Yahoo Finance ITW Reports Third Quarter 2022 Results
Revenue of $4.0 billion; an increase of 13% with organic growth of 16%
GAAP EPS of $2.35, an increase of 16%
Record operating income of $983 million, an increase of 16%
Operating margin of 24.5%, an increase of 70 bps; operating margin of 25.1% excluding (60) bps of margin dilution from the acquisition of MTS. Enterprise initiatives contributed 110 bps.
Raising full-year GAAP EPS guidance to $9.45 to $9.55 per share and organic revenue growth guidance to 11 to 12%
GLENVIEW, Ill., Oct. 25, 2022 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its third quarter 2022 results.
“Despite softening demand and inventory destocking in certain end-markets, the ITW team delivered another quarter of strong performance with organic growth of 16 percent, operating margin of 24.5 percent, after-tax ROIC of 29.9 percent and earnings per share growth of 16 percent,” said E. Scott Santi, Chairman and Chief Executive Officer. “Our business teams around the world continue to do an exceptional job of navigating what remains a dynamic and challenging operating environment to deliver for our customers and for the company. In addition, we were pleased to see incremental margins return to our normal 30 percent-plus historical levels in the third quarter as the impact of volume growth, enterprise initiatives, pricing actions, and some moderation in the pace of input cost inflation drove a 130 basis point improvement in operating margin in our base business.
“While it is clear that the economic outlook is becoming increasingly uncertain, demand remains strong across the majority of our business portfolio and as a result ITW is well-positioned to deliver a strong finish to what has been a very strong year.”
Third Quarter 2022 Results
Third quarter revenue of $4.0 billion increased 13 percent with organic revenue growth of 16 percent. The acquisition of MTS contributed three percent to revenue. Unfavorable foreign currency translation reduced revenue by six percent. Five of seven segments delivered double-digit organic growth in the quarter, led by Automotive OEM up 25 percent and Food Equipment up 23 percent. Test & Measurement and Electronics and Construction Products were both up 17 percent, Welding up 14 percent, Polymers & Fluids up eight percent and Specialty Products was essentially flat, or up three percent excluding significant 80/20 Front-to-Back driven Product Line Simplification (“PLS”). At the enterprise level, PLS reduced organic growth by (70) basis points. On a geographic basis, organic growth was 17 percent in North America, 14 percent in Europe, and 15 percent in Asia Pacific.
GAAP EPS was $2.35, an increase of 16 percent, and included $(0.13) of unfavorable foreign currency translation impact and $(0.07) from a higher effective tax rate. Operating margin of 25.1 percent improved 130 basis points excluding (60) basis points impact from the acquisition of MTS. Enterprise initiatives contributed 110 basis points. Price/cost was positive on a dollar-for-dollar basis and the margin dilution impact continued to moderate in the third quarter to (40) basis points as compared to (200) basis points in the first half of 2022. Operating cash flow was $713 million, and free cash flow was $612 million, an increase of 12 percent with a conversion rate to net income of 84 percent. The reported tax rate for the third quarter was 23.9 percent.
Portfolio Management and Capital Allocation Update
Consistent with our previously announced plan to divest certain business units, on October 3, 2022, ITW closed the sale of a division within the Polymers & Fluids segment for approximately $220 million, subject to certain closing adjustments. The division has annualized revenue of approximately $100 million in 2022. The gain related to this divestiture is estimated to contribute $0.45 to fourth quarter earnings per share.
ITW repurchased $500 million of shares in the third quarter and expects share repurchases of $1.75 billion for the full year. On August 5, 2022, the company raised its dividend by seven percent to an annualized rate of $5.24 per share.
2022 Guidance Update
Based on 12 percent organic growth year-to-date and current levels of demand, ITW is projecting full-year organic growth guidance of 11 to 12 percent and full-year revenue growth of nine to ten percent. The acquisition of MTS is expected to add three percent to revenue. Foreign currency translation at current foreign exchange rates is expected to reduce revenues by five percent.
