Illinois Tool Works Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended	March 31, 2020

	OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _______________ to _______________

Commission File Number: 1-4797

ILLINOIS TOOL WORKS INC.

(Exact name of registrant as specified in its charter)



Delaware				36-1258310
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification Number)
	155 Harlem Avenue	Glenview	IL	60025
(Address of principal executive offices)				(Zip Code)

(Registrant’s telephone number, including area code) 847-724-7500

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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	☐
		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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No x

The number of shares of registrant’s common stock, $0.01 par value, outstanding at March 31, 2020: 315,932,054.



	Table of Contents

	PART I - Financial Information
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 4.	Controls and Procedures	29

	PART II - Other Information
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 6.	Exhibits	32

Signatures		33

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

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

Shares of Common Stock Outstanding During the Period:
Average	318.3			327.3
Average assuming dilution	319.7			329.6

The Notes to Financial Statements are an integral part of this statement.

Illinois Tool Works Inc. and Subsidiaries

Statement of Comprehensive Income (Unaudited)



	Three Months Ended
	March 31,
In millions	2020			2019
Net Income	$	566		$	597

Foreign currency translation adjustments, net of tax	(287		)	31
Pension and other postretirement benefit adjustments, net of tax	9			4
Other comprehensive income (loss)	(278		)	35

Comprehensive Income	$	288		$	632

The Notes to Financial Statements are an integral part of this statement.

Illinois Tool Works Inc. and Subsidiaries

Statement of Financial Position (Unaudited)



In millions except per share amounts	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 (par value of $0.01 per share):
Issued- 550.0 shares in 2020 and 2019 Outstanding- 315.9 shares in 2020 and 319.8 shares in 2019	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

The Notes to Financial Statements are an integral part of this statement.

Illinois Tool Works Inc. and Subsidiaries

Statement of Changes in Stockholders' Equity (Unaudited)



In millions except per share amounts	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interest			Total

Three Months Ended March 31, 2020
Balance at December 31, 2019	$	6	$	1,304		$	22,403		$	(18,982	)	$	(1,705	)	$	4		$	3,030
Net income	—		—			566			—			—			—			566
Common stock issued for stock-based compensation	—		(3		)	—			8			—			—			5
Stock-based compensation expense	—		9			—			—			—			—			9
Repurchases of common stock	—		—			—			(706		)	—			—			(706		)
Dividends declared ($1.07 per share)	—		—			(338		)	—			—			—			(338		)
Other comprehensive income (loss)	—		—			—			—			(278		)	—			(278		)
Noncontrolling interest	—		(1		)	—			—			—			(3		)	(4		)
Balance at March 31, 2020	$	6	$	1,309		$	22,631		$	(19,680	)	$	(1,983	)	$	1		$	2,284

Three Months Ended March 31, 2019
Balance at December 31, 2018	$	6	$	1,253		$	21,217		$	(17,545	)	$	(1,677	)	$	4		$	3,258
Net income	—		—			597			—			—			—			597
Common stock issued for stock-based compensation	—		(8		)	—			9			—			—			1
Stock-based compensation expense	—		10			—			—			—			—			10
Repurchases of common stock	—		—			—			(375		)	—			—			(375		)
Dividends declared ($1.00 per share)	—		—			(326		)	—			—			—			(326		)
Other comprehensive income (loss)	—		—			—			—			35			—			35
Balance at March 31, 2019	$	6	$	1,255		$	21,488		$	(17,911	)	$	(1,642	)	$	4		$	3,200

The Notes to Financial Statements are an integral part of this statement.

Illinois Tool Works Inc. and Subsidiaries

Statement of Cash Flows (Unaudited)



