreign dividends
i0.6
i1.6
i0.2
Foreign
derived intangible income
(i1.3)
(i1.3)
(i0.1)
Excess
tax benefits from stock-based compensation
(i0.5)
(i1.0)
(i0.9)
Other,
net
(i1.0)
i0.3
(i0.3)
Effective
tax rate
i19.0
%
i22.0
%
i23.3
%
/
The
Company's effective tax rate for the twelve months ended December 31, 2021, 2020 and 2019 was i19.0%, i22.0%
and i23.3%, respectively. The 2021 effective tax rate benefited from discrete income tax benefits of $i21 million in the third quarter of 2021 related to
the utilization of capital losses and $i112 million in the second quarter of 2021 related to the
57
remeasurement of net deferred tax assets due to the enactment of the U.K. Finance Bill 2021, which increases the U.K. income tax rate from 19% to 25% effective April 1, 2023. The 2019 effective tax rate benefited from a discrete
income tax benefit of $i21 million in the third quarter for the U.S. federal provision to return adjustment resulting primarily from changes in estimates related to the Act. Additionally, the effective tax rates for 2021, 2020 and 2019 included discrete income tax benefits of $i17
million, $i27 million and $i28
million, respectively, related to excess tax benefits from stock-based compensation.
Upon repatriation of foreign earnings to the U.S., the Company may be subject to foreign withholding taxes. The accrual for foreign withholding taxes related to the expected repatriation of foreign held cash and equivalents as of December 31, 2021 and 2020 was $i48
million and $i55 million, respectively.
Deferred foreign withholding taxes have not been provided on undistributed earnings considered permanently invested. As of December 31, 2021, undistributed earnings of certain international subsidiaries that are considered permanently invested were approximately $i6
billion. Determination of the related deferred tax liability is not practicable because of the complexities associated with the hypothetical calculation.
Deferred tax assets and liabilities— iThe components of deferred income tax assets and liabilities as of December 31, 2021 and 2020 were as follows:
2021
2020
In
millions
Asset
Liability
Asset
Liability
Goodwill and intangible assets
$
i431
$
(i534)
$
i292
$
(i476)
Inventory
reserves, capitalized tax cost and LIFO inventory
i39
(i3)
i31
(i3)
Investments
i17
(i146)
i10
(i156)
Plant
and equipment
i17
(i103)
i16
(i91)
Accrued
expenses and reserves
i39
—
i37
—
Employee
benefit accruals
i170
—
i168
—
Foreign
tax credit carryforwards
i11
—
i12
—
Net
operating loss carryforwards
i456
—
i418
—
Capital
loss carryforwards
i236
—
i88
—
Allowances
for uncollectible accounts
i11
—
i10
—
Pension
liabilities
—
(i65)
—
(i27)
Unrealized
loss (gain) on foreign debt instruments
i—
(i44)
i29
i—
Operating
leases
i49
(i49)
i48
(i48)
Other
i52
(i42)
i32
(i18)
Gross
deferred income tax assets (liabilities)
i1,528
(i986)
i1,191
(i819)
Valuation
allowances
(i644)
—
(i427)
—
Total
deferred income tax assets (liabilities)
$
i884
$
(i986)
$
i764
$
(i819)
The
valuation allowances recorded as of December 31, 2021 and 2020 related primarily to certain net operating loss carryforwards and capital loss carryforwards. As of December 31, 2021, the Company had utilized all realizable foreign tax credit carryforwards.
58
i
As
of December 31, 2021, the Company had net operating loss carryforwards available to offset future taxable income in the U.S. and certain foreign jurisdictions, which expire as follows:
Gross Carryforwards
Related to Net
In millions
Operating Losses
2022
$
i19
2023
i5
2024
i9
2025
i2
2026
i9
2027-2047
i574
Do
not expire
i1,116
Total gross carryforwards related to net operating losses
$
i1,734
/
Unrecognized
tax benefits— iThe changes in the amount of unrecognized tax benefits for the twelve months ended December 31, 2021, 2020 and 2019 were as follows:
In
millions
2021
2020
2019
Beginning balance
$
i346
$
i296
$
i297
Additions
based on tax positions related to the current year
i11
i74
i6
Additions
for tax positions of prior years
i23
i39
i13
Reductions
for tax positions of prior years
(i12)
(i47)
(i14)
Settlements
i—
(i23)
(i5)
Foreign
currency translation
(i8)
i7
(i1)
Ending
balance
$
i360
$
i346
$
i296
Included
in the balance as of December 31, 2021 were approximately $i320 million of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate.
The Company and its subsidiaries
file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions including the Internal Revenue Service, Her Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. The Company believes it is reasonably possible that within the next twelve months the amount of the Company's unrecognized tax benefits may be decreased by approximately $i51
million related predominantly to the potential resolution of federal, state and foreign examinations. The Company has recorded its best estimate of the potential exposure for these issues. iThe following table summarizes the open tax years for the Company's major jurisdictions:
Jurisdiction
Open Tax Years
United
States – Federal
i2017-i2021
United Kingdom
i2017-i2021
Germany
i2015-i2021
France
i2017-i2021
Australia
i2013-i2021
The
Company recognizes interest and penalties related to income tax matters in income tax expense. The accrual for interest and penalties as of December 31, 2021 and 2020 was $i40 million and $i34
million, respectively.