Prior GAAP EPS guidance of $9.00 to $9.40 was adjusted to a narrower range of $9.00 to $9.10 primarily to account for incremental foreign currency translation headwinds and raised by the estimated divestiture gain of $0.45 resulting in the company raising its full-year GAAP EPS guidance to a range of $9.45 to $9.55 per share. For the full year, operating margin is projected to be approximately 24 percent, with enterprise initiatives contributing 100 basis points. Free cash flow is projected to be approximately 80 percent of net income.
Non-GAAP Measures
This earnings release contains certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures is included in the attached supplemental reconciliation schedule. The estimated guidance of free cash flow conversion rate is based on assumptions that are difficult to predict, and estimated guidance for the most directly comparable GAAP measure and a reconciliation of this forward-looking estimate to its most directly comparable GAAP estimate have been omitted due to the unreasonable efforts required in connection with such a reconciliation and the lack of reliable forward-looking cash flow information.
Forward-looking Statements
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements 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, expected impact of inflation including raw material inflation and rising interest rates, enterprise initiatives, future financial and operating performance, free cash flow and free cash flow conversion rate, organic and total revenue, operating and incremental margin, price/cost impact, diluted income per share, restructuring expenses and related benefits, expected dividend payments, expected repatriation of overseas cash, after-tax return on invested capital, effective tax rates, exchange rates, expected access to liquidity sources, expected capital allocation, expected timing and amount of share repurchases, end market economic and regulatory conditions, potential acquisitions and divestitures and related impact on financial results, including statements with respect to the impact of the 2021 acquisition of the MTS Test & Simulation business and the 2022 divestiture of a division within the Polymers & Fluids segment, and the company’s 2022 guidance. These statements are subject to certain risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from those anticipated. Such factors include those contained in ITW's Form 10-K for 2021 and subsequent reports filed with the SEC.
About Illinois Tool Works
ITW (NYSE: ITW) is a Fortune 200 global multi-industrial manufacturing leader with revenues totaling $14.5 billion in 2021. The company’s seven industry-leading segments leverage the unique ITW Business Model to drive solid growth with best-in-class margins and returns in markets where highly innovative, customer-focused solutions are required. ITW’s approximately 45,000 dedicated colleagues around the world thrive in the company’s decentralized and entrepreneurial culture. www.itw.com