	Three Months Ended
	March 31,
In millions	2020			2019
Cash Provided by (Used for) Operating Activities:
Net income	$	566		$	597
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	68			67
Amortization and impairment of intangible assets	36			43
Change in deferred income taxes	17			22
Provision for uncollectible accounts	2			2
(Income) loss from investments	(3		)	(7		)
(Gain) loss on sale of operations and affiliates	(1		)	2
Stock-based compensation expense	9			10
Other non-cash items, net	2			4
Change in assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in-
Trade receivables	10			(106		)
Inventories	(48		)	(32		)
Prepaid expenses and other assets	(10		)	(22		)
Increase (decrease) in-
Accounts payable	17			48
Accrued expenses and other liabilities	(93		)	(99		)
Income taxes	46			87
Other, net	(4		)	—
Net cash provided by operating activities	614			616
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents)	—			(4		)
Additions to plant and equipment	(60		)	(77		)
Proceeds from investments	7			7
Proceeds from sale of plant and equipment	3			2
Other, net	(3		)	—
Net cash provided by (used for) investing activities	(53		)	(72		)
Cash Provided by (Used for) Financing Activities:
Cash dividends paid	(342		)	(328		)
Issuance of common stock	17			11
Repurchases of common stock	(706		)	(375		)
Net proceeds from (repayments of) debt with original maturities of three months or less	—			1,058
Repayments of debt with original maturities of more than three months	—			(650		)
Other, net	(16		)	(11		)
Net cash provided by (used for) financing activities	(1,047		)	(295		)
Effect of Exchange Rate Changes on Cash and Equivalents	(65		)	2
Cash and Equivalents:
Increase (decrease) during the period	(551		)	251
Beginning of period	1,981			1,504
End of period	$	1,430		$	1,755
Supplementary Cash Flow Information:
Cash Paid During the Period for Interest	$	56		$	63
Cash Paid During the Period for Income Taxes, Net of Refunds	$	106		$	84

The Notes to Financial Statements are an integral part of this statement.

Illinois Tool Works Inc. and Subsidiaries

Notes to Financial Statements (Unaudited)

(1) Significant Accounting Policies

Financial Statements— The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company”). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company’s 2019 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting.

New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance which changes the methodology used to measure credit losses for certain financial instruments. Under prior guidance, credit loss reserves were estimated based on historical information. The new guidance requires credit loss reserves to reflect the estimated credit losses expected to be incurred over the life of the financial asset. The Company adopted this new guidance effective January 1, 2020, which did not have a material impact on the Company's results of operations or financial position.

In January 2017, the FASB issued authoritative guidance which simplifies the assessment of goodwill for impairment. Under prior guidance, when the estimated fair value of a reporting unit was less than its carrying value, the fair value of the goodwill was determined by valuing the other assets and liabilities of the reporting unit. Under the new guidance, the requirement to determine the fair value of goodwill has been eliminated, and an impairment charge is recognized for the amount that the carrying value of the reporting unit exceeds its fair value. Effective January 1, 2020, the Company adopted the new guidance prospectively and will apply the new guidance during its annual assessment of goodwill in the third quarter, or earlier if a triggering event occurs. The adoption of this new accounting guidance had no impact on the Company's results of operations or financial position.

In December 2019, the FASB issued authoritative guidance which simplifies certain aspects of the accounting for income taxes, including the elimination of an exception to the methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated full year loss. The Company early adopted this new guidance effective January 1, 2020, which did not have a material impact on the Company's results of operations or financial position.

(2) Novel Coronavirus (COVID-19)

In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) occurred in China and other jurisdictions. The COVID-19 outbreak was subsequently declared a global pandemic by the World Health Organization on March 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 during 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, including the North American automotive market, which shut down production in mid-March. The Company expects the disruptions caused by the COVID-19 outbreak to have a more significant adverse impact on the Company's operating results across all segments in the second quarter of 2020, as the spread of COVID-19 has accelerated in North America and across Europe, with more pronounced impacts in the Automotive OEM, Food Equipment, Welding and Construction Products segments. However, the full extent of the COVID-19 outbreak in 2020 and its impact on the markets served by the Company and on the Company’s operations is highly uncertain. A prolonged outbreak will continue to interrupt the operations of the Company and its customers and suppliers.

(3) Divestitures

The Company routinely reviews its portfolio of businesses relative to its business portfolio criteria and evaluates if further portfolio refinements may be needed. The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with annual revenues totaling up to $1 billion. As such, the Company may commit to a plan to exit or dispose of certain businesses and present them as held for sale in periods prior to the sale of the business.

