ITW Reports Second Quarter 2020 Results

Rhea-AI Summary

Illinois Tool Works (ITW) reported Q2 2020 revenue of $2.6 billion, a 29% decline compared to the previous year, with organic revenue down 27%. The operating margin was 17.5%, reflecting a decrease from 24.1% in the prior year. GAAP EPS was $1.01, down from $1.91. Free cash flow rose 12% to $681 million, achieving a 213% conversion rate. ITW reported approximately $1.8 billion in cash and equivalents, with a credit facility offering up to $2.5 billion in additional liquidity.

Positive

• Free cash flow increased 12% to $681 million, with a 213% conversion rate.
• Ended the quarter with approximately $1.8 billion in cash and cash equivalents.
• Significant liquidity options available through a revolving credit facility of up to $2.5 billion.

Negative

• Total revenue declined by 29% compared to the prior year.
• Organic revenue fell 27%, indicating a significant drop in sales.
• GAAP EPS decreased to $1.01 from $1.91 year-over-year.

• Total revenue of $2.6 billion as organic revenue declined 27%
• Operating margin of 17.5%
• Operating income of $449 million
• GAAP EPS of $1.01
• Free cash flow of $681 million, 213% of net income

GLENVIEW, Ill., July 31, 2020 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its second quarter 2020 results.

“Our performance in the second quarter clearly demonstrates that the progress we have made on executing our long-term enterprise strategy has put ITW in a position of considerable strength in managing through the effects of the global pandemic,” said E. Scott Santi, chairman and chief executive officer.  “Our powerful ITW Business Model and decentralized, entrepreneurial culture are never more valuable than during times of significant and rapid change, and I want to thank all of my ITW colleagues around the world for their incredible care and commitment to keeping their co-workers safe while continuing to serve our customers with excellence.  Our people responded to an unprecedented health crisis and a 29 percent decline in revenues and still delivered $449 million in operating income, $681 million in free cash flow, and operating margin of 17.5 percent.  Strong proactive divisional leadership and our flexible cost structure allowed us to reduce operating expenses by over $140 million in the quarter despite the fact that we made the decision to provide full compensation and benefits support to every ITW team member for the entirety of the second quarter.”

“Looking forward, while significant end-market disruption and uncertainties remain, we will continue to leverage our financial strength and ample liquidity to prioritize playing offense in the recovery over playing defense in the contraction and to ensure that every one of our businesses is strongly positioned to fully participate in the recovery.  Despite the near-term challenges of the moment, we remain deeply committed to achieving and sustaining ITW’s full-potential performance, and we will utilize our financial strength and flexible cost structure to protect investments in areas of strategic importance to the execution of our long-term strategy.  I am confident that the strength and resilience of the ITW Business Model, our high-quality diversified business portfolio, and our people put us in a strong position to deal decisively and effectively with the effects of the pandemic however it plays out from here while remaining focused on executing our long-term enterprise strategy,” Santi concluded.

Second Quarter Results

Second-quarter revenue of $2.6 billion declined 29 percent with organic revenue down 27 percent.  Foreign currency translation and divestitures reduced revenues by 1.5 percent and 1.0 percent, respectively.  Revenues improved sequentially as the quarter progressed.

Operating margin was 17.5 percent compared to 24.1 percent in the prior year period as the lower volume impact was partially offset by benefits from Enterprise Initiatives of 100 basis points.  GAAP earnings per share (EPS) were $1.01 compared to $1.91 in the prior year period.  Free cash flow increased 12 percent to $681 million with a 213 percent conversion rate.  After-tax return on invested capital was 16.8 percent.  The effective tax rate for the second quarter was 21.3 percent.

At quarter end, ITW had approximately $1.8 billion in cash and cash equivalents on hand, essentially no short-term debt and a revolving credit facility in place that could provide additional liquidity of up to $2.5 billion, if needed.

On May 5, 2020, ITW suspended annual guidance for 2020 due to uncertainties regarding the duration and severity of the COVID-19 pandemic.

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.

Forward-looking Statement

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 effects of the COVID-19 pandemic, related government actions and the Company’s strategy in response thereto on the Company’s business, the anticipated duration of the Company’s COVID-19 containment and recovery phases, the Company’s financial scenario planning and estimates, expected access to liquidity sources, expected capital allocation, diluted earnings per share, foreign exchange rates, total and organic revenue, operating margin, economic and regulatory conditions in various geographic regions, expected dividend payments, price/cost impact, restructuring expenses, expected adjustments to capacity and cost structure, free cash flow, effective tax rate, after-tax return on invested capital, timing and amount of share repurchases, if any, potential acquisitions and dispositions and related impact on financial results, and plans regarding the issuance of 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 2019 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 $14.1 billion in 2019.  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								Six Months Ended
	June 30,								June 30,
In millions except per share amounts	2020				2019				2020				2019
Operating Revenue	$	2,564			$	3,609			$	5,792			$	7,161
Cost of revenue	1,594				2,099				3,465				4,158
Selling, administrative, and research and development expenses	486				598				1,046				1,209
Amortization and impairment of intangible assets	35				41				71				84
Operating Income	449				871				1,210				1,710
Interest expense	(51		)		(55		)		(102		)		(118		)
Other income (expense)	8				9				33				23
Income Before Taxes	406				825				1,141				1,615
Income Taxes	87				202				256				395
Net Income	$	319			$	623			$	885			$	1,220
Net Income Per Share:
Basic	$	1.01			$	1.92			$	2.79			$	3.74
Diluted	$	1.01			$	1.91			$	2.78			$	3.72
Cash Dividends Per Share:
Paid	$	1.07			$	1.00			$	2.14			$	2.00
Declared	$	1.07			$	1.00			$	2.14			$	2.00
Shares of Common Stock Outstanding During the Period:
Average	316.1				324.8				317.2				326.0
Average assuming dilution	317.4				326.6				318.6				327.9

