filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
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 | |||||||||||||||
| 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 |
The Notes to Financial Statements are an integral part of this statement.
Illinois Tool Works Inc. and Subsidiaries
Statement of Comprehensive Income (Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net Income | $ | 727 | $ | 639 | $ | 2,127 | $ | 2,085 | |||||||||||||||
| Foreign currency translation adjustments, net of tax | (210) | (59) | (394) | (29) | |||||||||||||||||||
| Pension and other postretirement benefit adjustments, net of tax | 5 | 11 | 14 | 33 | |||||||||||||||||||
| Other comprehensive income (loss) | (205) | (48) | (380) | 4 | |||||||||||||||||||
| Comprehensive Income | $ | 522 | $ | 591 | $ | 1,747 | $ | 2,089 |
The Notes to Financial Statements are an integral part of this statement.
Illinois Tool Works Inc. and Subsidiaries
Statement of Financial Position (Unaudited)
| In millions except per share amounts | 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 (par value of $0.01 per share): | |||||||||||
| Issued- 550.0 shares in 2022 and 2021 Outstanding- 307.2 shares in 2022 and 312.9 shares in 2021 | 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 |
The Notes to Financial Statements are an integral part of this statement.
Illinois Tool Works Inc. and Subsidiaries
Statement of Changes in Stockholders' Equity (Unaudited)
| In millions except per share amounts | Common Stock | Additional Paid-in Capital | Retained Earnings | Common Stock Held in Treasury | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interest | Total | ||||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 6 | $ | 1,464 | $ | 24,967 | $ | (21,382) | $ | (1,677) | $ | 1 | $ | 3,379 | |||||||||
| Net income | — | — | 727 | — | — | — | 727 | ||||||||||||||||
| Stock-based compensation expense | — | 15 | — | — | — | — | 15 | ||||||||||||||||
| Repurchases of common stock | — | — | — | (500) | — | — | (500) | ||||||||||||||||
| Dividends declared ($1.31 per share) | — | — | (402) | — | — | — | (402) | ||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (205) | — | (205) | ||||||||||||||||
| Balance at September 30, 2022 | $ | 6 | $ | 1,479 | $ | 25,292 | $ | (21,882) | $ | (1,882) | $ | 1 | $ | 3,014 | |||||||||
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||
| Balance at June 30, 2021 | $ | 6 | $ | 1,402 | $ | 23,842 | $ | (20,140) | $ | (1,590) | $ | 1 | $ | 3,521 | |||||||||
| Net income | — | — | 639 | — | — | — | 639 | ||||||||||||||||
| Stock-based compensation expense | — | 14 | — | — | — | — | 14 | ||||||||||||||||
| Repurchases of common stock | — | — | — | (250) | — | — | (250) | ||||||||||||||||
| Dividends declared ($1.22 per share) | — | — | (383) | — | — | — | (383) | ||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (48) | — | (48) | ||||||||||||||||
| Balance at September 30, 2021 | $ | 6 | $ | 1,416 | $ | 24,098 | $ | (20,390) | $ | (1,638) | $ | 1 | $ | 3,493 | |||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 6 | $ | 1,432 | $ | 24,325 | $ | (20,636) | $ | (1,502) | $ | 1 | $ | 3,626 | |||||||||
| Net income | — | — | 2,127 | — | — | — | 2,127 | ||||||||||||||||
| Common stock issued for stock-based compensation | — | (1) | — | 4 | — | — | 3 | ||||||||||||||||
| Stock-based compensation expense | — | 48 | — | — | — | — | 48 | ||||||||||||||||
| Repurchases of common stock | — | — | — | (1,250) | — | — | (1,250) | ||||||||||||||||
| Dividends declared ($3.75 per share) | — | — | (1,160) | — | — | — | (1,160) | ||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (380) | — | (380) | ||||||||||||||||
| Balance at September 30, 2022 | $ | 6 | $ | 1,479 | $ | 25,292 | $ | (21,882) | $ | (1,882) | $ | 1 | $ | 3,014 | |||||||||
| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 6 | $ | 1,362 | $ | 23,114 | $ | (19,659) | $ | (1,642) | $ | 1 | $ | 3,182 | |||||||||
| Net income | — | — | 2,085 | — | — | — | 2,085 | ||||||||||||||||
| Common stock issued for stock-based compensation | — | 13 | — | 19 | — | — | 32 | ||||||||||||||||
| Stock-based compensation expense | — | 41 | — | — | — | — | 41 | ||||||||||||||||
| Repurchases of common stock | — | — | — | (750) | — | — | (750) | ||||||||||||||||
| Dividends declared ($3.50 per share) | — | — | (1,101) | — | — | — | (1,101) | ||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | 4 | — | 4 | ||||||||||||||||
| Balance at September 30, 2021 | $ | 6 | $ | 1,416 | $ | 24,098 | $ | (20,390) | $ | (1,638) | $ | 1 | $ | 3,493 |
The Notes to Financial Statements are an integral part of this statement.