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME (UNAUDITED)
| Three Months Ended |
| Nine Months Ended | ||||||||||||
| September 30, |
| September 30, | ||||||||||||
In millions except per share amounts |
| 2022 |
|
|
| 2021 |
|
|
| 2022 |
|
|
| 2021 |
|
Operating Revenue | $ | 4,011 |
|
| $ | 3,556 |
|
| $ | 11,961 |
|
| $ | 10,776 |
|
Cost of revenue |
| 2,371 |
|
|
| 2,096 |
|
|
| 7,120 |
|
|
| 6,298 |
|
Selling, administrative, and research and development expenses |
| 624 |
|
|
| 581 |
|
|
| 1,935 |
|
|
| 1,735 |
|
Amortization and impairment of intangible assets |
| 33 |
|
|
| 34 |
|
|
| 102 |
|
|
| 100 |
|
Operating Income |
| 983 |
|
|
| 845 |
|
|
| 2,804 |
|
|
| 2,643 |
|
Interest expense |
| (52 | ) |
|
| (49 | ) |
|
| (147 | ) |
|
| (153 | ) |
Other income (expense) |
| 26 |
|
|
| 10 |
|
|
| 64 |
|
|
| 44 |
|
Income Before Taxes |
| 957 |
|
|
| 806 |
|
|
| 2,721 |
|
|
| 2,534 |
|
Income Taxes |
| 230 |
|
|
| 167 |
|
|
| 594 |
|
|
| 449 |
|
Net Income | $ | 727 |
|
| $ | 639 |
|
| $ | 2,127 |
|
| $ | 2,085 |
|
|
|
|
|
|
|
|
| ||||||||
Net Income Per Share: |
|
|
|
|
|
|
| ||||||||
Basic | $ | 2.36 |
|
| $ | 2.03 |
|
| $ | 6.85 |
|
| $ | 6.61 |
|
Diluted | $ | 2.35 |
|
| $ | 2.02 |
|
| $ | 6.83 |
|
| $ | 6.58 |
|
|
|
|
|
|
|
|
| ||||||||
Cash Dividends Per Share: |
|
|
|
|
|
|
| ||||||||
Paid | $ | 1.22 |
|
| $ | 1.14 |
|
| $ | 3.66 |
|
| $ | 3.42 |
|
Declared | $ | 1.31 |
|
| $ | 1.22 |
|
| $ | 3.75 |
|
| $ | 3.50 |
|
|
|
|
|
|
|
|
| ||||||||
Shares of Common Stock Outstanding During the Period: |
|
|
|
|
|
|
| ||||||||
Average |
| 308.8 |
|
|
| 314.6 |
|
|
| 310.6 |
|
|
| 315.6 |
|
Average assuming dilution |
| 309.7 |
|
|
| 315.9 |
|
|
| 311.6 |
|
|
| 316.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millions | September 30, 2022 |
| December 31, 2021 | ||||
Assets |
|
|
| ||||
Current Assets: |
|
|
| ||||
Cash and equivalents | $ | 774 |
|
| $ | 1,527 |
|
Trade receivables |
| 3,031 |
|
|
| 2,840 |
|
Inventories |
| 2,007 |
|
|
| 1,694 |
|
Prepaid expenses and other current assets |
| 281 |
|
|
| 313 |
|
Assets held for sale |
| 103 |
|
|
| — |
|
Total current assets |
| 6,196 |
|
|
| 6,374 |
|
|
|
|
| ||||
Net plant and equipment |
| 1,705 |
|
|
| 1,809 |
|
Goodwill |
| 4,759 |
|
|
| 4,965 |
|
Intangible assets |
| 798 |
|
|
| 972 |
|
Deferred income taxes |
| 448 |
|
|
| 552 |
|
Other assets |
| 1,320 |
|
|
| 1,405 |
|
| $ | 15,226 |
|
| $ | 16,077 |
|
|
|
|
| ||||
Liabilities and Stockholders' Equity |
|
|
| ||||
Current Liabilities: |
|
|
| ||||
Short-term debt | $ | 1,688 |
|
| $ | 778 |
|
Accounts payable |
| 618 |
|
|
| 585 |
|
Accrued expenses |
| 1,559 |
|
|
| 1,648 |
|
Cash dividends payable |
| 402 |
|
|
| 382 |
|
Income taxes payable |
| 97 |
|
|
| 77 |
|
Liabilities held for sale |
| 28 |
|
|
| — |
|
Total current liabilities |
| 4,392 |
|
|
| 3,470 |
|
|
|
|
| ||||
Noncurrent Liabilities: |
|
|
| ||||
Long-term debt |