In the second quarter of 2019, the Company approved plans to divest six businesses, including two businesses in the Test & Measurement and Electronics segment, one business in the Automotive OEM segment, one business in the Welding segment, and two businesses in the Specialty Products segment. These six businesses were classified as held for sale beginning in the second quarter of 2019.

In the fourth quarter of 2019, the Company divested three of the held for sale businesses which included one business in the Test & Measurement and Electronics segment, one business in the Welding segment, and one business in the Specialty Products segment. For the twelve months ended December 31, 2019, the Company recorded net pre-tax gains on disposal of businesses of $44 million ($30 million after-tax, or $0.09 per diluted share) which was primarily due to the three divestitures of held for sale businesses discussed above. The net pre-tax gain was included in Other income (expense) in the Statement of Income.

Operating revenue related to businesses divested in 2019 that was included in the Company's results of operations for the three months ended March 31, 2019, was $36 million, which included $15 million in the Welding segment, $16 million in the Test & Measurement and Electronics segment, and $5 million in the Specialty Products segment.

As of December 31, 2019, three of the businesses discussed above continued to be held for sale, including one business in the Test & Measurement and Electronics segment, one business in the Automotive OEM segment, and one business in the Specialty Products segment. In the first quarter of 2020, the Company concluded that the sales of the one business in the Automotive OEM segment and the one business in the Specialty Products segment previously held for sale were no longer probable of being completed within one year, primarily due to the disruptions and economic uncertainty resulting from the COVID-19 pandemic. Accordingly, these businesses are no longer presented as held for sale in the Statement of Financial Position beginning in the first quarter of 2020. As of March 31, 2020, only the one business in the Test & Measurement and Electronics segment continued to be presented as held for sale, and it is expected to be sold within one year.

The assets and liabilities related to the held for sale businesses that were included in assets and liabilities held for sale in the Statement of Financial Position as of March 31, 2020 and December 31, 2019, were as follows:



In millions	March 31, 2020		December 31, 2019
Trade receivables	$	41	$	81
Inventories	22		28
Net plant and equipment	15		48
Goodwill and intangible assets	140		166
Other	5		28
Total assets held for sale	$	223	$	351

Accounts payable	$	12	$	21
Accrued expenses	8		17
Other	22		33
Total liabilities held for sale	$	42	$	71

Operating revenue related to the one business held for sale as of March 31, 2020 that was included in the Company's results of operations for the three months ended March 31, 2020 and 2019, was as follows:



	Three Months Ended
	March 31,
In millions	2020		2019
Operating revenue	$	50	$	51

(4) Operating Revenue

The Company's 84 diversified operating divisions are organized and managed based on similar product categories 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. Operating revenue

by product category, which is consistent with the Company's segment presentation, for the three months ended March 31, 2020 and 2019 was as follows:



	Three Months Ended
	March 31,
In millions	2020			2019
Automotive OEM	$	696		$	806
Food Equipment	483			518
Test & Measurement and Electronics	485			524
Welding	372			427
Polymers & Fluids	393			416
Construction Products	390			401
Specialty Products	414			465
Intersegment revenue	(5		)	(5		)
Total operating revenue	$	3,228		$	3,552

The following is a description of the product offerings, end markets and typical revenue transactions for each of the Company's seven segments:

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.

Products sold in this segment are primarily manufactured to the customer's specifications and are sold under long-term supply agreements with OEM auto manufacturers and other top tier auto parts suppliers. The Company typically recognizes revenue for products in this segment at the time of shipment. Certain products may be produced utilizing tooling that is owned by the customer that the Company developed and is reimbursed by the customer for the associated cost. In these arrangements, the Company typically retains a contractual right to use the customer-owned tooling for the purpose of fulfilling its obligations under the supply agreement. The Company records reimbursements for the cost of customer-owned tooling as a cost offset rather than operating revenue as tooling is not considered a product offering central to the Company's operations.

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 institutional/restaurant and food retail 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.

Revenue for equipment sold in this segment is typically recognized at the time of product shipment. In limited circumstances involving installation of equipment and customer acceptance, the Company may recognize revenue upon completion of installation and acceptance by the customer. Annual service contracts are typically sold separate from equipment and the related revenue is recognized on a straight-line basis over the annual service period. Operating revenue for on-demand service repairs and parts is recorded upon completion and customer acceptance of the work performed.

