ITW Reports Second Quarter 2020 Results

Company Release - 7/31/2020 8:00 AM ET
  • 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 amounts2020 2019 2020 2019
Operating Revenue$2,564  $3,609  $5,792  $7,161 
Cost of revenue1,594  2,099  3,465  4,158 
Selling, administrative, and research and development expenses486  598  1,046  1,209 
Amortization and impairment of intangible assets35  41  71  84 
Operating Income449  871  1,210  1,710 
Interest expense(51) (55) (102) (118)
Other income (expense)8  9  33  23 
Income Before Taxes406  825  1,141  1,615 
Income Taxes87  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:       
Average316.1  324.8  317.2  326.0 
Average assuming dilution317.4  326.6  318.6  327.9 

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

In millionsJune 30, 2020 December 31, 2019
Assets   
Current Assets:   
Cash and equivalents$1,812  $1,981 
Trade receivables2,156  2,461 
Inventories1,167  1,164 
Prepaid expenses and other current assets253  296 
Assets held for sale221  351 
Total current assets5,609  6,253 
    
Net plant and equipment1,711  1,729 
Goodwill4,443  4,492 
Intangible assets801  851 
Deferred income taxes470  516 
Other assets1,229  1,227 
 $14,263  $15,068 
    
Liabilities and Stockholders’ Equity   
Current Liabilities:   
Short-term debt$4  $4 
Accounts payable402  472 
Accrued expenses1,106  1,217 
Cash dividends payable338  342 
Income taxes payable152  48 
Liabilities held for sale40  71 
Total current liabilities2,042  2,154 
    
Noncurrent Liabilities:   
Long-term debt7,765  7,754 
Deferred income taxes676  668 
Noncurrent income taxes payable413  462 
Other liabilities1,009  1,000 
Total noncurrent liabilities9,863  9,884 
    
Stockholders’ Equity:   
Common stock6  6 
Additional paid-in-capital1,317  1,304 
Retained earnings22,612  22,403 
Common stock held in treasury(19,669) (18,982)
Accumulated other comprehensive income (loss)(1,909) (1,705)
Noncontrolling interest1  4 
Total stockholders’ equity2,358  3,030 
 $14,263  $15,068 

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

Three Months Ended June 30, 2020
Dollars in millionsTotal RevenueOperating IncomeOperating Margin
Automotive OEM$361  $(28)  (7.8)%
Food Equipment336  31   9.2%
Test & Measurement and Electronics455  117   25.7%
Welding298  64   21.6%
Polymers & Fluids354  82   23.1%
Construction Products376  90   23.7%
Specialty Products387  98   25.4%
Intersegment(3    %
Total Segments2,564  454   17.7%
Unallocated  (5)  %
Total Company$2,564  $449   17.5%


Six Months Ended June 30, 2020
Dollars in millionsTotal RevenueOperating IncomeOperating Margin
Automotive OEM$1,057  $117   11.1%
Food Equipment819  148   18.1%
Test & Measurement and Electronics940  238   25.4%
Welding670  173   25.8%
Polymers & Fluids747  175   23.4%
Construction Products766  181   23.6%
Specialty Products801  207   25.9%
Intersegment(8)    %
Total Segments5,792  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 RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal 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 MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal 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) bps380 bps(330) bps320 bps40 bps160 bps
Total Organic (3090) bps  (1770) bps  80 bps  (850) bps  (60) bps  (160) bps  (220) bps  (750) bps
Acquisitions/

Divestitures
40 bps60 bps50 bps10 bps
Restructuring/
Other
100 bps130 bps70 bps90 bps30 bps100 bps80 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 RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal 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 MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal 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) bps250 bps(80) bps280 bps20 bps90 bps30 bps
Total Organic (1210) bps  (810) bps  50 bps  (410) bps  50 bps  (70) bps  (180) bps  (400) bps
Acquisitions/

Divestitures
50 bps70 bps60 bps20 bps
Restructuring/

Other
180 bps90 bps10 bps70 bps80 bps90 bps80 bps80 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 millions2020 2019 2020 2019
Operating income$449  $871  $1,210  $1,710 
Tax rate21.3 % 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 
Inventories1,167  1,256  1,167  1,256 
Net assets held for sale181  346  181  346 
Net plant and equipment1,711  1,717  1,711  1,717 
Goodwill and intangible assets5,244  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 capital16.8 % 28.6 % 22.0 % 28.1 %

FREE CASH FLOW (UNAUDITED)

 Three Months Ended Six Months Ended
 June 30, June 30,
Dollars in millions2020 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 rate213 % 98 % 140 % 94 %


Media ContactInvestor Relations
Illinois Tool WorksIllinois Tool Works
Trisha KnychKaren Fletcher
Tel: 224.661.7566Tel: 224.661.7433
mediarelations@itw.com investorrelations@itw.com 

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Source: Illinois Tool Works Inc.