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ITW Reports Second Quarter 2021 Results

July 30, 2021 8:00 AM

GLENVIEW, Ill., July 30, 2021 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its second quarter 2021 results.

“In the second quarter, we saw continued improvement in both the breadth and pace of the recovery, with organic revenue growth at the segment level ranging from 17 to 84 percent,” said E. Scott Santi, Chairman and Chief Executive Officer. “In the face of rising raw material costs and a challenging supply chain environment, our people around the world leveraged the strength and resilience of our proprietary business model and the ‘Win the Recovery’ actions taken over the course of the past year to serve our customers with excellence while delivering 43 percent revenue growth and 143 percent earnings growth. While the near-term environment is certainly not without its challenges, order intake rates in all segments and geographic regions remain strong and I have no doubt that we are well positioned to continue to execute at a high level as we move through the remainder of the year.”

Second Quarter 2021 ResultsSecond quarter revenue of $3.7 billion increased 43 percent versus the prior year period, as organic revenue grew 37 percent and foreign currency translation impact was favorable by six percent.

GAAP EPS of $2.45 increased 143 percent and included a $0.35 one-time tax benefit related to the remeasurement of net deferred tax assets in the United Kingdom. Operating income increased 99 percent to $893 million and incremental margin was 40 percent. Operating margin was 24.3 percent, an increase of 680 basis points with enterprise initiatives contributing 150 basis points, partially offset by dilutive price/cost margin impact of 120 basis points. In the quarter, price recovery actions essentially offset raw material cost increases on a dollar-for-dollar basis. Free cash flow was $477 million, 72 percent of net income adjusted for the one-time tax benefit. After-tax return on invested capital improved to 30.8 percent. The effective tax rate for the second quarter was 10.1 percent, and excluding the one-time tax benefit, the effective tax rate was 23.0 percent.

All seven segments delivered double-digit organic growth in the quarter, led by Automotive OEM up 84 percent and Food Equipment up 46 percent. Welding, Test & Measurement and Electronics, Construction Products, and Polymers & Fluids delivered organic growth in the range of 28 to 33 percent, and Specialty Products grew 17 percent. On a geographic basis, organic growth was 36 percent in North America, 50 percent in Europe, and 20 percent in Asia Pacific. As expected, the impact of Automotive OEM customers adjusting production schedules to account for the well-publicized shortage of several components reduced ITW’s revenues by approximately $60 million or two percentage points in the quarter.

2021 GuidanceThe company is raising its full-year GAAP EPS guidance to $8.55 to $8.95 per share, an increase of $0.35 or 32 percent at the midpoint versus prior year. This compares to previous guidance of $8.20 to $8.60 per share and incorporates the one-time tax benefit realized in the second quarter. The company is also raising its organic growth guidance to a range of 11 to 13 percent. Foreign currency translation impact at current foreign exchange rates is projected to contribute 3 percentage points to revenue growth. Raw material cost increases are expected to be offset by price increases on a dollar-for-dollar basis and therefore EPS neutral. The full year margin dilution impact from price/cost is now forecasted to be approximately 100 basis points, partially offsetting the expected margin contribution from Enterprise Initiatives of more than 100 basis points. As a result of price/cost, operating margin is expected to be in the range of 24.5 to 25.5 percent, an increase of 210 basis points at the midpoint versus 2020 and 50 basis points lower versus previous guidance. Free cash flow is expected to be approximately 100 percent of net income adjusted for the second quarter one-time tax benefit, and the company is on pace to repurchase approximately $1 billion of its shares, having repurchased $500 million in the first half of the year. Guidance excludes any impact from the previously announced acquisition of the MTS Test & Simulation business.

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. The estimated guidance of free cash flow conversion rate is based on assumptions that are difficult to predict, and a reconciliation of estimated free cash flow to the most directly comparable GAAP measure has been omitted due to the unreasonable efforts required in connection with such a reconciliation and the lack of availability of reliable forward-looking cash flow and operating information.

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 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, expected impact of tariffs and raw material inflation, product line simplification activities and enterprise initiatives, future financial and operating performance, free cash flow, organic and total revenue, operating margin, price/cost impact, diluted income per share, restructuring expenses and related benefits, expected dividend payments, expected repatriation, after-tax return on invested capital, effective tax rates, exchange rates, expected access to liquidity sources, expected capital allocation, expected timing and amount of share repurchases, end market economic and regulatory conditions, potential acquisitions and dispositions and related impact on financial results, including statements with respect to the anticipated acquisition of the MTS Test & Simulation business, and the company’s 2021 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 2020.

