Illinois Tool Works Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison with Q1 2018 unless stated otherwise. ITW is a diversified global industrial manufacturer operating through seven segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $3,552 million | $3,744 million | Down 5.1% |
| Organic revenue | — | — | Down 1.5%; flat excluding one fewer shipping day |
| Operating income | $839 million | $903 million | Down 7.1% |
| Operating margin | 23.6% | 24.1% | Down 50 basis points |
| Net income | $597 million | $652 million | Down 8.4% |
| Diluted EPS | $1.81 | $1.90 | Down 4.7% |
| Operating cash flow | $616 million | $538 million | Up 14.5% |
| Free cash flow | $539 million | $444 million | Up 21.4% |
| Cash and equivalents | $1,755 million | $1,504 million at Dec. 31, 2018 | Up $251 million |
| Total debt | $7,741 million | $7,380 million at Dec. 31, 2018 | Up $361 million |
| Total debt / trailing EBITDA | 1.9x | 1.8x at Dec. 31, 2018 | Higher |
| Adjusted after-tax ROIC | 27.7% | 27.7% | Unchanged |
Interest expense was $63 million versus $66 million. The effective tax rate rose to 24.4% from 23.2%, primarily because Q1 2018 included a $14 million discrete foreign-tax-credit benefit. The filing does not provide a consolidated gross margin figure.
Material changes and segment performance
- Foreign currency translation reduced revenue by 3.4% and operating income by 3.5%. Higher restructuring expense reduced operating margin by 70 basis points; excluding that impact, margin increased 20 basis points, with enterprise initiatives contributing 100 basis points.
- Automotive OEM was the largest segment pressure: organic revenue fell 6.4% amid lower auto production; revenue declined 10.5% and operating income 23.3% year over year.
- Welding was the only segment with revenue growth: revenue rose 1.0% and operating income 2.4%, supported by 2.8% organic growth.
- Other segment revenue declined: Food Equipment 1.7%, Test & Measurement and Electronics 3.6%, Polymers & Fluids 6.0%, Construction Products 6.3%, and Specialty Products 4.3%. Every segment reported an operating margin above 20%.
- ITW repurchased 2.7 million shares for approximately $375 million and paid $328 million in dividends. Dividends declared were $1.00 per share, versus $0.78 in Q1 2018.
Liquidity, debt, and other financial matters
- Current assets were $6.075 billion and current liabilities $3.961 billion at March 31, 2019; net working capital was $2.114 billion, down $122 million from year-end.
- Short-term debt included $1.1 billion of commercial paper and $700 million of notes due April 1, 2019. The notes were repaid on that due date. Management cites free cash flow, credit facilities, and access to debt markets as liquidity sources.
- Operating cash flow less $77 million of capital spending produced reported free cash flow of $539 million. Cash dividends and repurchases totaled $703 million during the quarter.
- ITW adopted lease accounting in January 2019, recognizing a $223 million operating-lease right-of-use asset and $193 million lease liability at quarter-end; adoption had no material effect on quarterly results or cash flows.
- Ongoing tax audits could reduce unrecognized tax benefits by approximately $36 million within 12 months, predominantly relating to intercompany transactions.
Outlook, management commentary, and risks
- Management described the quarter as solid despite a challenging environment, a slower-than-expected start that improved during the quarter, foreign exchange headwinds, one fewer shipping day, and accelerated restructuring expense. No specific full-year earnings or revenue guidance is provided in the filing text.
- ITW is evaluating options, including potential divestitures, for certain businesses with revenue totaling up to $1 billion. If divestitures occur, the company expects any EPS dilution to be offset by incremental share repurchases.
- Management said tariffs imposed to date had not materially affected results; it will continue to assess tariffs and pricing actions to mitigate potential raw-material cost increases.
- Key risks identified include weakness in served markets, economic and political uncertainty, foreign exchange, raw-material inflation or shortages, execution of enterprise initiatives, financing and credit availability, tax matters, pension exposures, legal proceedings, divestiture liabilities, impairment, and cybersecurity or data-privacy events.
Important facts for investors to verify
- Whether organic growth improves as the impact of the one fewer shipping day and product-line simplification changes.
- How automotive production, regional demand, and foreign exchange affect revenue and margins, particularly in Automotive OEM.
- Whether restructuring costs and enterprise initiatives deliver the expected margin benefits.
- Debt and liquidity trends after repayment of the $700 million notes, including commercial-paper use and the 1.9x debt-to-EBITDA ratio.
- Any decisions on the potential divestitures and the associated earnings impact and planned share repurchases.
- Developments in tax audits, tariffs, raw-material costs, and other disclosed risks.