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 83 divisions in 52 countries. As ofDecember 31, 2020 , the Company employed approximately 43,000 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. 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
18,500 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
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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 and prioritized 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. •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 83 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 2020 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
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 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
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--------------------------------------------------------------------------------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. 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 . The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. However, due to the COVID-19 pandemic, the Company has deferred any further significant divestiture activity until market conditions normalize.
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 to 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, 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.
Near-term Priorities
While it was the challenges brought about by the COVID-19 pandemic that
dominated the Company's attention starting in 2020, it was the collection of
capabilities and competitive advantages that have been built and honed over the
past eight years through the execution of ITW's enterprise strategy that
provided the Company with the options to respond. This, coupled with the
proprietary and powerful ITW Business Model, diversified high-quality business
portfolio and diligent execution put the Company in a position of strength in
dealing with the global pandemic.
From the early days of the pandemic, the Company focused 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; and (4) leverage the Company's strengths to position it to fully
participate in the recovery.
"Win the Recovery" is an execution component of the Company's enterprise
strategy, not a separate initiative, with every one of the Company's divisions
identifying specific opportunities presented by the pandemic to capture
sustainable share gains that are aligned with the ITW long-term enterprise
strategy. The Company expects these efforts to contribute meaningfully to
accelerate its progress toward full-potential organic growth. The Company
continues to focus on delivering strong results in any environment while
executing its long-term strategy to achieve and sustain ITW's full potential
performance.
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--------------------------------------------------------------------------------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, such as the recently announced agreement with Amphenol Corporation
("Amphenol"), whereby the Company intends to acquire the Test & Simulation
business of MTS Systems Corporation ("MTS") from Amphenol, which is expected to
close following the receipt of all required regulatory approvals and the
satisfaction of other customary closing conditions. Upon completion of this
acquisition, the Test & Simulation business of MTS will be reported within the
Company's Test & Measurement and Electronics segment.
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 2020 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 in the latter part of the first quarter of 2020 as COVID-19 continued to spread and impact the countries in which the Company operates and the markets the Company serves. 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; and (4) leverage the Company's strengths to position it to fully participate in the recovery phase. To support ITW's colleagues, among its many actions and initiatives, the Company redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagueswho have child and elder care needs, and implemented aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. To support its customers, the Company has worked diligently to keep its facilities 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. 16 -------------------------------------------------------------------------------- In areas around the world where governments issued stay-at-home or similar orders, the vast majority of ITW's businesses were designated as critical or essential businesses and, as such, they remained 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. While the vast majority of the Company's facilities have remained open and operational during the pandemic, many of these facilities were operating at a reduced capacity. The full extent of the COVID-19 outbreak and its impact on the markets served by the Company and on the Company's operations and financial position continues to be 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 I - Item 1A - Risk Factors in the Company's 2020 Annual Report on Form 10-K. Separately, the Company does not believe that tariffs imposed in recent years 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 delivered strong financial results in the first quarter of 2021, as the Company experienced solid recovery progress in many of its end markets. The primary drivers of the Company's financial performance are the continued successful execution of enterprise initiatives, including the "Win the Recovery" actions initiated over the course of the past