[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2016 | |
OR | |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _______________ to _______________ |
Delaware | 36-1258310 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
155 Harlem Avenue, Glenview, IL | 60025 |
(Address of principal executive offices) | (Zip Code) |
Table of Contents | ||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
In millions except per share amounts | 2016 | 2015 | 2016 | 2015 | |||||||||||
Operating Revenue | $ | 3,431 | $ | 3,434 | $ | 6,705 | $ | 6,776 | |||||||
Cost of revenue | 1,967 | 2,024 | 3,863 | 3,994 | |||||||||||
Selling, administrative, and research and development expenses | 617 | 622 | 1,214 | 1,238 | |||||||||||
Amortization and impairment of intangible assets | 55 | 58 | 114 | 117 | |||||||||||
Operating Income | 792 | 730 | 1,514 | 1,427 | |||||||||||
Interest expense | (58 | ) | (55 | ) | (116 | ) | (109 | ) | |||||||
Other income (expense) | 17 | 21 | 21 | 42 | |||||||||||
Income Before Taxes | 751 | 696 | 1,419 | 1,360 | |||||||||||
Income Taxes | 226 | 216 | 426 | 422 | |||||||||||
Net Income | $ | 525 | $ | 480 | $ | 993 | $ | 938 | |||||||
Net Income Per Share: | |||||||||||||||
Basic | $ | 1.47 | $ | 1.31 | $ | 2.76 | $ | 2.53 | |||||||
Diluted | $ | 1.46 | $ | 1.30 | $ | 2.75 | $ | 2.51 | |||||||
Cash Dividends Per Share: | |||||||||||||||
Paid | $ | 0.55 | $ | 0.485 | $ | 1.10 | $ | 0.97 | |||||||
Declared | $ | 0.55 | $ | 0.485 | $ | 1.10 | $ | 0.97 | |||||||
Shares of Common Stock Outstanding During the Period: | |||||||||||||||
Average | 356.6 | 366.2 | 359.3 | 371.4 | |||||||||||
Average assuming dilution | 358.5 | 368.4 | 361.2 | 373.8 |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
In millions | 2016 | 2015 | 2016 | 2015 | |||||||||||
Net Income | $ | 525 | $ | 480 | $ | 993 | $ | 938 | |||||||
Other Comprehensive Income (Loss): | |||||||||||||||
Foreign currency translation adjustments, net of tax | (144 | ) | 169 | 20 | (408 | ) | |||||||||
Pension and other postretirement benefit adjustments, net of tax | 6 | 11 | 14 | 20 | |||||||||||
Comprehensive Income (Loss) | $ | 387 | $ | 660 | $ | 1,027 | $ | 550 |
In millions | June 30, 2016 | December 31, 2015 | |||||
Assets | |||||||
Current Assets: | |||||||
Cash and equivalents | $ | 2,355 | $ | 3,090 | |||
Trade receivables | 2,413 | 2,203 | |||||
Inventories | 1,145 | 1,086 | |||||
Prepaid expenses and other current assets | 254 | 341 | |||||
Total current assets | 6,167 | 6,720 | |||||
Net plant and equipment | 1,580 | 1,577 | |||||
Goodwill | 4,466 | 4,439 | |||||
Intangible assets | 1,441 | 1,560 | |||||
Deferred income taxes | 466 | 346 | |||||
Other assets | 1,102 | 1,087 | |||||
$ | 15,222 | $ | 15,729 | ||||
Liabilities and Stockholders' Equity | |||||||
Current Liabilities: | |||||||
Short-term debt | $ | 864 | $ | 526 | |||
Accounts payable | 519 | 449 | |||||
Accrued expenses | 1,116 | 1,136 | |||||
Cash dividends payable | 195 | 200 | |||||
Income taxes payable | 130 | 57 | |||||
Total current liabilities | 2,824 | 2,368 | |||||
Noncurrent Liabilities: | |||||||
Long-term debt | 6,300 | 6,896 | |||||
Deferred income taxes | 149 | 256 | |||||
Other liabilities | 999 | 981 | |||||
Total noncurrent liabilities | 7,448 | 8,133 | |||||
Stockholders’ Equity: | |||||||
Common stock | 6 | 6 | |||||
Additional paid-in-capital | 1,158 | 1,135 | |||||
Income reinvested in the business | 18,916 | 18,316 | |||||
Common stock held in treasury | (13,664 | ) | (12,729 | ) | |||
Accumulated other comprehensive income (loss) | (1,470 | ) | (1,504 | ) | |||
Noncontrolling interest | 4 | 4 | |||||
Total stockholders’ equity | 4,950 | 5,228 | |||||
$ | 15,222 | $ | 15,729 |
Six Months Ended | |||||||
June 30, | |||||||
In millions | 2016 | 2015 | |||||
Cash Provided by (Used for) Operating Activities: | |||||||
Net income | $ | 993 | $ | 938 | |||
Adjustments to reconcile net income to cash provided by (used for) operating activities: | |||||||
Depreciation | 118 | 119 | |||||
Amortization and impairment of intangible assets | 114 | 117 | |||||
Change in deferred income taxes | (203 | ) | (7 | ) | |||
Provision for uncollectible accounts | 6 | 4 | |||||
(Income) loss from investments | (3 | ) | 3 | ||||
(Gain) loss on sale of plant and equipment | 1 | (1 | ) | ||||
(Gain) loss on sale of operations and affiliates | 6 | (16 | ) | ||||
Stock-based compensation expense | 20 | 24 | |||||
Other non-cash items, net | 1 | 7 | |||||
Change in assets and liabilities, net of acquisitions and divestitures: | |||||||
(Increase) decrease in- | |||||||
Trade receivables | (210 | ) | (189 | ) | |||
Inventories | (54 | ) | (48 | ) | |||
Prepaid expenses and other assets | (58 | ) | 24 | ||||