(8) iNet Income Per Share
Net income per basic share is computed by dividing net income by the weighted-average number of shares outstanding for the period. Net income per diluted share is computed by dividing net income by the weighted-average number of shares
59
assuming
dilution for stock options and restricted stock units. Dilutive shares reflect the potential additional shares that would be outstanding if the dilutive stock options outstanding were exercised and the unvested restricted stock units vested during the period. iThe computation of net income per share for the twelve months ended December 31, 2021, 2020 and 2019 was as follows:
In
millions except per share amounts
2021
2020
2019
Net Income
$
i2,694
$
i2,109
$
i2,521
Net
income per share—Basic:
Weighted-average common shares
i315.1
i316.9
i323.9
Net
income per share—Basic
$
i8.55
$
i6.66
$
i7.78
Net
income per share—Diluted:
Weighted-average common shares
i315.1
i316.9
i323.9
Effect
of dilutive stock options and restricted stock units
i1.3
i1.4
i1.7
Weighted-average
common shares assuming dilution
i316.4
i318.3
i325.6
Net
income per share—Diluted
$
i8.51
$
i6.63
$
i7.74
Options
that were considered antidilutive were not included in the computation of diluted net income per share. There were i0.4 million, i0.5
million and i0.9 million antidilutive options outstanding for the twelve months ended December 31, 2021, 2020 and 2019, respectively.
(9)
iGoodwill and Intangible Assets
i
The changes in the carrying amount of goodwill for the twelve months ended December 31,
2021 and 2020 were as follows:
On
December 1, 2021, the Company completed the acquisition of the MTS Test & Simulation business for a purchase price of $i750 million, subject to certain closing adjustments, which was reported within the Test & Measurement and Electronics segment. The Company is in process of allocating the purchase price to the
acquired assets and liabilities as of the acquisition date, including intangible assets and goodwill. Based on its initial allocation, the Company recorded goodwill of $i371 million and intangible assets of $i321 million.
The intangible assets included $i93 million related to indefinite-lived trademarks and brands and $i228 million
related to amortizable intangible assets. Refer to Note 3. Acquisitions for additional information regarding this acquisition.
The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarter of 2021, 2020 and 2019. There were iiino//
impairment charges as a result of these assessments.
For the twelve months ended December 31, 2021, 2020 and 2019, amortization and impairment of intangible assets was $i133 million, $i154
million and $i159 million, respectively.
i
As of December 31,
2021, the estimated future amortization expense of intangible assets for the twelve months ending December 31 was as follows:
In millions
2022
$
i137
2023
i118
2024
i101
2025
i78
2026
i59
/
(10) iLeases
The
Company's lease transactions are primarily for the use of facilities, vehicles and office equipment under operating lease arrangements. Total rental expense for operating leases for the twelve months ended December 31, 2021, 2020 and 2019 was $i118 million, $i113
million and $i113 million, respectively. Total rental expense for the twelve months ended December 31, 2021, 2020 and 2019 included $i47
million, $i48 million and $i44 million, respectively, related to short-term operating leases and variable lease payments. Short-term operating
leases have original terms of one year or less, or can be terminated at the Company's option with a short notice period and without significant penalty, and are not capitalized.
ii
The
following table summarizes information related to the Company's capitalized operating leases for the twelve months ended December 31, 2021 and 2020:
Dollars in millions
2021
2020
Right-of-use assets
$
i222
$
i216
Current
portion of operating lease liabilities
$
i61
$
i55
Long-term
portion of operating lease liabilities
i133
i133
Operating
lease liabilities
$
i194
$
i188
Rental
expense related to capitalized operating leases
$
i71
$
i65
Cash
paid related to maturities of operating lease liabilities
$
i70
$
i64
Operating
lease right-of-use assets obtained in exchange for operating lease liabilities
$
i71
$
i65
Weighted-average
remaining lease term
i4.4 years
i4.1 years
Weighted-average
discount rate
i1.98
%
i2.34
%
//
61
The
right-of-use assets related to operating leases and the current and long-term portions of operating lease liabilities were included in Other assets, Accrued expenses and Other liabilities, respectively, in the Statement of Financial Position. The weighted-average discount rate was based on the incremental borrowing rate of the Company and its subsidiaries. iAs of December 31,
2021, future maturities of operating lease liabilities for the twelve months ending December 31 were as follows:
Short-term
debt— iShort-term debt represents obligations with a maturity date of one year or less and is stated at cost which approximates fair value. Short-term debt also includes current maturities of long-term debt that have been reclassified to short-term.iShort-term
debt as of December 31, 2021 and 2020 consisted of the following:
In millions
2021
2020
Current maturities of long-term debt
$
i568
$
i350
Commercial
paper
i210
i—
Total short-term debt
$
i778
$
i350
As
of December 31, 2021, short-term debt included $i568 million related to the i1.75% Euro notes due May
20, 2022 and commercial paper of $i210 million. As of December 31, 2020, short-term debt included $i350 million related to the i3.375% notes
due September 15, 2021, which were redeemed in full on June 15, 2021. There was ino commercial paper outstanding as of December 31, 2020.
