ITW Reports Third Quarter 2020 Results

Rhea-AI Summary

Illinois Tool Works (NYSE: ITW) reported Q3 2020 revenue of $3.3 billion, a 29% increase from Q2 2020 but a 4.9% decrease year-over-year. The company achieved an operating margin of 23.8% and GAAP EPS of $1.83. The after-tax return on invested capital rose to 29.6%

Free cash flow reached $631 million, or 108% of net income. Six of seven segments maintained operating margins above 20%. ITW continues to execute its long-term strategy despite challenges posed by the pandemic.

Positive

• Revenue increased 29% sequentially from Q2 2020.
• Free cash flow was 108% of net income, totaling $631 million.
• After-tax return on invested capital improved to 29.6%.
• Operating margin was solid at 23.8%.

Negative

• Q3 revenue declined 4.9% compared to the prior year.
• Organic revenue decreased by 4.6% year-over-year.
• Operating margin fell from 25.0% in the prior year.

• Total revenue of $3.3 billion as revenue increased 29 percent versus Q2 2020
• Operating margin of 23.8%
• GAAP EPS of $1.83
• After-tax ROIC of 29.6%
• Free cash flow was 108% of net income

GLENVIEW, Ill., Oct. 23, 2020 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its third quarter 2020 results.

“We saw solid recovery progress in many of the end markets we serve in the third quarter as evidenced by our revenue being up sequentially 29 percent versus second quarter.  Our people around the world responded by leveraging our proprietary business model to provide excellent service to our customers while keeping themselves and their co-workers safe.  These efforts and our third quarter financial results support the decisions we made early in the pandemic to provide full compensation and benefits support to all of our ITW team members, to focus on positioning the company for full participation in the recovery, and to remain invested in the key initiatives supporting the execution of our long-term enterprise strategy,” said E. Scott Santi, chairman and chief executive officer.  “I am very proud of how the ITW team is managing through this challenging period, and I thank all of my ITW colleagues around the world for their continued exceptional efforts and dedication.”

“In the face of the unprecedented challenges and circumstances brought about by the global pandemic, our strong operational and financial performance over the last several quarters provides further evidence that ITW is a company that has both the enduring competitive advantages and the resilience necessary to deliver consistent upper tier performance in any economic environment.  Looking ahead, we remain focused on delivering strong results across a range of economic scenarios while continuing to execute on our long-term strategy to achieve and sustain ITW’s full-potential performance,” Santi concluded.

Third Quarter Results
Third-quarter revenue of $3.3 billion declined 4.9 percent compared to the prior year period as organic revenue declined 4.6 percent.  Divestitures reduced revenue by 1.0 percent, partially offset by a foreign currency translation benefit of 0.7 percent.  Product Line Simplification reduced revenue by 30 basis points.

Operating margin was 23.8 percent compared to 25.0 percent in the prior year period as the lower volume impact and higher restructuring expenses were partially offset with benefits from Enterprise Initiatives of 120 basis points.  Six of seven segments delivered operating margin above 20 percent.

GAAP earnings per share was $1.83 compared to $2.04 in the prior year period.  Free cash flow was $631 million, 108 percent of net income.  After-tax return on invested capital improved to 29.6 percent compared to 29.2 percent in the prior year period.  The effective tax rate was 21.3 percent.

On May 5, 2020, ITW suspended annual guidance for 2020 due to uncertainties regarding the duration and severity of the COVID-19 pandemic.  On August 7, 2020, ITW raised its dividend seven percent to an annualized $4.56 per share. 

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 fiscal 2020 financial performance projections and ranges, 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										Nine Months Ended
	September 30,										September 30,
In millions except per share amounts	2020					2019					2020					2019
Operating Revenue	$	3,307				$	3,479				$	9,099				$	10,640
Cost of revenue	1,910					2,007					5,375					6,165
Selling, administrative, and research and development expenses	560					566					1,606					1,775
Amortization and impairment of intangible assets	48					38					119					122
Operating Income	789					868					1,999					2,578
Interest expense	(52		)			(52		)			(154		)			(170		)
Other income (expense)	2					26					35					49
Income Before Taxes	739					842					1,880					2,457
Income Taxes	157					182					413					577
Net Income	$	582				$	660				$	1,467				$	1,880
Net Income Per Share:
Basic	$	1.84				$	2.05				$	4.63				$	5.79
Diluted	$	1.83				$	2.04				$	4.61				$	5.76
Cash Dividends Per Share:
Paid	$	1.07				$	1.00				$	3.21				$	3.00
Declared	$	1.14				$	1.07				$	3.28				$	3.07
Shares of Common Stock Outstanding During the Period:
Average	316.5					322.3					316.9					324.8
Average assuming dilution	317.9					324.0					318.3					326.6