Increase (decrease) in- | |||||||
Accounts payable | 68 | 40 | |||||
Accrued expenses and other liabilities | — | (116 | ) | ||||
Income taxes | 216 | (9 | ) | ||||
Other, net | (1 | ) | — | ||||
Net cash provided by (used for) operating activities | 1,014 | 890 | |||||
Cash Provided by (Used for) Investing Activities: | |||||||
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates | (2 | ) | (6 | ) | |||
Additions to plant and equipment | (121 | ) | (147 | ) | |||
Proceeds from investments | 10 | 3 | |||||
Proceeds from sale of plant and equipment | 4 | 12 | |||||
Proceeds from sales of operations and affiliates | 2 | 29 | |||||
Other, net | (8 | ) | (52 | ) | |||
Net cash provided by (used for) investing activities | (115 | ) | (161 | ) | |||
Cash Provided by (Used for) Financing Activities: | |||||||
Cash dividends paid | (398 | ) | (365 | ) | |||
Issuance of common stock | 57 | 47 | |||||
Repurchases of common stock | (1,000 | ) | (1,786 | ) | |||
Net proceeds from (repayments of) debt with original maturities of three months or less | (311 | ) | (656 | ) | |||
Proceeds from debt with original maturities of more than three months | 1 | 1,098 | |||||
Repayments of debt with original maturities of more than three months | (1 | ) | — | ||||
Excess tax benefits from stock-based compensation | 19 | 16 | |||||
Other, net | (11 | ) | (13 | ) | |||
Net cash provided by (used for) financing activities | (1,644 | ) | (1,659 | ) | |||
Effect of Exchange Rate Changes on Cash and Equivalents | 10 | (202 | ) | ||||
Cash and Equivalents: | |||||||
Increase (decrease) during the period | (735 | ) | (1,132 | ) | |||
Beginning of period | 3,090 | 3,990 | |||||
End of period | $ | 2,355 | $ | 2,858 | |||
Supplementary Cash and Non-Cash Information: | |||||||
Cash Paid During the Period for Interest | $ | 133 | $ | 113 | |||
Cash Paid During the Period for Income Taxes, Net of Refunds | $ | 394 | $ | 390 |
In millions | June 30, 2016 | December 31, 2015 | |||||
Raw material | $ | 418 | $ | 415 | |||
Work-in-process | 142 | 130 | |||||
Finished goods | 667 | 622 | |||||
LIFO reserve | (82 | ) | (81 | ) | |||
Total inventories | $ | 1,145 | $ | 1,086 |
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||||||||||||
Pension | Other Postretirement Benefits | Pension | Other Postretirement Benefits | ||||||||||||||||||||||||||||
In millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||||||||||||||||||
Service cost | $ | 16 | $ | 18 | $ | 3 | $ | 2 | $ | 32 | $ | 36 | $ | 5 | $ | 5 | |||||||||||||||
Interest cost | 24 | 23 | 6 | 6 | 47 | 46 | 12 | 12 | |||||||||||||||||||||||
Expected return on plan assets | (36 | ) | (38 | ) | (5 | ) | (6 | ) | (73 | ) | (76 | ) | (11 | ) | (12 | ) | |||||||||||||||
Amortization of actuarial loss | 10 | 15 | — | — | 21 | 30 | — | — | |||||||||||||||||||||||
Amortization of prior service income | — | — | (1 | ) | — | — | — | (1 | ) | — | |||||||||||||||||||||
Net periodic benefit cost | $ | 14 | $ | 18 | $ | 3 | $ | 2 | $ | 27 | $ | 36 | $ | 5 | $ | 5 |
In millions | June 30, 2016 | December 31, 2015 | |||||
Fair value | $ | 7,752 | $ | 7,153 | |||
Carrying value | 6,950 | 6,897 |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
In millions | 2016 | 2015 | 2016 | 2015 | |||||||||||
Beginning balance | $ | (1,332 | ) | $ | (1,226 | ) | $ | (1,504 | ) | $ | (658 | ) | |||
Foreign currency translation adjustments during the period | (124 | ) | 153 | — | (374 | ) | |||||||||
Foreign currency translation adjustments reclassified to income | — | — | 1 | — | |||||||||||
Income taxes | (20 | ) | 16 | 19 | (34 | ) | |||||||||
Foreign currency translation adjustments, net of tax | (144 | ) | 169 | 20 | (408 | ) | |||||||||
Pension and other postretirement benefit adjustments during the period | — | — | 1 | (2 | ) | ||||||||||
Pension and other postretirement benefit adjustments reclassified to income | 9 | 15 | 20 | 30 | |||||||||||
Income taxes | (3 | ) | (4 | ) | (7 | ) | (8 | ) | |||||||
Pension and other postretirement benefit adjustments, net of tax | 6 | 11 | 14 | 20 | |||||||||||
Ending balance | $ | (1,470 | ) | $ | (1,046 | ) | $ | (1,470 | ) | $ | (1,046 | ) |
• | ITW’s 80/20 management process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980’s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the Company. Through the application of data-driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the “80”) and eliminates complexity associated with the less profitable opportunities (the “20”). 80/20 enables ITW businesses to consistently deliver world-class operational excellence in regards to 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 the insight gathered from the 80/20 management 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 then creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of more than 16,000 granted and pending patents; |
