Illinois Tool Works Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. ITW is a diversified industrial manufacturer operating through seven segments. Financial amounts below are in millions of dollars except per-share data.
Financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $3,544 | $3,228 | +9.8% |
| Operating income | $905 | $761 | +18.8% |
| Operating margin | 25.5% | 23.6% | +190 basis points |
| Net income | $671 | $566 | +18.6% |
| Diluted EPS | $2.11 | $1.77 | +19.2% |
| Operating cash flow | $609 | $614 | -$5 |
| Free cash flow | $541 | $554 | -$13 |
| Capital expenditures | $68 | $60 | +$8 |
Organic revenue grew 6.1%; favorable foreign currency translation contributed 3.7 percentage points to reported revenue growth. Operating-margin improvement reflected 120 basis points of enterprise-initiative benefits and 120 basis points of positive operating leverage, partly offset by 60 basis points of unfavorable price/cost. After-tax return on average invested capital was 32.1%, up from 27.0%.
Segment performance
| Segment | Revenue | Revenue change | Operating income | Operating margin |
|---|---|---|---|---|
| Automotive OEM | $783 | +12.6% | $189 | 24.1% |
| Food Equipment | $451 | -6.5% | $96 | 21.2% |
| Test & Measurement and Electronics | $552 | +14.0% | $157 | 28.4% |
| Welding | $401 | +7.5% | $121 | 30.3% |
| Polymers & Fluids | $435 | +10.7% | $112 | 25.7% |
| Construction Products | $469 | +20.2% | $130 | 27.6% |
| Specialty Products | $457 | +10.4% | $126 | 27.6% |
All segments except Food Equipment recorded organic revenue growth. Food Equipment remained pressured by pandemic-related weakness in restaurant, institutional and service demand. Construction Products had the highest reported segment revenue growth; all segments reported operating margins above 21%.
Liquidity, debt and capital allocation
- Cash and equivalents were $2,484 at March 31, 2021, down $80 from year-end 2020. Net working capital was $4,024, up $90 from year-end.
- Total debt was $7,949, down from $8,122 at December 31, 2020. The trailing-twelve-month total debt-to-EBITDA ratio improved to 2.3 from 2.5.
- ITW reported no commercial paper outstanding and no borrowings under its $2.5 billion revolving credit facility, which matures in September 2024. Short-term debt included $350 of 3.375% notes due September 15, 2021.
- Q1 dividends paid were $361; the company repurchased approximately 1.2 million shares for $250. The repurchase program had $990 of authorization remaining at quarter-end.
- Cash decreased by $80 during the quarter, including $594 of net cash used in financing activities and a $30 adverse foreign-exchange effect.
Outlook, commentary and risks
- Management reported solid recovery progress in many end markets and cited execution of its enterprise initiatives and “Win the Recovery” actions as key performance drivers. It did not provide specific financial guidance in the supplied filing text.
- COVID-19 continued to adversely affect global operations and end markets; management said the extent and duration of the impact remained highly uncertain. Rising raw-material costs and challenging global supply-chain conditions also weighed on results.
- The company agreed to acquire the Test & Simulation business of MTS Systems from Amphenol for $750, subject to post-closing adjustments, regulatory approvals and customary closing conditions. The business is expected to join Test & Measurement and Electronics.
- Ongoing tax audits could affect unrecognized tax benefits; ITW said those benefits could decrease by approximately $99 within the next 12 months, predominantly relating to intercompany transactions.
- Other disclosed risks include market downturns, currency fluctuations, raw-material inflation or shortages, cyber and data-security events, pension-market risks, acquisitions and divestitures, tax changes, litigation, and environmental and climate-related matters. The filing reported no material changes to previously disclosed risk factors and no legal proceedings in the period.
Key facts investors should verify
- Whether organic growth and margin improvement persist, particularly as raw-material inflation and supply constraints affect price/cost.
- The pace of Food Equipment recovery and the effect of pandemic-related conditions on service and restaurant demand.
- Cash conversion, including the quarter’s working-capital outflows from receivables and inventories, and progress in free cash flow.
- Debt repayment and refinancing plans for the $350 of notes due in September 2021, alongside continued dividends and share repurchases.
- Regulatory and closing progress, final cost and integration plans for the proposed $750 MTS Test & Simulation acquisition, and developments in tax audits.