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, automotive original equipment manufacturers and tiers, industrial capital goods, 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.

Revenue for products sold in this segment is typically recognized at the time of shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue recognition is deferred until such obligations have been completed.

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.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

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.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

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.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

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, general industrial, consumer durables, 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.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue is recognized when such obligations have been completed.

(5) Income Taxes

The Company's effective tax rate for the three months ended March 31, 2020 and 2019 was 23.0% and 24.4%, respectively. The effective tax rate for the three months ended March 31, 2020 and 2019 benefited from discrete income tax benefits of $7 million and $5 million, respectively, related to excess tax benefits from stock-based compensation.

The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions, including the Internal Revenue Service ("IRS"), Her Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. Due to the ongoing audits, the Company believes it is reasonably possible that within the next twelve months the amount of the Company's unrecognized tax benefits may be decreased by approximately $59 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues.

(6) Inventories

Inventories as of March 31, 2020 and December 31, 2019 were as follows:



In millions	March 31, 2020			December 31, 2019
Raw material	$	449		$	452
Work-in-process	139			131
Finished goods	686			670
LIFO reserve	(89		)	(89		)
Total inventories	$	1,185		$	1,164

(7) Pension and Other Postretirement Benefits

Pension and other postretirement benefit costs for the three months ended March 31, 2020 and 2019 were as follows:



	Three Months Ended
	March 31,
	Pension						Other Postretirement Benefits
In millions	2020			2019			2020			2019
Components of net periodic benefit cost:
Service cost	$	14		$	13		$	2		$	2
Interest cost	15			20			4			5
Expected return on plan assets	(28		)	(30		)	(6		)	(6		)
Amortization of actuarial loss (gain)	12			5			—			—
Total net periodic benefit cost	$	13		$	8		$	—		$	1

The service cost component of net periodic benefit cost is presented within Cost of revenue and Selling, administrative, and research and development expenses in the Statement of Income while the other components of net periodic benefit cost are presented within Other income (expense).

The Company expects to contribute approximately $29 million to its pension plans and $5 million to its other postretirement benefit plans in 2020. As of March 31, 2020, contributions of $14 million to pension plans and $2 million to other postretirement benefit plans have been made.

(8) Debt

There was no commercial paper outstanding as of March 31, 2020 and December 31, 2019. As of March 31, 2020 and December 31, 2019, short-term debt included $4 million related to the 4.88% notes due through December 31, 2020. The Company has a $2.5 billion line of credit agreement with a termination date of September 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 line of credit agreement as of March 31, 2020.

The approximate fair value and related carrying value of the Company's total long-term debt, including current maturities of long-term debt presented as short-term debt, as of March 31, 2020 and December 31, 2019 were as follows:



In millions	March 31, 2020		December 31, 2019
Fair value	$	8,199	$	8,614
Carrying value	7,694		7,758

The approximate fair values of the Company's long-term debt, including current maturities, were based on a valuation model using Level 2 observable inputs which included market rates for comparable instruments for the respective periods.

(9) Accumulated Other Comprehensive Income (Loss)

The following table summarizes changes in Accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019:



	Three Months Ended
	March 31,
In millions	2020			2019
Beginning balance	$	(1,705	)	$	(1,677	)

Foreign currency translation adjustments during the period	(272		)	43
Income taxes	(15		)	(12		)
Total foreign currency translation adjustments, net of tax	(287		)	31

Pension and other postretirement benefit adjustments reclassified to income	12			5
Income taxes	(3		)	(1		)
Total pension and other postretirement benefit adjustments, net of tax	9			4

Ending balance	$	(1,983	)	$	(1,642	)

Pension and other postretirement benefit adjustments reclassified to income related to the amortization of actuarial gains and losses and prior service cost. Refer to Note 7. Pension and Other Postretirement Benefits for additional information.

The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May 2015 and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of this debt resulting from fluctuations in the Euro to U.S. dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). The carrying values of the 2019, 2015 and 2014 Euro notes were $1.7 billion, $1.1 billion and $1.1 billion, respectively, as of March 31, 2020. The unrealized pre-tax gain recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was $304 million and $239 million as of March 31, 2020 and December 31, 2019, respectively.

