ILLINOIS TOOL WORKS INC - FORM 8-K - EX-99.1 - July 31, 2020

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8-K - 8-K - ILLINOIS TOOL WORKS INCitw-20200731.htm

Exhibit 99.1

ITW Reports Second Quarter 2020 Results

•Total revenue of $2.6 billion as organic revenue declined 27%
•Operating margin of 17.5%
•Operating income of $449 million
•GAAP EPS of $1.01
•Free cash flow of $681 million, 213% of net income


GLENVIEW, IL., July 31, 2020 - Illinois Tool Works Inc. (NYSE: ITW) today reported its second quarter 2020 results.

“Our performance in the second quarter clearly demonstrates that the progress we have made on executing our long-term enterprise strategy has put ITW in a position of considerable strength in managing through the effects of the global pandemic,” said E. Scott Santi, chairman and chief executive officer. “Our powerful ITW Business Model and decentralized, entrepreneurial culture are never more valuable than during times of significant and rapid change, and I want to thank all of my ITW colleagues around the world for their incredible care and commitment to keeping their co-workers safe while continuing to serve our customers with excellence. Our people responded to an unprecedented health crisis and a 29 percent decline in revenues and still delivered $449 million in operating income, $681 million in free cash flow, and operating margin of 17.5 percent. Strong proactive divisional leadership and our flexible cost structure allowed us to reduce operating expenses by over $140 million in the quarter despite the fact that we made the decision to provide full compensation and benefits support to every ITW team member for the entirety of the second quarter.”

“Looking forward, while significant end-market disruption and uncertainties remain, we will continue to leverage our financial strength and ample liquidity to prioritize playing offense in the recovery over playing defense in the contraction and to ensure that every one of our businesses is strongly positioned to fully participate in the recovery. Despite the near-term challenges of the moment, we remain deeply committed to achieving and sustaining ITW’s full-potential performance, and we will utilize our financial strength and flexible cost structure to protect investments in areas of strategic importance to the execution of our long-term strategy. I am confident that the strength and resilience of the ITW Business Model, our high-quality diversified business portfolio, and our people put us in a strong position to deal decisively and effectively with the effects of the pandemic however it plays out from here while remaining focused on executing our long-term enterprise strategy,” Santi concluded.

Second Quarter Results
Second-quarter revenue of $2.6 billion declined 29 percent with organic revenue down 27 percent. Foreign currency translation and divestitures reduced revenues by 1.5 percent and 1.0 percent, respectively. Revenues improved sequentially as the quarter progressed.

Operating margin was 17.5 percent compared to 24.1 percent in the prior year period as the lower volume impact was partially offset by benefits from Enterprise Initiatives of 100 basis points. GAAP earnings per share (EPS) were $1.01 compared to $1.91 in the prior year period. Free cash flow increased 12 percent to $681 million with a 213 percent conversion rate. After-tax return on invested capital was 16.8 percent. The effective tax rate for the second quarter was 21.3 percent.

At quarter end, ITW had approximately $1.8 billion in cash and cash equivalents on hand, essentially no short-term debt and a revolving credit facility in place that could provide additional liquidity of up to $2.5 billion, if needed.

On May 5, 2020, ITW suspended annual guidance for 2020 due to uncertainties regarding the duration and severity of the COVID-19 pandemic.

Non-GAAP Measures
This earnings release contains certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures is included in the attached supplemental reconciliation schedule.

Forward-looking Statement
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, without limitation, statements regarding the potential effects of the COVID-19 pandemic, related government actions and the Company’s strategy in response thereto on the Company’s business, the


anticipated duration of the Company’s COVID-19 containment and recovery phases, the Company’s financial scenario planning and estimates, expected access to liquidity sources, expected capital allocation, diluted earnings per share, foreign exchange rates, total and organic revenue, operating margin, economic and regulatory conditions in various geographic regions, expected dividend payments, price/cost impact, restructuring expenses, expected adjustments to capacity and cost structure, free cash flow, effective tax rate, after-tax return on invested capital, timing and amount of share repurchases, if any, potential acquisitions and dispositions and related impact on financial results, and plans regarding the issuance of guidance. These statements are subject to certain risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those anticipated. Such factors include those contained in ITW's Form 10-K for 2019 and subsequent reports filed with the SEC.