The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions. During the third quarter of 2019, the
Company entered into a $i2.5 billion, ifive-year revolving credit facility with a termination date of September 27, 2024, which is available to provide additional
liquidity, including to support the potential issuances of commercial paper. On September 22, 2021, due to the anticipated LIBOR transition, the Company agreed to suspend its right to borrow in Euro, British Pounds Sterling and Japanese Yen currencies under the revolving credit facility, effective December 31, 2021. The Company may continue to borrow in U.S. Dollars under the credit facility. This change is not expected to have a significant impact on the Company's liquidity or its commercial paper program. iNo
amounts were outstanding under the revolving credit facility as of December 31, 2021. The Company was also in compliance with the financial covenants of the revolving credit facility as of December 31, 2021, which included a minimum interest coverage ratio. The weighted-average interest rate on commercial paper was i0.1% for the twelve months ended December 31,
2021. The Company did inot have any commercial paper outstanding during 2020.
62
As of December 31, 2021, the Company had unused capacity of approximately $i201
million under international debt facilities. In the ordinary course of business, the Company also had approximately $i210 million outstanding in guarantees, letters of credit and other similar arrangements with financial institutions as of December 31, 2021.
Long-term debt— Long-term debt represents obligations with a maturity date greater than one year, and excludes current maturities that
have been reclassified to short-term debt. iLong-term debt at carrying value and fair value as of December 31, 2021 and 2020 consisted of the following:
The
approximate fair values of the Company's long-term debt, including current maturities, were based on a valuation model using Level 2 observable inputs, which included market rates for comparable instruments for the respective periods.
In 2005, the Company issued $i54 million of i4.88%
notes due through December 31, 2020 at i100% of face value, which were fully repaid by the due date.
In 2009, the Company issued $i700 million
of i6.25% redeemable notes due April 1, 2019 at i99.98% of face value, which were repaid on the due date.
In
2011, the Company issued $i350 million of i3.375% notes due September 15,
2021 at i99.552% of face value, which were redeemed in full on June 15, 2021, and $i650 million of i4.875%
notes due September 15, 2041 at i98.539% of face value.
In 2012, the Company issued $i1.1
billion of i3.9% notes due September 1, 2042 at i99.038% of face value.
In February 2014, the
Company issued $i650 million of i1.95% notes due March 1, 2019 at i99.871%
of face value and $i700 million of i3.5% notes due March 1, 2024 at i99.648%
of face value. The $i650 million of i1.95% notes due March 1, 2019 were repaid on the due date.
In
May 2014, the Company issued €i500 million of i1.75% Euro notes due May
20, 2022 at i99.16% of face value and €i500 million of i3.0%
Euro notes due May 19, 2034 at i98.089% of face value.
In May 2015, the Company issued €i500
million of i1.25% Euro notes due May 22, 2023 at i99.239% of face value and €i500
million of i2.125% Euro notes due May 22, 2030 at i99.303% of face value. Net proceeds from the May 2015 debt issuances were used to repay commercial
paper and for general corporate purposes.
In November 2016, the Company issued $i1.0 billion of i2.65%
notes due November 15, 2026 at i99.685% of face value. Net proceeds from the November 2016 debt issuance were used to repay commercial paper and for general corporate purposes.
63
In June 2019, the Company issued €i600
million of i0.25% Euro notes due December 5, 2024 at i99.662% of face value, €i500
million of i0.625% Euro notes due December 5, 2027 at i99.343% of face value and €i500
million of i1.00% Euro notes due June 5, 2031 at i98.982% of face value. Net proceeds from the issuances were used to repay commercial paper and for general
corporate purposes.
The Company designated the €i1.0 billion of Euro notes issued in May 2014, the €i1.0
billion of Euro notes issued in May 2015 and the €i1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Refer to Note 14. Stockholders' Equity for additional information regarding the net investment hedge.
All of the Company's notes listed above represent senior unsecured obligations
ranking equal in right of payment. iAs of December 31, 2021, scheduled future maturities of long-term debt, including current maturities of long-term debt, for the twelve months ending December 31 were as follows:
In millions
2022
$
i568
2023
i567
2024
i1,378
2025
i—
2026
i995
2027
and future years
i3,969
Total
$
i7,477
(12) iPension
and Other Postretirement Benefits
The Company has both funded and unfunded defined benefit pension and other postretirement benefit plans, predominately in the U.S. The U.S. primary pension plan provides benefits based on years of service and final average salary. The U.S. primary postretirement health care plan is contributory with the participants' contributions adjusted annually. The U.S. primary postretirement life insurance plan is noncontributory. Beginning January 1, 2007, the U.S. primary pension and other postretirement benefit plans were closed to new participants. Newly hired employees and employees from acquired businesses that are not participating in these plans are eligible for additional Company contributions under the existing U.S. primary defined contribution
retirement plans. The Company's expense related to defined contribution plans was $i88 million in 2021, $i85
million in 2020, and $i86 million in 2019. In addition to the U.S. plans, the Company also has defined benefit pension plans in certain other countries, mainly the United Kingdom, Canada, Germany and Switzerland.
i
Summarized
information regarding net periodic benefit cost included in the Statement of Income related to the Company's significant defined benefit pension and other postretirement benefit plans for the twelve months ended December 31, 2021, 2020 and 2019 is as follows:
Pension
Other
Postretirement Benefits
In millions
2021
2020
2019
2021
2020
2019
Components of net periodic benefit cost:
Service
cost
$
i53
$
i55
$
i52
$
i7
$
i8
$
i7
Interest
cost
i39
i60
i78
i11
i16
i20
Expected
return on plan assets
(i101)
(i113)
(i121)
(i25)
(i24)
(i22)
Amortization
of actuarial (gain) loss
i53
i47
i21
i—
(i1)
(i1)
Amortization
of prior service cost
i1
i2
i1
i—
i—
i—
Total
net periodic benefit cost
$
i45
$
i51
$
i31
$
(i7)
$
(i1)
$
i4
/
The
service cost component of net periodic benefit cost is presented within Cost of revenue and Selling, administrative, and research and development expenses in the Statement of Income while the other components of net periodic benefit cost are presented within Other income (expense).
