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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): February 3, 2026
_________________________
ILLINOIS TOOL WORKS INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | | | | | | | | | | |
| Delaware | 1-4797 | | 36-1258310 |
| (State or other jurisdiction of incorporation) | (Commission File No.) | | (I.R.S. Employer Identification No.) |
| | | | | | | |
| 155 Harlem Avenue | Glenview | IL | | | | 60025 |
| (Address of principal executive offices) | | | (Zip Code) |
Registrant's telephone number, including area code: 847-724-7500
Not Applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| | | | | |
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | ITW | New York Stock Exchange |
| 0.625% Euro Notes due 2027 | ITW27 | New York Stock Exchange |
| 3.250% Euro Notes due 2028 | ITW28 | New York Stock Exchange |
| 2.125% Euro Notes due 2030 | ITW30 | New York Stock Exchange |
| 1.00% Euro Notes due 2031 | ITW31 | New York Stock Exchange |
| 3.375% Euro Notes due 2032 | ITW32 | New York Stock Exchange |
| 3.00% Euro Notes due 2034 | ITW34 | New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition
On February 3, 2026, Illinois Tool Works Inc. (the "Company") announced its 2025 fourth quarter results of operations in the press release furnished as Exhibit 99.1.
Non-GAAP Financial Measures
The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure, along with free cash flow to net income conversion rate, is useful to investors in evaluating the Company's financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. A reconciliation of free cash flow to net cash provided by operating activities is included in the press release furnished as Exhibit 99.1.
The Company uses after-tax return on average invested capital ("After-tax ROIC") to measure the effectiveness of its operations' use of invested capital to generate profits. After-tax ROIC is not defined under U.S. generally accepted accounting principles ("GAAP"). After-tax ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company's ability to generate returns from cash invested in its operations and may be different than the method used by other companies to calculate After-tax ROIC. The Company defines After-tax ROIC as operating income after taxes divided by average invested capital, which is annualized when presented in interim periods. Operating income after taxes is a non-GAAP measure consisting of net income before interest expense and other income (expense), on an after-tax basis, which are excluded as they do not represent returns generated by the Company's operations. For comparability, the Company also excluded the net discrete tax benefit of $27 million in the third quarter of 2025 and the discrete tax benefit of $21 million in the first quarter of 2025 from net income and the effective tax rate for the year ended December 31, 2025. Additionally, for comparability, the Company also excluded the net discrete tax benefit of $121 million in the third quarter of 2024 from net income and the effective tax rate for the year ended December 31, 2024. Total invested capital represents the net assets of the Company, other than cash and equivalents and outstanding debt which do not represent capital investment in the Company's operations. The most comparable GAAP measure to operating income after taxes is net income. Calculations of net income to average invested capital and After-tax ROIC are included in the press release furnished as Exhibit 99.1.
The Company presented diluted net income per share for the twelve months ended December 31, 2024 excluding the cumulative effect of a change in inventory accounting method and the impact of the sale of the Company's noncontrolling interest in Wilsonart International Holdings LLC. The Company believes this non-GAAP measure enhances investors' understanding of the Company's underlying financial performance and improves comparability with other periods. A reconciliation of this non-GAAP measure to diluted net income per share is included in the press release furnished as Exhibit 99.1.
Item 9.01 Financial Statements and Exhibits
| | | | | | | | | | | |
| (d) | Exhibits | | |
| | | |
| Exhibit Number | | Exhibit Description |
| | | |
| | | |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| | |
| | ILLINOIS TOOL WORKS INC. |
| | |
| | |
| Dated: February 3, 2026 | | By: /s/ Michael M. Larsen |
| | Michael M. Larsen |
| | Senior Vice President & Chief Financial Officer |
Exhibit 99.1
ITW Reports Fourth Quarter and Full Year 2025 Results
Fourth Quarter 2025 Highlights
•Revenue of $4.1 billion, an increase of 4.1%
•Operating margin of 26.5%, as enterprise initiatives contributed 140 bps
•GAAP EPS of $2.72, an increase of 7%
2025 Highlights
•Revenue of $16 billion, an increase of 0.9%
•Customer-Back Innovation contributed 2.4% to revenue growth, an increase of 40 bps
•Operating margin of 26.3%, as enterprise initiatives contributed 130 bps
•GAAP EPS of $10.49 exceeded the prior guidance mid-point of $10.45
2026 Guidance
•Revenue growth of 2 to 4%, organic growth of 1 to 3%
•Operating margin expansion of approximately 100 bps with enterprise initiatives contributing 100 bps
•GAAP EPS of $11.00 to $11.40, an increase of 7% at the mid-point
GLENVIEW, IL., February 3, 2026 - Illinois Tool Works Inc. (NYSE: ITW) today reported its fourth quarter and full year 2025 results.
