ILLINOIS TOOL WORKS INC. Item 2.02 Results of Operations and Financial Condition
On
Non-GAAP Financial Measures
The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company's financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. A reconciliation of free cash flow to net cash provided by operating activities is included in the press release furnished as Exhibit 99.1.
The Company uses after-tax return on average invested capital ("ROIC") to measure the effectiveness of its operations' use of invested capital to generate profits. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company's financial performance and may be different than the method used by other companies to calculate ROIC. Average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations. Average invested capital is calculated using balances at the start of the period and at the end of each quarter. A calculation of ROIC is included in the press release furnished as Exhibit 99.1.
The Company uses the ratio of net debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. The Company believes that net debt to EBITDA is a meaningful metric to investors in evaluating the Company's financial liquidity and may be different than the method used by other companies to calculate net debt to EBITDA. Net debt, EBITDA and the ratio of net debt to EBITDA are non-GAAP financial measures. The ratio of net debt to EBITDA represents total debt less cash and equivalents, divided by net income before interest expense, other income (expense), income taxes, depreciation and amortization and impairment of intangible assets on a trailing twelve month basis. A calculation of the ratio of net debt to EBITDA and reconciliations of net debt to total debt and EBITDA to net income are included in the press release furnished as Exhibit 99.1.
Item 8.01 Other Events
The Company's business, financial condition, results of operations and cash
flows are subject to various risks, which could cause actual results to vary
materially from anticipated results. The risk set forth below relating to the
impact of the COVID-19 pandemic on our business, supplements the risks
previously disclosed under the heading "Risk Factors" in Part I, Item 1A of the
Company's Annual Report on Form 10-K for the year ended
The COVID-19 pandemic has adversely affected the Company's business and could materially affect the Company's financial condition, results of operations and liquidity. The full and long-term extent of the effects of the COVID-19 pandemic on our business depend on future events that are highly uncertain and cannot be predicted.
The COVID-19 pandemic and the measures taken globally to reduce its spread have negatively impacted the global economy, disrupted consumer/customer demand and global supply chains, and created significant volatility and disruption of financial markets. These measures adversely affected our results of operations primarily in the latter part of the first quarter of 2020, and while we expect that our results will continue to be adversely impacted during the second quarter of 2020 and beyond, we are currently unable to quantify or estimate the full and long-term impact of the pandemic on our financial condition, results of operations and liquidity.
As governments have issued travel restrictions and adopted shutdown and stay-at-home or similar orders, certain of our businesses in the affected country, state or municipality subject to these orders have been forced to close. While some of these businesses have reopened, and our businesses that have been designated as critical or essential were not forced to close, the pandemic has decreased customer demand in many of our end markets, and those businesses that have reopened or remained open in many cases are operating at a reduced capacity. The Company has implemented numerous actions in order to focus on the needs of its colleagues and customers, and further actions may be required as conditions evolve. In addition, although the Company has avoided widespread furloughs or layoffs, we cannot predict the number or timing of further closures or the size of the workforce that will be impacted by such closures.
The COVID-19 pandemic also has the potential to significantly and extendedly alter demand for our products and disrupt our supply chain as a result of shifts in demand, illness, quarantine, travel restrictions or financial hardship. We have been able to procure the critical raw materials and components necessary to continue production, but there is no guarantee that we will be able to do so in the
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future. A prolonged extension of the conditions resulting from the pandemic could force both customer and supplier bankruptcies, which we expect would adversely impact our results; however, given the uncertainty around the duration and breadth of the COVID-19 pandemic, we cannot reasonably estimate the extent of these adverse effects on our operations.
Furthermore, the COVID-19 pandemic has impacted the proper functioning of financial and capital markets. If the global economy continues to deteriorate and recovery is protracted, we may not be able to access our short-term credit facilities and may be required to seek additional financing sources, which may not be available on reasonable terms or at all. If the Company suffers a liquidity shortage, we may be forced to reduce our workforce, decrease or suspend dividend payments to our stockholders or adopt other measures. At this time, we cannot predict the likelihood, timing or the consequences of a future liquidity shortage in our business.
Due to the unprecedented and rapidly changing social and economic consequences
of the COVID-19 pandemic on the global economy generally, the full and long-term
impact of the pandemic on our business is highly uncertain. The ultimate
significance of the COVID-19 pandemic, including any measures to reduce its
spread, on our business will depend on events that are beyond our control and
that we cannot predict. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also affect our business,
financial condition or results of operations. In particular, the COVID-19
pandemic exacerbates many of the other risks described in our Annual Report on
Form 10-K for the year ended
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
Exhibit Number Exhibit Description
99.1 Press Release issued by Illinois Tool Works Inc. dated May 5,
2020 (furnished pursuant to Item 2.02).
104 Cover Page Interactive Data File (embedded within the Inline
XBRL document)
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