Illinois Tool Works Inc. and Subsidiaries
Statement of Cash Flows (Unaudited)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| In millions | 2022 | 2021 | |||||||||
| Cash Provided by (Used for) Operating Activities: | |||||||||||
| Net income | $ | 2,127 | $ | 2,085 | |||||||
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
| Depreciation | 209 | 206 | |||||||||
| Amortization and impairment of intangible assets | 102 | 100 | |||||||||
| Change in deferred income taxes | (72) | (79) | |||||||||
| Provision for uncollectible accounts | 4 | — | |||||||||
| (Income) loss from investments | (8) | (28) | |||||||||
| (Gain) loss on sale of plant and equipment | (1) | — | |||||||||
| (Gain) loss on sale of operations and affiliates | (1) | — | |||||||||
| Stock-based compensation expense | 48 | 41 | |||||||||
| Other non-cash items, net | 1 | 8 | |||||||||
| Change in assets and liabilities, net of acquisitions and divestitures: | |||||||||||
| (Increase) decrease in- | |||||||||||
| Trade receivables | (417) | (270) | |||||||||
| Inventories | (477) | (365) | |||||||||
| Prepaid expenses and other assets | 27 | (63) | |||||||||
| Increase (decrease) in- | |||||||||||
| Accounts payable | 84 | 44 | |||||||||
| Accrued expenses and other liabilities | 14 | 133 | |||||||||
| Income taxes | (102) | (30) | |||||||||
| Other, net | (1) | 1 | |||||||||
| Net cash provided by operating activities | 1,537 | 1,783 | |||||||||
| Cash Provided by (Used for) Investing Activities: | |||||||||||
| Acquisition of businesses (excluding cash and equivalents) | (2) | — | |||||||||
| Additions to plant and equipment | (256) | (217) | |||||||||
| Proceeds from investments | 12 | 37 | |||||||||
| Proceeds from sale of plant and equipment | 8 | 6 | |||||||||
| Proceeds from sales of operations and affiliates | 3 | — | |||||||||
| Other, net | (2) | (2) | |||||||||
| Net cash provided by (used for) investing activities | (237) | (176) | |||||||||
| Cash Provided by (Used for) Financing Activities: | |||||||||||
| Cash dividends paid | (1,139) | (1,080) | |||||||||
| Issuance of common stock | 17 | 42 | |||||||||
| Repurchases of common stock | (1,250) | (750) | |||||||||
| Net proceeds from (repayments of) debt with original maturities of three months or less | 1,078 | 1 | |||||||||
| Proceeds from debt with original maturities of more than three months | 454 | — | |||||||||
| Repayments of debt with original maturities of more than three months | (1,110) | (350) | |||||||||
| Other, net | (15) | (10) | |||||||||
| Net cash provided by (used for) financing activities | (1,965) | (2,147) | |||||||||
| Effect of Exchange Rate Changes on Cash and Equivalents | (88) | (37) | |||||||||
| Cash and Equivalents: | |||||||||||
| Increase (decrease) during the period | (753) | (577) | |||||||||
| Beginning of period | 1,527 | 2,564 | |||||||||
| End of period | $ | 774 | $ | 1,987 | |||||||
| Supplementary Cash Flow Information: | |||||||||||
| Cash Paid During the Period for Interest | $ | 170 | $ | 178 | |||||||
| Cash Paid During the Period for Income Taxes, Net of Refunds | $ | 768 | $ | 558 |
The Notes to Financial Statements are an integral part of this statement.