“ITW delivered a solid finish to the year, marked by more than four percent revenue growth and a seven percent increase in GAAP earnings per share. As a result of our disciplined execution across all seven segments, we expanded both operating margin and income to record levels in the quarter,” said Christopher O’Herlihy, President and Chief Executive Officer.
“Our results over the past year demonstrate that ITW is well-positioned to deliver solid financial performance in any environment as we consistently exceeded market growth while improving profitability and margins. Notably, our Customer-Back Innovation initiatives were a primary catalyst, contributing 2.4 percent to revenue growth in 2025. Building on this momentum, we expect to continue outperforming our end markets in 2026 as we leverage ITW’s unique business model to drive consistent, above-market organic growth with best-in-class margins and returns. I extend my sincere gratitude to our global colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence,” O’Herlihy concluded.
Fourth Quarter 2025 Results
Fourth quarter revenue of $4.1 billion increased by 4.1 percent and organic revenue growth was 1.3 percent. Foreign currency translation increased revenue by 2.5 percent and acquisitions added 0.3 percent.
GAAP EPS of $2.72 increased seven percent. Operating margin of 26.5 percent increased 30 basis points as enterprise initiatives contributed 140 basis points. Segment operating margin increased 120 basis points to 27.7 percent. Operating cash flow was $1 billion, and free cash flow was $0.9 billion with a conversion of 109 percent to net income. During the quarter, the company repurchased $375 million of its own shares and the effective tax rate was 22.8 percent.
Full Year 2025 Results
Full year revenue of $16 billion increased 0.9 percent as organic revenue was flat. Foreign currency translation increased revenue by 0.8 percent and acquisitions contributed 0.1 percent to revenues.
GAAP EPS of $10.49 exceeded the prior guidance mid-point of $10.45. Operating income was $4.2 billion and operating margin was 26.3 percent with enterprise initiatives contributing 130 basis points. Segment operating margin of 27.2 percent increased 70 basis points. Pricing and supply chain actions successfully offset the tariff impact for the year. Six of seven segments expanded operating margins with three segments achieving operating margins above 30 percent.
Operating cash flow was $3.1 billion and free cash flow was $2.7 billion, with a conversion of 88 percent to net income. The company invested approximately $0.8 billion to support the long-term growth of its highly profitable businesses and returned $3.3 billion to shareholders through dividends and share repurchases. The effective tax rate was 22.7 percent.
2026 Guidance
ITW is initiating 2026 guidance including GAAP EPS in the range of $11.00 to $11.40 per share, which represents seven percent earnings growth at the mid-point. The company projects revenue growth of two to four percent and organic growth of one to three percent based on current levels of demand and present foreign exchange rates.
Operating margin is projected to be in the range of 26.5 to 27.5 percent, an improvement of approximately 100 basis points with enterprise initiatives contributing 100 basis points.
All seven segments are expected to deliver positive organic growth and operating margin expansion in 2026.
Free cash flow is projected to be greater than 100 percent of net income, and the company plans to repurchase approximately $1.5 billion of its own shares. The projected effective tax rate is 23.5 to 24.5 percent.
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 to net income 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. For the same reasons, the company is unable to address the potential significance of the unavailable information, which could be material to future results.
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 potential impact of tariffs, the Company’s projected pricing actions, the impact of enterprise initiatives, future financial and operating performance, free cash flow and free cash flow to net income conversion rate, organic and total revenue, operating and incremental margin, price/cost impact, statements regarding diluted earnings per share, after-tax return on invested capital, effective tax rates, exchange rates, expected timing and amount of share repurchases, end market economic and regulatory conditions, and the Company’s 2026 guidance. These statements are subject to certain risks, uncertainties, assumptions, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that could cause actual results to differ materially from the Company’s expectations include those that are detailed in ITW’s Form 10-K for 2024 and subsequent reports filed with the SEC.