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

In millions	September 30, 2020					December 31, 2019
Assets
Current Assets:
Cash and equivalents	$	2,169				$	1,981
Trade receivables	2,494					2,461
Inventories	1,149					1,164
Prepaid expenses and other current assets	219					296
Assets held for sale	—					351
Total current assets	6,031					6,253
Net plant and equipment	1,736					1,729
Goodwill	4,591					4,492
Intangible assets	814					851
Deferred income taxes	509					516
Other assets	1,259					1,227
	$	14,940				$	15,068
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt	$	353				$	4
Accounts payable	521					472
Accrued expenses	1,263					1,217
Cash dividends payable	361					342
Income taxes payable	42					48
Liabilities held for sale	—					71
Total current liabilities	2,540					2,154
Noncurrent Liabilities:
Long-term debt	7,592					7,754
Deferred income taxes	671					668
Noncurrent income taxes payable	413					462
Other liabilities	1,027					1,000
Total noncurrent liabilities	9,703					9,884
Stockholders’ Equity:
Common stock	6					6
Additional paid-in-capital	1,346					1,304
Retained earnings	22,833					22,403
Common stock held in treasury	(19,652		)			(18,982		)
Accumulated other comprehensive income (loss)	(1,837		)			(1,705		)
Noncontrolling interest	1					4
Total stockholders’ equity	2,697					3,030
	$	14,940				$	15,068

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

Three Months Ended September 30, 2020
Dollars in millions	Total Revenue				Operating Income				Operating Margin
Automotive OEM	$	714			$	149			20.8	%
Food Equipment	449				88				19.6	%
Test & Measurement and Electronics	489				116				23.7	%
Welding	346				96				27.9	%
Polymers & Fluids	438				116				26.6	%
Construction Products	456				128				28.1	%
Specialty Products	420				106				25.2	%
Intersegment	(5		)		—				—	%
Total Segments	3,307				799				24.2	%
Unallocated	—				(10		)		—	%
Total Company	$	3,307			$	789			23.8	%

Nine Months Ended September 30, 2020
Dollars in millions	Total Revenue				Operating Income				Operating Margin
Automotive OEM	$	1,771			$	266			15.0	%
Food Equipment	1,268				236				18.6	%
Test & Measurement and Electronics	1,429				354				24.8	%
Welding	1,016				269				26.5	%
Polymers & Fluids	1,185				291				24.6	%
Construction Products	1,222				309				25.3	%
Specialty Products	1,221				313				25.7	%
Intersegment	(13		)		—				—	%
Total Segments	9,099				2,038				22.4	%
Unallocated	—				(39		)		—	%
Total Company	$	9,099			$	1,999			22.0	%

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

Q3 2020 vs. Q3 2019 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM			Food Equipment			Test & Measurement and Electronics			Welding			Polymers & Fluids			Construction Products		Specialty Products			Total ITW
Organic	(4.8)		%	(19.5)		%	(2.4)		%	(10.0)		%	5.8		%	7.6	%	(4.7)		%	(4.6)		%
Acquisitions/Divestitures	—		%	—		%	(3.0)		%	(4.3)		%	—		%	—	%	(0.8)		%	(1.0)		%
Translation	0.7		%	0.9		%	1.1		%	0.3		%	(1.0)		%	2.0	%	0.7		%	0.7		%
Operating Revenue	(4.1)		%	(18.6)		%	(4.3)		%	(14.0)		%	4.8		%	9.6	%	(4.8)		%	(4.9)		%

Q3 2020 vs. Q3 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

(90) bps

(490) bps

(60) bps

(180) bps

130 bps

150 bps

(100) bps

(100) bps

Changes in Variable Margin & OH Costs

120 bps

(120) bps

(140) bps

120 bps

150 bps

180 bps

(90) bps

40 bps

Total Organic

30 bps

(610) bps

(200) bps

(60) bps

280 bps

330 bps

(190) bps

(60) bps

Acquisitions/Divestitures

—

—

30 bps

60 bps

—

—

20 bps

10 bps

Restructuring/Other

(160) bps

(180) bps

(20) bps

(30) bps

(30) bps

(30) bps

70 bps

(70) bps

Total Operating Margin Change

(130) bps

(790) bps

(190) bps

(30) bps

250 bps

300 bps

(100) bps

(120) bps

Total Operating Margin % *

20.8%

19.6%

23.7%

27.9%

26.6%

28.1%

25.2%

23.8%

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

50 bps

80 bps

440 bps

10 bps

310 bps

20 bps

90 bps

150 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.11) on GAAP earnings per share for the third quarter of 2020.