About Illinois Tool WorksITW (NYSE: ITW) is a Fortune 200 global multi-industrial manufacturing leader with revenues totaling $12.6 billion in 2020. 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 43,000 dedicated colleagues around the world thrive in the company’s decentralized and entrepreneurial culture. www.itw.com

Media Contact Illinois Tool Works Tel: 224.661.7451 [email protected] Investor Relations Illinois Tool Works Karen Fletcher Tel: 224.661.7433 [email protected]

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSTATEMENT OF INCOME (UNAUDITED)

Three Months Ended Six Months Ended
June 30, June 30,
In millions except per share amounts2021 2020 2021 2020
Operating Revenue$3,676 $2,564 $7,220 $5,792
Cost of revenue2,163 1,594 4,202 3,465
Selling, administrative, and research and development expenses588 486 1,154 1,046
Amortization and impairment of intangible assets32 35 66 71
Operating Income893 449 1,798 1,210
Interest expense(52) (51) (104) (102)
Other income (expense)22 8 34 33
Income Before Taxes863 406 1,728 1,141
Income Taxes88 87 282 256
Net Income$775 $319 $1,446 $885
Net Income Per Share:
Basic$2.46 $1.01 $4.58 $2.79
Diluted$2.45 $1.01 $4.56 $2.78
Cash Dividends Per Share:
Paid$1.14 $1.07 $2.28 $2.14
Declared$1.14 $1.07 $2.28 $2.14
Shares of Common Stock Outstanding During the Period:
Average315.6 316.1 316.1 317.2
Average assuming dilution316.9 317.4 317.4 318.6

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSTATEMENT OF FINANCIAL POSITION (UNAUDITED)

In millionsJune 30, 2021 December 31, 2020
Assets
Current Assets:
Cash and equivalents$2,058 $2,564
Trade receivables2,786 2,506
Inventories1,400 1,189
Prepaid expenses and other current assets265 264
Total current assets6,509 6,523
Net plant and equipment1,767 1,777
Goodwill4,658 4,690
Intangible assets716 781
Deferred income taxes613 533
Other assets1,317 1,308
$15,580 $15,612
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt$592 $350
Accounts payable607 534
Accrued expenses1,326 1,284
Cash dividends payable358 361
Income taxes payable77 60
Total current liabilities2,960 2,589
Noncurrent Liabilities:
Long-term debt7,056 7,772
Deferred income taxes617 588
Noncurrent income taxes payable365 413
Other liabilities1,061 1,068
Total noncurrent liabilities9,099 9,841
Stockholders’ Equity:
Common stock6 6
Additional paid-in-capital1,402 1,362
Retained earnings23,842 23,114
Common stock held in treasury(20,140) (19,659)
Accumulated other comprehensive income (loss)(1,590) (1,642)
Noncontrolling interest1 1
Total stockholders’ equity3,521 3,182
$15,580 $15,612

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)

Three Months Ended June 30, 2021
Dollars in millionsTotal Revenue Operating Income Operating Margin
Automotive OEM$707 $133 18.8%
Food Equipment514 113 22.0%
Test & Measurement and Electronics606 170 28.1%
Welding402 115 28.5%
Polymers & Fluids466 127 27.3%
Construction Products518 143 27.6%
Specialty Products471 128 27.2%
Intersegment(8) — —%
Total Segments3,676 929 25.3%
Unallocated— (36) —%
Total Company$3,676 $893 24.3%

Six Months Ended June 30, 2021
Dollars in millionsTotal Revenue Operating Income Operating Margin
Automotive OEM$1,490 $322 21.6%
Food Equipment965 209 21.6%
Test & Measurement and Electronics1,158 327 28.2%
Welding803 236 29.4%
Polymers & Fluids901 239 26.6%
Construction Products987 273 27.6%
Specialty Products928 254 27.4%
Intersegment(12) — —%
Total Segments7,220 1,860 25.8%
Unallocated— (62) —%
Total Company$7,220 $1,798 24.9%

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)

Q2 2021 vs. Q2 2020 Favorable/(Unfavorable)
Operating RevenueAutomotiveOEMFoodEquipmentTest & Measurementand ElectronicsWeldingPolymers& FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic83.5%46.0%28.7%32.6%27.6%28.2 %17.2%37.2%
Acquisitions/Divestitures—%—%—%—%—%(0.1)%—%—%
Translation11.8%6.9%4.3%2.6%4.1%9.6 %4.4%6.2%
Operating Revenue95.3%52.9%33.0%35.2%31.7%37.7 %21.6%43.4%

