ILLINOIS TOOL WORKS INC. INTRODUCTION
Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 84 divisions in 53 countries. As ofDecember 31, 2019 , the Company employed approximately 45,000 people. The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. 14
-------------------------------------------------------------------------------- Due to the large number of diverse businesses and the Company's decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the Company's corporate management collects data on several key measurements: operating revenue, operating income, operating margin, overhead costs, number of months on hand in inventory, days sales outstanding in accounts receivable, past due receivables and return on invested capital. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.
THE ITW BUSINESS MODEL
The powerful and highly differentiated ITW Business Model is the Company's core source of value creation. The ITW Business Model is the Company's competitive advantage and defines how ITW creates value for its shareholders. It is comprised of three unique elements:
• ITW's 80/20 Front-to-Back process is the operating system that is applied
in every ITW business. Initially introduced as a manufacturing efficiency
tool in the 1980s, ITW has continually refined, improved and expanded
80/20 into a proprietary, holistic business management process that
generates significant value for the Company and its customers. Through the
application of data driven insights generated by 80/20 practice, ITW
focuses on its largest and best opportunities (the "80") and eliminates
cost, complexity and distractions associated with the less profitable
opportunities (the "20"). 80/20 enables ITW businesses to consistently
achieve world-class operational excellence in product availability,
quality, and innovation, while generating superior financial performance;
• Customer-Back Innovation has fueled decades of profitable growth at ITW.
The Company's unique innovation approach is built on insight gathered from
the 80/20 Front-to-Back process. Working from the customer back, ITW
businesses position themselves as the go-to problem solver for their "80"
customers. ITW's innovation efforts are focused on understanding customer
needs, particularly those in "80" markets with solid long-term growth
fundamentals, and creating unique solutions to address those needs. These
customer insights and learnings drive innovation at ITW and have
contributed to a portfolio of approximately 18,000 granted and pending
patents;
• ITW's Decentralized, Entrepreneurial Culture enables ITW businesses to be
fast, focused, and responsive. ITW businesses have significant flexibility
within the framework of the ITW Business Model to customize their approach
in order to best serve their specific customers' needs. ITW colleagues
recognize their unique responsibilities to execute the Company's strategy
and values. As a result, the Company maintains a focused and simple
organizational structure that, combined with outstanding execution,
delivers best-in-class services and solutions adapted to each business'
customers and end markets.
ENTERPRISE STRATEGY
In late 2012, ITW began its strategic framework transitioning the Company on its
current path to fully leverage the compelling performance potential of the ITW
Business Model. The Company undertook a complete review of its performance,
focusing on its businesses delivering consistent above-market growth with
best-in-class margins and returns, and developing a strategy to replicate that
performance across its operations.
ITW determined that solid and consistent above-market organic growth is the core
growth engine to deliver world-class financial performance and compelling
long-term returns for its shareholders. To shift its primary growth engine to
organic, the Company began executing a multi-step approach.
• The first step was to narrow the focus and improve the quality of ITW's
business portfolio. As part of the Portfolio Management initiative, ITW
exited businesses that were operating in commoditized market spaces andprioritized sustainable differentiation as a must-have requirement for all
ITW businesses. This process included both divesting entire businesses and
exiting commoditized product lines and customers inside otherwise highly
differentiated ITW divisions.
As a result of this work, ITW's business portfolio now has significantly higher
organic growth potential. ITW segments and divisions now possess attractive and
differentiated product lines and end markets as they continue to improve
operating margins and generate price/cost increases. The Company achieved this
through product line simplification, or eliminating the complexity and overhead
costs associated with smaller product lines and customers, while supporting and
growing the businesses' largest / most profitable customers and product lines.
15
--------------------------------------------------------------------------------• Step two, Business Structure Simplification, was implemented to simplify
and scale up ITW's operating structure to support increased engineering,
marketing, and sales resources, and improve global reach and
competitiveness, all of which were critical to driving accelerated organic
growth. ITW now has 84 scaled-up divisions with significantly enhanced
focus on growth investments, core customers and products, and
customer-back innovation.
• The Strategic Sourcing initiative established sourcing as a core strategic
and operational capability at ITW, delivering an average of one percent
reduction in spend each year from 2013 through 2019 and continues to be a
key contributor to the Company's ongoing enterprise strategy.
• With the initial portfolio realignment and scale-up work largely complete,
the Company shifted its focus to preparing for and accelerating organic
growth, reapplying the 80/20 Front-to-Back process to optimize its newly
scaled-up divisions for growth, first, to build a foundation of
operational excellence, and second, to identify the best opportunities to
drive organic growth.
ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company's operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
PATH TO FULL POTENTIAL - FINISHING THE JOB
Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly finish the job and reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential:
• Portfolio discipline
• 80/20 Front-to-Back practice excellence
• Full-potential organic growth
Portfolio Discipline
The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model. ITW businesses have the right "raw material" in terms of market and business attributes that best fit the ITW Business Model and have significant potential to drive above-market organic growth over the long-term. The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.
As part of its agenda to finish the job, the Company routinely evaluates its portfolio to ensure it delivers sustainable differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and assessing selective high-quality acquisitions to supplement ITW's long-term growth potential.
The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with revenues totaling up to$1 billion . In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases. Refer to Note 3. Divestitures in Item 1. Financial Statements for more information regarding divestitures.
80/20 Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven
approach to identify where the Company has true differentiation and the ability
to drive sustainable, high-quality organic growth. The Company simplifies and
eliminates complexity and redesigns every aspect of its business to ensure
focused execution on key opportunities, markets, customers, and products.
ITW will continue its efforts to finish the job and drive 80/20 Front-to-Back
practice excellence in every division in the Company, every day. Driving strong
operational excellence in the quality of 80/20 Front-to-Back practice across the
Company,
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--------------------------------------------------------------------------------division by division, will produce further customer-facing performance improvement in a number of the Company's divisions and additional structural margin expansion at the enterprise level.
Full-potential Organic Growth
Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division, with specific focus on:
• "80" focused Market Penetration - fully leveraging the considerable growth
potential that resides in the Company's largest and most differentiated
product offerings and customer relationships
• Customer-Back Innovation - strengthening the Company's commitment to
serial innovation and delivering a continuous flow of differentiated new
products to its key customers
• Strategic Sales Excellence - deploying a high-performance sales function
in every division
As the Company continues to make progress toward its full potential, the Company
will explore opportunities to reinforce or further expand the long-term organic
growth potential of ITW through the addition of selective high-quality
acquisitions.
Near-term Priorities
Currently, there is uncertainty around how severe the COVID-19 pandemic will be, how long it will last, or how quickly ITW's customers and end markets will recover. The COVID-19 pandemic has impacted, and is expected to continue to impact, the Company's organic revenue and profitability across all segments. However, at this very uncertain time, ITW believes that the strength and resilience of ITW's Business Model and its strong balance sheet put the Company in a favorable position to deal with the crisis as it unfolds. For the duration of the COVID-19 pandemic, the Company is focusing its efforts on the following priorities: (1) protect the health and support the well-being of ITW's colleagues; (2) continue to serve the Company's customers with excellence to the best of its ability; (3) maintain financial strength, liquidity and strategic optionality throughout the containment and recovery phases; and (4) leverage the Company's strengths to position it to fully participate in the recovery phase.
TERMS USED BY ITW
Management uses the following terms to describe the financial results of operations of the Company:
• Organic business - acquired businesses that have been included in the
Company's results of operations for more than 12 months on a constant
currency basis.
• Operating leverage - the estimated effect of the organic revenue volume
changes on organic operating income, assuming variable margins remain the
same as the prior period.
• Price/cost - represents the estimated net impact of increases or decreases
in the cost of materials used in the Company's products versus changes in
the selling price to the Company's customers.
• Product line simplification (PLS) - focuses businesses on eliminating the
complexity and overhead costs associated with smaller product lines and
customers, and focuses businesses on supporting and growing their largest
customers and product lines; in the short-term, PLS may result in a
decrease in revenue and overhead costs while improving operating margin.
In the long-term, PLS is expected to result in growth in revenue,
profitability, and returns.
