Illinois Tool Works Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. ITW is a diversified global industrial manufacturer with seven operating segments. Results were affected by the COVID-19 pandemic, particularly late in the quarter.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $3.228 billion | $3.552 billion | Down 9.1%; organic revenue down 6.6% |
| Operating income | $761 million | $839 million | Down 9.3% |
| Operating margin | 23.6% | 23.6% | Flat |
| Net income | $566 million | $597 million | Down 5.2% |
| Diluted EPS | $1.77 | $1.81 | Down 2.2% |
| Cash from operations | $614 million | $616 million | Down $2 million |
| Free cash flow | $554 million | $539 million | Up $15 million |
Foreign currency translation and divestitures also reduced revenue. Operating margin remained level as enterprise initiatives, lower restructuring costs and favorable price/cost offset negative operating leverage and higher employee-related expenses. The effective tax rate was 23.0%, compared with 24.4%.
Balance sheet and capital allocation
- Cash and equivalents were $1.430 billion at March 31, down from $1.981 billion at year-end 2019.
- Total debt was $7.694 billion, compared with $7.758 billion at year-end. Debt to trailing-twelve-month EBITDA was 2.1x versus 2.0x at year-end.
- ITW had no commercial paper outstanding and no borrowings on its $2.5 billion revolving credit facility. It reported $4 million of short-term debt and no corporate debt maturities over the next 12 months other than that amount.
- Net cash used in financing was $1.047 billion, including $706 million of share repurchases and $342 million of dividends paid. Repurchases were temporarily suspended beginning in March due to the pandemic.
- Net working capital was $3.474 billion, down $625 million from year-end, primarily due to lower cash.
- Comprehensive income was $288 million, down from $632 million, reflecting $287 million of after-tax foreign-currency translation losses.
Segment performance and material changes
| Segment | Revenue change | Operating margin |
|---|---|---|
| Automotive OEM | Down 13.7% | 20.9%, up 30 bps |
| Food Equipment | Down 6.8% | 24.3%, down 60 bps |
| Test & Measurement and Electronics | Down 7.5% | 25.1%, up 100 bps |
| Welding | Down 12.8% | 29.1%, up 100 bps |
| Polymers & Fluids | Down 5.5% | 23.6%, up 230 bps |
| Construction Products | Down 2.6% | 23.4%, up 170 bps |
| Specialty Products | Down 10.9% | 26.3%, down 20 bps |
Organic revenue declined across regions: North America 5.0%, EMEA 7.1% and Asia Pacific 12.0%; China was down 24.2%. Automotive production shutdowns in North America began in mid-March. Construction Products had essentially flat organic revenue, supported by North American residential demand.
Outlook, risks and unusual items
- Management expected COVID-19 to have a more significant adverse impact on results across all segments in Q2, particularly Automotive OEM, Food Equipment, Welding and Construction Products. The filing states that the full duration and financial impact were highly uncertain; it provides no quantified earnings or revenue guidance.
- As of April 30, approximately 10% of ITW’s manufacturing facilities worldwide were temporarily closed due to government shutdown requirements or reduced customer orders. Many operating facilities were running at reduced capacity.
- Management cited the company’s business model, balance sheet, and access to liquidity as strengths, while prioritizing employee health, customer service, liquidity and readiness for recovery. It planned to manage discretionary costs and working capital.
- COVID-19 risks include further demand and supply-chain disruption, customer or supplier failures, facility closures, and reduced access to financing. ITW said it could not estimate the pandemic’s full or long-term impact.
- Of businesses previously classified as held for sale, two were no longer considered probable of sale within one year because of pandemic-related disruption and uncertainty. One Test & Measurement and Electronics business remained held for sale.
- Ongoing tax audits could change unrecognized tax benefits; ITW said those benefits could decrease by approximately $59 million within the next 12 months, predominantly relating to intercompany transactions.
- ITW reported $25 million of other income, primarily reflecting foreign currency translation gains, and interest expense of $51 million, down from $63 million.
Important facts for investors to verify
- Whether the anticipated Q2 deterioration and facility closures materially affected subsequent revenue, margins and cash generation.
- Cash, debt, credit-facility availability and debt-to-EBITDA trends, especially as share repurchases were suspended and cash declined during Q1.
- Segment recovery patterns, particularly in automotive, food equipment, welding and construction products, and the pace of recovery across regions.
- Progress and terms of the remaining divestiture, and the effects of portfolio changes and product-line simplification on revenue and margins.
- Developments in tax audits and the estimated $59 million potential decrease in unrecognized tax benefits.