Illinois Tool Works Inc. and Subsidiaries
Notes to Financial Statements (Unaudited)
(1) Significant Accounting Policies
Financial Statements— The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the "Company"). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. Interim results are not necessarily indicative of results for the full year. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company's 2021 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting.
(2) Novel 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 spread and impacted the countries in which the Company operates and the markets the Company serves. During 2021 and 2022, the Company experienced solid recovery progress in many of its end markets; however, the disruptions caused by the COVID-19 pandemic have continued 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, spikes in infections (including the spread of variants) continuing to be experienced and certain jurisdictions continuing to impose stay-at-home orders. The pandemic and resurgence of outbreaks could continue to adversely impact the operations of the Company and its customers and suppliers.
(3) MTS Test & Simulation Acquisition
On December 1, 2021, the Company completed the acquisition of the Test & Simulation business of MTS Systems Corporation ("MTS") from Amphenol Corporation for a purchase price of $750 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 $101 million and $308 million for the three and nine months ended September 30, 2022, respectively. The Company is in the 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 updated allocation, the Company recorded goodwill of $435 million and intangible assets of $257 million. The intangible assets included $93 million related to indefinite-lived trademarks and brands and $164 million related to amortizable intangible assets that are expected to be amortized on a straight-line basis over estimated useful lives ranging from 1 to 14 years, with a weighted-average life of 11 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. Adjustments resulting from updates to the purchase price allocation during 2022 were not material. Subsequent acquisition accounting adjustments may change the 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) Divestitures
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 $1.0 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 fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. Due to the COVID-19 pandemic, the Company chose to defer any further significant divestiture activity in 2020 and 2021. The Company has reinitiated the divestiture process in 2022 for certain businesses with combined annual revenues of approximately $0.5 billion, subject to approval by the Company's Board of Directors.
In the second quarter of 2022, plans were approved to divest two businesses, including one business in the Polymers & Fluids segment and one business in the Food Equipment segment, with total combined revenues of $115 million for the year ended December 31, 2021. These two businesses were classified as held for sale beginning in the second quarter of 2022.
Subsequent to the third quarter, on October 3, 2022, the Company completed the sale of the one business in the Polymers & Fluids segment for $220 million, subject to certain closing adjustments. The sale is expected to result in a pre-tax gain of approximately $156 million in the fourth quarter of 2022. As of September 30, 2022, this business was presented as held for sale in the Statement of Financial Position.
As of September 30, 2022, the assets and liabilities related to the two businesses discussed above that were included in assets and liabilities held for sale in the Statement of Financial Position were as follows:
| In millions | September 30, 2022 | ||||
| Trade receivables | $ | 20 | |||
| Inventories | 19 | ||||
| Net plant and equipment | 14 | ||||
| Goodwill and intangible assets | 43 | ||||
| Other | 7 | ||||
| Total assets held for sale | $ | 103 | |||
| Accounts payable | $ | 3 | |||
| Accrued expenses | 14 | ||||
| Other | 11 | ||||
| Total liabilities held for sale | $ | 28 |
Operating revenue of the two businesses held for sale for the three and nine months ended September 30, 2022 and 2021 was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Operating revenue | $ | 37 | $ | 28 | $ | 100 | $ | 86 |
(5) Operating Revenue
The Company's 83 diversified operating divisions 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. Operating revenue by product category, which is consistent with the Company's segment presentation, for the three and nine months ended September 30, 2022 and 2021 was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Automotive OEM | $ | 753 | $ | 647 | $ | 2,224 | $ | 2,137 | |||||||||||||||
| Food Equipment | 633 | 544 | 1,813 | 1,509 | |||||||||||||||||||
| Test & Measurement and Electronics | 715 | 552 | 2,096 | 1,710 | |||||||||||||||||||
| Welding | 477 | 425 | 1,413 | 1,228 | |||||||||||||||||||
| Polymers & Fluids | 473 | 456 | 1,450 | 1,357 | |||||||||||||||||||
| Construction Products | 527 | 478 | 1,643 | 1,465 | |||||||||||||||||||
| Specialty Products | 438 | 459 | 1,337 | 1,387 | |||||||||||||||||||
| Intersegment revenue | (5) | (5) | (15) | (17) | |||||||||||||||||||
| Total operating revenue | $ | 4,011 | $ | 3,556 | $ | 11,961 | $ | 10,776 |
The following is a description of the product offerings, end markets and typical revenue transactions for each 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.