• | ITW’s decentralized, entrepreneurial culture allows 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 customers. ITW colleagues are clear about what is expected of them with regard to ITW’s business model, strategy, and values. This leads to a focused and simple organizational structure that, combined with outstanding execution, delivers operational excellence adapted to their specific customers and end markets. |
• | 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. |
Three Months Ended | |||||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acq/Div | Restructuring | Impairment | Foreign Currency | Total | |||||||||||||||
Operating revenue | $ | 3,431 | $ | 3,434 | (0.1 | )% | 1.2 | % | — | % | — | % | — | % | (1.3 | )% | (0.1 | )% | |||||
Operating income | $ | 792 | $ | 730 | 8.4 | % | 9.3 | % | — | % | 0.6 | % | — | % | (1.5 | )% | 8.4 | % | |||||
Operating margin % | 23.1 | % | 21.3 | % | 180 bps | 170 bps | — | 10 bps | — | — | 180 bps |
Six Months Ended | |||||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acq/Div | Restructuring | Impairment | Foreign Currency | Total | |||||||||||||||
Operating revenue | $ | 6,705 | $ | 6,776 | (1.0 | )% | 0.9 | % | (0.1 | )% | — | % | — | % | (1.8 | )% | (1.0 | )% | |||||
Operating income | $ | 1,514 | $ | 1,427 | 6.1 | % | 7.8 | % | (0.1 | )% | 0.6 | % | (0.2 | )% | (2.0 | )% | 6.1 | % | |||||
Operating margin % | 22.6 | % | 21.1 | % | 150 bps | 140 bps | — | 10 bps | — | — | 150 bps |
• | Operating revenue decreased in the second quarter and year-to-date periods primarily due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth. |
• | Organic revenue grew 1.2% and 0.9% in the second quarter and year-to-date periods, respectively, as consumer-facing businesses increased 3%, representing approximately 60% of total revenues, partially offset by a decline of 2% in the industrial-facing businesses. |
◦ | Six of seven segments had worldwide organic revenue growth primarily due to higher end market demand, penetration gains and product innovation in each respective period. Organic revenue declined in the Welding segment in each respective period primarily as a result of lower demand in the oil and gas and industrial end markets. |
◦ | PLS activities associated with the portfolio management component of the Company's Enterprise Strategy reduced organic revenue growth by approximately one percentage point. |
◦ | North American organic revenue increased 0.4% in the second quarter. Growth in the Food Equipment, Test & Measurement and Electronics, Automotive OEM and Polymers & Fluids segments was partially offset by the decline in the Welding and Construction Products segments. In the year-to-date period, North American organic revenue increased 1.1% as growth in six segments was partially offset by a decline in the Welding segment. |
◦ | Europe, Middle East and Africa organic revenue increased 2.9% and 1.7% in the second quarter and year-to-date periods, respectively. Growth in the Automotive OEM, Food Equipment, Construction Products and Test & Measurement and Electronics segments was partially offset by a decline in the Welding segment. |
◦ | Asia Pacific organic revenue increased 1.0% in the second quarter primarily due to growth in the Construction Products, Specialty Products and Automotive OEM segments, partially offset by a decline in the Welding segment. In the year-to-date period, Asia Pacific organic revenue decreased 0.3% primarily due to a decline in the Welding and Test & Measurement and Electronics segments, partially offset by growth in the Construction Products, Specialty Products and Automotive OEM segments. |
• | Operating margin of 23.1% in the second quarter and 22.6% in the year-to-date period increased 180 basis points and 150 basis points, respectively. The primary driver of the operating margin improvement was the benefit of the Company's enterprise initiatives that contributed 120 basis points in each respective period. Favorable price/cost of 20 basis points in both comparable periods and positive operating leverage of 10 basis points in the second quarter and 20 basis points in the year-to-date period contributed to operating margin expansion. |
• | Diluted earnings per share (EPS) of $1.46 increased 12.3% for the second quarter. In the year-to-date period, EPS of $2.75 increased 9.6%. |
• | Free cash flow was $471 million in the second quarter of 2016. In the year-to-date period, free cash flow was $893 million. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. |