year, and continued focus on the highly differentiated ITW Business Model. Despite rising raw material costs and a challenging global supply chain environment, the Company generated operating revenue growth of 9.8 percent, operating income growth of 18.8 percent, operating margin was 25.5 percent and after-tax return on average invested capital was 32.1 percent. Additionally, with the exception of the Food Equipment segment, all segments achieved organic revenue growth, and all seven segments had operating margins that exceeded 21 percent. Refer to the After-tax Return onAverage Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. The Company's consolidated results of operations for the first quarter of 2021 and 2020 were as follows: Three Months Ended Dollars in millions March 31, Components of Increase (Decrease) Acquisition/ Foreign 2021 2020 Inc (Dec) Organic Divestiture Restructuring Currency Total Operating revenue$ 3,544 $ 3,228 9.8 % 6.1 % - % - % 3.7 % 9.8 % Operating income$ 905 $ 761 18.8 % 14.6 % - % - % 4.2 % 18.8 % Operating margin % 25.5 % 23.6 % 190 bps 190 bps - - - 190 bps •Operating revenue increased 9.8 percent due to higher organic revenue and the favorable effect of foreign currency translation. •Organic revenue grew 6.1% primarily due to the solid recovery progress in many of the Company's end markets from the disruptions in the Company's global operations resulting from the COVID-19 pandemic. An increase in organic revenue in six segments was partially offset by a decline in the Food Equipment segment, which continues to have more pronounced impacts from the COVID-19 pandemic. Product line simplification activities reduced organic revenue by 20 basis points in the first quarter. •North American organic revenue grew 4.3% as an increase in five segments was partially offset by a decline in the Food Equipment and Automotive OEM segments. •Europe,Middle East andAfrica organic revenue increased 0.5%. Growth in the Construction Products, Automotive OEM, Specialty Products, Polymers & Fluids and Test & Measurement and Electronics segments was partially offset by a decline in the Food Equipment and Welding segments. •Asia Pacific organic revenue increased 27.1% due to growth in all segments.China organic revenue grew 62.4% as all segments had growth, driven primarily by the Automotive OEM, Test & Measurement and Electronics, Food Equipment and Polymers & Fluids segments. •Operating income of$905 million in the first quarter increased 18.8%. •Operating margin was 25.5% in the first quarter. The increase of 190 basis points was primarily driven by benefits from the Company's enterprise initiatives of 120 basis points and positive operating leverage of 120 basis points, partially offset by unfavorable price/cost of 60 basis points. 17 -------------------------------------------------------------------------------- •The effective tax rate for the first quarter of 2021 and 2020 was 22.4% and 23.0%, respectively. The effective tax rate included discrete income tax benefits related to excess tax benefits from stock-based compensation of$9 million and$7 million for the first quarter of 2021 and 2020, respectively. •Diluted earnings per share (EPS) were$2.11 for the first quarter of 2021, an increase of 19.2%. •Free cash flow was$541 million for the first quarter of 2021. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. •The Company repurchased approximately 1.2 million shares of its common stock in the first quarter of 2021 for approximately$250 million . •After-tax return on average invested capital was 32.1% for the first quarter of 2021 compared to 27.0% in the prior period. Refer to the After-tax Return onAverage Invested Capital 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 2021 and
2020 were as follows:
Three Months ended March 31,
Dollars in millions Operating Revenue Operating Income
2021 2020 2021 2020
Automotive OEM $ 783 $ 696 $ 189 $ 145
Food Equipment 451 483 96 117
Test & Measurement and Electronics 552 485 157 121
Welding 401 372 121 109
Polymers & Fluids 435 393 112 93
Construction Products 469 390 130 91
Specialty Products 457 414 126 109
Intersegment revenue (4) (5) - -
Unallocated - - (26) (24)
Total $ 3,544 $ 3,228 $ 905 $ 761
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 2021 and 2020 were as follows:
Three Months Ended
Dollars in millions March 31, Components of Increase (Decrease)
Acquisition/ Foreign
2021 2020 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 783 $ 696 12.6 % 7.6 % - % - % 5.0 % 12.6 %
Operating income $ 189 $ 145 30.2 % 23.1 % - % 1.1 % 6.0 % 30.2 %
Operating margin % 24.1 % 20.9 % 320 bps 300 bps - 20 bps - 320 bps
•Operating revenue grew due to higher organic revenue and the favorable effect
of foreign currency translation.
•Organic revenue increased 7.6% versus worldwide auto builds which increased 14%
due to customer and geographic region mix. Additionally, product line
simplification activities reduced organic revenue by 40 basis points.
•North American organic revenue decreased 1.8% compared to North American auto
builds which declined 4%. Auto builds for the Detroit 3, where the Company has
higher content, decreased 9%. Additionally, North American revenue was down as
customers adjusted their production schedules in response to the near-term
supply chain issues affecting the automotive industry.
•European organic revenue increased 4.0% compared to European auto builds which
decreased 1%.
•Asia Pacific organic revenue increased 42.7%. China organic revenue grew 58.4%
versus China auto builds which increased 77%.
