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ITW Reports Third Quarter 2021 Results

October 28, 2021 8:00 AM

GLENVIEW, IL., Oct. 28, 2021 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its third quarter 2021 results.

“We saw continued strong growth momentum in six of our seven segments in the third quarter, while our Automotive OEM segment continued to be impacted by auto production reductions associated with the well-publicized supply chain challenges affecting our customers,” said E. Scott Santi, Chairman and Chief Executive Officer. “Our teams around the world continue to do an exceptional job of executing for our customers and for the company in a very challenging environment as evidenced by the six percent organic growth and ten percent earnings per share growth that ITW delivered in the quarter. Moving forward, we remain highly focused on fully leveraging the competitive strength of the ITW Business Model and the investments we have made, and continue to make, in support of the execution of our enterprise strategy and our ‘Win the Recovery’ positioning to their full potential.”

Third Quarter 2021 ResultsThird quarter revenue grew eight percent to $3.6 billion, with six percent organic growth. Operating income grew seven percent to $845 million. Excluding Automotive OEM, revenue grew 12 percent and operating income grew 14 percent. Operating margin was 23.8 percent, flat year-over-year, with enterprise initiatives and volume leverage each contributing 100 basis points or more of positive margin impact offset by price/cost margin dilution impact of 200 basis points. Consistent with our strategy, price recovery actions offset raw material cost increases on a dollar-for-dollar basis in the third quarter. GAAP EPS of $2.02 increased 10 percent. The effective tax rate for the third quarter was 20.8 percent, in line with the third quarter of 2020, and included a $0.06 one-time tax benefit. Operating cash flow was $619 million, 97 percent of net income, and free cash flow was $548 million, 86 percent of net income.

Six of seven segments delivered strong organic growth in the quarter, led by Welding up 22 percent, Food Equipment up 19 percent, Test & Measurement and Electronics up 12 percent, and Specialty Products up 8 percent. Polymers & Fluids and Construction Products were both up 3 percent. Automotive OEM declined 11 percent.

Capital Allocation UpdatePending final regulatory approvals, ITW expects to complete its previously announced acquisition of the MTS Test & Simulation business in the fourth quarter of 2021. On August 6, 2021, ITW raised its dividend by seven percent to an annualized rate of $4.88 per share. The company is on pace to repurchase approximately $1 billion of its shares in 2021, having repurchased $750 million year-to-date.

2021 GuidanceITW expects total revenue growth of 13 to 14 percent and organic growth in the range of 11 to 12 percent. Foreign currency translation impact at current foreign exchange rates is projected to contribute two percentage points to revenue growth. GAAP EPS guidance is updated to a range of $8.30 to $8.50, due to actual and anticipated lower auto production levels in Q3 and Q4 versus previous guidance. Raw material cost increases are expected to be offset with price on a dollar-for-dollar basis and therefore EPS neutral. Full year margin dilution impact from price/cost is expected to be approximately 150 basis points, offset by more than 200 basis points of volume leverage and a contribution from enterprise initiatives of more than 100 basis points. Operating margin is expected to be in the range of 23.5 to 24.5 percent, an increase of more than 100 basis points at the midpoint versus 2020. Free cash flow is expected to be approximately 90 percent of net income adjusted for one-time tax benefits. Guidance excludes any impact from the 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 estimated guidance for the most directly comparable GAAP measure and a reconciliation of estimated free cash flow to the most directly comparable GAAP measure have 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 and global supply chain challenges, 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 and free cash flow conversion rate, 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 WorksKaren FletcherTel: 224.661.7433[email protected]

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

Three Months Ended Nine Months Ended
September 30, September 30,
In millions except per share amounts2021 2020 2021 2020
Operating Revenue$3,556 $3,307 $10,776 $9,099
Cost of revenue2,096 1,910 6,298 5,375
Selling, administrative, and research and development expenses581 560 1,735 1,606
Amortization and impairment of intangible assets34 48 100 119
Operating Income845 789 2,643 1,999
Interest expense(49) (52) (153) (154)
Other income (expense)10 2 44 35
Income Before Taxes806 739 2,534 1,880
Income Taxes167 157 449 413
Net Income$639 $582 $2,085 $1,467
Net Income Per Share:
Basic$2.03 $1.84 $6.61 $4.63
Diluted$2.02 $1.83 $6.58 $4.61
Cash Dividends Per Share:
Paid$1.14 $1.07 $3.42 $3.21
Declared$1.22 $1.14 $3.50 $3.28
Shares of Common Stock Outstanding During the Period:
Average314.6 316.5 315.6 316.9
Average assuming dilution315.9 317.9 316.9 318.3

