Illinois Tool Works Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. ITW is a diversified industrial manufacturer with seven reported segments and 83 divisions. Amounts below are in millions of dollars except per-share data and percentages.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|
| Operating revenue | $3,676 | $2,564 | $7,220 | $5,792 |
| Operating income | $893 | $449 | $1,798 | $1,210 |
| Operating margin | 24.3% | 17.5% | 24.9% | 20.9% |
| Net income | $775 | $319 | $1,446 | $885 |
| Diluted EPS | $2.45 | $1.01 | $4.56 | $2.78 |
| Operating cash flow | $555 | $737 | $1,164 | $1,351 |
| Free cash flow | $477 | $681 | $1,018 | $1,235 |
- Q2 revenue rose 43.4% (37.2% organic); six-month revenue rose 24.7% (19.9% organic). Foreign currency translation contributed 6.2 and 4.8 percentage points, respectively. All segments and major geographic regions posted double-digit organic growth.
- Q2 operating margin expanded 680 basis points and six-month margin 400 basis points. Management attributed gains principally to operating leverage and enterprise initiatives, partly offset by unfavorable price/cost and higher overhead expenses.
- Reported diluted EPS increased 142.6% in Q2 and 64.0% year to date. A $112 tax benefit from the U.K. tax-rate change added about $0.35 to Q2 EPS; excluding it, EPS growth was 107.9% for Q2 and 51.4% year to date.
- At June 30, cash and equivalents were $2,058; total debt was $7,648, comprising $592 short-term and $7,056 long-term. Total debt to trailing-twelve-month EBITDA was 2.0x, down from 2.5x at December 31, 2020.
- Current assets were $6,509 and current liabilities $2,960; net working capital was $3,549, down from $3,934 at year-end. Cash declined by $506 during the first half. A $300 receivables increase and $222 inventory increase contributed to lower operating cash flow year over year.
- ITW reported no commercial paper or revolving-credit borrowings and had $2.5 billion available under its revolving credit facility. The $592 of short-term debt includes Euro notes due in May 2022; $350 million of notes due September 2021 were redeemed in June.
- First-half capital returns included $721 of dividends paid and $500 of share repurchases. The quarterly dividend declared was $1.14 per share. At quarter-end, $740 million remained authorized under the 2018 repurchase program and $3.0 billion under the new 2021 program.
Q2 segment performance
| Segment | Revenue | Organic revenue growth | Operating margin |
|---|
| Automotive OEM | $707 | 83.5% | 18.8% (vs. -7.8%) |
| Food Equipment | $514 | 46.0% | 22.0% (vs. 9.2%) |
| Test & Measurement and Electronics | $606 | 28.7% | 28.1% (vs. 25.7%) |
| Welding | $402 | 32.6% | 28.5% (vs. 21.6%) |
| Polymers & Fluids | $466 | 27.6% | 27.3% (vs. 23.1%) |
| Construction Products | $518 | 28.2% | 27.6% (vs. 23.7%) |
| Specialty Products | $471 | 17.2% | 27.2% (vs. 25.4%) |
Changes, outlook, and risks
- Results rebounded strongly from the pandemic-affected 2020 comparison period. Management cited ongoing recovery across end markets and its “Win the Recovery” actions. Automotive OEM revenue also faced customer production-schedule changes related to component shortages.
- Rising raw-material costs and a challenging global supply chain pressured price/cost. Management reported unfavorable consolidated price/cost effects of 120 basis points in Q2 and 90 basis points year to date.
- COVID-19 conditions remained uncertain, with global operating disruption, infection spikes and variants posing risks to ITW, customers, and suppliers. Other disclosed risks include market weakness, foreign exchange, input availability and inflation, cyber and data-security events, pensions, tax matters, acquisitions, divestitures, legal proceedings, and environmental and climate-related factors.
- The filing provides no specific quantitative revenue, earnings, or margin guidance. Management said it believed cash generation and available credit were sufficient for debt service and capital-allocation priorities.
- ITW agreed to acquire MTS Systems’ Test & Simulation business from Amphenol for $750 million, subject to adjustments and customary closing conditions, including regulatory approvals. The acquisition had not yet closed.
- Unusual items include the $112 million discrete U.K. tax benefit and a one-time indirect-tax recovery in Brazil that benefited Polymers & Fluids segment results. Tax-authority audits are ongoing; ITW said unrecognized tax benefits could decrease by approximately $55 million within twelve months.
- The company reported no legal proceedings in this filing and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess how much of the sharp year-over-year growth reflects sustainable demand versus the unusually weak 2020 comparison, and monitor the durability of organic growth by segment and region.
- Track price/cost, raw-material inflation, supply constraints, and whether margin expansion persists after operating leverage and the nonrecurring tax benefit.
- Review cash conversion and working-capital trends, particularly receivables and inventory growth, alongside dividend and repurchase spending.
- Confirm closing, final cost, and expected returns for the MTS Test & Simulation acquisition.
- Monitor the 2022 Euro-note maturity, leverage, and the company’s use of remaining repurchase authorizations.