•Operating margin of 24.1% in the first quarter increased 320 basis points
primarily driven by positive operating leverage of 130 basis points and the net
benefits of the Company's enterprise initiatives and cost management, partially
offset by unfavorable price/cost of 110 basis points.
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 retail and food institutional/restaurant 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 2021 and 2020 were as follows:
Three Months Ended
Dollars in millions March 31, Components of Increase (Decrease)
Acquisition/ Foreign
2021 2020 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 451 $ 483 (6.5) % (9.6) % - % - % 3.1 % (6.5) %
Operating income $ 96 $ 117 (18.3) % (20.9) % - % 0.2 % 2.4 % (18.3) %
Operating margin % 21.2 % 24.3 % (310) bps (310) bps - - - (310) bps
•Operating revenue declined due to lower organic revenue, partially offset by
the favorable effect of foreign currency translation.
•Organic revenue decreased 9.6% as equipment and service organic revenue
declined 3.9% and 19.0%, respectively, driven by the negative impacts resulting
from the COVID-19 pandemic. Although organic revenue was down in the quarter,
the demand trends have improved sequentially versus the fourth quarter of 2020.
•North American organic revenue declined 6.2% as equipment organic revenue
decreased 1.3%, primarily driven by lower demand in the restaurant and
institutional end markets, partially offset by growth in the food retail end
markets. Service organic revenue decreased 13.2%.
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•International organic revenue decreased 14.6%. Equipment organic revenue
declined 7.1%, primarily due to lower demand in the European warewash and
refrigeration end markets, partially offset by higher demand in Asia . Service
organic revenue decreased 28.0%.
•Operating margin of 21.2% in the first quarter decreased 310 basis points
primarily due to negative operating leverage of 260 basis points, product mix
and unfavorable price/cost of 10 basis points, partially offset by benefits from
the Company's enterprise initiatives.
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, industrial capital goods, automotive original equipment manufacturers and tiers, 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 2021 and 2020 were as follows:
Three Months Ended
Dollars in millions March 31, Components of Increase (Decrease)
Acquisition/ Foreign
2021 2020 Inc (Dec) Organic Divestiture Restructuring
Currency Total
Operating revenue $ 552 $ 485 14.0 % 10.7 % - % - % 3.3 % 14.0 %
Operating income $ 157 $ 121 29.2 % 25.7 % - % - % 3.5 % 29.2 %
Operating margin % 28.4 % 25.1 % 330 bps 330 bps - - - 330 bps
•Operating revenue grew due to higher organic revenue and the favorable effect
of foreign currency translation.
•Organic revenue increased 10.7%.
•Electronics organic revenue increased 16.0%. The electronics assembly
businesses increased 24.3% primarily due to higher demand in North America and
Asia Pacific . The other electronics businesses, which include the contamination
control, static control and pressure sensitive adhesives businesses, increased
12.4% with growth in all major regions.
•Organic revenue for the test and measurement businesses increased 6.5%
primarily driven by higher semi-conductor demand in North America and the impact
of a stronger capital spending environment, partially offset by lower demand in
the aerospace and oil and gas end markets in North America . Instron , where
demand is more closely tied to the capital spending environment, had organic
revenue growth of 11.8%.
•Operating margin of 28.4% in the first quarter increased 330 basis points
primarily due to positive operating leverage of 260 basis points and benefits
from the Company's enterprise initiatives.
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 2021
and 2020 were as follows:
Three Months Ended
Dollars in millions March 31, Components of Increase (Decrease)
Acquisition/ Foreign
2021 2020 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 401 $ 372 7.5 % 6.2 % - % - % 1.3 % 7.5 %
Operating income $ 121 $ 109 11.7 % 10.6 % - % 0.5 % 0.6 % 11.7 %
Operating margin % 30.3 % 29.1 % 120 bps 120 bps - 10 bps (10) bps 120 bps
•Operating revenue increased due to higher organic revenue and the favorable
effect of foreign currency translation.
•Organic revenue grew 6.2% driven by an increase in equipment of 10.2%,
primarily due to higher demand in the commercial end markets. Consumables
organic revenue was flat as growth in the commercial end markets in North
America and the oil and gas end markets in Asia Pacific was offset by a decline
in the industrial end markets.