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

In millionsSeptember 30, 2021 December 31, 2020
Assets
Current Assets:
Cash and equivalents$1,987 $2,564
Trade receivables2,729 2,506
Inventories1,524 1,189
Prepaid expenses and other current assets337 264
Total current assets6,577 6,523
Net plant and equipment1,744 1,777
Goodwill4,610 4,690
Intangible assets683 781
Deferred income taxes580 533
Other assets1,323 1,308
$15,517 $15,612
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt$579 $350
Accounts payable565 534
Accrued expenses1,399 1,284
Cash dividends payable383 361
Income taxes payable70 60
Total current liabilities2,996 2,589
Noncurrent Liabilities:
Long-term debt6,972 7,772
Deferred income taxes633 588
Noncurrent income taxes payable365 413
Other liabilities1,058 1,068
Total noncurrent liabilities9,028 9,841
Stockholders’ Equity:
Common stock6 6
Additional paid-in-capital1,416 1,362
Retained earnings24,098 23,114
Common stock held in treasury(20,390) (19,659)
Accumulated other comprehensive income (loss)(1,638) (1,642)
Noncontrolling interest1 1
Total stockholders’ equity3,493 3,182
$15,517 $15,612

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)

Three Months Ended September 30, 2021
Dollars in millionsTotalRevenueOperatingIncomeOperatingMargin
Automotive OEM$647 $112 17.3%
Food Equipment544 130 23.9%
Test & Measurement and Electronics552 148 26.8%
Welding425 128 30.0%
Polymers & Fluids456 111 24.2%
Construction Products478 133 27.8%
Specialty Products459 126 27.3%
Intersegment(5) — —%
Total Segments3,556 888 24.9%
Unallocated— (43) —%
Total Company$3,556 $845 23.8%

Nine Months Ended September 30, 2021
Dollars in millionsTotalRevenueOperatingIncomeOperatingMargin
Automotive OEM$2,137 $434 20.3%
Food Equipment1,509 339 22.5%
Test & Measurement and Electronics1,710 475 27.8%
Welding1,228 364 29.6%
Polymers & Fluids1,357 350 25.8%
Construction Products1,465 406 27.7%
Specialty Products1,387 380 27.4%
Intersegment(17) — —%
Total Segments10,776 2,748 25.5%
Unallocated— (105) —%
Total Company$10,776 $2,643 24.5%

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)

Q3 2021 vs. Q3 2020 Favorable/(Unfavorable)
Operating RevenueAutomotiveOEMFoodEquipmentTest &MeasurementandElectronicsWeldingPolymers& FluidsConstructionProductsSpecialtyProductsTotalITW
Organic(10.7)%18.9%11.8%22.0%3.4%3.4 %8.3%6.3%
Acquisitions/Divestitures— %—%—%—%—%(0.1)%—%—%
Translation1.3 %2.1%1.1%0.9%0.7%1.7 %1.1%1.2%
Operating Revenue(9.4)%21.0%12.9%22.9%4.1%5.0 %9.4%7.5%

Q3 2021 vs. Q3 2020 Favorable/(Unfavorable)
Change in Operating MarginAutomotiveOEMFoodEquipmentTest &MeasurementandElectronicsWeldingPolymers& FluidsConstructionProductsSpecialtyProductsTotalITW
Operating Leverage(240) bps410 bps290 bps290 bps70 bps50 bps180 bps130 bps
Changes in Variable Margin & OH Costs(320) bps(140) bps(20) bps(40) bps(340) bps(120) bps30 bps(210) bps
Total Organic(560) bps270 bps270 bps250 bps(270) bps(70) bps210 bps(80) bps
Acquisitions/Divestitures————————
Restructuring/Other210 bps160 bps40 bps(40) bps30 bps40 bps—80 bps
Total Operating Margin Change(350) bps430 bps310 bps210 bps(240) bps(30) bps210 bps—
Total Operating Margin % *17.3%23.9%26.8%30.0%24.2%27.8%27.3%23.8%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 40 bps 60 bps 170 bps 20 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 third quarter of 2021.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)

