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Section 1: 8-K (8-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): May 5, 2020
_________________________

ILLINOIS TOOL WORKS INC.
(Exact name of registrant as specified in its charter)

Delaware
 
1-4797
 
36-1258310
(State or other jurisdiction of incorporation)
 
(Commission File No.)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
 
 
155 Harlem Avenue
Glenview
IL
 
 
 
 
60025
(Address of principal executive offices)
 
 
 
(Zip Code)
Registrant's telephone number, including area code: 847-724-7500

Not Applicable
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
ITW
New York Stock Exchange
1.75% Euro Notes due 2022
ITW22
New York Stock Exchange
1.25% Euro Notes due 2023
ITW23
New York Stock Exchange
0.250% Euro Notes due 2024
ITW24A
New York Stock Exchange
0.625% Euro Notes due 2027
ITW27
New York Stock Exchange
2.125% Euro Notes due 2030
ITW30
New York Stock Exchange
1.00% Euro Notes due 2031
ITW31
New York Stock Exchange
3.00% Euro Notes due 2034
ITW34
New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2).

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



Item 2.02    Results of Operations and Financial Condition

On May 5, 2020, Illinois Tool Works Inc. (the “Company” or “we”) announced its 2020 first quarter results of operations in the press release furnished as Exhibit 99.1.

Non-GAAP Financial Measures

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. A reconciliation of free cash flow to net cash provided by operating activities is included in the press release furnished as Exhibit 99.1.

The Company uses after-tax return on average invested capital (“ROIC”) to measure the effectiveness of its operations’ use of invested capital to generate profits. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. Average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations. Average invested capital is calculated using balances at the start of the period and at the end of each quarter. A calculation of ROIC is included in the press release furnished as Exhibit 99.1.

The Company uses the ratio of net debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. The Company believes that net debt to EBITDA is a meaningful metric to investors in evaluating the Company’s financial liquidity and may be different than the method used by other companies to calculate net debt to EBITDA. Net debt, EBITDA and the ratio of net debt to EBITDA are non-GAAP financial measures. The ratio of net debt to EBITDA represents total debt less cash and equivalents, 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. A calculation of the ratio of net debt to EBITDA and reconciliations of net debt to total debt and EBITDA to net income are included in the press release furnished as Exhibit 99.1.

Item 8.01 Other Events

The Company’s business, financial condition, results of operations and cash flows are subject to various risks, which could cause actual results to vary materially from anticipated results. The risk set forth below relating to the impact of the COVID-19 pandemic on our business, supplements the risks previously disclosed under the heading “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The COVID-19 pandemic has adversely affected the Company’s business and could materially affect the Company’s financial condition, results of operations and liquidity. The full and long-term extent of the effects of the COVID-19 pandemic on our business depend on future events that are highly uncertain and cannot be predicted.

The COVID-19 pandemic and the measures taken globally to reduce its spread have negatively impacted the global economy, disrupted consumer/customer demand and global supply chains, and created significant volatility and disruption of financial markets. These measures adversely affected our results of operations primarily in the latter part of the first quarter of 2020, and while we expect that our results will continue to be adversely impacted during the second quarter of 2020 and beyond, we are currently unable to quantify or estimate the full and long-term impact of the pandemic on our financial condition, results of operations and liquidity.

As governments have issued travel restrictions and adopted shutdown and stay-at-home or similar orders, certain of our businesses in the affected country, state or municipality subject to these orders have been forced to close. While some of these businesses have reopened, and our businesses that have been designated as critical or essential were not forced to close, the pandemic has decreased customer demand in many of our end markets, and those businesses that have reopened or remained open in many cases are operating at a reduced capacity. The Company has implemented numerous actions in order to focus on the needs of its colleagues and customers, and further actions may be required as conditions evolve. In addition, although the Company has avoided widespread furloughs or layoffs, we cannot predict the number or timing of further closures or the size of the workforce that will be impacted by such closures.

