Illinois Tool Works Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. ITW is a diversified global industrial manufacturer with seven reporting segments. Financial amounts below are in millions of dollars, except per-share data.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $3,307 | $3,479 | $9,099 | $10,640 |
| Operating income | $789 | $868 | $1,999 | $2,578 |
| Operating margin | 23.8% | 25.0% | 22.0% | 24.2% |
| Net income | $582 | $660 | $1,467 | $1,880 |
| Diluted EPS | $1.83 | $2.04 | $4.61 | $5.76 |
| Operating cash flow | $683 | $920 | $2,034 | $2,221 |
| Free cash flow | $631 | $830 | $1,866 | $1,977 |
Q3 revenue declined 4.9% year over year (organic revenue down 4.6%); operating income declined 9.1%. Year-to-date revenue fell 14.5% (organic down 12.7%) and operating income fell 22.5%. Management reported Q3 revenue up 29% sequentially from Q2 as demand improved across all segments. Q3 margin decreased 120 basis points; year-to-date margin decreased 220 basis points. Management attributed margin pressure principally to negative operating leverage, partly offset by enterprise initiatives and favorable price/cost.
Segments and material changes
- In Q3, Construction Products and Polymers & Fluids grew organic revenue 7.6% and 5.8%, respectively. Construction Products revenue rose 9.6% and operating margin increased 300 basis points to 28.1%; Polymers & Fluids revenue rose 4.8% and margin increased 250 basis points to 26.6%.
- Food Equipment had the steepest Q3 segment revenue decline, down 18.6%; operating margin fell 790 basis points to 19.6%, reflecting weak restaurant and institutional demand and negative operating leverage.
- Automotive OEM revenue declined 4.1% in Q3, versus a 24.2% decline year to date. Welding revenue fell 14.0% in Q3; Specialty Products fell 4.8%. Test & Measurement and Electronics revenue fell 4.3%, including the effect of a 2019 divestiture.
- Q3 results included restructuring costs and recapture of depreciation and amortization for a business no longer classified as held for sale. A one-time customer cost-sharing settlement adversely affected Specialty Products margin; the filing does not provide a clear amount.
Cash, debt and liquidity
Cash and equivalents were $2,169 at September 30, 2020, up from $1,981 at December 31, 2019. Total debt was $7,945, compared with $7,758; total debt to trailing-twelve-month EBITDA increased to 2.4 from 2.0 at year-end 2019. The $349 of notes due in September 2021 was reclassified to short-term debt. ITW had no commercial paper or borrowings under its $2.5 billion revolving credit facility, which matures in 2024.
Year-to-date capital returns included $1,019 of dividends paid and $706 of share repurchases. Repurchases were suspended beginning in March 2020; $1.2 billion remained authorized under the current program at quarter end. Capital spending was $168 year to date, versus $244 in 2019.
Outlook, risks and other items
- ITW provided no specific numerical earnings or revenue guidance in this filing. Management expected COVID-19-related disruptions to adversely affect Q4 2020 results and said the duration and full financial impact remained highly uncertain.
- Management cited continued uncertainty around customer demand, operations, supply chains and the economic recovery. It reported all facilities open at quarter end, though many were operating below capacity, and emphasized protecting employees and customers, managing costs and working capital, and preserving liquidity.
- Three businesses previously classified as held for sale were no longer considered likely to be sold within one year; none remained classified as held for sale at September 30. The annual goodwill and indefinite-lived intangible asset impairment assessment resulted in no impairment charge.
- Ongoing tax audits could reduce unrecognized tax benefits by approximately $67 within the next 12 months, predominantly involving intercompany transactions. A proposed EPA settlement involving a facility was approximately $0.4 and was not expected to materially affect results, financial condition or cash flows.
- The filing identifies risks including prolonged pandemic effects, weaker end markets, supply interruptions, currency and raw-material fluctuations, financing access, legal and tax outcomes, and potential impairment charges. Management said tariffs imposed in the prior year had not materially affected operating results.
Key facts for investors to verify
- Whether the sequential recovery in Q3 demand continued after quarter end, particularly in Food Equipment, Welding and other exposed markets.
- Whether organic revenue, operating leverage and margins stabilize, and how much enterprise initiatives offset any further demand weakness.
- Cash generation, debt leverage and liquidity, including the near-term maturity reclassified as short-term debt and the status of suspended share repurchases.
- Any subsequent developments in COVID-19 impacts, divestiture plans, tax audits, or the Specialty Products customer settlement.