| 5,940 |
|
|
| 6,909 |
|
Deferred income taxes |
| 655 |
|
|
| 654 |
|
Noncurrent income taxes payable |
| 273 |
|
|
| 365 |
|
Other liabilities |
| 952 |
|
|
| 1,053 |
|
Total noncurrent liabilities |
| 7,820 |
|
|
| 8,981 |
|
|
|
|
| ||||
Stockholders' Equity: |
|
|
| ||||
Common stock |
| 6 |
|
|
| 6 |
|
Additional paid-in-capital |
| 1,479 |
|
|
| 1,432 |
|
Retained earnings |
| 25,292 |
|
|
| 24,325 |
|
Common stock held in treasury |
| (21,882 | ) |
|
| (20,636 | ) |
Accumulated other comprehensive income (loss) |
| (1,882 | ) |
|
| (1,502 | ) |
Noncontrolling interest |
| 1 |
|
|
| 1 |
|
Total stockholders' equity |
| 3,014 |
|
|
| 3,626 |
|
| $ | 15,226 |
|
| $ | 16,077 |
|
|
|
|
|
|
|
|
|
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended September 30, 2022 | ||||||||
Dollars in millions | Total Revenue | Operating Income | Operating Margin | |||||
Automotive OEM | $ | 753 |
| $ | 132 |
| 17.5 | % |
Food Equipment |
| 633 |
|
| 167 |
| 26.3 | % |
Test & Measurement and Electronics |
| 715 |
|
| 180 |
| 25.2 | % |
Welding |
| 477 |
|
| 150 |
| 31.5 | % |
Polymers & Fluids |
| 473 |
|
| 119 |
| 25.3 | % |
Construction Products |
| 527 |
|
| 136 |
| 25.7 | % |
Specialty Products |
| 438 |
|
| 121 |
| 27.7 | % |
Intersegment |
| (5 | ) |
| — |
| — | % |
Total Segments |
| 4,011 |
|
| 1,005 |
| 25.1 | % |
Unallocated |
| — |
|
| (22 | ) | — | % |
Total Company | $ | 4,011 |
| $ | 983 |
| 24.5 | % |
Nine Months Ended September 30, 2022 | ||||||||
Dollars in millions | Total Revenue | Operating Income | Operating Margin | |||||
Automotive OEM | $ | 2,224 |
| $ | 371 |
| 16.7 | % |
Food Equipment |
| 1,813 |
|
| 445 |
| 24.5 | % |
Test & Measurement and Electronics |
| 2,096 |
|
| 486 |
| 23.2 | % |
Welding |
| 1,413 |
|
| 431 |
| 30.5 | % |
Polymers & Fluids |
| 1,450 |
|
| 362 |
| 25.0 | % |
Construction Products |
| 1,643 |
|
| 428 |
| 26.0 | % |
Specialty Products |
| 1,337 |
|
| 362 |
| 27.1 | % |
Intersegment |
| (15 | ) |
| — |
| — | % |
Total Segments |
| 11,961 |
|
| 2,885 |
| 24.1 | % |
Unallocated |
| — |
|
| (81 | ) | — | % |
Total Company | $ | 11,961 |
| $ | 2,804 |
| 23.4 | % |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q3 2022 vs. Q3 2021 Favorable/(Unfavorable) | ||||||||||||||||
Operating Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
Organic | 24.7 | % | 23.1 | % | 17.1 | % | 13.9 | % | 8.4 | % | 17.1 | % | (0.3) | % | 15.7 | % |
Acquisitions/ | — | % | — | % | 18.3 | % | — | % | — | % | — | % | — | % | 2.8 | % |
Translation | (8.2) | % | (6.7) | % | (5.9) | % | (1.5) | % | (4.9) | % | (6.9) | % | (4.4) | % | (5.7) | % |
Operating | 16.5 | % | 16.4 | % | 29.5 | % | 12.4 | % | 3.5 | % | 10.2 | % | (4.7) | % | 12.8 | % |
Q3 2022 vs. Q3 2021 Favorable/(Unfavorable) | ||||||||||||||||
Change in Operating Margin | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
Operating Leverage | 420 bps | 420 bps | 360 bps | 230 bps | 150 bps | 260 bps | (10) bps | 290 bps | ||||||||