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

YTD 2020 vs. YTD 2019 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM			Food Equipment			Test & Measurement and Electronics			Welding			Polymers & Fluids			Construction Products			Specialty Products			Total ITW
Organic	(23.3)		%	(21.2)		%	(5.5)		%	(14.7)		%	(4.0)		%	(0.5)		%	(9.9)		%	(12.7)		%
Acquisitions/Divestitures	—		%	—		%	(3.0)		%	(3.9)		%	—		%	—		%	(0.9)		%	(1.0)		%
Translation	(0.9)		%	(0.4)		%	(0.4)		%	(0.2)		%	(2.0)		%	(1.0)		%	(0.7)		%	(0.8)		%
Operating Revenue	(24.2)		%	(21.6)		%	(8.9)		%	(18.8)		%	(6.0)		%	(1.5)		%	(11.5)		%	(14.5)		%

YTD 2020 vs. YTD 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

(530) bps

(580) bps

(150) bps

(280) bps

(90) bps

(20) bps

(220) bps

(300) bps

Changes in Variable Margin & OH Costs

(180) bps

(150) bps

120 bps

(10) bps

230 bps

100 bps

30 bps

30 bps

Total Organic

(710) bps

(730) bps

(30) bps

(290) bps

140 bps

80 bps

(190) bps

(270) bps

Acquisitions/Divestitures

—

—

40 bps

70 bps

—

—

50 bps

20 bps

Restructuring/Other

50 bps

(10) bps

—

30 bps

40 bps

50 bps

80 bps

30 bps

Total Operating Margin Change

(660) bps

(740) bps

10 bps

(190) bps

180 bps

130 bps

(60) bps

(220) bps

Total Operating Margin % *

15.0%

18.6%

24.8%

26.5%

24.6%

25.3%

25.7%

22.0%

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

60 bps

80 bps

270 bps

20 bps

340 bps

20 bps

90 bps

130 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.28) on GAAP earnings per share for the first nine months 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															Nine Months Ended
	June 30,					September 30,										September 30,
Dollars in millions	2020					2020					2019					2020					2019
Operating income	$	449				$	789				$	868				$	1,999				$	2,578
Tax rate	21.3			%		21.3			%		24.1			%		22.0			%		24.3			%
Income taxes	(96)					(168)					(210)					(439)					(628)
Operating income after taxes	$	353				$	621				$	658				$	1,560				$	1,950
Invested capital:
Trade receivables	$	2,156				$	2,494				$	2,499				$	2,494				$	2,499
Inventories	1,167					1,149					1,209					1,149					1,209
Net assets held for sale	181					—					324					—					324
Net plant and equipment	1,711					1,736					1,693					1,736					1,693
Goodwill and intangible assets	5,244					5,405					5,320					5,405					5,320
Accounts payable and accrued expenses	(1,508)					(1,784)					(1,722)					(1,784)					(1,722)
Other, net	(636)					(527)					(535)					(527)					(535)
Total invested capital	$	8,315				$	8,473				$	8,788				$	8,473				$	8,788
Average invested capital	$	8,431				$	8,394				$	9,007				$	8,536				$	9,083
Return on average invested capital	16.8			%		29.6			%		29.2			%		24.4			%		28.6			%

A reconciliation of the tax rate for the three and nine month periods ended September 30, 2019 excluding the third quarter 2019 discrete tax benefit of $21 million related to a U.S. federal provision to return adjustment is as follows:

	Three Months Ended							Nine Months Ended
	September 30, 2019							September 30, 2019
Dollars in millions	Income Taxes				Tax Rate			Income Taxes				Tax Rate
As reported	$	182			21.6	%		$	577			23.5	%
Discrete tax benefit	21				2.5	%		21				0.8	%
As adjusted	$	203			24.1	%		$	598			24.3	%

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

FREE CASH FLOW (UNAUDITED)

	Three Months Ended										Nine Months Ended
	September 30,										September 30,
Dollars in millions	2020					2019					2020					2019
Net cash provided by operating activities	$	683				$	920				$	2,034				$	2,221
Less: Additions to plant and equipment	(52)					(90)					(168)					(244)
Free cash flow	$	631				$	830				$	1,866				$	1,977
Net income	$	582				$	660				$	1,467				$	1,880
Free cash flow to net income conversion rate	108			%		126			%		127			%		105			%

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' Q3 2020 earnings results?

In Q3 2020, Illinois Tool Works reported $3.3 billion in revenue, a GAAP EPS of $1.83, and an operating margin of 23.8%.

How did revenue for ITW change from Q2 to Q3 2020?

ITW's revenue increased by 29% from Q2 2020.

What is the after-tax return on invested capital for ITW in Q3 2020?

The after-tax return on invested capital for ITW improved to 29.6% in Q3 2020.

How much free cash flow did ITW generate in Q3 2020?

Illinois Tool Works generated $631 million in free cash flow in Q3 2020, which was 108% of net income.

What factors contributed to ITW's revenue decline in Q3 2020?

ITW's Q3 revenue declined 4.9% year-over-year due to a 4.6% organic revenue decline and divestitures that reduced revenue by 1.0%.