The COVID-19 pandemic also has the potential to significantly and extendedly alter demand for our products and disrupt our supply chain as a result of shifts in demand, illness, quarantine, travel restrictions or financial hardship. We have been able to procure the critical raw materials and components necessary to continue production, but there is no guarantee that we will be able to do so in the



future. A prolonged extension of the conditions resulting from the pandemic could force both customer and supplier bankruptcies, which we expect would adversely impact our results; however, given the uncertainty around the duration and breadth of the COVID-19 pandemic, we cannot reasonably estimate the extent of these adverse effects on our operations.

Furthermore, the COVID-19 pandemic has impacted the proper functioning of financial and capital markets. If the global economy continues to deteriorate and recovery is protracted, we may not be able to access our short-term credit facilities and may be required to seek additional financing sources, which may not be available on reasonable terms or at all. If the Company suffers a liquidity shortage, we may be forced to reduce our workforce, decrease or suspend dividend payments to our stockholders or adopt other measures. At this time, we cannot predict the likelihood, timing or the consequences of a future liquidity shortage in our business.

Due to the unprecedented and rapidly changing social and economic consequences of the COVID-19 pandemic on the global economy generally, the full and long-term impact of the pandemic on our business is highly uncertain. The ultimate significance of the COVID-19 pandemic, including any measures to reduce its spread, on our business will depend on events that are beyond our control and that we cannot predict. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business, financial condition or results of operations. In particular, the COVID-19 pandemic exacerbates many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019, including in ways that are not possible to predict.

Item 9.01    Financial Statements and Exhibits

(d)
Exhibits
 
 
 
 
 
 
 
Exhibit Number
 
Exhibit Description
 
 
 
 
 
 
 
104
 
Cover Page Interactive Data File (embedded within the Inline XBRL document)




SIGNATURES


Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
 
 
ILLINOIS TOOL WORKS INC.
 
 
 
 
 
 
Dated: May 5, 2020
 
By: /s/ Michael M. Larsen
 
 
Michael M. Larsen
 
 
Senior Vice President & Chief Financial Officer


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Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit


Exhibit 99.1

ITW Reports First Quarter 2020 Results


GAAP EPS of $1.77, a decrease of 2%
Operating margin of 23.6%
Free cash flow was 98% of net income
Strong financial position and balance sheet with $1.4 billion of cash on hand, essentially no short-term debt, and a revolving credit facility in place that could provide additional liquidity of $2.5 billion
Due to uncertainties regarding the duration and severity of the COVID-19 pandemic, ITW is suspending previously announced annual guidance for 2020

GLENVIEW, IL., May 5, 2020 - Illinois Tool Works Inc. (NYSE: ITW) today reported its first quarter 2020 results with GAAP earnings per share (EPS) of $1.77 compared to $1.81 in the prior year period. First-quarter revenue of $3.2 billion declined 9.1 percent with organic revenue down 6.6 percent. Foreign currency translation and divestitures reduced revenues by 1.5 percent and 1.0 percent, respectively. Operating margin was flat at 23.6 percent as Enterprise Initiatives contributed 120 basis points. Free cash flow was $554 million with a 98 percent conversion rate and after-tax return on invested capital was 27.0 percent.

ITW’s differentiated financial position includes a strong balance sheet, with approximately $1.4 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.

“While things are far from normal for any of us or our businesses at present, I am inspired and heartened by the teamwork, flexibility, ingenuity, and selflessness demonstrated by the ITW team in adapting to the very unusual and challenging circumstances brought about by the pandemic,” said E. Scott Santi, chairman and chief executive officer. “Our ITW colleagues everywhere are going the extra mile to protect the health and support the well-being of each other and to continue to serve our customers with excellence. Around the world, many ITW manufacturing locations have been designated as essential, signifying the vital role the company plays in supporting customers and industries that are critical to the economic health of the markets and communities we serve.”