YTD 2021 vs. YTD 2020 Favorable/(Unfavorable)
Operating RevenueAutomotiveOEMFoodEquipmentTest &MeasurementandElectronicsWeldingPolymers& FluidsConstructionProductsSpecialtyProductsTotalITW
Organic15.7%15.2%16.8%19.3%12.4%14.0 %10.8%14.9%
Acquisitions/Divestitures—%—%—%—%—%(0.1)%—%—%
Translation4.9%3.8%2.9%1.6%2.1%6.0 %2.8%3.5%
Operating Revenue20.6%19.0%19.7%20.9%14.5%19.9 %13.6%18.4%

YTD 2021 vs. YTD 2020 Favorable/(Unfavorable)
Change in Operating MarginAutomotiveOEMFoodEquipmentTest &MeasurementandElectronicsWeldingPolymers& FluidsConstructionProductsSpecialtyProductsTotalITW
Operating Leverage310 bps350 bps380 bps270 bps240 bps250 bps210 bps300 bps
Changes in Variable Margin & OH Costs150 bps(20) bps(100) bps60 bps(130) bps(20) bps(20) bps(70) bps
Total Organic460 bps330 bps280 bps330 bps110 bps230 bps190 bps230 bps
Acquisitions/Divestitures————————
Restructuring/Other70 bps60 bps20 bps(20) bps10 bps10 bps(20) bps20 bps
Total Operating Margin Change 530 bps 390 bps 300 bps 310 bps 120 bps 240 bps 170 bps 250 bps
Total Operating Margin % *20.3%22.5%27.8%29.6%25.8%27.7%27.4%24.5%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 40 bps 60 bps 160 bps 10 bps 250 bps 20 bps 70 bps 100 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.24) on GAAP earnings per share for the first nine months of 2021.

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

AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)

Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in millions2021 2020 2021 2020
Operating income$845 $789 $2,643 $1,999
Tax rate (as adjusted in 2021)23.4 % 21.3 % 22.9 % 22.0 %
Income taxes(198) (168) (607) (439)
Operating income after taxes$647 $621 $2,036 $1,560
Invested capital:
Trade receivables$2,729 $2,494 $2,729 $2,494
Inventories1,524 1,149 1,524 1,149
Net plant and equipment1,744 1,736 1,744 1,736
Goodwill and intangible assets5,293 5,405 5,293 5,405
Accounts payable and accrued expenses(1,964) (1,784) (1,964) (1,784)
Other, net(269) (527) (269) (527)
Total invested capital$9,057 $8,473 $9,057 $8,473
Average invested capital$9,084 $8,394 $8,912 $8,536
After-tax return on average invested capital28.5 % 29.6 % 30.5 % 24.4 %

A reconciliation of the tax rate for the three and nine month periods ended September 30, 2021, excluding the third quarter 2021 discrete tax benefit of $21 million related to the utilization of capital losses and 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 Nine Months Ended
September 30, 2021 September 30, 2021
Dollars in millionsIncome Taxes Tax Rate Income Taxes Tax Rate
As reported$167 20.8% $449 17.7%
Discrete tax benefit related to the third quarter 202121 2.6% 21 0.8%
Discrete tax benefit related to the second quarter 2021— —% 112 4.4%
As adjusted$188 23.4% $582 22.9%

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

FREE CASH FLOW (UNAUDITED)

Three Months Ended Nine Months Ended Twelve Months
September 30, September 30, Ended
Dollars in millions2021 2020 2021 2020 December 31, 2020
Net cash provided by operating activities$619 $683 $1,783 $2,034 $2,807
Less: Additions to plant and equipment(71) (52) (217) (168) (236)
Free cash flow$548 $631 $1,566 $1,866 $2,571
Net income$639 $582 $2,085 $1,467 $2,109
Net cash provided by operating activities to Net income conversion rate97 % 117 % 86 % 139 % 133 %
Free cash flow to Net income conversion rate86 % 108 % 75 % 127 % 122 %

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Source: Illinois Tool Works Inc.

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