64
The Company used the updated mortality improvement scales from the Society of Actuaries, MP-2021 and MP-2020, to measure its U.S. pension and other postretirement benefit obligations as of December 31, 2021 and 2020, respectively, which did not have a significant impact in either period.
i
The
following table provides a rollforward of the plan benefit obligations for the twelve months ended December 31, 2021 and 2020:
Pension
Other Postretirement Benefits
In
millions
2021
2020
2021
2020
Change in benefit obligation:
Beginning balance
$
i2,939
$
i2,731
$
i591
$
i570
Service
cost
i53
i55
i7
i8
Interest
cost
i39
i60
i11
i16
Plan
participants' contributions
i2
i1
i10
i10
Amendments
i—
i1
i—
i—
Actuarial
(gain) loss
(i131)
i205
i2
i26
Acquisitions
i40
i—
i—
i—
Benefits
paid
(i161)
(i160)
(i42)
(i41)
Medicare
subsidy received
i—
i—
i1
i2
Foreign
currency translation
(i16)
i46
i—
i—
Ending
balance
$
i2,765
$
i2,939
$
i580
$
i591
Accumulated
benefit obligation as of December 31
$
i2,642
$
i2,792
/
For
the years ended December 31, 2021 and 2020, the actuarial (gain) loss related to the Company's pension and other postretirement benefit obligations was primarily related to changes in discount rates. Refer to the Assumptions section below for further details related to the discount rates used in the valuations of pension and other postretirement benefit obligations.
65
i
The
following table provides a rollforward of the plan assets and a reconciliation of funded status for the twelve months ended December 31, 2021 and 2020:
Pension
Other Postretirement Benefits
In
millions
2021
2020
2021
2020
Change in plan assets:
Beginning balance
$
i3,096
$
i2,844
$
i402
$
i374
Actual
return on plan assets
i63
i343
i59
i55
Company
contributions
i25
i26
i5
i4
Plan
participants' contributions
i2
i1
i10
i10
Acquisitions
i28
i—
i—
i—
Benefits
paid
(i161)
(i160)
(i42)
(i41)
Foreign
currency translation
(i12)
i42
i—
i—
Ending
balance
$
i3,041
$
i3,096
$
i434
$
i402
Reconciliation
of funded status:
Funded status
$
i276
$
i157
$
(i146)
$
(i189)
Other
immaterial plans
(i57)
(i54)
(i5)
(i5)
Net
asset (liability) as of December 31
$
i219
$
i103
$
(i151)
$
(i194)
The
amounts recognized in the Statement of Financial Position as of December 31 consist of:
Other assets
$
i465
$
i355
$
i—
$
i—
Accrued
expenses
(i11)
(i11)
(i3)
(i3)
Other
noncurrent liabilities
(i235)
(i241)
(i148)
(i191)
Net
asset (liability) as of December 31
$
i219
$
i103
$
(i151)
$
(i194)
The
pre-tax amounts recognized in accumulated other comprehensive (income) loss consist of:
Net actuarial (gain) loss
$
i349
$
i495
$
(i71)
$
(i39)
Prior
service cost
i5
i6
i—
i—
Pre-tax
accumulated other comprehensive (income) loss as of December 31
$
i354
$
i501
$
(i71)
$
(i39)
/
As
of December 31, 2021 and 2020, pension plans with projected benefit obligations in excess of plan assets had projected benefit obligations of $i232 million and $i212 million,
respectively, and plan assets of $i59 million and $i32 million,
respectively. As of December 31, 2021 and 2020, pension plans with accumulated benefit obligations in excess of plan assets had accumulated benefit obligations of $i223 million and $i205 million,
respectively, and plan assets of $i59 million and $i32 million,
respectively.
66
Assumptions— iThe weighted-average assumptions used in the valuations of pension and other postretirement benefits were as follows:
Pension
Other Postretirement Benefits
2021
2020
2019
2021
2020
2019
Assumptions
used to determine benefit obligations as of December 31:
Discount rate
i2.33
%
i1.89
%
i2.61
%
i2.92
%
i2.59
%
i3.29
%
Rate
of compensation increases
i3.40
%
i3.24
%
i3.44
%
Interest
crediting rate - U.S. cash balance plan
i3.75
%
i3.75
%
i4.00
%
Assumptions used to determine net periodic benefit cost for the twelve months ended December 31:
Discount rate
i1.89
%
i2.61
%
i3.66
%
i2.59
%
i3.29
%
i4.40
%
Expected
return on plan assets
i3.67
%
i4.33
%
i4.71
%
i6.65
%
i6.70
%
i6.70
%
Rate
of compensation increases
i3.24
%
i3.44
%
i3.52
%
Interest
crediting rate - U.S. cash balance plan
i3.75
%
i4.00
%
i4.00 %
The expected long-term rates of return for pension and other postretirement benefit
plans were developed using historical asset class returns while factoring in current market conditions such as inflation, interest rates and asset class performance.