About Illinois Tool Works
ITW (NYSE: ITW) is a Fortune 300 global multi-industrial manufacturing leader with revenue of $16 billion in 2025. 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 43,000 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 | | Twelve Months Ended |
| December 31, | | December 31, |
| In millions except per share amounts | 2025 | | 2024 | | 2025 | | 2024 |
| Operating Revenue | $ | 4,093 | | | $ | 3,932 | | | $ | 16,044 | | | $ | 15,898 | |
| Cost of revenue | 2,284 | | | 2,221 | | | 8,969 | | | 8,858 | |
| Selling, administrative, and research and development expenses | 704 | | | 655 | | | 2,779 | | | 2,675 | |
| Amortization and impairment of intangible assets | 20 | | | 25 | | | 80 | | | 101 | |
| Operating Income | 1,085 | | | 1,031 | | | 4,216 | | | 4,264 | |
| Interest expense | (75) | | | (68) | | | (292) | | | (283) | |
| Other income (expense) | 14 | | | 20 | | | 42 | | | 441 | |
| Income Before Taxes | 1,024 | | | 983 | | | 3,966 | | | 4,422 | |
| Income taxes | 234 | | | 233 | | | 900 | | | 934 | |
| Net Income | $ | 790 | | | $ | 750 | | | $ | 3,066 | | | $ | 3,488 | |
| | | | | | | |
| Net Income Per Share: | | | | | | | |
Basic | $ | 2.73 | | | $ | 2.55 | | | $ | 10.52 | | | $ | 11.75 | |
Diluted | $ | 2.72 | | | $ | 2.54 | | | $ | 10.49 | | | $ | 11.71 | |
| | | | | | | |
| Cash Dividends Per Share: | | | | | | | |
Paid | $ | 1.61 | | | $ | 1.50 | | | $ | 6.11 | | | $ | 5.70 | |
Declared | $ | 1.61 | | | $ | 1.50 | | | $ | 6.22 | | | $ | 5.80 | |
| | | | | | | |
| Shares of Common Stock Outstanding During the Period: | | | | | | | |
Average | 289.5 | | 294.7 | | 291.5 | | 296.8 |
Average assuming dilution | 290.2 | | 295.8 | | 292.3 | | 297.8 |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
| | | | | | | | | | | |
| In millions | December 31, 2025 | | December 31, 2024 |
| Assets | | | |
| Current Assets: | | | |
| Cash and equivalents | $ | 851 | | | $ | 948 | |
| Trade receivables | 3,227 | | | 2,991 | |
| Inventories | 1,659 | | | 1,605 | |
| Prepaid expenses and other current assets | 463 | | | 312 | |
| | | |
| Total current assets | 6,200 | | | 5,856 | |
| | | |
| Net plant and equipment | 2,230 | | | 2,036 | |
| Goodwill | 5,098 | | | 4,839 | |
| Intangible assets | 591 | | | 592 | |
| Deferred income taxes | 519 | | | 369 | |
| Other assets | 1,510 | | | 1,375 | |
| | $ | 16,148 | | | $ | 15,067 | |
| | | |
| Liabilities and Stockholders' Equity | | | |
| Current Liabilities: | | | |
| Short-term debt | $ | 2,286 | | | $ | 1,555 | |
| Accounts payable | 522 | | | 519 | |
| Accrued expenses | 1,636 | | | 1,576 | |
| Cash dividends payable | 465 | | | 441 | |
| Income taxes payable | 217 | | | 217 | |
| | | |
| Total current liabilities | 5,126 | | | 4,308 | |
| | | |
| Noncurrent Liabilities: | | | |
| Long-term debt | 6,683 | | | 6,308 | |
| Deferred income taxes | 154 | | | 119 | |
| Other liabilities | 959 | | | 1,015 | |
| Total noncurrent liabilities | 7,796 | | | 7,442 | |
| | | |
| Stockholders' Equity: | | | |
| Common stock | 6 | | | 6 | |
| Additional paid-in-capital | 1,771 | | | 1,669 | |
| Retained earnings | 30,150 | | | 28,893 | |
| Common stock held in treasury | (26,875) | | | (25,375) | |
| Accumulated other comprehensive income (loss) | (1,827) | | | (1,877) | |
| Noncontrolling interest | 1 | | | 1 | |
| Total stockholders' equity | 3,226 | | | 3,317 | |
| $ | 16,148 | | | $ | 15,067 | |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| | | | | | | | | | | |
| Three Months Ended December 31, 2025 |