About Illinois Tool Works
ITW (NYSE: ITW) is a Fortune 200 global multi-industrial manufacturing leader with revenues totaling $14.1 billion in 2019. The company’s seven industry-leading segments leverage the unique ITW Business Model to drive solid growth with best-in-class margins and returns in markets where highly innovative, customer-focused solutions are required. ITW’s approximately 45,000 dedicated colleagues around the world thrive in the company’s decentralized and entrepreneurial culture. www.itw.com


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME (UNAUDITED)
Three Months EndedSix Months Ended
June 30,June 30,
In millions except per share amounts2020201920202019
Operating Revenue$2,564  $3,609  $5,792  $7,161  
Cost of revenue1,594  2,099  3,465  4,158  
Selling, administrative, and research and development expenses486  598  1,046  1,209  
Amortization and impairment of intangible assets35  41  71  84  
Operating Income449  871  1,210  1,710  
Interest expense(51) (55) (102) (118) 
Other income (expense)8  9  33  23  
Income Before Taxes406  825  1,141  1,615  
Income Taxes87  202  256  395  
Net Income$319  $623  $885  $1,220  
Net Income Per Share:
Basic$1.01  $1.92  $2.79  $3.74  
Diluted$1.01  $1.91  $2.78  $3.72  
Cash Dividends Per Share:
Paid$1.07  $1.00  $2.14  $2.00  
Declared$1.07  $1.00  $2.14  $2.00  
Shares of Common Stock Outstanding During the Period:
Average316.1  324.8  317.2  326.0  
Average assuming dilution317.4  326.6  318.6  327.9  



ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millionsJune 30, 2020December 31, 2019
Assets
Current Assets:
Cash and equivalents$1,812  $1,981  
Trade receivables2,156  2,461  
Inventories1,167  1,164  
Prepaid expenses and other current assets253  296  
Assets held for sale221  351  
Total current assets5,609  6,253  
Net plant and equipment1,711  1,729  
Goodwill4,443  4,492  
Intangible assets801  851  
Deferred income taxes470  516  
Other assets1,229  1,227  
 $14,263  $15,068  
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt$4  $4  
Accounts payable402  472  
Accrued expenses1,106  1,217  
Cash dividends payable338  342  
Income taxes payable152  48  
Liabilities held for sale40  71  
Total current liabilities2,042  2,154  
Noncurrent Liabilities:
Long-term debt7,765  7,754  
Deferred income taxes676  668  
Noncurrent income taxes payable413  462  
Other liabilities1,009  1,000  
Total noncurrent liabilities9,863  9,884  
Stockholders’ Equity:
Common stock6  6  
Additional paid-in-capital1,317  1,304  
Retained earnings22,612  22,403  
Common stock held in treasury(19,669) (18,982) 
Accumulated other comprehensive income (loss)(1,909) (1,705) 
Noncontrolling interest1  4  
Total stockholders’ equity2,358  3,030  
 $14,263  $15,068  



ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Three Months Ended June 30, 2020
Dollars in millionsTotal RevenueOperating IncomeOperating Margin
Automotive OEM$361  $(28) (7.8)%
Food Equipment336  31  9.2 %
Test & Measurement and Electronics455  117  25.7 %
Welding298  64  21.6 %
Polymers & Fluids354  82  23.1 %
Construction Products376  90  23.7 %
Specialty Products387  98  25.4 %
Intersegment(3) —  — %
Total Segments2,564  454  17.7 %
Unallocated—  (5) — %
Total Company$2,564  $449  17.5 %

Six Months Ended June 30, 2020
Dollars in millionsTotal RevenueOperating IncomeOperating Margin
Automotive OEM$1,057  $117  11.1 %
Food Equipment819  148  18.1 %
Test & Measurement and Electronics940  238  25.4 %
Welding670  173  25.8 %
Polymers & Fluids747  175  23.4 %
Construction Products766  181  23.6 %
Specialty Products801  207  25.9 %
Intersegment(8) —  — %
Total Segments5,792  1,239  21.4 %
Unallocated—  (29) — %
Total Company$5,792  $1,210  20.9 %





ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q2 2020 vs. Q2 2019 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic(52.6)%(37.6)%(10.6)%(24.9)%(14.4)%(9.1)%(16.1)%(26.5)%
Acquisitions/
Divestitures		— %— %(3.0)%(3.9)%— %— %(0.8)%(1.0)%
Translation(1.5)%(1.0)%(1.1)%(0.6)%(2.8)%(2.3)%(1.3)%(1.5)%
Operating
Revenue		(54.1)%(38.6)%(14.7)%(29.4)%(17.2)%(11.4)%(18.2)%(29.0)%