• | The Company repurchased approximately 4.8 million and 10.1 million shares of its common stock in the second quarter and year-to-date periods, respectively, for approximately $500 million and $1.0 billion, respectively. |
• | Total cash dividends of $198 million and $398 million were paid in the second quarter and year-to-date periods of 2016, respectively. |
• | Adjusted after-tax return on average invested capital was 22.9% for the second quarter and 22.1% for the year-to-date period, an increase of 260 basis points and 240 basis points, respectively. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||
Dollars in millions | Operating Revenue | Operating Income | Operating Revenue | Operating Income | |||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||||||||
Automotive OEM | $ | 670 | $ | 649 | $ | 173 | $ | 159 | $ | 1,326 | $ | 1,302 | $ | 346 | $ | 322 | |||||||||||||||
Food Equipment | 535 | 518 | 134 | 114 | 1,034 | 1,013 | 256 | 226 | |||||||||||||||||||||||
Test & Measurement and Electronics | 507 | 496 | 94 | 79 | 971 | 979 | 166 | 150 | |||||||||||||||||||||||
Welding | 375 | 426 | 94 | 111 | 764 | 859 | 187 | 228 | |||||||||||||||||||||||
Polymers & Fluids | 443 | 446 | 93 | 94 | 861 | 887 | 177 | 182 | |||||||||||||||||||||||
Construction Products | 424 | 419 | 103 | 84 | 808 | 800 | 184 | 147 | |||||||||||||||||||||||
Specialty Products | 484 | 486 | 126 | 115 | 952 | 948 | 248 | 219 | |||||||||||||||||||||||
Intersegment revenues | (7 | ) | (6 | ) | — | — | (11 | ) | (12 | ) | — | — | |||||||||||||||||||
Unallocated | — | — | (25 | ) | (26 | ) | — | — | (50 | ) | (47 | ) | |||||||||||||||||||
Total | $ | 3,431 | $ | 3,434 | $ | 792 | $ | 730 | $ | 6,705 | $ | 6,776 | $ | 1,514 | $ | 1,427 |
• | plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses. |
Three Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 670 | $ | 649 | 3.5 | % | 4.2 | % | — | % | — | % | (0.7 | )% | 3.5 | % | |||||
Operating income | $ | 173 | $ | 159 | 9.0 | % | 8.4 | % | — | % | 1.0 | % | (0.4 | )% | 9.0 | % | |||||
Operating margin % | 25.8 | % | 24.5 | % | 130 bps | 100 bps | — | 30 bps | — | 130 bps |
Six Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 1,326 | $ | 1,302 | 1.9 | % | 3.4 | % | — | % | — | % | (1.5 | )% | 1.9 | % | |||||
Operating income | $ | 346 | $ | 322 | 7.4 | % | 8.2 | % | — | % | 0.4 | % | (1.2 | )% | 7.4 | % | |||||
Operating margin % | 26.1 | % | 24.8 | % | 130 bps | 110 bps | — | 20 bps | — | 130 bps |
• | Operating revenue increased in the second quarter and year-to-date periods due to organic revenue growth, partially offset by the unfavorable effect of foreign currency translation. |
• | Worldwide organic revenue grew 4.2% and 3.4% in the second quarter and year-to-date periods, respectively, as a result of penetration gains, exceeding worldwide auto build growth of 3% and 2% in the respective periods. |
◦ | North American organic revenue grew 2.5% and 3.3% in the second quarter and year-to-date periods, respectively, versus total North American auto build growth of 2% and 3% in the respective periods. Auto build growth for the Detroit 3, where the Company has higher content, was 2% in each respective period, |
◦ | European organic revenue grew 7.7% and 5.5% for the second quarter and year-to-date periods, respectively, in line with auto build growth of 8% for the second quarter and 5% in the year-to-date period. |
◦ | Asia Pacific organic revenue increased 3.0% and 1.9% in the second quarter and year-to-date periods, respectively. China organic revenue growth of 13.0% and 9.4% in the second quarter and year-to-date periods, respectively, exceeded Chinese auto build growth of 4% and 6% in each respective period. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, were flat in both respective periods. |
• | Operating margin was 25.8% in the second quarter. The increase of 130 basis points was primarily driven by the net benefits from the Company's enterprise initiatives and cost management of 50 basis points, positive operating leverage of 60 basis points and lower restructuring expenses, partially offset by unfavorable price/cost of 20 basis points. |
• | In the year-to-date period, operating margin of 26.1% increased 130 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management of 60 basis points, positive operating leverage of 40 basis points and lower restructuring expenses. |
• | 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. |
Three Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 535 | $ | 518 | 3.5 | % | 4.7 | % | — | % | — | % | (1.2 | )% | 3.5 | % | |||||
Operating income | $ | 134 | $ | 114 | 17.5 | % | 13.6 | % | — | % | 4.9 | % | (1.0 | )% | 17.5 | % | |||||
Operating margin % | 25.0 | % | 22.0 | % | 300 bps | 190 bps | — | 110 bps | — | 300 bps |