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 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.
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:
-
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) Income Taxes
The Company's effective tax rate for the three months ended September 30, 2022 and 2021 was 23.9% and 20.8%, respectively, and 21.8% and 17.7% for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate for the nine months ended September 30, 2022 included a discrete income tax benefit of $51 million in the second quarter of 2022 related to a decrease in unrecognized tax benefits resulting from the resolution of a U.S. tax audit. The effective tax rate for the three and nine months ended September 30, 2021 included a discrete income tax benefit of $21 million in the third quarter of 2021 related to the utilization of capital losses. The effective tax rate for the nine months ended September 30, 2021 also benefited from 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 rates for 2022 and 2021 included discrete income tax benefits related to excess tax benefits from stock-based compensation of $1 million for the three months ended September 30, 2022 and 2021, and $9 million and $14 million for the nine months ended September 30, 2022 and 2021, respectively.
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 ("IRS"), HM 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 $22 million related predominantly to the potential resolution of income tax examinations. The Company has recorded its best estimate of the potential exposure for these issues.
(7) Goodwill and Intangible Assets
The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarters of 2022 and 2021. The assessments resulted in no impairment charges in either 2022 or 2021.
(8) Inventories
Inventories as of September 30, 2022 and December 31, 2021 were as follows:
| In millions | September 30, 2022 | December 31, 2021 | |||||||||
| Raw material | $ | 849 | $ | 716 | |||||||
| Work-in-process | 250 | 208 | |||||||||
| Finished goods | 1,047 | 888 | |||||||||
| LIFO reserve | (139) | (118) | |||||||||
| Total inventories | $ | 2,007 | $ | 1,694 |
(9) Pension and Other Postretirement Benefits
Pension and other postretirement benefit costs for the three and nine months ended September 30, 2022 and 2021 were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| Pension | Other Postretirement Benefits | Pension | Other Postretirement Benefits | ||||||||||||||||||||||||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||
| Components of net periodic benefit cost: | |||||||||||||||||||||||||||||||||||||||||||||||
| Service cost | $ | 11 | $ | 13 | $ | 2 | $ | 2 | $ | 35 | $ | 40 | $ | 5 | $ | 6 | |||||||||||||||||||||||||||||||
| Interest cost | 13 | 10 | 3 | 3 | 38 | 30 | 10 | 8 | |||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | (24) | (26) | (7) | (7) | (76) | (77) | (20) | (20) | |||||||||||||||||||||||||||||||||||||||
| Amortization of actuarial loss (gain) | 5 | 14 | (1) | — | 18 | 40 | (3) | — | |||||||||||||||||||||||||||||||||||||||
| Amortization of prior service cost | 1 | — | — | — | 1 | 1 | — | — | |||||||||||||||||||||||||||||||||||||||
| Settlements | 1 | — | — | — | 1 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total net periodic benefit cost (income) | $ | 7 | $ | 11 | $ | (3) | $ | (2) | $ | 17 | $ | 34 | $ | (8) | $ | (6) |
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).
The Company expects to contribute approximately $14 million to its pension plans and $4 million to its other postretirement benefit plans in 2022. As of September 30, 2022, contributions of $8 million to pension plans and $3 million to other postretirement benefit plans have been made.