The ending balance of Accumulated other comprehensive income (loss) as of March 31, 2020 and 2019 consisted of cumulative translation adjustment losses, net of tax, of $1.6 billion and $1.3 billion, respectively, and unrecognized pension and other postretirement benefits costs, net of tax, of $381 million and $360 million, respectively.

(10) Segment Information

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. Refer to Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding operating revenue and operating income for the Company's segments.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 84 divisions in 53 countries. As of December 31, 2019, the Company employed approximately 45,000 people.

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 18,000 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 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 84 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 2019 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 - FINISHING THE JOB

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 finish the job and 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

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.

As part of its agenda to finish the job, 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. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases. Refer to Note 3. Divestitures in Item 1. Financial Statements for more information regarding divestitures.

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 its efforts to finish the job and 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.

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.

Near-term Priorities

Currently, there is uncertainty around how severe the COVID-19 pandemic will be, how long it will last, or how quickly ITW’s customers and end markets will recover. The COVID-19 pandemic has impacted, and is expected to continue to impact, the Company's organic revenue and profitability across all segments. However, at this very uncertain time, ITW believes that the strength and resilience of ITW’s Business Model and its strong balance sheet put the Company in a favorable position to deal with the crisis as it unfolds.

For the duration of the COVID-19 pandemic, the Company is focusing 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 throughout the containment and recovery phases; and (4) leverage the Company's strengths to position it to fully participate in the recovery phase.

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 2019 Annual Report on Form 10-K.

CONSOLIDATED RESULTS OF OPERATIONS

to spread and impact the countries in which the Company operates and the markets the Company serves, including the North American automotive market, which shut down production in mid-March. Despite the challenging macro environment that impacted the Company's first quarter 2020 organic revenue, operating margin of 23.6 percent was flat to the prior year period, after-tax return on average invested capital was 27.0 percent and diluted earnings per share only declined 2.2 percent. Leveraging the strength and resilience of the ITW Business Model, all segments had operating margins ranging from 20.9 percent to 29.1 percent in the first quarter of 2020.

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 throughout the containment and recovery phases; and (4) leverage the Company's strengths to position it to fully participate in the recovery phase. To support ITW’s colleagues, among other initiatives, the Company has redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagues who have childcare needs due to school closings, and implemented aggressive new workplace sanitation practices to minimize infection risk. To support its customers, the Company has worked diligently to keep its factories 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.

In areas around the world where governments have issued stay-at-home or similar orders, the vast majority of ITW's businesses have been designated as critical or essential businesses and, as such, they remain 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. However, as of April 30, 2020, approximately 10% of the Company's manufacturing facilities worldwide were temporarily closed due to either government imposed shut-down requirements or a decline in customer orders.

While the vast majority of the Company’s facilities remain open and operational, many of these facilities are operating at a reduced capacity and the Company expects the customer demand disruptions caused by the COVID-19 outbreak to have a more significant adverse impact on the Company's operating results across all segments in the second quarter of 2020, as the spread of COVID-19 has accelerated in North America and across Europe, with more pronounced impacts in the Automotive OEM, Food Equipment, Welding and Construction Products segments. However, the full extent of the COVID-19 outbreak in 2020 and its impact on the markets served by the Company and on the Company’s operations and financial position is 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 II - Other Information, Item 1A. Risk Factors.

Separately, the Company does not believe that tariffs imposed in the prior year 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’s consolidated results of operations for the first quarter of 2020 and 2019 were as follows:



	Three Months Ended
Dollars in millions	March 31,								Components of Increase (Decrease)
	2020			2019			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	3,228		$	3,552		(9.1	)%	(6.6	)%	(1.0	)%	—	%	(1.5	)%	(9.1	)%
Operating income	$	761		$	839		(9.3	)%	(11.0	)%	(0.2	)%	3.3	%	(1.4	)%	(9.3	)%
Operating margin %	23.6		%	23.6		%	—		(110) bps		20 bps		90 bps		—		—


•	Operating revenue declined due to lower organic revenues, the unfavorable effect of foreign currency translation and divestitures.


•	Organic revenue decreased 6.6% primarily due to disruptions in the Company's global operations resulting from the spread of COVID-19 across all major regions. Product line simplification activities reduced organic revenue by 40 basis points.