Six Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 1,034 | $ | 1,013 | 2.2 | % | 4.0 | % | — | % | — | % | (1.8 | )% | 2.2 | % | |||||
Operating income | $ | 256 | $ | 226 | 13.5 | % | 12.7 | % | — | % | 2.3 | % | (1.5 | )% | 13.5 | % | |||||
Operating margin % | 24.8 | % | 22.3 | % | 250 bps | 180 bps | — | 70 bps | — | 250 bps |
• | Operating revenue increased in the second quarter and year-to-date periods due to organic revenue growth, partially offset by the unfavorable effect of foreign currency translation. |
• | Organic revenue increased 4.7% in the second quarter as equipment and service organic revenue grew 6.7% and 1.1%, respectively. In the year-to-date period, organic revenue increased 4.0% as equipment and service organic revenue grew 5.4% and 1.6%, respectively. |
◦ | North American organic revenue increased 5.8% in the second quarter and 5.2% in the year-to-date period. North American equipment revenue increased 9.0% in the second quarter and 7.2% in the year-to-date period primarily due to strong end market demand in the retail, refrigeration, warewash and cooking businesses. Service revenue in North America increased 0.7% and 2.2% in the second quarter and year-to-date periods, respectively. |
◦ | International organic revenue increased 3.3% in the second quarter and 2.4% in the year-to-date period. International equipment organic revenue increased 4.0% in the second quarter and 3.3% in the year-to-date period primarily due to growth in Europe. International service organic revenue grew 1.7% and 0.7% in the second quarter and year-to-date periods, respectively. |
• | Operating margin was 25.0% in the second quarter. The 300 basis point improvement was primarily driven by positive operating leverage of 110 basis points, lower restructuring expenses, favorable price/cost of 50 basis points and the net benefits of the Company's enterprise initiatives and cost management. |
• | In the year-to-date period, operating margin of 24.8% increased 250 basis points primarily driven by positive operating leverage of 90 basis points, lower restructuring expenses, the net benefits of the Company's enterprise initiatives and cost management of 60 basis points and favorable price/cost of 50 basis points. |
• | equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids; |
• | electronic assembly equipment and related consumable solder materials; |
• | 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 telecommunications, electronics, medical and transportation applications. |
Three Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 507 | $ | 496 | 2.0 | % | 2.8 | % | — | % | — | % | (0.8 | )% | 2.0 | % | |||||
Operating income | $ | 94 | $ | 79 | 18.1 | % | 19.0 | % | — | % | 0.8 | % | (1.7 | )% | 18.1 | % | |||||
Operating margin % | 18.6 | % | 16.1 | % | 250 bps | 250 bps | — | — | — | 250 bps |
Six Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 971 | $ | 979 | (0.9 | )% | 0.5 | % | — | % | — | % | (1.4 | )% | (0.9 | )% | |||||
Operating income | $ | 166 | 150 | 10.4 | % | 11.7 | % | — | % | 0.6 | % | (1.9 | )% | 10.4 | % | ||||||
Operating margin % | 17.1 | % | 15.4 | % | 170 bps | 170 bps | — | — | — | 170 bps |
• | Operating revenue increased in the second quarter due to organic revenue growth, partially offset by the unfavorable effect of foreign currency translation. In the year-to-date period, operating revenue decreased due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth. |
• | Organic revenue increased 2.8% and 0.5% in the second quarter and year-to-date periods, respectively. |
◦ | Worldwide electronics organic revenue increased 5.9% and 2.4% in the second quarter and year-to-date periods, respectively, primarily due to an increase in the electronics assembly businesses in the North American solar and semi-conductor end markets in the second quarter. Other electronics businesses grew 0.7% in the second quarter, primarily due to growth in Europe, and declined 0.5% in the year-to-date period primarily due to PLS activities in the pressure sensitive adhesives businesses in Asia Pacific. |
◦ | Organic revenue for the worldwide test and measurement businesses was flat in the second quarter and decreased 1.3% in the year-to-date period primarily due to the impact of a weak capital spending environment in North America and Europe, partially offset by growth in Asia Pacific. |
• | Operating margin was 18.6% in the second quarter. The increase of 250 basis points was primarily driven by the net benefits resulting from the Company's enterprise initiatives and cost management of 120 basis points, positive operating leverage of 90 basis points and favorable price/cost of 30 basis points. |