•North American organic revenue increased 6.7% primarily due to an increase in
the commercial end markets of 17.4%, partially offset by a decline in the
industrial end markets of 0.6%.
•International organic revenue grew 3.6% primarily due to increased demand in
the oil and gas end markets in Asia Pacific of 10.8%, partially offset by a
decline in Europe of 3.6%.
•Operating margin of 30.3% in the first quarter increased 120 basis points
primarily driven by positive operating leverage of 100 basis points and benefits
from the Company's enterprise initiatives, partially offset by unfavorable
price/cost of 30 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 2021 and 2020 were as follows:
Three Months Ended
Dollars in millions March 31, Components of Increase (Decrease)
Acquisition/ Foreign
2021 2020 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 435 $ 393 10.7 % 8.8 % - % - % 1.9 % 10.7 %
Operating income $ 112 $ 93 20.4 % 17.3 % - % 0.5 % 2.6 % 20.4 %
Operating margin % 25.7 % 23.6 % 210 bps 190 bps - 10 bps 10 bps 210 bps
•Operating revenue increased due to higher organic revenue and the favorable
effect of foreign currency translation.
•Organic revenue increased 8.8%. Product line simplification activities reduced
organic revenue by 60 basis points.
•Organic revenue for the automotive aftermarket businesses increased 8.7%
primarily driven by growth in the car care, engine repair and body repair
businesses in North America .
•Organic revenue for the polymers businesses increased 15.9% with growth across
all major regions.
•Organic revenue for the fluids businesses decreased 0.8% primarily due to a
decline in the industrial maintenance, repair, and operations end markets in
Europe , partially offset by growth in North America .
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•Operating margin of 25.7% in the first quarter increased 210 basis points
primarily driven by positive operating leverage of 200 basis points, benefits
from the Company's enterprise initiatives and lower intangible asset
amortization expense, partially offset by unfavorable price/cost of 100 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 2021 and 2020 were as follows:
Three Months Ended
Dollars in millions March 31, Components of Increase (Decrease)
Acquisition/ Foreign
2021 2020 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 469 $ 390 20.2 % 12.8 % (0.2) % - % 7.6 % 20.2 %
Operating income $ 130 $ 91 41.8 % 33.5 % - % 0.1 % 8.2 % 41.8 %
Operating margin % 27.6 % 23.4 % 420 bps 430 bps - - (10) bps 420 bps
•Operating revenue increased primarily due to higher organic revenue and the
favorable effect of foreign currency translation.
•Organic revenue increased 12.8% with growth across all major regions. Product
line simplification activities reduced organic revenue by 30 basis points.
•North American organic revenue grew 11.8% as the United States residential and
commercial end markets increased 12.8% and 2.8%, respectively.
•International organic revenue increased 13.7%. European organic revenue
increased 18.9% primarily driven by an increase in continental Europe and the
United Kingdom in the commercial and residential end markets. Asia Pacific
organic revenue increased 6.9% primarily due to an increase in Australia and New
Zealand in the retail and residential end markets.
•Operating margin of 27.6% in the first quarter increased 420 basis points
primarily driven by positive operating leverage of 260 basis points and net
benefits from the Company's enterprise initiatives and cost management.
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,
consumer durables, general industrial, 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.
22
--------------------------------------------------------------------------------The results of operations for the Specialty Products segment for the first quarter of 2021 and 2020 were as follows:
Three Months Ended
Dollars in millions March 31, Components of Increase (Decrease)
Acquisition/ Foreign
2021 2020 Inc (Dec) Organic Divestiture Restructuring Currency Total
Operating revenue $ 457 $ 414 10.4 % 7.3 % - % - % 3.1 % 10.4 %
Operating income $ 126 $ 109 15.9 % 15.1 % - % (2.3) % 3.1 % 15.9 %
Operating margin % 27.6 % 26.3 % 130 bps 190 bps - (60) bps - 130 bps
•Operating revenue increased due to higher organic revenue and the favorable
effect of foreign currency translation.
•Organic revenue increased 7.3%. Consumable sales grew 7.3% primarily due to
higher demand in North America and Asia Pacific . Equipment sales increased 7.6%
as higher demand in Europe and North America was offset by lower demand in Asia
Pacific .