The discount rate reflects the current rate at which the associated liabilities could theoretically be effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. The Company estimates the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate.
Assumed
health care cost trend rates have an effect on the amounts reported for the postretirement health care benefit plans. iThe assumed health care cost trend rates used to determine the postretirement benefit obligation as of December 31 were as follows:
2021
2020
2019
Health
care cost trend rate assumed for the next year
i7.00
%
i7.00
%
i6.70
%
Ultimate
trend rate
i4.50
%
i4.50
%
i4.50
%
Year
the rate reaches the ultimate trend rate
2029
2027
2026
Plan assets— The Company's overall investment strategy for the assets in the pension funds is to achieve a balance between the goals of growing plan assets and keeping risk at a reasonable level over a long-term investment horizon. In order to reduce unnecessary risk, the pension funds are diversified across several asset classes, securities and investment managers. The target allocations for plan assets are i15%
to i25% equity investments, i75% to i85%
fixed income investments and i0% to i10% in other types of investments. The
Company does not use derivatives for the purpose of speculation, leverage, circumventing investment guidelines or taking risks that are inconsistent with specified guidelines.
The assets in the Company's postretirement health care plan are primarily invested in life insurance policies. The Company's overall investment strategy for the assets in the postretirement health care fund is to invest in assets that provide a reasonable tax exempt rate of return while preserving capital.
iThe
following tables present the fair value of the Company's pension and other postretirement benefit plan assets as of December 31, 2021 and 2020, by asset category and valuation methodology. Level 1 assets are valued using unadjusted quoted prices for identical assets in active markets. Level 2 assets are valued using quoted prices or other observable inputs for similar assets. Level 3 assets are valued using unobservable inputs, but reflect the assumptions market participants would be expected to use in pricing the assets. Each financial instrument's categorization is based on the lowest level of input that is significant to the fair value measurement.
Total
fair value of other postretirement benefit plan assets
$
i402
$
i—
$
i—
$
i—
Cash
and equivalents include cash on hand and instruments with original maturities of three months or less and are valued at cost, which approximates fair value. Fixed income securities primarily consist of U.S. and foreign government bills, notes and bonds, corporate debt securities and investment contracts. The majority of the assets in this category are valued by evaluating bid prices provided by independent financial data services. For securities where market data is not readily available, unobservable market data is used to value the security.
Pension assets measured at net asset value include mutual funds, collective trust funds, partnerships/private equity interests and life insurance policies. Mutual funds and collective trust funds are funds that are valued based on the value of the underlying investments which can
be redeemed on a daily basis. The underlying investments include both passively and actively managed U.S. and foreign large- and mid-cap equity funds and short-term investment funds. Partnerships/private equity interests are investments in partnerships where the benefit plan is a limited partner. The investments are valued by the investment managers on a periodic basis using pricing models that use market, income and cost valuation methods. Distributions are received from these funds on a periodic basis through the liquidation of the underlying assets of the fund. Life insurance policies are used to fund other postretirement benefits in order to obtain favorable tax treatment and are valued
68
based on the cash surrender value of the underlying policies. The
Company has selected the funds in which these assets are invested and may elect to withdraw funds with proper notice to the insurance company or maintain the policies and receive death benefits as determined by the contracts.
Cash flows— The Company generally funds its pension and other postretirement benefit plans as required by law or to the extent such contributions are tax deductible. The Company expects to contribute approximately $i14
million to its pension plans and $i4 million to its other postretirement benefit plans in 2022. iAs
of December 31, 2021, the Company's portion of the future benefit payments that are expected to be paid during the twelve months ending December 31 is as follows:
In millions
Pension
Other Postretirement Benefits
2022
$
i163
$
i35
2023
i169
i36
2024
i171
i36
2025
i173
i36
2026
i173
i36
Years
2027-2031
i843
i176
(13)
iCommitments and Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, including those involving environmental, product liability (including toxic tort) and general liability claims. iThe
Company accrues for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Company's estimates of the outcomes of these matters and its experience in contesting, litigating and settling other similar matters. The Company believes resolution of these matters, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, liquidity or future operations.
(14) iStockholders'
Equity
Preferred stock— Preferred stock, without par value, of which i0.3 million shares are authorized and unissued, is issuable in series. The Board of Directors is authorized to fix by resolution the designation and characteristics of each series of preferred stock. The Company has no present commitment to issue its preferred stock.
Share repurchases—
On February 13, 2015, the Company's Board of Directors authorized a stock repurchase program which provided for the repurchase of up to $i6.0 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 i6.1 million shares of its common stock at an average price of $i91.78 per share during 2015, approximately i18.7
million shares of its common stock at an average price of $i107.17 per share during 2016, approximately i7.1 million shares of its common stock at an average
price of $i140.56 per share during 2017, approximately i13.9 million shares of its common stock at an average price of $i143.66
per share during 2018 and approximately i3.1 million shares of its common stock at an average price of $i143.23 per share during 2019. The 2015 Program was
completed in the second quarter of 2019.