• | In the year-to-date period, operating margin of 17.1% increased 170 basis points primarily driven by the net benefits resulting from the Company's enterprise initiatives and cost management of 120 basis points, favorable price/cost of 30 basis points and positive operating leverage of 20 basis points. |
• | arc welding equipment; |
• | metal arc welding consumables and related accessories; and |
• | metal jacketing and other insulation products. |
Three Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Restructuring | Impairment | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 375 | $ | 426 | (12.2 | )% | (11.3 | )% | — | % | — | % | (0.9 | )% | (12.2 | )% | |||||
Operating income | $ | 94 | $ | 111 | (16.3 | )% | (10.7 | )% | (4.9 | )% | — | % | (0.7 | )% | (16.3 | )% | |||||
Operating margin % | 24.9 | % | 26.1 | % | (120) bps | 20 bps | (140) bps | — | — | (120) bps |
Six Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Restructuring | Impairment | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 764 | $ | 859 | (11.1 | )% | (9.9 | )% | — | % | — | % | (1.2 | )% | (11.1 | )% | |||||
Operating income | $ | 187 | $ | 228 | (18.2 | )% | (12.5 | )% | (3.8 | )% | (1.3 | )% | (0.6 | )% | (18.2 | )% | |||||
Operating margin % | 24.4 | % | 26.5 | % | (210) bps | (70) bps | (100) bps | (40) bps | — | (210) bps |
• | Operating revenue decreased due to the decline in organic revenue and the unfavorable effect of foreign currency translation. |
• | Worldwide organic revenue decreased 11.3% and 9.9% in the second quarter and year-to-date periods, respectively, due to lower demand in the oil and gas and industrial end markets and the impact of a soft capital spending environment. In the second quarter, organic revenue declined for equipment and consumables 13% and 10%, respectively. In the year-to-date period, organic revenue declined for equipment and consumables 11% and 8%, respectively. |
◦ | North American organic revenue declined 8.4% and 7.5% in the second quarter and year-to-date periods, respectively, primarily due to decreases across the oil and gas end markets and industrial end markets primarily related to heavy equipment for agriculture, infrastructure and mining. |
◦ | International organic revenue decreased 20.8% and 17.9% in the second quarter and year-to-date periods, respectively, primarily due to weak oil and gas end markets in Europe and Asia Pacific. |
• | Operating margin was 24.9% in the second quarter. The decline of 120 basis points was primarily due to negative operating leverage of 220 basis points, higher restructuring expenses of 140 basis points and lower variable margins due to product mix from lower sales of higher margin equipment, partially offset by the net benefits of the Company's enterprise initiatives and cost management of 190 basis points and favorable price/cost of 70 basis points. |
• | In the year-to-date period, operating margin of 24.4% declined 210 basis points primarily due to negative operating leverage of 180 basis points, higher restructuring expenses, lower variable margins due to product mix from lower sales of higher margin equipment and the unfavorable impact of intangible asset impairment, partially offset by the net benefits of the Company's enterprise initiatives and cost management of 160 basis points and favorable price/cost of 40 basis points. |
• | 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. |
Three Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 443 | $ | 446 | (0.8 | )% | 1.9 | % | — | % | — | % | (2.7 | )% | (0.8 | )% | |||||
Operating income | $ | 93 | $ | 94 | (0.8 | )% | 5.2 | % | — | % | (3.5 | )% | (2.5 | )% | (0.8 | )% | |||||
Operating margin % | 20.9 | % | 20.9 | % | — | 70 bps | — | (70) bps | — | — |
Six Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 861 | $ | 887 | (3.0 | )% | 1.2 | % | (0.5 | )% | — | % | (3.7 | )% | (3.0 | )% | |||||
Operating income | $ | 177 | $ | 182 | (2.5 | )% | 2.3 | % | (0.5 | )% | (1.2 | )% | (3.1 | )% | (2.5 | )% | |||||
Operating margin % | 20.6 | % | 20.5 | % | 10 bps | 20 bps | — | (10) bps | — | 10 bps |
• | Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth. |
• | Organic revenue increased 1.9% and 1.2% in the second quarter and year-to-date periods, respectively, primarily due to stronger demand in North American end markets. |
◦ | Organic revenue for the worldwide automotive aftermarket businesses increased 3.3% and 2.4% in the second quarter and year-to-date periods, respectively, primarily in North America. Worldwide fluids businesses increased 1.4% and 0.9% in the second quarter and year-to-date periods, respectively, primarily driven by an increase in South America. Organic revenue for the worldwide polymers businesses was flat for the second quarter and year-to-date periods primarily driven by a decline in North America and Europe, offset by growth in South America. |