•North American organic revenue increased 5.7% as growth in the consumer
packaging businesses was partially offset by a decline in the ground support
equipment businesses.
•International organic revenue increased 9.9% primarily due to an increase in
the appliances businesses in Europe and Asia Pacific and the ground support
equipment businesses in Europe .
•Operating margin of 27.6% in the first quarter increased 130 basis points
primarily driven by positive operating leverage of 140 basis points and net
benefits from the Company's enterprise initiatives and cost management,
partially offset by unfavorable price/cost of 150 basis points and higher
restructuring expenses.
OTHER FINANCIAL HIGHLIGHTS
•Interest expense in the first quarter of 2021 was$52 million versus$51 million in the first quarter of 2020. •Other income (expense) was income of$12 million in the first quarter of 2021, a decrease of$13 million compared to the first quarter of 2020 primarily due to lower foreign currency translation gains and lower interest income in 2021.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are free cash flow and short-term credit facilities. As ofMarch 31, 2021 , the Company had$2.5 billion of cash and equivalents on hand, no outstanding borrowings under its$2.5 billion revolving credit facility, and no commercial paper outstanding. 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. 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 I - Item 1A - Risk Factors in the Company's 2020 Annual Report on Form 10-K. 23 --------------------------------------------------------------------------------
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 2021 and 2020 was as follows:
Three Months Ended
March 31,
In millions 2021 2020
Net cash provided by operating activities $ 609 $ 614
Additions to plant and equipment (68) (60)
Free cash flow $ 541 $ 554
Cash dividends paid $ (361) $ (342)
Repurchases of common stock (250) (706)
Other, net 20 8
Effect of exchange rate changes on cash and equivalents (30) (65)
Net increase (decrease) in cash and equivalents$ (80) $ (551) Stock Repurchase Program OnAugust 3, 2018 , the Company's Board of Directors authorized a stock repurchase program which provides for the repurchase of up to$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. Due to the COVID-19 pandemic, the Company temporarily suspended its share repurchase program starting inMarch 2020 . InFebruary 2021 , the Company resumed its share repurchase program and repurchased approximately 1.2 million shares of its common stock at an average price of$211.50 in the first quarter of 2021. As ofMarch 31, 2021 , there were$990 million of authorized repurchases remaining under the 2018 Program. 24 --------------------------------------------------------------------------------
After-tax Return on
The Company uses after-tax return on average invested capital ("After-tax ROIC")
to measure the effectiveness of its operations' use of invested capital to
generate profits. After-tax 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 After-tax 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. After-tax ROIC for the first
quarter of 2021 and 2020 was as follows:
Three Months Ended
March 31,
Dollars in millions 2021 2020
Operating income $ 905 $ 761
Tax rate 22.4 % 23.0 %
Income taxes (203) (175)
Operating income after taxes $ 702 $ 586
Invested capital:
Trade receivables $ 2,662 2,424
Inventories 1,292 1,185
Net assets held for sale - 181
Net plant and equipment 1,746 1,704
Goodwill and intangible assets 5,379 5,237
Accounts payable and accrued expenses (1,850) (1,593)
Other, net (488) (590)
Total invested capital $ 8,741 $ 8,548
Average invested capital $ 8,740 $ 8,677 After-tax return on average invested capital 32.1 % 27.0 %
After-tax ROIC increased 510 basis points for the three month period endedMarch 31, 2021 compared to the prior year period as a result of a 19.7% increase in after-tax operating income versus a 0.7% increase in average invested capital. 25 --------------------------------------------------------------------------------
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as ofMarch 31, 2021 andDecember 31, 2020 is summarized as follows: Increase/ In millions March 31, 2021 December 31, 2020 (Decrease) Current assets: Cash and equivalents$ 2,484 $ 2,564 $ (80) Trade receivables 2,662 2,506 156 Inventories 1,292 1,189 103 Other 266 264 2 Total current assets 6,704 6,523 181 Current liabilities: Short-term debt 350 350 - Accounts payable and accrued expenses 1,850 1,818 32 Other 480 421 59 Total current liabilities 2,680 2,589 91 Net working capital$ 4,024 $ 3,934 $ 90 As ofMarch 31, 2021 , a significant portion 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 of
In millions March 31, 2021 December 31, 2020 Short-term debt $ 350 $ 350 Long-term debt 7,599 7,772 Total debt$ 7,949 $ 8,122 There was no commercial paper outstanding as ofMarch 31, 2021 andDecember 31, 2020 . Short-term debt as ofMarch 31, 2021 andDecember 31, 2020 included$350 million related to the 3.375% notes dueSeptember 15, 2021 . The Company has a$2.5 billion revolving credit facility 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 revolving credit facility as ofMarch 31, 2021 orDecember 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. EBITDA and the ratio of total debt to