Unless otherwise stated, the changes in financial results in the consolidated
results of operations and the results of operations by segment represent the
current year period versus the comparable period in the prior year. The
following discussion of operating results should be read in conjunction with
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations in the Company's 2019 Annual Report on Form 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) occurred inChina and other jurisdictions. The COVID-19 outbreak was subsequently declared a global pandemic by theWorld Health Organization onMarch 11, 2020 . In response to the outbreak, governments around the globe have taken various actions to reduce its spread, including travel restrictions, shutdowns of businesses deemed nonessential, and stay-at-home or similar orders. The COVID-19 pandemic and the measures taken globally to reduce its spread have negatively impacted the global economy, causing significant disruptions in the Company's global operations starting primarily during the latter part of the first quarter of 2020 as COVID-19 continued 17 -------------------------------------------------------------------------------- to spread and impact the countries in which the Company operates and the markets the Company serves, including the North American automotive market, which shut down production in mid-March. Despite the challenging macro environment that impacted the Company's first quarter 2020 organic revenue, operating margin of 23.6 percent was flat to the prior year period, after-tax return on average invested capital was 27.0 percent and diluted earnings per share only declined 2.2 percent. Leveraging the strength and resilience of the ITW Business Model, all segments had operating margins ranging from 20.9 percent to 29.1 percent in the first quarter of 2020. For the duration of the COVID-19 pandemic, the Company is focusing on the following priorities: (1) protect the health and support the well-being of ITW's colleagues; (2) continue to serve the Company's customers with excellence to the best of its ability; (3) maintain financial strength, liquidity and strategic optionality throughout the containment and recovery phases; and (4) leverage the Company's strengths to position it to fully participate in the recovery phase. To support ITW's colleagues, among other initiatives, the Company has redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagues who have childcare needs due to school closings, and implemented aggressive new workplace sanitation practices to minimize infection risk. To support its customers, the Company has worked diligently to keep its factories open and operating safely. The Company has adapted customer service systems and practices to seamlessly serve its customers under "work from home" requirements in many parts of the world. In areas around the world where governments have issued stay-at-home or similar orders, the vast majority of ITW's businesses have been designated as critical or essential businesses and, as such, they remain open and operational. In some cases, this is because the Company's products directly impact the COVID-19 response effort. In other cases, the Company's businesses are designated as critical because they play a vital role in serving and supporting industries that are deemed essential to the physical and economic health of our communities. However, as ofApril 30, 2020 , approximately 10% of the Company's manufacturing facilities worldwide were temporarily closed due to either government imposed shut-down requirements or a decline in customer orders. While the vast majority of the Company's facilities remain open and operational, many of these facilities are operating at a reduced capacity and the Company expects the customer demand disruptions caused by the COVID-19 outbreak to have a more significant adverse impact on the Company's operating results across all segments in the second quarter of 2020, as the spread of COVID-19 has accelerated inNorth America and acrossEurope , with more pronounced impacts in the Automotive OEM, Food Equipment, Welding and Construction Products segments. However, the full extent of the COVID-19 outbreak in 2020 and its impact on the markets served by the Company and on the Company's operations and financial position is highly uncertain. A prolonged outbreak will continue to interrupt the operations of the Company and its customers and suppliers. A description of the risks relating to the impact of the COVID-19 outbreak on the Company's business, operations and financial condition is contained in Part II - Other Information, Item 1A. Risk Factors. Separately, the Company does not believe that tariffs imposed in the prior year have had a material impact on its operating results. The Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to mitigate the impact of any raw material cost increases resulting from these tariffs.
The Company's consolidated results of operations for the first quarter of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions March 31 , Components of Increase (Decrease)
Acquisition/ Foreign
2020 2019 Inc (Dec) Organic
Divestiture Restructuring Currency Total
Operating revenue
- % (1.5 )% (9.1 )%
Operating income
3.3 % (1.4 )% (9.3 )%
Operating margin % 23.6 % 23.6 % - (110) bps 20 bps
90 bps - -
• Operating revenue declined due to lower organic revenues, the unfavorable
effect of foreign currency translation and divestitures.
• Organic revenue decreased 6.6% primarily due to disruptions in theCompany's global operations resulting from the spread of COVID-19 across
all major regions. Product line simplification activities reduced organic
revenue by 40 basis points.
• North American organic revenue decreased 5.0% as six segments
declined, partially offset by growth in the Construction Products
segment.
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•Europe ,Middle East andAfrica organic revenue decreased 7.1% as all seven segments declined primarily driven by the Automotive OEM, Test & Measurement and Electronics and Specialty Products segments. •Asia Pacific organic revenue decreased 12.0%, withChina down 24.2%, due to a decline in all seven segments primarily driven by the Automotive OEM and Food Equipment segments. • Operating income of$761 million decreased 9.3% primarily due to lower
organic revenue and unfavorable foreign currency translation, partially
offset by lower restructuring expenses.
• Operating margin of 23.6% was flat compared to the prior year primarily
driven by benefits from the Company's enterprise initiatives of 120 basis
points, lower restructuring expenses and favorable price/cost of 20 basis,
partially offset by negative operating leverage of 150 basis points and
higher employee-related expenses.
• The effective tax rate for the first quarter of 2020 was 23.0% versus
24.4% in 2019. The effective tax rate for both periods included discrete
income tax benefits related to excess tax benefits from stock-based
compensation of
• Diluted earnings per share (EPS) of
• Free cash flow was
the Cash Flow section of Liquidity and Capital Resources for a
reconciliation of this non-GAAP measure.
• The Company repurchased approximately 4.2 million shares of its common
stock in the first quarter of 2020 for approximately
• After-tax return on average invested capital was 27.0% for the first
quarter of 2020. Refer to the After-Tax Return on
section of Liquidity and Capital Resources for a reconciliation of this
non-GAAP measure.