• | Operating margin of 20.9% in the second quarter was flat compared to the prior year primarily driven by higher restructuring expenses, offset by favorable operating leverage of 50 basis points and the net benefits of the Company's enterprise initiatives and cost management. |
• | In the year-to-date period, operating margin of 20.6% increased 10 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 60 basis points and favorable operating leverage of 20 basis points, partially offset by the impact of a first quarter 2015 discrete claim recovery of 60 basis points and higher restructuring expenses. |
• | 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. |
Three Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 424 | $ | 419 | 1.2 | % | 3.1 | % | (0.2 | )% | — | % | (1.7 | )% | 1.2 | % | |||||
Operating income | $ | 103 | $ | 84 | 23.7 | % | 22.1 | % | (0.3 | )% | 4.7 | % | (2.8 | )% | 23.7 | % | |||||
Operating margin % | 24.3 | % | 19.9 | % | 440 bps | 370 bps | — | 70 bps | — | 440 bps |
Six Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 808 | $ | 800 | 1.0 | % | 4.0 | % | (0.2 | )% | — | % | (2.8 | )% | 1.0 | % | |||||
Operating income | $ | 184 | $ | 147 | 25.5 | % | 23.4 | % | (0.2 | )% | 5.9 | % | (3.6 | )% | 25.5 | % | |||||
Operating margin % | 22.8 | % | 18.3 | % | 450 bps | 350 bps | — | 100 bps | — | 450 bps |
• | Operating revenue increased primarily due to organic revenue growth, partially offset by the unfavorable effect of foreign currency translation. |
• | Organic revenue increased 3.1% and 4.0% in the second quarter and year-to-date periods, respectively. |
◦ | North American organic revenue decreased 1.4% in the second quarter. Renovation/remodel declined 6.4% due to lower demand, partially offset by organic revenue growth of 5.2% in commercial and 1.1% growth in residential. In the year-to-date period, North American organic revenue grew 4.1% driven by growth of 5.8% in renovation/remodel, 6.6% in commercial and 1.7% in residential. |
◦ | International organic revenue increased 6.4% and 3.9% in the second quarter and year-to-date periods, respectively. Asia Pacific organic revenue increased 6.6% and 4.4% in the second quarter and year-to-date periods, respectively, primarily due to growth in Australia and New Zealand. European organic revenue increased 6.1% and 3.3% in the second quarter and year-to-date periods, respectively, primarily due to growth in the United Kingdom, France and Germany. |
• | Operating margin was 24.3% in the second quarter. The increase of 440 basis points was primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 230 basis points, positive operating leverage of 70 basis points, lower restructuring expenses and favorable price/cost of 30 basis points. |
• | In the year-to-date period, operating margin of 22.8% increased 450 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 140 basis points, positive operating leverage of 100 basis points, lower restructuring expenses and favorable price/cost of 70 basis points. |
• | 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 fasteners and components for appliances; |
• | airport ground support equipment; and |
• | components for medical devices. |
Three Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 484 | $ | 486 | (0.4 | )% | 0.3 | % | — | % | — | % | (0.7 | )% | (0.4 | )% | |||||
Operating income | $ | 126 | $ | 115 | 10.2 | % | 10.2 | % | — | % | 1.0 | % | (1.0 | )% | 10.2 | % | |||||
Operating margin % | 26.0 | % | 23.5 | % | 250 bps | 240 bps | — | 10 bps | — | 250 bps |
Six Months Ended | |||||||||||||||||||||
Dollars in millions | June 30, | Components of Increase (Decrease) | |||||||||||||||||||
2016 | 2015 | Inc (Dec) | Organic | Acquisition/Divestiture | Restructuring | Foreign Currency | Total | ||||||||||||||
Operating revenue | $ | 952 | $ | 948 | 0.5 | % | 1.7 | % | — | % | — | % | (1.2 | )% | 0.5 | % | |||||
Operating income | $ | 248 | $ | 219 | 13.4 | % | 13.3 | % | — | % | 1.5 | % | (1.4 | )% | 13.4 | % | |||||
Operating margin % | 26.0 | % | 23.1 | % | 290 bps | 260 bps | — | 30 bps | — | 290 bps |
• | Operating revenue decreased in the second quarter due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth. In the year-to-date period, operating revenue increased due to organic revenue growth, partially offset by the unfavorable effect of foreign currency translation. |
• | Organic revenue increased 0.3% and 1.7% in the second quarter and year-to-date periods, respectively, primarily driven by growth in the consumer packaging businesses. |
◦ | North American organic revenue was flat in the second quarter and increased 2.4% in the year-to-date period. |
