Illinois Tool Works Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. ITW is a diversified industrial manufacturer with seven reportable segments. Financial amounts below are in U.S. dollars; “Q3” refers to the three-month period and “year to date” to the nine-month period.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $3.556B | $3.307B | $10.776B | $9.099B |
| Operating income | $845M | $789M | $2.643B | $1.999B |
| Operating margin | 23.8% | 23.8% | 24.5% | 22.0% |
| Net income | $639M | $582M | $2.085B | $1.467B |
| Diluted EPS | $2.02 | $1.83 | $6.58 | $4.61 |
| Operating cash flow | $619M | $683M | $1.783B | $2.034B |
| Free cash flow | $548M | $631M | $1.566B | $1.866B |
Q3 revenue increased 7.5% (organic growth of 6.3%); operating income rose 7.1%, while operating margin was flat. Diluted EPS increased 10.4%. Year-to-date revenue rose 18.4% (organic growth of 14.9%), operating income increased 32.2%, and diluted EPS rose 42.7%. Excluding the disclosed discrete tax benefits, EPS growth was 7.1% for Q3 and 33.6% year to date.
Cash conversion weakened: year-to-date operating cash flow and free cash flow declined from 2020. The filing attributes substantial working-capital cash use to increases in receivables and inventories. Capital expenditures were $217M year to date, versus $168M in 2020.
Segments and changes versus prior year
- Six of seven segments delivered Q3 organic revenue growth; Automotive OEM declined 10.7%, primarily amid customer production reductions related to semiconductor and other component shortages. All seven segments grew organically year to date.
- Food Equipment, Test & Measurement and Electronics, and Welding were notable Q3 growth contributors, with organic revenue growth of 18.9%, 11.8%, and 22.0%, respectively.
- Polymers & Fluids was a Q3 weak spot: organic revenue increased 3.4%, but operating income fell 5.2% and margin declined 240 basis points to 24.2%.
- Consolidated Q3 margin was flat as positive operating leverage and enterprise initiatives were offset by unfavorable price/cost, higher freight and overhead expenses. Unfavorable price/cost reduced margin by 200 basis points.
Liquidity, debt and capital allocation
- At September 30, 2021, cash and equivalents were $1.987B, total debt was $7.551B, and net working capital was $3.581B. Total debt was down from $8.122B at December 31, 2020; debt to trailing-twelve-month EBITDA was 1.9x, versus 2.5x at year-end 2020.
- ITW had no commercial paper or borrowings under its $2.5B revolving credit facility. The facility expires in 2024. The company stated that restricting certain non-U.S.-dollar borrowing currencies from year-end 2021 due to the LIBOR transition was not expected to materially affect liquidity.
- Year-to-date dividends paid were $1.080B and share repurchases were $750M. ITW repurchased approximately 1.0M shares for $250M in Q3. At quarter end, $490M remained under the 2018 repurchase authorization and $3.0B under the 2021 authorization.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management described recovery progress as solid but noted continuing adverse effects from COVID-19 and global supply-chain disruptions, including raw-material inflation and freight costs.
- Management said automotive production cuts tied to component shortages weighed on Automotive OEM. The duration and effects of the pandemic, supply constraints, raw-material availability and inflation, and market conditions remain uncertain.
- Q3’s effective tax rate included a $21M discrete benefit from utilization of capital losses. The year-to-date rate also benefited from a $112M Q2 benefit related to remeasurement of U.K. deferred tax assets following legislation increasing the U.K. tax rate from 19% to 25% in 2023.
- ITW agreed to acquire MTS Systems’ Test & Simulation business from Amphenol for $750M, subject to adjustments, regulatory approvals and customary closing conditions. Closing was expected in Q4 2021; the business would join Test & Measurement and Electronics.
- The company reported no legal proceedings in this filing and no material changes to the risk factors disclosed in its 2020 Form 10-K. Annual goodwill and indefinite-lived intangible asset impairment assessments resulted in no impairment charges.
Important facts for investors to verify
- Whether supply-chain constraints, especially automotive component shortages, and inflation continue to pressure sales, margins and cash conversion.
- Whether working-capital investment moderates and operating cash flow and free cash flow recover.
- How much reported earnings growth reflects the discrete tax benefits, and the sustainability of underlying margins and EPS growth.
- The closing, final cost and expected performance of the MTS Test & Simulation acquisition.
- Future use of the remaining share-repurchase authorizations and the effect of capital returns on cash and debt.