EBITDA are non-GAAP financial measures. 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
26
--------------------------------------------------------------------------------
than the method used by other companies to calculate total debt to EBITDA. 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 ended March
31, 2021 and December 31, 2020 was as follows:
Dollars in millions March 31, 2021 December 31, 2020
Total debt $ 7,949 $ 8,122
Net income $ 2,214 $ 2,109
Add:
Interest expense 207 206
Other income (15) (28)
Income taxes 620 595
Depreciation 271 273
Amortization and impairment of intangible assets 152 154
EBITDA $ 3,449 $ 3,309
Total debt to EBITDA ratio 2.3 2.5
Stockholders' Equity
The changes to stockholders' equity during the three months ended
In millions Total stockholders' equity,December 31, 2020 $ 3,182 Net income 671 Repurchases of common stock (250) Dividends declared (360)
Foreign currency translation adjustments, net of tax (7) Other, net
40
Total stockholders' equity, March 31, 2021 $ 3,276 FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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," "intend," "may," "strategy," "prospects," "estimate," "will," "should," "could," "project," "target," "anticipate," "guidance," "forecast," and other similar words, including, without limitation, statements regarding the duration and potential effects of the COVID-19 pandemic, related government actions and the Company's strategy in response thereto on the Company's business, future financial and operating performance, free cash flow, economic and regulatory conditions in various geographic regions, the impact of foreign currency fluctuations, the timing and amount of benefits from the Company's enterprise strategy initiatives, the timing and amount of share repurchases, the protection of the Company's intellectual property, the likelihood of future goodwill or intangible asset impairment charges, the impact of adopting new accounting pronouncements, 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 cost and availability of additional financing, the availability of raw materials and energy and the impact of tariffs and raw material cost inflation, product line simplification activities and enterprise initiatives, the Company's portion of future benefit payments related to pension and postretirement benefits, the Company's information technology infrastructure, potential acquisitions and divestitures and the expected performance of acquired businesses and impact of divested businesses, the impact ofU.S. tax legislation and the estimated timing and amount related to the resolution of tax matters, the cost of compliance with environmental regulations, the impact of failure of the Company's employees to comply with applicable laws and regulations, and the outcome of outstanding legal proceedings. 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 COVID-19 pandemic, related government actions and the Company's strategy in response thereto, (2) 27 -------------------------------------------------------------------------------- weaknesses or downturns in the markets served by the Company, (3) changes or deterioration in international and domestic political and economic conditions, (4) the unfavorable impact of foreign currency fluctuations, (5) the timing and amount of benefits from the Company's enterprise strategy initiatives and their impact on organic revenue growth, (6) market conditions and availability of financing to fund the Company's share repurchases, (7) a delay or decrease in the introduction of new products into the Company's product lines, (8) failure to protect the Company's intellectual property, (9) 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, (10) raw material price increases and supply shortages, (11) financial market risks to the Company's obligations under its defined benefit pension plans, (12) negative effects of service interruptions, data corruption, cyber-based attacks, network security breaches, or violations of data privacy laws, (13) the potential negative impact of acquisitions on the Company's profitability and returns, (14) negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (15) unfavorable tax law changes and tax authority rulings, (16) potential adverse outcomes in legal proceedings, (17) uncertainties related to environmental regulation and the physical risks of climate change, and (18) failure of the Company's employees, agents or business partners to comply with anti-corruption and other laws. A more detailed description of these risks is contained under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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.
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. Investors 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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