Changes in Variable Margin & OH Costs | (400) bps | (150) bps | (150) bps | (160) bps | — | (470) bps | (20) bps | (170) bps | ||||||||
Total Organic | 20 bps | 270 bps | 210 bps | 70 bps | 150 bps | (210) bps | (30) bps | 120 bps | ||||||||
Acquisitions/ | — | — | (370) bps | — | — | — | — | (60) bps | ||||||||
Restructuring/Other | — | (30) bps | — | 80 bps | (40) bps | — | 70 bps | 10 bps | ||||||||
Total Operating Margin Change | 20 bps | 240 bps | (160) bps | 150 bps | 110 bps | (210) bps | 40 bps | 70 bps | ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total Operating Margin % * | 17.5% | 26.3% | 25.2% | 31.5% | 25.3% | 25.7% | 27.7% | 24.5% | ||||||||
|
|
|
|
|
|
|
|
| ||||||||
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets | 30 bps | 50 bps | 180 bps | 10 bps | 220 bps | 20 bps | 60 bps | 90 bps ** | ||||||||
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.08) on GAAP earnings per share for the third quarter of 2022. | ||||||||||||||||
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
YTD 2022 vs. YTD 2021 Favorable/(Unfavorable) | ||||||||||||||||
Operating Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
Organic | 9.2 | % | 25.2 | % | 8.4 | % | 16.3 | % | 10.4 | % | 17.7 | % | (0.5) | % | 12.2 | % |
Acquisitions/ | — | % | — | % | 18.0 | % | — | % | — | % | — | % | — | % | 2.9 | % |
Translation | (5.1) | % | (5.0) | % | (3.9) | % | (1.2) | % | (3.6) | % | (5.6) | % | (3.1) | % | (4.1) | % |
Operating | 4.1 | % | 20.2 | % | 22.5 | % | 15.1 | % | 6.8 | % | 12.1 | % | (3.6) | % | 11.0 | % |
YTD 2022 vs. YTD 2021 Favorable/(Unfavorable) | ||||||||||||||||
Change in Operating Margin | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
Operating Leverage | 170 bps | 480 bps | 180 bps | 230 bps | 180 bps | 260 bps | (10) bps | 220 bps | ||||||||
Changes in Variable Margin & OH Costs | (410) bps | (260) bps | (270) bps | (170) bps | (250) bps | (430) bps | (50) bps | (240) bps | ||||||||
Total Organic | (240) bps | 220 bps | (90) bps | 60 bps | (70) bps | (170) bps | (60) bps | (20) bps | ||||||||
Acquisitions/ | — | — | (380) bps | — | — | — | — | (60) bps | ||||||||
Restructuring/Other | (120) bps | (20) bps | 10 bps | 30 bps | (10) bps | — | 30 bps | (30) bps | ||||||||
Total Operating Margin Change | (360) bps | 200 bps | (460) bps | 90 bps | (80) bps | (170) bps | (30) bps | (110) bps | ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total Operating Margin % * | 16.7% | 24.5% | 23.2% | 30.5% | 25.0% | 26.0% | 27.1% | 23.4% | ||||||||
|
|
|
|
|
|
|
|
| ||||||||
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets | 30 bps | 60 bps | 190 bps | 10 bps | 220 bps | 20 bps | 60 bps | 90 bps ** | ||||||||
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.25) on GAAP earnings per share for the first nine months of 2022. | ||||||||||||||||
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
| Three Months Ended |
| Nine Months Ended | ||||||||||||