RESULTS OF OPERATIONS BY SEGMENT
Total operating revenue and operating income for the first quarter of 2020 and
2019 were as follows:
Three Months Ended March 31,
Dollars in millions Operating Revenue Operating Income
2020 2019 2020 2019
Automotive OEM $ 696 $ 806 $ 145 $ 167
Food Equipment 483 518 117 129Test & Measurement and Electronics 485 524 121
126 Welding 372 427 109 120 Polymers & Fluids 393 416 93 89 Construction Products 390 401 91 87 Specialty Products 414 465 109 123 Intersegment revenue (5 ) (5 ) - - Unallocated - - (24 ) (2 ) Total$ 3,228 $ 3,552 $ 761 $ 839 Segments are allocated a fixed overhead charge based on the segment's revenue. Expenses not charged to the segments are reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuations on a quarterly and annual basis.
AUTOMOTIVE OEM
This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers market. Products in this segment include:
• plastic and metal components, fasteners and assemblies for automobiles,
light trucks and other industrial uses.
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The results of operations for the Automotive OEM segment for the first quarter of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions March 31 , Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 696 $ 806 (13.7 )% (12.0 )% - % - % (1.7 )% (13.7 )%
Operating income $ 145 $ 167 (12.8 )% (19.4 )% - % 8.3 % (1.7 )% (12.8 )%
Operating margin % 20.9 % 20.6 % 30 bps (170) bps - 200 bps - 30 bps
• Operating revenue declined due to lower organic revenue and the
unfavorable effect of foreign currency translation.
• Organic revenue declined 12.0% versus worldwide auto builds which
decreased 23%. Auto builds for
Company has a higher concentration of revenue as compared to the other
geographic regions, declined 27%. Product line simplification activities
reduced organic revenue by 90 basis points.
• North American organic revenue decreased 13.2% compared to North
American auto builds which declined 10% due to customer mix. Auto
builds for the Detroit 3, where the Company has higher content,
decreased 15%.
• European organic revenue was down 8.7% compared to European auto
builds which decreased 19%.
• Asia Pacific organic revenue decreased 16.7%. China organic revenue
declined 21.3% versus China auto builds which declined 46%.
• Operating margin was 20.9%. The increase of 30 basis points was primarily
driven by lower restructuring expenses of 200 basis points, benefits from
the Company's enterprise initiatives and favorable price/cost of 20 basis
points, partially offset by negative operating leverage of 240 basis
points and higher employee-related expenses.
FOOD EQUIPMENT
This segment is a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food institutional/restaurant and food retail markets. Products in this segment include:
• warewashing equipment;
• cooking equipment, including ovens, ranges and broilers;
• refrigeration equipment, including refrigerators, freezers and prep tables;
• food processing equipment, including slicers, mixers and scales;
• kitchen exhaust, ventilation and pollution control systems; and
• food equipment service, maintenance and repair.
The results of operations for the Food Equipment segment for the first quarter of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions March 31 , Components of Increase (Decrease)
Foreign
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Currency Total
Operating revenue $ 483 $ 518 (6.8 )% (5.6 )% - % - % (1.2 )% (6.8 )%
Operating income $ 117 $ 129 (9.4 )% (10.2 )% - % 1.8 % (1.0 )% (9.4 )%
Operating margin % 24.3 % 24.9 % (60) bps (120) bps - 50 bps 10 bps (60) bps
• Operating revenue declined due to lower organic revenue and the
unfavorable effect of foreign currency translation.
• Organic revenue decreased 5.6% as equipment and service organic revenue
declined 7.7% and 2.0%, respectively.
• North American organic revenue declined 4.1% as equipment organic
revenue declined 5.7% primarily driven by lower demand in
restaurants and food retail, partially offset by growth in
institutional end markets. Service organic revenue decreased 1.7%.
• International organic revenue decreased 7.6% as equipment organic
revenue declined 10.1% primarily due to lower demand in the European
cooking and warewash end markets and lower demand in Asia . Service
organic revenue decreased 2.5%.
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• Operating margin of 24.3% decreased 60 basis points primarily due to
negative operating leverage of 130 basis points and higheremployee-related expenses, partially offset by benefits from the Company's
enterprise initiatives, favorable price/cost of 60 basis points and lower
restructuring expenses.
TEST & MEASUREMENT AND ELECTRONICS
This segment is a branded and innovative producer of test and measurement and electronic manufacturing and maintenance, repair, and operations, or "MRO" solutions that improve efficiency and quality for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, automotive original equipment manufacturers and tiers, industrial capital goods, energy and consumer durables markets. Products in this segment include:
• equipment, consumables, and related software for testing and measuring of
materials, structures, gases and fluids;
• electronic assembly equipment;
• electronic components and component packaging;
• static control equipment and consumables used for contamination control in
clean room environments; and
• pressure sensitive adhesives and components for electronics, medical,
transportation and telecommunications applications.