| Dollars in millions | Total Revenue | Operating Income | Operating Margin |
| Automotive OEM | $ | 827 | | $ | 180 | | 21.8 | % |
| Food Equipment | 698 | | 196 | | 28.0 | % |
| Test & Measurement and Electronics | 789 | | 221 | | 28.1 | % |
| Welding | 462 | | 153 | | 33.3 | % |
| Polymers & Fluids | 457 | | 132 | | 29.0 | % |
| Construction Products | 431 | | 126 | | 29.0 | % |
| Specialty Products | 433 | | 124 | | 28.7 | % |
| Intersegment | (4) | | — | | — | % |
| Total Segments | 4,093 | | 1,132 | | 27.7 | % |
| Unallocated | — | | (47) | | — | % |
| Total Company | $ | 4,093 | | $ | 1,085 | | 26.5 | % |
| | | | | | | | | | | |
| Twelve Months Ended December 31, 2025 |
| Dollars in millions | Total Revenue | Operating Income | Operating Margin |
| Automotive OEM | $ | 3,288 | | $ | 693 | | 21.1 | % |
| Food Equipment | 2,699 | | 753 | | 27.9 | % |
| Test & Measurement and Electronics | 2,825 | | 694 | | 24.6 | % |
| Welding | 1,890 | | 621 | | 32.9 | % |
| Polymers & Fluids | 1,765 | | 493 | | 27.9 | % |
| Construction Products | 1,820 | | 550 | | 30.2 | % |
| Specialty Products | 1,775 | | 553 | | 31.2 | % |
| Intersegment | (18) | | — | | — | % |
| Total Segments | 16,044 | | 4,357 | | 27.2 | % |
| Unallocated | — | | (141) | | — | % |
| Total Company | $ | 16,044 | | $ | 4,216 | | 26.3 | % |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Q4 2025 vs. Q4 2024 Favorable/(Unfavorable) |
| Operating Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW |
| Organic | 1.9 | % | 0.7 | % | 1.8 | % | 2.3 | % | 4.7 | % | (3.5) | % | 1.1 | % | 1.3 | % |
Acquisitions/
Divestitures | — | % | — | % | 1.5 | % | — | % | — | % | — | % | — | % | 0.3 | % |
| Translation | 3.6 | % | 3.1 | % | 2.2 | % | 1.0 | % | 1.8 | % | 2.0 | % | 2.9 | % | 2.5 | % |
| Operating Revenue | 5.5 | % | 3.8 | % | 5.5 | % | 3.3 | % | 6.5 | % | (1.5) | % | 4.0 | % | 4.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Q4 2025 vs. Q4 2024 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 | 40 bps | 10 bps | 40 bps | 40 bps | 80 bps | (80) bps | 30 bps | 30 bps |
| Changes in Variable Margin & OH Costs | 130 bps | 70 bps | 130 bps | 200 bps | 60 bps | 190 bps | 10 bps | 10 bps |
| Total Organic | 170 bps | 80 bps | 170 bps | 240 bps | 140 bps | 110 bps | 40 bps | 40 bps |
Acquisitions/
Divestitures | — | — | (60) bps | — | — | — | — | (10) bps |
| Restructuring/Other | 30 bps | — | — | (30) bps | (30) bps | (10) bps | (10) bps | — |
| Total Operating Margin Change | 200 bps | 80 bps | 110 bps | 210 bps | 110 bps | 100 bps | 30 bps | 30 bps |
| | | | | | | | |
| Total Operating Margin % * | 21.8% | 28.0% | 28.1% | 33.3% | 29.0% | 29.0% | 28.7% | 26.5% |
| | | | | | | | |
| * Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets | 20 bps | 10 bps | 120 bps | — | 130 bps | 10 bps | 20 bps | 50 bps ** |
| ** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.05) on GAAP earnings per share for the fourth quarter of 2025. |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Full Year 2025 vs Full Year 2024 Favorable/(Unfavorable) |
| Operating Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW |
| Organic | 2.0 | % | 0.8 | % | (1.4) | % | 2.0 | % | (0.2) | % | (5.1) | % | 1.0 | % | — | % |
Acquisitions/
Divestitures | — | % | — | % | 0.4 | % | — | % | — | % | — | % | — | % | 0.1 | % |
| Translation | 1.2 | % | 1.1 | % | 1.2 | % | 0.1 | % | 0.3 | % | 0.5 | % | 0.8 | % | 0.8 | % |