On August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which provides for the repurchase of up to an additional $i3.0 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 i6.7 million shares of its common stock at an average price of $i158.11
per share during 2019, approximately i4.2 million shares of its common stock at an average price of $i167.69 per share during 2020 and approximately i4.4 million
shares of its common stock at an average price of $i227.29 per share during 2021. As of December 31, 2021, there were approximately $i240
million of authorized repurchases remaining under the 2018 Program.
On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $i3.0 billion of the Company's common stock over an open-ended
period of time (the "2021 Program"). As of December 31, 2021, there were $i3.0 billion of authorized repurchases remaining under the 2021 Program.
Cash Dividends— Cash dividends declared were $i4.72
per share in 2021, $i4.42 per share in 2020 and $i4.14 per share in 2019. Cash dividends paid were $i4.64
per share in 2021, $i4.35 per share in 2020 and $i4.07 per share in 2019.
69
Accumulated
other comprehensive income (loss)— iThe changes in accumulated other comprehensive income (loss) during 2021, 2020 and 2019 were as follows:
In
millions
2021
2020
2019
Beginning balance
$
(i1,642)
$
(i1,705)
$
(i1,677)
Foreign
currency translation adjustments during the period
i73
(i82)
i7
Foreign
currency translation adjustments reclassified to income
i5
i—
i—
Income
taxes
(i73)
i86
(i9)
Total
foreign currency translation adjustments, net of tax
i5
i4
(i2)
Pension
and other postretirement benefit adjustments during the period
i125
i30
(i54)
Pension
and other postretirement benefit adjustments reclassified to income
i54
i48
i21
Income
taxes
(i44)
(i19)
i7
Total
pension and other postretirement benefit adjustments, net of tax
i135
i59
(i26)
Ending
balance
$
(i1,502)
$
(i1,642)
$
(i1,705)
Foreign
currency translation adjustments reclassified to income primarily relate to the exit of immaterial foreign operations. Pension and other postretirement benefit adjustments reclassified to income represent the amortization of actuarial gains and losses and prior service cost. Refer to Note 12. Pension and Other Postretirement Benefits for the amounts included in net periodic benefit cost.
The Company designated the €i1.0 billion of Euro
notes issued in May 2014, the €i1.0 billion of Euro notes issued in May 2015 and the €i1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated
foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of this debt resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). The cumulative unrealized pre-tax gain (loss) recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was a gain of $i183
million as of December 31, 2021 and a loss of $i120 million as of December 31, 2020.
As of December 31, 2021 and 2020, the ending balance of Accumulated other comprehensive income (loss)
consisted of after-tax cumulative translation adjustment losses of $i1.3 billion and $i1.3
billion, respectively, and after-tax unrecognized pension and other postretirement benefits costs of $i196 million and $i331
million, respectively.
(15) iStock-Based Compensation
On May 8, 2015 (the "Effective Date"), the 2015 Long-Term Incentive Plan (the "2015 Plan") was approved by shareholders. As of the Effective Date,
no additional awards will be granted to employees under the 2011 Long-Term Incentive Plan (the "2011 Plan"). The significant terms of stock options and restricted stock units ("RSUs") were not changed under the 2015 Plan. Stock options and RSUs are issued to officers and/or other management employees under these plans. Stock options generally vest over a ifour-year period and have an expiration of iten
years from the issuance date. RSUs generally "cliff" vest after a ithree-year period and include units with and without performance criteria. RSUs with performance criteria provide for full "cliff" vesting after ithree
years if the Compensation Committee certifies that the performance goals have been met. Upon vesting, the holder will receive ione share of common stock of the Company for each vested restricted stock unit.
Commencing in February 2013, the Company began issuing shares from treasury stock to cover the exercised
options and vested RSUs. Prior to February 2013, the Company generally issued new shares from its authorized but unissued share pool. As of December 31, 2021, approximately i10 million shares of ITW common stock were reserved for issuance under these plans.
70
The
Company records compensation expense for the grant date fair value of stock awards over the remaining service periods of those awards. iThe following table summarizes the Company's stock-based compensation expense for the twelve months ended December 31, 2021,
2020 and 2019:
In millions
2021
2020
2019
Pre-tax stock-based compensation expense
$
i53
$
i42
$
i41
Tax
benefit
(i6)
(i5)
(i5)
Total
stock-based compensation expense, net of tax
$
i47
$
i37
$
i36
i
The
following table summarizes activity related to non-vested RSUs for the twelve months ended December 31, 2021:
The
fair value of RSUs is equal to the common stock fair market value on the date of the grant. RSUs provide for dividend equivalents payable in additional RSUs for dividends that would have been paid during the vesting period. Stock option exercise prices are equal to the common stock fair market value on the date of grant. The Company estimates forfeitures based on historical rates for awards with similar characteristics. The Company uses a binomial option pricing model to estimate the fair value of the stock options granted. iThe
following summarizes the assumptions used in the option valuations for the twelve months ended December 31, 2021, 2020 and 2019:
2021
2020
2019
Risk-free
interest rate
i0.04-i1.38%
i1.41-i1.59%
i2.50%-i2.68%
Weighted-average
volatility
i24.0%
i21.0%
i22.0%
Dividend
yield
i2.50%
i2.56%
i2.20%
Expected
years until exercise
i8.9-i9.4
i9.1-i9.6
i8.7-i9.0
Lattice-based
option valuation models, such as the binomial option pricing model, incorporate ranges of assumptions for inputs. The risk-free rate of interest for periods within the contractual life of the option is based on a zero-coupon U.S. government instrument over the contractual term of the equity instrument. Expected volatility is based on implied volatility from traded options on the Company's stock and historical volatility of the Company's stock. The Company uses historical data to estimate option exercise timing and employee termination rates within the valuation model. The weighted-average dividend yield is based on historical information. The expected term of options granted is derived from the output of the option valuation
model and represents the period of time that options granted are expected to be outstanding. The ranges presented result from separate groups of employees assumed to exhibit different exercise behavior.