The results of operations for the Test & Measurement and Electronics segment for the first quarter of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions March 31 , Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 485 $ 524 (7.5 )% (3.3 )% (3.1 )% - % (1.1 )% (7.5 )%
Operating income $ 121 $ 126 (3.8 )% (2.3 )% (1.2 )% 0.7 % (1.0 )% (3.8 )%
Operating margin % 25.1 % 24.1 % 100 bps 20 bps 60 bps 20 bps - 100 bps
• Operating revenue declined due to lower organic revenues, a divestiture
and the unfavorable effect of foreign currency translation.
• Organic revenue decreased 3.3% as
international was down 7.3%.
• Organic revenue for the test and measurement businesses decreased
2.4% primarily driven by lower end market demand in Europe ,
partially offset by higher semi-conductor demand in North America .
Instron , where demand is more closely tied to the capital spending
environment, had an organic revenue decline of 15.4%.
• Electronics organic revenue declined 4.3%. The electronics assembly
businesses decreased 10.1% primarily due to lower demand in North
America . The other electronics businesses, which include the
contamination control, static control and pressure sensitive
adhesives businesses, declined 0.8% due to a decrease in Asia
Pacific and Europe , partially offset by growth in North America .
• Operating margin of 25.1% increased 100 basis points primarily due to
benefits from the Company's enterprise initiatives, lower intangible asset
amortization expense, the impact of a divestiture and favorable price/cost
of 30 basis points, partially offset by negative operating leverage of 100
basis points and higher employee-related expenses.
WELDING
This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and industrial capital goods markets. Products in this segment include:
• arc welding equipment; and
• metal arc welding consumables and related accessories.
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The results of operations for the Welding segment for the first quarter of 2020
and 2019 were as follows:
Three Months Ended
Dollars in millions March 31 , Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 372 $ 427 (12.8 )% (9.0 )% (3.4 )% - % (0.4 )% (12.8 )%
Operating income $ 109 $ 120 (9.7 )% (10.1 )% (0.9 )% 1.4 % (0.1 )% (9.7 )%
Operating margin % 29.1 % 28.1 % 100 bps (30) bps 80 bps 40 bps 10 bps 100 bps
• Operating revenue decreased due to lower organic revenue, a divestiture
and the unfavorable effect of foreign currency translation.
• Organic revenue declined 9.0% driven by a decrease in equipment and
consumable sales of 9.7% and 7.9%, respectively, primarily due to lower
demand in the industrial end markets.
• North American organic revenue decreased 6.9% primarily due to a
decline in the industrial and commercial end markets of 10.3% and
4.1%, respectively, partially offset by an increase of 3.3% in the
oil and gas end markets.
• International organic revenue decreased 18.8% primarily due to a
decline in the oil and gas end markets.
• Operating margin of 29.1% increased 100 basis points compared to the prior
year as benefits from the Company's enterprise initiatives, the impact of
a divestiture and lower restructuring expenses were partially offset by
negative operating leverage of 160 basis points.
POLYMERS & FLUIDS
This segment is a branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial, MRO and construction markets. Products in this segment include:
• adhesives for industrial, construction and consumer purposes;
• chemical fluids which clean or add lubrication to machines;
• epoxy and resin-based coating products for industrial applications;
• hand wipes and cleaners for industrial applications;
• fluids, polymers and other supplies for auto aftermarket maintenance and
appearance;
• fillers and putties for auto body repair; and
• polyester coatings and patch and repair products for the marine industry.
The results of operations for the Polymers & Fluids segment for the first quarter of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions March 31 , Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 393 $ 416 (5.5 )% (3.2 )% - % - % (2.3 )% (5.5 )%
Operating income $ 93 $ 89 4.9 % 4.8 % - % 2.3 % (2.2 )% 4.9 %
Operating margin % 23.6 % 21.3 % 230 bps 180 bps - 50 bps - 230 bps
• Operating revenue decreased due to lower organic revenue and the
unfavorable effect of foreign currency translation.
• Organic revenue declined 3.2%. Product line simplification activities
reduced organic revenue by 60 basis points.
• Organic revenue for the automotive aftermarket businesses declined
2.8% primarily driven by a decrease in the car care businesses in
North America .
• Organic revenue for the polymers businesses decreased 4.6% primarily
driven by a decline in Asia and North America , primarily in the
heavy industrial end markets.
• Organic revenue for the fluids businesses decreased 2.2% primarily
due to a decline in the industrial maintenance, repair, and
operations end markets in North America .
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• Operating margin of 23.6% increased 230 basis points primarily driven by
the net benefits from the Company's enterprise initiatives and cost
management, favorable price/cost of 80 basis points and lower
restructuring expenses, partially offset by negative operating leverage of
80 basis points.