| Operating Revenue | 3.2 | % | 1.9 | % | 0.2 | % | 2.1 | % | 0.1 | % | (4.6) | % | 1.8 | % | 0.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Full Year 2025 vs Full Year 2024 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 | 40 bps | 20 bps | (40) bps | 30 bps | 10 bps | (110) bps | 20 bps | — |
| Changes in Variable Margin & OH Costs | 110 bps | 40 bps | 60 bps | 30 bps | 50 bps | 170 bps | 70 bps | (50) bps |
| Total Organic | 150 bps | 60 bps | 20 bps | 60 bps | 60 bps | 60 bps | 90 bps | (50) bps |
Acquisitions/
Divestitures | — | — | (20) bps | — | — | — | — | — |
| Restructuring/Other | — | 10 bps | (30) bps | — | (10) bps | 30 bps | — | — |
| Total Operating Margin Change | 150 bps | 70 bps | (30) bps | 60 bps | 50 bps | 90 bps | 90 bps | (50) bps |
| | | | | | | | |
| Total Operating Margin % * | 21.1% | 27.9% | 24.6% | 32.9% | 27.9% | 30.2% | 31.2% | 26.3% |
| | | | | | | | |
| * Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets | 20 bps | 10 bps | 130 bps | 10 bps | 150 bps | 10 bps | 10 bps | 50 bps ** |
| ** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.21) on GAAP earnings per share for 2025. |
|
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Twelve Months Ended |
| December 31, | | December 31, |
| Dollars in millions | 2025 | | 2024 | | 2025 | | 2024 |
| Numerator: | | | | | | | |
| Net income | $ | 790 | | | $ | 750 | | | $ | 3,066 | | | $ | 3,488 | |
| Net discrete tax benefit related to the third quarter 2025 | — | | | — | | | (27) | | | — | |
| Discrete tax benefit related to the first quarter 2025 | — | | | — | | | (21) | | | — | |
| Net discrete tax benefit related to the third quarter 2024 | — | | | — | | | — | | | (121) | |
Interest expense, net of tax (1) | 57 | | | 51 | | | 222 | | | 215 | |
Other (income) expense, net of tax (1) | (10) | | | (16) | | | (32) | | | (336) | |
| Operating income after taxes | $ | 837 | | | $ | 785 | | | $ | 3,208 | | | $ | 3,246 | |
| | | | | | | |
| Denominator: | | | | | | | |
| Invested capital: | | | | | | | |
| Cash and equivalents | $ | 851 | | | $ | 948 | | | $ | 851 | | | $ | 948 | |
| Trade receivables | 3,227 | | | 2,991 | | | 3,227 | | | 2,991 | |
| Inventories | 1,659 | | | 1,605 | | | 1,659 | | | 1,605 | |
| Net plant and equipment | 2,230 | | | 2,036 | | | 2,230 | | | 2,036 | |
| Goodwill and intangible assets | 5,689 | | | 5,431 | | | 5,689 | | | 5,431 | |
| Accounts payable and accrued expenses | (2,158) | | | (2,095) | | | (2,158) | | | (2,095) | |
| Debt | (8,969) | | | (7,863) | | | (8,969) | | | (7,863) | |
| Other, net | 697 | | | 264 | | | 697 | | | 264 | |
| Total net assets (stockholders' equity) | 3,226 | | | 3,317 | | | 3,226 | | | 3,317 | |
| Cash and equivalents | (851) | | | (948) | | | (851) | | | (948) | |
| Debt | 8,969 | | | 7,863 | | | 8,969 | | | 7,863 | |
| Total invested capital | $ | 11,344 | | | $ | 10,232 | | | $ | 11,344 | | | $ | 10,232 | |
| | | | | | | |
Average invested capital (2) | $ | 11,285 | | | $ | 10,511 | | | $ | 10,959 | | | $ | 10,419 | |
| | | | | | | |
Net income to average invested capital (3) | 28.0 | % | | 28.6 | % | | 28.0 | % | | 33.5 | % |
After-tax return on average invested capital (3) | 29.7 | % | | 29.9 | % | | 29.3 | % | | 31.2 | % |
(1) Effective tax rate used for interest expense and other (income) expense for the three months ended December 31, 2025 and 2024 was 22.8% and 23.7%, respectively, and 23.9%, and 23.8% for the twelve months ended December 31, 2025 and 2024, 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 December 31, 2025 and 2024 were converted to an annual rate by multiplying the calculated return by 4.