(10) Debt
Total debt as of September 30, 2022 and December 31, 2021 was as follows:
| In millions | September 30, 2022 | December 31, 2021 | |||||||||
| Short-term debt | $ | 1,688 | $ | 778 | |||||||
| Long-term debt | 5,940 | 6,909 | |||||||||
| Total debt | $ | 7,628 | $ | 7,687 |
Short-term debt included commercial paper of $1.2 billion and $210 million as of September 30, 2022 and December 31, 2021, respectively. The weighted-average interest rate on commercial paper as of September 30, 2022 and December 31, 2021 was 2.68% and 0.14%, respectively. Short-term debt as of September 30, 2022 also included $490 million related to the 1.25% Euro notes due May 22, 2023, which were reclassified from Long-term debt to Short-term debt in the second quarter of 2022. As of December 31, 2021, Short-term debt also included $568 million related to the 1.75% Euro notes due May 20, 2022, which were
redeemed in full at face value on February 22, 2022. Additionally, the $350 million of 3.375% notes due September 15, 2021 were redeemed in full at face value on June 15, 2021.
The Company has a $2.5 billion 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. No amounts were outstanding under the $2.5 billion revolving credit facility as of September 30, 2022 or December 31, 2021.
On October 21, 2022, the Company entered into a $3.0 billion revolving credit facility with a termination date of October 21, 2027. This agreement replaced the existing $2.5 billion revolving credit facility discussed above.
The approximate fair value and related carrying value of the Company's total long-term debt, including current maturities of long-term debt presented as short-term debt, as of September 30, 2022 and December 31, 2021 were as follows:
| In millions | September 30, 2022 | December 31, 2021 | |||||||||
| Fair value | $ | 5,873 | $ | 8,296 | |||||||
| Carrying value | 6,430 | 7,477 |
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.
(11) Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes in Accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Beginning balance | $ | (1,677) | $ | (1,590) | $ | (1,502) | $ | (1,642) | |||||||||||||||
| Foreign currency translation adjustments during the period | (159) | (35) | (277) | 22 | |||||||||||||||||||
| Foreign currency translation adjustments reclassified to income | — | — | — | 4 | |||||||||||||||||||
| Income taxes | (51) | (24) | (117) | (55) | |||||||||||||||||||
| Total foreign currency translation adjustments, net of tax | (210) | (59) | (394) | (29) | |||||||||||||||||||
| Pension and other postretirement benefit adjustments reclassified to income | 6 | 14 | 17 | 41 | |||||||||||||||||||
| Income taxes | (1) | (3) | (3) | (8) | |||||||||||||||||||
| Total pension and other postretirement benefit adjustments, net of tax | 5 | 11 | 14 | 33 | |||||||||||||||||||
| Ending balance | $ | (1,882) | $ | (1,638) | $ | (1,882) | $ | (1,638) |
Foreign currency translation adjustments reclassified to income related to the exit of immaterial foreign operations. Pension and other postretirement benefit adjustments reclassified to income represented settlements and the amortization of actuarial gains and losses. Refer to Note 9. Pension and Other Postretirement Benefits for additional information.
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). On February 22, 2022, €500 million of the Euro notes issued in May 2014 were redeemed in full. Refer to Note 10. Debt for additional information regarding the redemption of these notes. The carrying values of the 2019, 2015 and 2014 Euro notes were $1.6 billion, $1.0 billion and $481 million, respectively, as of September 30, 2022. The cumulative unrealized pre-tax gain (loss) recorded in Accumulated other comprehensive income
(loss) related to the net investment hedge was a gain of $667 million and $183 million as of September 30, 2022 and December 31, 2021, respectively.
As of September 30, 2022 and 2021, the ending balance of Accumulated other comprehensive income (loss) consisted of after-tax cumulative translation adjustment losses of $1.7 billion and $1.3 billion, respectively, and after-tax unrecognized pension and other postretirement benefit costs of $182 million and $298 million, respectively.
(12) Segment 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 seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Refer to Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding operating revenue and operating income for the Company's segments.
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