CONSTRUCTION PRODUCTS
This segment is a branded supplier of innovative engineered fastening systems
and solutions. This segment primarily serves the residential construction,
renovation/remodel and commercial construction markets. Products in this segment
include:
• fasteners and related fastening tools for wood and metal applications;
• anchors, fasteners and related tools for concrete applications;
• metal plate truss components and related equipment and software; and
• packaged hardware, fasteners, anchors and other products for retail.
The results of operations for the Construction Products segment for the first quarter of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions March 31 , Components of Increase (Decrease)
Foreign
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Currency Total
Operating revenue $ 390 $ 401 (2.6 )% 0.1 % - % - % (2.7 )% (2.6 )%
Operating income $ 91 $ 87 4.9 % 1.8 % - % 5.6 % (2.5 )% 4.9 %
Operating margin % 23.4 % 21.7 % 170 bps 40 bps - 120 bps 10 bps 170 bps
• Operating revenue decreased due to the unfavorable effect of foreign
currency translation.
• Organic revenue was essentially flat as growth in
by declines in Europe and Asia Pacific .
• North American organic revenue increased 8.8% as an increase of
11.2% in the United States residential end markets was partially
offset by a decrease of 3.7% in the commercial end markets.
• International organic revenue declined 6.1%. Asia Pacific organic
revenue decreased 6.1% primarily due to a decline in Australia and
New Zealand across all end markets. European organic revenue
decreased 6.1% driven by a decline in continental Europe .
• Operating margin was 23.4%. The increase of 170 basis points was primarily
driven by benefits from the Company's enterprise initiatives and lower
restructuring expenses, partially offset by unfavorable price/cost of 30
basis points.
SPECIALTY PRODUCTS
This segment is focused on diversified niche market opportunities with
substantial patent protection producing beverage packaging equipment and
consumables, product coding and marking equipment and consumables, and appliance
components and fasteners. This segment primarily serves the food and beverage,
general industrial, consumer durables, industrial capital goods and printing and
publishing markets. Products in this segment include:
• line integration, conveyor systems and line automation for the food and
beverage industries;
• plastic consumables that multi-pack cans and bottles and related equipment;
• foil, film and related equipment used to decorate consumer products;
• product coding and marking equipment and related consumables;
• plastic and metal closures and components for appliances;
• airport ground support equipment; and
• components for medical devices.
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--------------------------------------------------------------------------------The results of operations for the Specialty Products segment for the first quarter of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millions March 31, Components of Increase (Decrease)
2020 2019 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 414 $ 465 (10.9 )% (8.7 )% (1.2 )% - % (1.0 )% (10.9 )%
Operating income $ 109 $ 123 (11.8 )% (13.9 )% 1.2 % 1.9 % (1.0 )% (11.8 )%
Operating margin % 26.3 % 26.5 % (20) bps (150) bps 70 bps 60 bps - (20) bps
• Operating revenue decreased due to lower organic revenue, divestitures and
the unfavorable effect of foreign currency translation.
• Organic revenue decreased 8.7%. Consumables and equipment sales declined
8.2% and 10.3%, respectively, primarily due to lower demand in North
America and
revenue by 60 basis points.
• North American organic revenue decreased 8.1% primarily due to a
decrease in the consumer packaging, appliance, specialty films and
marking coding businesses.
• International organic revenue decreased 9.8% primarily due to a
decline in the consumer packaging, appliance, specialty films and
marking coding businesses in Europe .
• Operating margin was 26.3%. The decrease of 20 basis points was primarily
driven by negative operating leverage of 180 basis points and unfavorable
price/cost of 40 basis points, partially offset by benefits from the
Company's enterprise initiatives, the impact of divestitures and lower
restructuring expenses.
OTHER FINANCIAL HIGHLIGHTS
• Interest expense of
from
repayment of the
notes due
• Other income (expense) was income of
2020 versus $14 million in the prior year period. The year over year
increase was primarily driven by foreign currency translation gains in
2020 versus losses in 2019.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1. Significant Accounting Policies of Item 1. Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are free cash flow and short-term credit facilities. As ofMarch 31, 2020 , the Company had$1.4 billion of cash and equivalents on hand, no outstanding borrowings under its$2.5 billion revolving credit facility, and no commercial paper outstanding. In addition, other than$4 million of short-term debt, the Company has no corporate debt maturities in the next 12 months. The Company also has maintained strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:
• internal investments to support organic growth and sustain core businesses;
• payment of an attractive dividend to shareholders; and
• external investments in selective strategic acquisitions that support the
Company's organic growth focus, and an active share repurchase program
that the Company temporarily suspended starting in March 2020 due to the
COVID-19 pandemic.