A reconciliation of the 2025 effective tax rate, excluding the third quarter 2025 net discrete tax benefit of $27 million, which included a favorable discrete tax benefit of $43 million related to the estimated U.S. federal tax liability for 2024, partially offset by a $16 million discrete tax expense related primarily to the resolution of a foreign tax audit, and excluding the first quarter 2025 discrete tax benefit of $21 million related to the reversal of a valuation allowance on net operating loss carryforwards, is as follows:
| | | | | | | | | | | |
| Twelve Months Ended |
| December 31, 2025 |
| Dollars in millions | Income Taxes | | Tax Rate |
| As reported | $ | 900 | | | 22.7 | % |
| Net discrete tax benefit related to the third quarter 2025 | 27 | | | 0.7 | % |
| Discrete tax benefit related to the first quarter 2025 | 21 | | | 0.5 | % |
| As adjusted | $ | 948 | | | 23.9 | % |
A reconciliation of the 2024 effective tax rate excluding the third quarter 2024 net discrete tax benefit of $121 million, which included favorable discrete tax benefits of $107 million related to the utilization of capital loss carryforwards upon the sale of Wilsonart and $87 million related to a reorganization of the Company's intellectual property, partially offset by a $73 million discrete tax expense related to the remeasurement of unrecognized tax benefits associated with various intercompany transactions, is as follows:
| | | | | | | | | | | |
| Twelve Months Ended |
| December 31, 2024 |
| Dollars in millions | Income Taxes | | Tax Rate |
| As reported | $ | 934 | | | 21.1 | % |
| Net discrete tax benefit related to the third quarter 2024 | 121 | | | 2.7 | % |
| As adjusted | $ | 1,055 | | | 23.8 | % |
FREE CASH FLOW (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Twelve Months Ended |
| December 31, | | December 31, |
| Dollars in millions | 2025 | | 2024 | | 2025 | | 2024 |
| Net cash provided by operating activities | $ | 963 | | | $ | 1,114 | | | $ | 3,126 | | | $ | 3,281 | |
| Less: Additions to plant and equipment | (105) | | | (118) | | | (419) | | | (437) | |
| Free cash flow | $ | 858 | | | $ | 996 | | | $ | 2,707 | | | $ | 2,844 | |
| | | | | | | |
| Net income | $ | 790 | | | $ | 750 | | | $ | 3,066 | | | $ | 3,488 | |
| | | | | | | |
| Net cash provided by operating activities to net income conversion rate | 122 | % | | 149 | % | | 102 | % | | 94 | % |
| Free cash flow to net income conversion rate | 109 | % | | 133 | % | | 88 | % | | 82 | % |
ADJUSTED NET INCOME PER SHARE - DILUTED (UNAUDITED)
| | | | | |
| Twelve Months Ended |
| December 31, 2024 |
| As reported | $ | 11.71 | |
Impact of sale of noncontrolling interest in Wilsonart (1) | (1.26) | |
Cumulative effect of change in inventory accounting method, net of tax (2) | (0.30) | |
| As adjusted | $ | 10.15 | |
(1) Includes the $363 million pre-tax gain on the sale of noncontrolling interest in Wilsonart and related taxes.
(2) Represents the cumulative effect of the change from the LIFO method of accounting to the FIFO method for certain U.S. businesses ($117 million pre-tax, or $88 million after-tax).