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)

In millions	June 30, 2020				December 31, 2019
Assets
Current Assets:
Cash and equivalents	$	1,812			$	1,981
Trade receivables	2,156				2,461
Inventories	1,167				1,164
Prepaid expenses and other current assets	253				296
Assets held for sale	221				351
Total current assets	5,609				6,253
Net plant and equipment	1,711				1,729
Goodwill	4,443				4,492
Intangible assets	801				851
Deferred income taxes	470				516
Other assets	1,229				1,227
	$	14,263			$	15,068
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt	$	4			$	4
Accounts payable	402				472
Accrued expenses	1,106				1,217
Cash dividends payable	338				342
Income taxes payable	152				48
Liabilities held for sale	40				71
Total current liabilities	2,042				2,154
Noncurrent Liabilities:
Long-term debt	7,765				7,754
Deferred income taxes	676				668
Noncurrent income taxes payable	413				462
Other liabilities	1,009				1,000
Total noncurrent liabilities	9,863				9,884
Stockholders’ Equity:
Common stock	6				6
Additional paid-in-capital	1,317				1,304
Retained earnings	22,612				22,403
Common stock held in treasury	(19,669		)		(18,982		)
Accumulated other comprehensive income (loss)	(1,909		)		(1,705		)
Noncontrolling interest	1				4
Total stockholders’ equity	2,358				3,030
	$	14,263			$	15,068

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Three Months Ended June 30, 2020
Dollars in millions	Total Revenue				Operating Income				Operating Margin
Automotive OEM	$	361			$	(28	)			(7.8	)%
Food Equipment	336				31					9.2	%
Test & Measurement and Electronics	455				117					25.7	%
Welding	298				64					21.6	%
Polymers & Fluids	354				82					23.1	%
Construction Products	376				90					23.7	%
Specialty Products	387				98					25.4	%
Intersegment	(3		)		—					—	%
Total Segments	2,564				454					17.7	%
Unallocated	—				(5		)			—	%
Total Company	$	2,564			$	449				17.5	%

Six Months Ended June 30, 2020
Dollars in millions	Total Revenue				Operating Income				Operating Margin
Automotive OEM	$	1,057			$	117				11.1	%
Food Equipment	819				148					18.1	%
Test & Measurement and Electronics	940				238					25.4	%
Welding	670				173					25.8	%
Polymers & Fluids	747				175					23.4	%
Construction Products	766				181					23.6	%
Specialty Products	801				207					25.9	%
Intersegment	(8		)		—					—	%
Total Segments	5,792				1,239					21.4	%
Unallocated	—				(29		)			—	%
Total Company	$	5,792			$	1,210				20.9	%

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Q2 2020 vs. Q2 2019 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	(52.6)	%	(37.6)	%	(10.6)	%	(24.9)	%	(14.4)	%	(9.1)	%	(16.1)	%	(26.5)	%
Acquisitions/ Divestitures	—	%	—	%	(3.0)	%	(3.9)	%	—	%	—	%	(0.8)	%	(1.0)	%
Translation	(1.5)	%	(1.0)	%	(1.1)	%	(0.6)	%	(2.8)	%	(2.3)	%	(1.3)	%	(1.5)	%
Operating Revenue	(54.1)	%	(38.6)	%	(14.7)	%	(29.4)	%	(17.2)	%	(11.4)	%	(18.2)	%	(29.0)	%

Q2 2020 vs. Q2 2019 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

(1880) bps

(1300) bps

(300) bps

(520) bps

(380) bps

(200) bps

(380) bps

(750) bps

Changes in Variable Margin & OH Costs

(1210) bps

(470) bps

380 bps

(330) bps

320 bps

40 bps

160 bps

—

Total Organic

(3090) bps

(1770) bps

80 bps

(850) bps

(60) bps

(160) bps

(220) bps

(750) bps

Acquisitions/ Divestitures

—

—

40 bps

60 bps

—

—

50 bps

10 bps

Restructuring/ Other

100 bps

130 bps

—

70 bps

90 bps

30 bps

100 bps

80 bps

Total Operating Margin Change

(2990) bps

(1640) bps

120 bps

(720) bps

30 bps

(130) bps

(70) bps

(660) bps

Total Operating Margin % *

(7.8)%

9.2%

25.7%

21.6%

23.1%

23.7%

25.4%

17.5%

* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets

110 bps

100 bps

180 bps

20 bps

390 bps

30 bps

100 bps

140 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.08) on GAAP earnings per share for the second quarter of 2020.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