Also, for the duration of the COVID-19 crisis, the Company has made the
strategic decision to aggressively manage its discretionary costs and working
capital, while staying invested in its businesses, people and strategies, so
that the Company is positioned to fully support its customers in the recovery
phase and can return to executing its long-term strategy to deliver
differentiated long-term performance and returns as soon as possible.
24
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The Company believes that, based on its operating revenue, operating margin,
free cash flow, and credit ratings, it could readily obtain additional financing
if necessary. A description of the risks related to the impact of the COVID-19
outbreak on the financial and capital markets and the related potential risks to
the Company is contained in Part II - Other Information, Item 1A. Risk Factors.
Cash Flow
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. Summarized
cash flow information for the first quarter of 2020 and 2019 was as follows:
Three Months Ended
March 31,
In millions 2020 2019
Net cash provided by operating activities $ 614 $ 616
Additions to plant and equipment (60 ) (77 )
Free cash flow $ 554 $ 539
Cash dividends paid $ (342 ) $ (328 )
Repurchases of common stock (706 ) (375 )
Acquisition of businesses (excluding cash and
equivalents) - (4 ) Net proceeds from (repayments of) debt with original maturities of three months or less
- 1,058
Repayments of debt with original maturities of more than three months
- (650 )
Other, net 8 9
Effect of exchange rate changes on cash and equivalents (65 )
2
Net increase (decrease) in cash and equivalents
Stock Repurchase Program OnFebruary 13, 2015 , the Company's Board of Directors authorized a stock repurchase program which provided for the repurchase of up to$6.0 billion of the Company's common stock over an open-ended period of time (the "2015 Program"). Under the 2015 Program, the Company repurchased approximately 6.1 million shares of its common stock at an average price of$91.78 per share during 2015, approximately 18.7 million shares of its common stock at an average price of$107.17 per share during 2016, approximately 7.1 million shares of its common stock at an average price of$140.56 per share during 2017, approximately 13.9 million shares of its common stock at an average price of$143.66 per share during 2018, approximately 2.7 million shares of its common stock at an average price of$141.34 in the first quarter of 2019 and approximately 0.5 million shares of its common stock at an average price of$154.21 in the second quarter of 2019. The 2015 Program was completed in the second quarter of 2019. OnAugust 3, 2018 , the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional$3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). Under the 2018 Program, the Company repurchased approximately 2.0 million shares of its common stock at an average price of$149.04 in the second quarter of 2019, approximately 2.4 million shares of its common stock at an average price of$150.97 in the third quarter of 2019, approximately 2.2 million shares of its common stock at an average price of$175.02 in the fourth quarter of 2019 and approximately 4.2 million shares of its common stock at an average price of$167.69 in the first quarter of 2020. As ofMarch 31, 2020 , there were$1.2 billion of authorized repurchases remaining under the 2018 Program. Due to the COVID-19 pandemic, the Company temporarily suspended its share repurchase program starting inMarch 2020 . 25 --------------------------------------------------------------------------------
After-Tax Return on
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. ROIC for the first quarter of 2020 and 2019 was as follows:
Three Months Ended
March 31,
Dollars in millions 2020 2019
Operating income $ 761 $ 839
Tax rate 23.0 % 24.4 %
Income taxes (175 ) (205 )
Operating income after taxes
Invested capital: Trade receivables$ 2,424 $ 2,715 Inventories 1,185 1,346 Net assets held for sale 181 - Net plant and equipment 1,704 1,765 Goodwill and intangible assets 5,237 5,665
Accounts payable and accrued expenses (1,593 ) (1,796 ) Other, net
(590 ) (509 )
Total invested capital $ 8,548 $ 9,186
Average invested capital $ 8,677 $ 9,160 Return on average invested capital 27.0 % 27.7 %
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as ofMarch 31, 2020 andDecember 31, 2019 is summarized as follows: Increase/ In millions March 31, 2020 December 31, 2019 (Decrease) Current assets: Cash and equivalents $ 1,430 $ 1,981 $ (551 ) Trade receivables 2,424 2,461 (37 ) Inventories 1,185 1,164 21 Other 244 296 (52 ) Assets held for sale 223 351 (128 ) Total current assets 5,506 6,253 (747 ) Current liabilities: Short-term debt 4 4 - Accounts payable and accrued expenses 1,593 1,689 (96 ) Other 393 390 3 Liabilities held for sale 42 71 (29 ) Total current liabilities 2,032 2,154 (122 ) Net working capital $ 3,474 $ 4,099 $ (625 ) 26
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The decrease in net working capital as of
As ofMarch 31, 2020 , a majority of the Company's cash and equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to theU.S. Cash and equivalents held internationally are typically used for international operating needs or reinvested to fund expansion of existing international businesses. International funds may also be used to fund international acquisitions or, if not considered permanently invested, may be repatriated to theU.S. The Company has accrued for foreign withholding taxes related to foreign held cash and equivalents that are not permanently invested. In theU.S. , the Company utilizes cash flows from operations to fund domestic cash needs and the Company's capital allocation priorities. This includes operating needs of theU.S. businesses, dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existingU.S. businesses and general corporate needs. The Company may also use its commercial paper program, which is backed by long-term credit facilities, for short-term liquidity needs. The Company believes cash generated by operations and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in theU.S.