“It remains highly uncertain as to how long this global pandemic and related economic challenges will last or how quickly our customers and end markets will recover. However, I am confident that the strength and resilience of ITW’s powerful Business Model, our diversified, high-quality business portfolio, and our people put us in a position of strength to deal with whatever lies ahead. ITW will rise to the challenge, as we always have over the course of our 108-year history. Our strong financial position gives us the latitude to make strategic choices now to prepare for a range of recovery scenarios, and to come out the other side well-positioned to continue on our path to ITW’s full-potential performance.”

2020 Guidance
Due to the uncertainties regarding the duration and severity of the coronavirus (COVID-19) pandemic, ITW is suspending its previously announced annual guidance for 2020.

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 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, free cash flow, effective tax rate, after-tax return on invested capital, timing and amount of share repurchases, 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, the Form 8-K filed on May 5, 2020 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 Ended
 
March 31,
In millions except per share amounts
2020
 
2019
Operating Revenue
$
3,228

 
$
3,552

Cost of revenue
1,871

 
2,059

Selling, administrative, and research and development expenses
560

 
611

Amortization and impairment of intangible assets
36

 
43

Operating Income
761

 
839

Interest expense
(51
)
 
(63
)
Other income (expense)
25

 
14

Income Before Taxes
735

 
790

Income Taxes
169

 
193

Net Income
$
566

 
$
597

 
 
 
 
Net Income Per Share:
 
 
 
Basic
$
1.78

 
$
1.82

Diluted
$
1.77

 
$
1.81

 
 
 
 
Cash Dividends Per Share:
 
 
 
Paid
$
1.07

 
$
1.00

Declared
$
1.07

 
$
1.00

 
 
 
 
Shares of Common Stock Outstanding During the Period:
 
 
 
Average
318.3

 
327.3

Average assuming dilution
319.7

 
329.6







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

In millions
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Current Assets:
 
 
 
Cash and equivalents
$
1,430

 
$
1,981

Trade receivables
2,424

 
2,461

Inventories
1,185

 
1,164

Prepaid expenses and other current assets
244

 
296

Assets held for sale
223

 
351

Total current assets
5,506

 
6,253

 
 
 
 
Net plant and equipment
1,704

 
1,729

Goodwill
4,401

 
4,492

Intangible assets
836

 
851

Deferred income taxes
473

 
516

Other assets
1,229

 
1,227

 
$
14,149

 
$
15,068

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Short-term debt
$
4

 
$
4

Accounts payable
488

 
472

Accrued expenses
1,105

 
1,217

Cash dividends payable
338

 
342

Income taxes payable
55

 
48

Liabilities held for sale
42

 
71

Total current liabilities
2,032

 
2,154

 
 
 
 
Noncurrent Liabilities:
 
 
 
Long-term debt
7,690

 
7,754

Deferred income taxes
695

 
668

Noncurrent income taxes payable
462

 
462

Other liabilities
986

 
1,000

Total noncurrent liabilities
9,833

 
9,884

 
 
 
 
Stockholders’ Equity:
 
 
 
Common stock
6

 
6

Additional paid-in-capital
1,309

 
1,304

Retained earnings
22,631

 
22,403

Common stock held in treasury
(19,680
)
 
(18,982
)
Accumulated other comprehensive income (loss)
(1,983
)
 
(1,705
)
Noncontrolling interest
1

 
4

Total stockholders’ equity
2,284

 
3,030

 
$
14,149

 
$
15,068







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


Three Months Ended March 31, 2020
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
696

$
145

20.9
%
Food Equipment
483

117

24.3
%
Test & Measurement and Electronics
485

121

25.1
%
Welding
372

109

29.1
%
Polymers & Fluids
393

93

23.6
%
Construction Products
390

91

23.4
%
Specialty Products
414

109

26.3
%
Intersegment
(5
)