71
The weighted-average grant-date fair value of stock options granted for the twelve months ended December 31, 2021, 2020 and 2019 was $i40.90,
$i35.45 and $i34.36
per share, respectively. The aggregate intrinsic value of stock options exercised during the twelve months ended December 31, 2021, 2020 and 2019 was $i68 million, $i114
million and $i127 million, respectively. As of December 31, 2021, there was $i9
million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of i2 years. Exercise of stock options during the twelve months ended December 31, 2021, 2020 and 2019 resulted in cash receipts of $i50
million, $i66 million and $i85 million, respectively. The total fair value of vested stock option awards during the twelve months ended
December 31, 2021, 2020 and 2019 was $i19 million, $i16
million and $i17 million, respectively.
As of December 31, 2021, there was $i47
million of total unrecognized compensation cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average remaining contractual life of i1.8 years. The total fair value of vested RSU awards during the twelve months ended December 31, 2021, 2020 and 2019 was $i23
million, $i25 million and $i20
million, respectively.
Current
portion of pension and other postretirement benefit obligations
i14
i14
Other
i464
i442
Total
accrued expenses
$
i1,648
$
i1,284
Other
liabilities:
Pension benefit obligation
$
i235
$
i241
Postretirement
benefit obligation
i148
i191
Long-term
portion of operating lease liabilities
i133
i133
Other
i537
i503
Total
other liabilities
$
i1,053
$
i1,068
/
72
(17)
iSegment Information
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 iseven
segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. The following is a description of the Company's iseven segments:
Automotive OEM— This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems.
Businesses in this segment produce components and fasteners for automotive-related applications.
Food Equipment— This segment is a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integrated service offerings.
Test & Measurement and Electronics— This segment is a branded and innovative producer of test and measurement and electronic manufacturing and 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.
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.
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.
Construction Products— This segment is a branded supplier of innovative engineered fastening systems and solutions.
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.
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.
73
i
Segment
information for 2021, 2020 and 2019 was as follows:
In millions
2021
2020
2019
Operating revenue:
Automotive
OEM
$
i2,800
$
i2,571
$
i3,063
Food
Equipment
i2,078
i1,739
i2,188
Test
& Measurement and Electronics
i2,346
i1,963
i2,121
Welding
i1,650
i1,384
i1,638
Polymers
& Fluids
i1,804
i1,622
i1,669
Construction
Products
i1,945
i1,652
i1,625
Specialty
Products
i1,854
i1,660
i1,825
Intersegment
revenue
(i22)
(i17)
(i20)
Total
$
i14,455
$
i12,574
$
i14,109
Operating
income:
Automotive OEM
$
i545
$
i457
$
i659
Food
Equipment
i469
i342
i578
Test
& Measurement and Electronics
i643
i507
i542
Welding
i490
i376
i453
Polymers
& Fluids
i457
i402
i381
Construction
Products
i530
i421
i383
Specialty
Products
i504
i432
i472
Total
segments
i3,638
i2,937
i3,468
Unallocated
(i161)
(i55)
(i66)
Total
$
i3,477
$
i2,882
$
i3,402
Depreciation
and amortization and impairment of intangible assets:
Automotive OEM
$
i128
$
i131
$
i125
Food
Equipment
i42
i41
i41
Test
& Measurement and Electronics
i66
i75
i69
Welding
i26
i24
i26
Polymers
& Fluids
i62
i72
i77
Construction
Products
i32
i31
i29
Specialty
Products
i54
i53
i59
Total
$
i410
$
i427
$
i426
Plant
and equipment additions:
Automotive OEM
$
i116
$
i79
$
i134
Food
Equipment
i30
i34
i35
Test
& Measurement and Electronics
i37
i23
i26
Welding
i27
i27
i28
Polymers
& Fluids
i15
i16
i18
Construction
Products
i30
i21
i29
Specialty
Products
i41
i36
i56
Total
$
i296
$
i236
$
i326
Identifiable
assets:
Automotive OEM
$
i2,260
$
i2,302
$
i2,417
Food
Equipment
i1,052
i983
i1,042
Test
& Measurement and Electronics
i3,242
i2,239
i2,374
Welding
i784
i700
i734
Polymers
& Fluids
i1,881
i1,855
i1,862
Construction
Products
i1,367
i1,239
i1,176
Specialty
Products
i1,682
i1,635
i1,656
Total
segments
i12,268
i10,953
i11,261
Corporate
i3,809
i4,659
i3,807
Total
$
i16,077
$
i15,612
$
i15,068
/
74
Identifiable
assets by segment are those assets that are specifically used in that segment. Corporate assets are principally cash and equivalents, investments and other general corporate assets.