Debt
Total debt as ofMarch 31, 2020 andDecember 31, 2019 was as follows: In millions March 31, 2020 December 31, 2019 Short-term debt $ 4 $ 4 Long-term debt 7,690 7,754 Total debt $ 7,694 $ 7,758 There was no commercial paper outstanding as ofMarch 31, 2020 andDecember 31, 2019 . As ofMarch 31, 2020 andDecember 31, 2019 , short-term debt included$4 million related to the 4.88% notes due throughDecember 31, 2020 . The Company has a$2.5 billion line of credit agreement with a termination date ofSeptember 27, 2024 which is available to provide additional liquidity, including to support the potential issuances of commercial paper. No amounts were outstanding under the$2.5 billion line of credit agreement as ofMarch 31, 2020 .
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt 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. Total debt to EBITDA for the trailing twelve month periods endedMarch 31, 2020 andDecember 31, 2019 was as follows: Dollars in millions March 31, 2020 December 31, 2019 Total debt $ 7,694 $ 7,758 Net income $ 2,490 $ 2,521 Add: Interest expense 209 221 Other income (118 ) (107 ) Income taxes 743 767 Depreciation 268 267 Amortization and impairment of intangible assets 152 159 EBITDA $ 3,744 $ 3,828 Total debt to EBITDA ratio 2.1 2.0 27
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Stockholders' Equity
The changes to stockholders' equity during the three months ended
In millions
Total stockholders' equity,
566
Repurchases of common stock (706 )
Cash dividends declared (338 )
Foreign currency translation adjustments, net of tax (287 ) Other, net
19
Total stockholders' equity, March 31, 2020 $ 2,284 FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe," "expect," "plans," "intends," "may," "strategy," "prospects," "estimate," "project," "target," "anticipate," "guidance," "forecast," and other similar words, including, without limitation, statements regarding the potential effects of the COVID-19 pandemic on the Company's business, potential acquisitions and divestitures and the expected performance of acquired businesses and impact of divested businesses, the impact of tariffs and raw material cost inflation, economic and regulatory conditions in various geographic regions, the timing and amount of share repurchases, the timing and amount of benefits from the Company's enterprise strategy initiatives, the adequacy of internally generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency ofU.S. generated cash to fund cash requirements in theU.S. , the impact of enactedU.S. tax legislation, the cost and availability of additional financing, the Company's portion of future benefit payments related to pension and postretirement benefits, the availability of raw materials and energy, the expiration of any one of the Company's patents, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the impact of failure of the Company's employees to comply with applicable laws and regulations, the impact of foreign currency fluctuations, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the resolution of tax matters. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include (1) the impact of the COVID-19 pandemic and related government actions on the Company's operating results, financial condition and liquidity, (2) weaknesses or downturns in the markets served by the Company, (3) changes or deterioration in international and domestic political and economic conditions, including as a result of the COVID-19 pandemic, (4) the timing and amount of benefits from the Company's enterprise strategy initiatives and their impact on organic revenue growth, including the ability to execute divestitures, (5) market conditions and availability of financing to fund the Company's share repurchases, (6) failure of the Company's employees, agents or business partners to comply with anti-corruption and other laws, (7) the unfavorable impact of foreign currency fluctuations, (8) a delay or decrease in the introduction of new products into the Company's product lines, (9) failure to protect the Company's intellectual property, (10) the potential negative impact of acquisitions on the Company's profitability and returns, (11) negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (12) potential negative impact of impairments to goodwill and other intangible assets on the Company's return on invested capital, financial condition or results of operations, (13) increases in funding costs or decreases in credit availability due to market conditions or changes to the Company's credit ratings, (14) raw material price increases and supply shortages, (15) unfavorable tax law changes and tax authority rulings, (16) financial market risks to the Company's obligations under its defined benefit pension plans, (17) potential adverse outcomes in legal proceedings, (18) uncertainties related to environmental regulation and the physical risks of climate change, and (19) negative effects of service interruptions, data corruption, cyber-based attacks, network security breaches, or violations of data privacy laws. A more detailed description of these risks is contained under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Any forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.
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ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-public information or other confidential commercial information. Shareholders should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
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