%
Total Segments
3,228

785

24.3
%
Unallocated

(24
)
%
Total Company
$
3,228

$
761

23.6
%







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

Q1 2020 vs. Q1 2019 Favorable/(Unfavorable)
Operating Revenue
Automotive OEM
Food Equipment
Test & Measurement and Electronics
Welding
Polymers & Fluids
Construction Products
Specialty Products
Total ITW
Organic
(12.0
)%
(5.6
)%
(3.3
)%
(9.0
)%
(3.2
)%
0.1
 %
(8.7
)%
(6.6
)%
Acquisitions/
Divestitures
 %
 %
(3.1
)%
(3.4
)%
 %
 %
(1.2
)%
(1.0
)%
Translation
(1.7
)%
(1.2
)%
(1.1
)%
(0.4
)%
(2.3
)%
(2.7
)%
(1.0
)%
(1.5
)%
Operating
Revenue
(13.7
)%
(6.8
)%
(7.5
)%
(12.8
)%
(5.5
)%
(2.6
)%
(10.9
)%
(9.1
)%
Q1 2020 vs. Q1 2019 Favorable/(Unfavorable)
Change in Operating Margin
Automotive OEM
Food Equipment
Test & Measurement and Electronics
Welding
Polymers & Fluids
Construction Products
Specialty Products
Total ITW
Operating Leverage
(240) bps
(130) bps
 (100) bps
(160) bps
(80) bps
10 bps
(180) bps
(150) bps
Changes in Variable Margin & OH Costs
70 bps
10 bps
120 bps
130 bps
260 bps
30 bps
30 bps
40 bps
Total Organic
(170) bps
(120) bps
20 bps
(30) bps
180 bps
40 bps
(150) bps
(110) bps
Acquisitions/Divestitures
60 bps
80 bps
70 bps
20 bps
Restructuring/Other
200 bps
60 bps
20 bps
50 bps
50 bps
130 bps
60 bps
90 bps
Total Operating Margin Change
30 bps
(60) bps
100 bps
100 bps
230 bps
170 bps
(20) bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
20.9%
24.3%
25.1%
29.1%
23.6%
23.4%
26.3%
23.6%
 
 
 
 
 
 
 
 
 
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
60 bps
70 bps
170 bps
 20 bps
 360 bps
 30 bps
90 bps
 110 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.09) on GAAP earnings per share for the first quarter of 2020.





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


AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
 
Three Months Ended

March 31,
Dollars in millions
2020
 
2019
Operating income
$
761

 
$
839

Tax rate
23.0
%
 
24.4
%
Income taxes
(175
)
 
(205
)
Operating income after taxes
$
586

 
$
634

 
 
 
 
Invested capital:
 
 
 

Trade receivables
$
2,424

 
$
2,715

Inventories
1,185

 
1,346

Net assets held for sale
181

 

Net plant and equipment
1,704

 
1,765

Goodwill and intangible assets
5,237

 
5,665

Accounts payable and accrued expenses
(1,593
)
 
(1,796
)
Other, net
(590
)
 
(509
)
Total invested capital
$
8,548

 
$
9,186

 
 
 
 
Average invested capital
$
8,677

 
$
9,160

Return on average invested capital
27.0
%
 
27.7
%



FREE CASH FLOW (UNAUDITED)

 
Three Months Ended
 
March 31,
Dollars in millions
2020

2019
Net cash provided by operating activities
$
614

 
$
616

Less: Additions to plant and equipment
(60
)
 
(77
)
Free cash flow
$
554

 
$
539

 
 
 
 
Net income
$
566

 
$
597

Free cash flow to net income conversion rate
98
%
 
90
%








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


NET DEBT TO EBITDA (UNAUDITED)

 
Twelve Months Ended
Dollars in millions
March 31, 2020
Total debt
$
7,694

Less: Cash and equivalents
(1,430
)
Net debt
$
6,264

 
 
Net income
$
2,490

Add:
 
Interest expense
209

Other income
(118
)
Income taxes
743

Depreciation
268

Amortization and impairment of intangible assets
152

EBITDA
$
3,744

 
 
Net debt to EBITDA ratio
1.7




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