Q2 2020 vs. Q2 2019 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage (1880) bps  (1300) bps  (300) bps  (520) bps  (380) bps  (200) bps  (380) bps  (750) bps
Changes in Variable Margin & OH Costs (1210) bps  (470) bps  380 bps  (330) bps  320 bps  40 bps  160 bps —
Total Organic (3090) bps  (1770) bps  80 bps  (850) bps  (60) bps  (160) bps  (220) bps  (750) bps
Acquisitions/Divestitures—— 40 bps  60 bps —— 50 bps  10 bps
Restructuring/
Other		 100 bps  130 bps — 70 bps  90 bps  30 bps  100 bps  80 bps
Total Operating Margin Change (2990) bps  (1640) bps  120 bps  (720) bps  30 bps  (130) bps  (70) bps  (660) bps
Total Operating Margin % *(7.8)%9.2%25.7%21.6%23.1%23.7%25.4%17.5%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 110 bps  100 bps  180 bps  20 bps  390 bps  30 bps  100 bps  140 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.08) on GAAP earnings per share for the second quarter of 2020.




ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
1H 2020 vs. 1H 2019 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic(32.0)%(22.0)%(7.0)%(16.9)%(8.9)%(4.6)%(12.4)%(16.6)%
Acquisitions/
Divestitures		— %— %(3.1)%(3.7)%— %— %(1.0)%(1.0)%
Translation(1.7)%(1.2)%(1.0)%(0.5)%(2.5)%(2.5)%(1.2)%(1.5)%
Operating
Revenue		(33.7)%(23.2)%(11.1)%(21.1)%(11.4)%(7.1)%(14.6)%(19.1)%

1H 2020 vs. 1H 2019 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage (840) bps  (630) bps  (200) bps  (330) bps  (230) bps  (90) bps  (270) bps  (430) bps
Changes in Variable Margin & OH Costs (370) bps  (180) bps  250 bps  (80) bps  280 bps  20 bps  90 bps  30 bps
Total Organic (1210) bps  (810) bps  50 bps  (410) bps  50 bps  (70) bps  (180) bps  (400) bps
Acquisitions/Divestitures—— 50 bps  70 bps —— 60 bps  20 bps
Restructuring/Other 180 bps  90 bps  10 bps  70 bps  80 bps  90 bps  80 bps  80 bps
Total Operating Margin Change (1030) bps  (720) bps  110 bps  (270) bps  130 bps  20 bps  (40) bps  (300) bps
Total Operating Margin % *11.1%18.1%25.4%25.8%23.4%23.6%25.9%20.9%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 70 bps  80 bps  170 bps  20 bps  370 bps  30 bps  90 bps  130 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.17) on GAAP earnings per share for the first half of 2020.


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)


AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
Three Months EndedSix Months Ended
June 30,June 30,
Dollars in millions2020201920202019
Operating income$449  $871  $1,210  $1,710  
Tax rate21.3 %24.5 %22.4 %24.5 %
Income taxes(96) (213) (271) (418) 
Operating income after taxes$353  $658  $939  $1,292  
Invested capital:  
Trade receivables$2,156  $2,629  $2,156  $2,629  
Inventories1,167  1,256  1,167  1,256  
Net assets held for sale181  346  181  346  
Net plant and equipment1,711  1,717  1,711  1,717  
Goodwill and intangible assets5,244  5,431  5,244  5,431  
Accounts payable and accrued expenses(1,508) (1,719) (1,508) (1,719) 
Other, net(636) (433) (636) (433) 
Total invested capital$8,315  $9,227  $8,315  $9,227  
Average invested capital$8,431  $9,206  $8,557  $9,182  
Return on average invested capital16.8 %28.6 %22.0 %28.1 %



FREE CASH FLOW (UNAUDITED)
Three Months EndedSix Months Ended
June 30,June 30,
Dollars in millions2020201920202019
Net cash provided by operating activities$737  $685  $1,351  $1,301  
Less: Additions to plant and equipment(56) (77) (116) (154) 
Free cash flow$681  $608  $1,235  $1,147  
Net income$319  $623  $885  $1,220  
Free cash flow to net income conversion rate213 %98 %140 %94 %


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