| September 30, |
| September 30, | ||||||||||||
Dollars in millions |
| 2022 |
|
|
| 2021 |
|
|
| 2022 |
|
|
| 2021 |
|
Numerator: |
|
|
|
|
|
|
| ||||||||
Net Income | $ | 727 |
|
| $ | 639 |
|
| $ | 2,127 |
|
| $ | 2,085 |
|
Discrete tax benefit related to the second quarter 2022 |
| — |
|
|
| — |
|
|
| (51 | ) |
|
| — |
|
Discrete tax benefit related to the third quarter 2021 |
| — |
|
|
| (21 | ) |
|
| — |
|
|
| (21 | ) |
Discrete tax benefit related to the second quarter 2021 |
| — |
|
|
| — |
|
|
| — |
|
|
| (112 | ) |
Interest expense, net of tax (1) |
| 39 |
|
|
| 38 |
|
|
| 112 |
|
|
| 118 |
|
Other (income) expense, net of tax (1) |
| (20 | ) |
|
| (9 | ) |
|
| (49 | ) |
|
| (34 | ) |
Operating income after taxes | $ | 746 |
|
| $ | 647 |
|
| $ | 2,139 |
|
| $ | 2,036 |
|
|
|
|
|
|
|
|
| ||||||||
Denominator: |
|
|
|
|
|
|
| ||||||||
Invested capital: |
|
|
|
|
|
|
| ||||||||
Cash and equivalents | $ | 774 |
|
| $ | 1,987 |
|
| $ | 774 |
|
| $ | 1,987 |
|
Trade receivables |
| 3,031 |
|
|
| 2,729 |
|
|
| 3,031 |
|
|
| 2,729 |
|
Inventories |
| 2,007 |
|
|
| 1,524 |
|
|
| 2,007 |
|
|
| 1,524 |
|
Net assets held for sale |
| 75 |
|
|
| — |
|
|
| 75 |
|
|
| — |
|
Net plant and equipment |
| 1,705 |
|
|
| 1,744 |
|
|
| 1,705 |
|
|
| 1,744 |
|
Goodwill and intangible assets |
| 5,557 |
|
|
| 5,293 |
|
|
| 5,557 |
|
|
| 5,293 |
|
Accounts payable and accrued expenses |
| (2,177 | ) |
|
| (1,964 | ) |
|
| (2,177 | ) |
|
| (1,964 | ) |
Debt |
| (7,628 | ) |
|
| (7,551 | ) |
|
| (7,628 | ) |
|
| (7,551 | ) |
Other, net |
| (330 | ) |
|
| (269 | ) |
|
| (330 | ) |
|
| (269 | ) |
Total net assets (stockholders' equity) |
| 3,014 |
|
|
| 3,493 |
|
|
| 3,014 |
|
|
| 3,493 |
|
Cash and equivalents |
| (774 | ) |
|
| (1,987 | ) |
|
| (774 | ) |
|
| (1,987 | ) |
Debt |
| 7,628 |
|
|
| 7,551 |
|
|
| 7,628 |
|
|
| 7,551 |
|
Total invested capital | $ | 9,868 |
|
| $ | 9,057 |
|
| $ | 9,868 |
|
| $ | 9,057 |
|
|
|
|
|
|
|
|
| ||||||||
Average invested capital (2) | $ | 10,004 |
|
| $ | 9,084 |
|
| $ | 9,985 |
|
| $ | 8,912 |
|
|
|
|
|
|
|
|
| ||||||||
Net income to average invested capital (3) |
| 29.1 | % |
|
| 28.1 | % |
|
| 28.4 | % |
|
| 31.2 | % |
After-tax return on average invested capital (3) |
| 29.9 | % |
|
| 28.5 | % |
|
| 28.6 | % |
|
| 30.5 | % |
(1) Effective tax rate used for interest expense and other (income) expense for the three months ended September 30, 2022 and 2021 was 23.9% and 23.4%, respectively. Effective tax rate used for interest expense and other (income) expense for the nine months ended September 30, 2022 and 2021 was 23.7% and 22.9%, 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.
(3) Returns for the three months ended September 30, 2022 and 2021 were converted to an annual rate by multiplying the calculated return by 4. Returns for the nine months ended September 30, 2022 and 2021 were converted to an annual rate by dividing the calculated return by 3 and multiplying it by 4.