◦ | International organic revenue increased 1.1% and 0.7% in the second quarter and year-to-date periods, respectively. |
• | Operating margin was 26.0% in the second quarter. The increase of 250 basis points in the second quarter was primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 180 basis points and 10 basis points each for positive operating leverage, favorable price/cost and lower restructuring expenses. |
• | In the year-to-date period, operating margin of 26.0% increased 290 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 210 basis points, positive operating leverage of 30 basis points and lower restructuring expenses. |
• | Interest expense of $58 million and $116 million in the second quarter and year-to-date periods, respectively, increased from $55 million and $109 million in 2015, primarily due to the Euro notes issued in May 2015. |
• | Other income (expense) was income of $17 million in the second quarter of 2016, a decrease of $4 million primarily driven by a $6 million loss on the anticipated sale of a business and lower equity investment income, partially offset by currency translation gains. Other income (expense) was income of $21 million in the year-to-date period, a decrease of $21 million primarily due to a $15 million gain on the sale of a business in the first quarter of 2015 and the $6 million loss on the anticipated sale of a business in the second quarter of 2016. |
• | The effective tax rate for the year-to-date period of 2016 was 30.0% compared to 31.0% in 2015. |
• | 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 organic growth focus and an active share repurchase program. |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
In millions | 2016 | 2015 | 2016 | 2015 | |||||||||||
Net cash provided by operating activities | $ | 535 | $ | 448 | $ | 1,014 | $ | 890 | |||||||
Additions to plant and equipment | (64 | ) | (64 | ) | (121 | ) | (147 | ) | |||||||
Free cash flow | $ | 471 | $ | 384 | $ | 893 | $ | 743 | |||||||
Cash dividends paid | $ | (198 | ) | $ | (179 | ) | $ | (398 | ) | $ | (365 | ) | |||
Repurchases of common stock | (520 | ) | (307 | ) | (1,000 | ) | (1,786 | ) | |||||||
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates | — | (4 | ) | (2 | ) | (6 | ) | ||||||||
Net proceeds from (repayment of) debt | 214 | 209 | (311 | ) | 442 | ||||||||||
Other | 22 | (20 | ) | 73 | 42 | ||||||||||
Effect of exchange rate changes on cash and equivalents | (82 | ) | 103 | 10 | (202 | ) | |||||||||
Net increase (decrease) in cash and equivalents | $ | (93 | ) | $ | 186 | $ | (735 | ) | $ | (1,132 | ) |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
Dollars in millions | 2016 | 2015 | 2016 | 2015 | |||||||||||
Operating income | $ | 792 | $ | 730 | $ | 1,514 | $ | 1,427 | |||||||
Tax rate | 30.0 | % | 31.0 | % | 30.0 | % | 31.0 | % | |||||||
Income taxes | (238 | ) | (226 | ) | (454 | ) | (443 | ) | |||||||
Operating income after taxes | $ | 554 | $ | 504 | $ | 1,060 | $ | 984 | |||||||
Invested capital: | |||||||||||||||
Trade receivables | $ | 2,413 | $ | 2,412 | $ | 2,413 | $ | 2,412 | |||||||
Inventories | 1,145 | 1,191 | 1,145 | 1,191 | |||||||||||
Net plant and equipment | 1,580 | 1,636 | 1,580 | 1,636 | |||||||||||
Goodwill and intangible assets | 5,907 | 6,222 | 5,907 | 6,222 | |||||||||||
Accounts payable and accrued expenses | (1,635 | ) | (1,680 | ) | (1,635 | ) | (1,680 | ) | |||||||
Other, net | 349 | 437 | 349 | 437 | |||||||||||
Total invested capital | $ | 9,759 | $ | 10,218 | $ | 9,759 | $ | 10,218 | |||||||
Average invested capital | $ | 9,768 | $ | 10,021 | $ | 9,698 | $ | 10,099 | |||||||
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) | (112 | ) | (120 | ) | (112 | ) | (127 | ) | |||||||
Adjusted average invested capital | $ | 9,656 | $ | 9,901 | $ | 9,586 | $ | 9,972 | |||||||
Adjusted return on average invested capital | 22.9 | % | 20.3 | % | 22.1 | % | 19.7 | % |
Dollars in millions | June 30, 2016 | December 31, 2015 | Increase/ (Decrease) | ||||||||
Current assets: | |||||||||||
Cash and equivalents | $ | 2,355 | $ | 3,090 | $ | (735 | ) | ||||
Trade receivables | 2,413 | 2,203 | 210 | ||||||||
Inventories | 1,145 | 1,086 | 59 | ||||||||
Other | 254 | 341 | (87 | ) | |||||||
Total current assets | 6,167 | 6,720 | (553 | ) | |||||||
Current liabilities: | |||||||||||
Short-term debt | 864 | 526 | 338 | ||||||||
Accounts payable and accrued expenses | 1,635 | 1,585 | 50 | ||||||||
Other | 325 | 257 | 68 | ||||||||
Total current liabilities | 2,824 | 2,368 | 456 | ||||||||
Net working capital | $ | 3,343 | $ | 4,352 | $ | (1,009 | ) |
In millions | June 30, 2016 | December 31, 2015 | |||||
Short-term debt | $ | 864 | $ | 526 | |||
Long-term debt | 6,300 |