Q2 2021 vs. Q2 2020 Favorable/(Unfavorable)
Change in Operating MarginAutomotiveOEMFoodEquipmentTest & Measurement and ElectronicsWeldingPolymers& FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage1700 bps1010 bps560 bps480 bps520 bps440 bps330 bps700 bps
Changes in Variable Margin & OH Costs970 bps280 bps(330) bps220 bps(70) bps(30) bps(140) bps(20) bps
Total Organic2670 bps1290 bps230 bps700 bps450 bps410 bps190 bps680 bps
Acquisitions/Divestitures————————
Restructuring/Other(10) bps(10) bps10 bps(10) bps(30) bps(20) bps(10) bps—
Total Operating Margin Change2660 bps1280 bps240 bps690 bps420 bps390 bps180 bps680 bps
Total Operating Margin % *18.8%22.0%28.1%28.5%27.3%27.6%27.2%24.3%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 40 bps 70 bps 160 bps 10 bps 240 bps 20 bps 80 bps 90 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 2021.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)

1H 2021 vs. 1H 2020 Favorable/(Unfavorable)
Operating RevenueAutomotiveOEMFoodEquipmentTest & Measurementand ElectronicsWeldingPolymers& FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic33.6%13.2%19.4%17.9%17.7%20.3 %12.1%19.9%
Acquisitions/Divestitures—%—%—%—%—%(0.1)%—%—%
Translation7.3%4.7%3.8%1.9%2.9%8.6 %3.7%4.8%
Operating Revenue40.9%17.9%23.2%19.8%20.6%28.8 %15.8%24.7%

1H 2021 vs. 1H 2020 Favorable/(Unfavorable)
Change in Operating MarginAutomotiveOEMFoodEquipmentTest & Measurement and ElectronicsWeldingPolymers& FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage630 bps320 bps420 bps280 bps360 bps350 bps230 bps390 bps
Changes in Variable Margin & OH Costs420 bps40 bps(140) bps90 bps(40) bps70 bps(50) bps10 bps
Total Organic1050 bps360 bps280 bps370 bps320 bps420 bps180 bps400 bps
Acquisitions/Divestitures————————
Restructuring/Other—(10) bps—(10) bps—(20) bps(30) bps—
Total Operating Margin Change1050 bps350 bps280 bps360 bps320 bps400 bps150 bps400 bps
Total Operating Margin % *21.6%21.6%28.2%29.4%26.6%27.6%27.4%24.9%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 40 bps 70 bps 170 bps 10 bps 260 bps 20 bps 80 bps 100 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.16) on GAAP earnings per share for the first half of 2021.

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

AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)

Three Months Ended Six Months Ended
June 30, June 30,
Dollars in millions2021 2020 2021 2020
Operating income$893 $449 $1,798 $1,210
Tax rate23.0 % 21.3 % 22.7 % 22.4 %
Income taxes(206) (96) (409) (271)
Operating income after taxes$687 $353 $1,389 $939
Invested capital:
Trade receivables$2,786 $2,156 $2,786 $2,156
Inventories1,400 1,167 1,400 1,167
Net assets held for sale— 181 — 181
Net plant and equipment1,767 1,711 1,767 1,711
Goodwill and intangible assets5,374 5,244 5,374 5,244
Accounts payable and accrued expenses(1,933) (1,508) (1,933) (1,508)
Other, net(283) (636) (283) (636)
Total invested capital$9,111 $8,315 $9,111 $8,315
Average invested capital$8,926 $8,431 $8,864 $8,557
After-tax return on average invested capital30.8 % 16.8 % 31.3 % 22.0 %

A reconciliation of the tax rate for the three and six month periods ended June 30, 2021 excluding the second quarter 2021 discrete tax benefit of $112 million related to a change in the U.K. income tax rate is as follows:

Three Months Ended Six Months Ended
June 30, 2021 June 30, 2021
Dollars in millionsIncome Taxes Tax Rate Income Taxes Tax Rate
As reported$88 10.1% $282 16.3%
Discrete tax benefit112 12.9% 112 6.4%
As adjusted$200 23.0% $394 22.7%

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

FREE CASH FLOW (UNAUDITED)

Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, December 31,
Dollars in millions2021 2020 2021 2020 2020
Net cash provided by operating activities$555 $737 $1,164 $1,351 $2,807
Less: Additions to plant and equipment(78) (56) (146) (116) (236)
Free cash flow$477 $681 $1,018 $1,235 $2,571
Net income$775 $319 $1,446 $885 $2,109
Less: Second quarter 2021 discrete tax benefit related to a change in the U.K. income tax rate(112) — (112) — —
Adjusted net income$663 $319 $1,334 $885 $2,109
Free cash flow to adjusted net income conversion rate72 % 213 % 76 % 140 % 122 %

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Source: Illinois Tool Works Inc.

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