i
Enterprise-wide information for the twelve months ended December 31, 2021, 2020 and 2019 was as follows:
In
millions
2021
2020
2019
Operating Revenue by Geographic Region:
United States
$
i6,578
$
i5,834
$
i6,507
Canada/Mexico
i940
i778
i972
Total
North America
i7,518
i6,612
i7,479
Europe,
Middle East and Africa
i3,870
i3,447
i3,920
Asia
Pacific
i2,802
i2,291
i2,400
South
America
i265
i224
i310
Total
operating revenue
$
i14,455
$
i12,574
$
i14,109
/
Operating
revenue by geographic region is based on the customers' locations. As of December 31, 2021 and 2020, the Company had approximately i45% and i42%,
respectively, of its total net plant and equipment in the United States. Countries where the Company had 10% or more of its total net plant and equipment included China as of December 31, 2021, with approximately i11%, and both China and Germany as December 31, 2020, with approximately ii10/%
each. No single customer accounted for more than 5% of consolidated revenues for the twelve months ended December 31, 2021, 2020 or 2019.
75
ITEM 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.Controls
and Procedures
Controls and Procedures
The Company's management, with the participation of the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of December 31, 2021. Based on such evaluation, the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial
Officer have concluded that, as of December 31, 2021, the Company's disclosure controls and procedures were effective.
Management Report on Internal Control over Financial Reporting
The Management Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are found in Item 8. Financial Statements and Supplementary Data.
In connection with the evaluation by management, including the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, no changes in the
Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2021 were identified that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
ITEM 9B.Other Information
None.
ITEM 9C.Disclosure
Regarding Foreign Jurisdictions that Prevent Inspections
None.
76
PART III
ITEM 10.Directors, Executive Officers and Corporate Governance
Information regarding the Directors of the Company who are standing for
reelection and any persons nominated to become Directors of the Company is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors" in the Company's Proxy Statement for the 2022 Annual Meeting of Stockholders.
Information regarding the Audit Committee and its Financial Experts is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors - Board of Directors and Its Committees" and "Audit Committee Report" in the Company's Proxy Statement for the 2022 Annual
Meeting of Stockholders.
Information regarding the Executive Officers of the Company can be found in Part I of this Annual Report on Form 10-K under the caption "Information About Our Executive Officers."
Information regarding the Company's code of ethics that applies to the Company's Chairman & Chief Executive Officer, Senior Vice President & Chief Financial Officer, and key financial and accounting personnel is incorporated by reference from the information under the caption "Proposal 1 - Election of Directors - Corporate Governance
Policies and Practices" in the Company's Proxy Statement for the 2022 Annual Meeting of Stockholders.
ITEM 11.Executive Compensation
Information regarding executive compensation is incorporated by reference from the information under the captions "NEO Compensation,""Proposal 1 - Election of Directors - Director Compensation," and "Compensation Discussion and Analysis" in the Company's Proxy Statement for the 2022 Annual Meeting of Stockholders.
ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors - Ownership of ITW Stock" and "NEO Compensation - Equity Compensation Plan Information" in the Company's Proxy Statement for the 2022 Annual Meeting of Stockholders.
ITEM 13.Certain Relationships and
Related Transactions, and Director Independence
Information regarding certain relationships and related transactions is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors - Ownership of ITW Stock,""Certain Relationships and Related Party Transactions" and "Proposal 1 - Election of Directors - Corporate Governance Policies and Practices" in the Company's Proxy Statement for the 2022 Annual Meeting of Stockholders.
Information regarding director independence is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors - Corporate Governance Policies
and Practices" and "Appendix A - Categorical Standards for Director Independence" in the Company's Proxy Statement for the 2022 Annual Meeting of Stockholders.
ITEM 14. Principal Accounting Fees and Services
This information is incorporated by reference from the information under the caption "Proposal 2 - Ratification of the Appointment of Independent Registered Public Accounting Firm" in the Company's Proxy Statement for the 2022 Annual Meeting of Stockholders.
77
PART
IV
ITEM 15.Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
The following information is included as part of Item 8. Financial Statements and Supplementary Data:
Management Report on Internal Control over Financial Reporting
Statement of Income
Statement of Comprehensive Income
Statement
of Financial Position
Statement of Changes in Stockholders' Equity
Statement of Cash Flows
Notes to Financial Statements
The following report of the Company's independent registered public accounting firm (PCAOB ID:i34) is included as part of Item 8. Financial Statements and Supplementary Data:
Report
of Independent Registered Public Accounting Firm
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Management contract or compensatory plan or arrangement.
**
The
following financial information from Illinois Tool Works Inc.'s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Statement of Income, (ii) Statement of Comprehensive Income, (iii) Statement of Changes in Stockholders' Equity (iv) Statement of Financial Position, (v) Statement of Cash Flows and (vi) related Notes to Financial Statements.
ITEM 16. Form 10-K Summary
None.
81
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 11th day of February 2022.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on this 11th day of February 2022.
Original powers of attorney authorizing E. Scott Santi to sign the Company's Annual Report on Form 10-K and amendments thereto on behalf of the above-named directors of the registrant
have been filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K (Exhibit 24).
82
Dates Referenced Herein and Documents Incorporated by Reference