1H 2020 vs. 1H 2019 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	(32.0)	%	(22.0)	%	(7.0)	%	(16.9)	%	(8.9)	%	(4.6)	%	(12.4)	%	(16.6)	%
Acquisitions/ Divestitures	—	%	—	%	(3.1)	%	(3.7)	%	—	%	—	%	(1.0)	%	(1.0)	%
Translation	(1.7)	%	(1.2)	%	(1.0)	%	(0.5)	%	(2.5)	%	(2.5)	%	(1.2)	%	(1.5)	%
Operating Revenue	(33.7)	%	(23.2)	%	(11.1)	%	(21.1)	%	(11.4)	%	(7.1)	%	(14.6)	%	(19.1)	%

1H 2020 vs. 1H 2019 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

(840) bps

(630) bps

(200) bps

(330) bps

(230) bps

(90) bps

(270) bps

(430) bps

Changes in Variable Margin & OH Costs

(370) bps

(180) bps

250 bps

(80) bps

280 bps

20 bps

90 bps

30 bps

Total Organic

(1210) bps

(810) bps

50 bps

(410) bps

50 bps

(70) bps

(180) bps

(400) bps

Acquisitions/ Divestitures

—

—

50 bps

70 bps

—

—

60 bps

20 bps

Restructuring/ Other

180 bps

90 bps

10 bps

70 bps

80 bps

90 bps

80 bps

80 bps

Total Operating Margin Change

(1030) bps

(720) bps

110 bps

(270) bps

130 bps

20 bps

(40) bps

(300) bps

Total Operating Margin % *

11.1%

18.1%

25.4%

25.8%

23.4%

23.6%

25.9%

20.9%

* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets

70 bps

80 bps

170 bps

20 bps

370 bps

30 bps

90 bps

130 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.17) on GAAP earnings per share for the first half of 2020.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)

AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)

	Three Months Ended								Six Months Ended
	June 30,								June 30,
Dollars in millions	2020				2019				2020				2019
Operating income	$	449			$	871			$	1,210			$	1,710
Tax rate	21.3		%		24.5		%		22.4		%		24.5		%
Income taxes	(96		)		(213		)		(271		)		(418		)
Operating income after taxes	$	353			$	658			$	939			$	1,292
Invested capital:
Trade receivables	$	2,156			$	2,629			$	2,156			$	2,629
Inventories	1,167				1,256				1,167				1,256
Net assets held for sale	181				346				181				346
Net plant and equipment	1,711				1,717				1,711				1,717
Goodwill and intangible assets	5,244				5,431				5,244				5,431
Accounts payable and accrued expenses	(1,508		)		(1,719		)		(1,508		)		(1,719		)
Other, net	(636		)		(433		)		(636		)		(433		)
Total invested capital	$	8,315			$	9,227			$	8,315			$	9,227
Average invested capital	$	8,431			$	9,206			$	8,557			$	9,182
Return on average invested capital	16.8		%		28.6		%		22.0		%		28.1		%

FREE CASH FLOW (UNAUDITED)

	Three Months Ended								Six Months Ended
	June 30,								June 30,
Dollars in millions	2020				2019				2020				2019
Net cash provided by operating activities	$	737			$	685			$	1,351			$	1,301
Less: Additions to plant and equipment	(56		)		(77		)		(116		)		(154		)
Free cash flow	$	681			$	608			$	1,235			$	1,147
Net income	$	319			$	623			$	885			$	1,220
Free cash flow to net income conversion rate	213		%		98		%		140		%		94		%

Media Contact	Investor Relations
Illinois Tool Works	Illinois Tool Works
Trisha Knych	Karen Fletcher
Tel: 224.661.7566	Tel: 224.661.7433
mediarelations@itw.com	investorrelations@itw.com

FAQ

What were Illinois Tool Works' Q2 2020 earnings per share (EPS)?

The GAAP EPS for Q2 2020 was $1.01, down from $1.91 in the previous year.

How much did Illinois Tool Works' revenue decline in Q2 2020?

Revenue declined by 29% in Q2 2020 compared to the same period in the prior year.

What was the operating margin for Illinois Tool Works in Q2 2020?

The operating margin for Q2 2020 was 17.5%, down from 24.1% in the prior year.

How much free cash flow did Illinois Tool Works generate in Q2 2020?

Illinois Tool Works generated $681 million in free cash flow, reflecting a 12% increase.

What liquidity options does Illinois Tool Works have as of Q2 2020?

As of Q2 2020, Illinois Tool Works had approximately $1.8 billion in cash and a revolving credit facility providing up to $2.5 billion.