A reconciliation of the tax rate for the nine months ended September 30, 2022, excluding the second quarter 2022 discrete tax benefit of $51 million related to the resolution of a U.S. tax audit, is as follows:
| Nine Months Ended | ||||
| September 30, 2022 | ||||
Dollars in millions | Income Taxes |
| Tax Rate | ||
As reported | $ | 594 |
| 21.8 | % |
Discrete tax benefit related to the second quarter 2022 |
| 51 |
| 1.9 | % |
As adjusted | $ | 645 |
| 23.7 | % |
A reconciliation of the tax rate for the three and nine month periods ended September 30, 2021, 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:
| Three Months Ended |
| Nine Months Ended | ||||||||
| September 30, 2021 |
| September 30, 2021 | ||||||||
Dollars in millions | Income Taxes |
| Tax Rate |
| Income Taxes |
| Tax Rate | ||||
As reported | $ | 167 |
| 20.8 | % |
| $ | 449 |
| 17.7 | % |
Discrete tax benefit related to the third quarter 2021 |
| 21 |
| 2.6 | % |
|
| 21 |
| 0.8 | % |
Discrete tax benefit related to the second quarter 2021 |
| — |
| — | % |
|
| 112 |
| 4.4 | % |
As adjusted | $ | 188 |
| 23.4 | % |
| $ | 582 |
| 22.9 | % |
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AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
| Twelve Months Ended | ||
Dollars in millions | December 31, 2021 | ||
Numerator: |
| ||
Net income | $ | 2,694 |
|
Discrete tax benefit related to the third quarter 2021 |
| (21 | ) |
Discrete tax benefit related to the second quarter 2021 |
| (112 | ) |
Interest expense, net of tax (1) |
| 157 |
|
Other (income) expense, net of tax (1) |
| (40 | ) |
Operating income after taxes | $ | 2,678 |
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Denominator: |
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Invested capital: |
| ||
Cash and equivalents | $ | 1,527 |
|
Trade receivables |
| 2,840 |
|
Inventories |
| 1,694 |
|
Net plant and equipment |
| 1,809 |
|
Goodwill and intangible assets |
| 5,937 |
|
Accounts payable and accrued expenses |
| (2,233 | ) |
Debt |
| (7,687 | ) |
Other, net |
| (261 | ) |
Total net assets (stockholders' equity) |
| 3,626 |
|
Cash and equivalents |
| (1,527 | ) |
Debt |
| 7,687 |
|
Total invested capital | $ | 9,786 |
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Average invested capital (2) | $ | 9,087 |
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Net income to average invested capital |
| 29.6 | % |
After-tax return on average invested capital |
| 29.5 | % |
(1) Effective tax rate used for interest expense and other (income) expense for the year ended December 31, 2021 was 23.0%.
(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 the period presented.
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:
| Twelve Months Ended | ||||
| December 31, 2021 | ||||
Dollars in millions | Income Taxes |
| Tax Rate | ||
As reported | $ | 632 |
| 19.0 | % |
Discrete tax benefit related to the third quarter 2021 |
| 21 |
| 0.6 | % |
Discrete tax benefit related to the second quarter 2021 |
| 112 |
| 3.4 | % |
As adjusted | $ | 765 |
| 23.0 | % |
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FREE CASH FLOW (UNAUDITED)
| Three Months Ended |
| Nine Months Ended | ||||||||||||
| September 30, |
| September 30, | ||||||||||||
Dollars in millions |
| 2022 |
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| 2021 |
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| 2022 |
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| 2021 |
|
Net cash provided by operating activities | $ | 713 |
|
| $ | 619 |
|
| $ | 1,537 |
|
| $ | 1,783 |
|
Less: Additions to plant and equipment |
| (101 | ) |
|
| (71 | ) |
|
| (256 | ) |
|
| (217 | ) |
Free cash flow | $ | 612 |
|
| $ | 548 |
|
| $ | 1,281 |
|
| $ | 1,566 |
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Net Income | $ | 727 |
|
| $ | 639 |
|
| $ | 2,127 |
|
| $ | 2,085 |
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Net cash provided by operating activities to net income conversion rate |
| 98 | % |
|
| 97 | % |
|
| 72 | % |
|
| 86 | % |
Free cash flow to net income conversion rate |
| 84 | % |
|
| 86 | % |
|
| 60 | % |
|
| 75 | % |
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Media Contact | Investor Relations |
Tel: 224.661.7451 | Karen Fletcher |
Tel: 224.661.7433 | |
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