◦	North American organic revenue decreased 5.0% as six segments declined, partially offset by growth in the Construction Products segment.


◦	Europe, Middle East and Africa organic revenue decreased 7.1% as all seven segments declined primarily driven by the Automotive OEM, Test & Measurement and Electronics and Specialty Products segments.


◦	Asia Pacific organic revenue decreased 12.0%, with China down 24.2%, due to a decline in all seven segments primarily driven by the Automotive OEM and Food Equipment segments.


•	Operating income of $761 million decreased 9.3% primarily due to lower organic revenue and unfavorable foreign currency translation, partially offset by lower restructuring expenses.


•	Operating margin of 23.6% was flat compared to the prior year primarily driven by benefits from the Company's enterprise initiatives of 120 basis points, lower restructuring expenses and favorable price/cost of 20 basis, partially offset by negative operating leverage of 150 basis points and higher employee-related expenses.


•	The effective tax rate for the first quarter of 2020 was 23.0% versus 24.4% in 2019. The effective tax rate for both periods included discrete income tax benefits related to excess tax benefits from stock-based compensation of $7 million and $5 million in 2020 and 2019, respectively.


•	Diluted earnings per share (EPS) of $1.77 decreased 2.2% in 2020.


•	Free cash flow was $554 million for the first quarter of 2020. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.


•	The Company repurchased approximately 4.2 million shares of its common stock in the first quarter of 2020 for approximately $706 million.


•	After-tax return on average invested capital was 27.0% for the first quarter of 2020. Refer to the After-Tax Return on Average 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 2020 and 2019 were as follows:



	Three Months Ended March 31,
Dollars in millions	Operating Revenue						Operating Income
	2020			2019			2020			2019
Automotive OEM	$	696		$	806		$	145		$	167
Food Equipment	483			518			117			129
Test & Measurement and Electronics	485			524			121			126
Welding	372			427			109			120
Polymers & Fluids	393			416			93			89
Construction Products	390			401			91			87
Specialty Products	414			465			109			123
Intersegment revenue	(5		)	(5		)	—			—
Unallocated	—			—			(24		)	(2		)
Total	$	3,228		$	3,552		$	761		$	839

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.

The results of operations for the Automotive OEM segment for the first quarter of 2020 and 2019 were as follows:



	Three Months Ended
Dollars in millions	March 31,								Components of Increase (Decrease)
	2020			2019			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	696		$	806		(13.7	)%	(12.0	)%	—	%	—	%	(1.7	)%	(13.7	)%
Operating income	$	145		$	167		(12.8	)%	(19.4	)%	—	%	8.3	%	(1.7	)%	(12.8	)%
Operating margin %	20.9		%	20.6		%	30 bps		(170) bps		—		200 bps		—		30 bps


•	Operating revenue declined due to lower organic revenue and the unfavorable effect of foreign currency translation.


•	Organic revenue declined 12.0% versus worldwide auto builds which decreased 23%. Auto builds for North America, Europe and China, where the Company has a higher concentration of revenue as compared to the other geographic regions, declined 27%. Product line simplification activities reduced organic revenue by 90 basis points.


◦	North American organic revenue decreased 13.2% compared to North American auto builds which declined 10% due to customer mix. Auto builds for the Detroit 3, where the Company has higher content, decreased 15%.


◦	European organic revenue was down 8.7% compared to European auto builds which decreased 19%.


◦	Asia Pacific organic revenue decreased 16.7%. China organic revenue declined 21.3% versus China auto builds which declined 46%.


•	Operating margin was 20.9%. The increase of 30 basis points was primarily driven by lower restructuring expenses of 200 basis points, benefits from the Company's enterprise initiatives and favorable price/cost of 20 basis points, partially offset by negative operating leverage of 240 basis points and higher employee-related expenses.

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 institutional/restaurant and food retail 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 2020 and 2019 were as follows:



	Three Months Ended
Dollars in millions	March 31,								Components of Increase (Decrease)
	2020			2019			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	483		$	518		(6.8	)%	(5.6	)%	—	%	—	%	(1.2	)%	(6.8	)%
Operating income	$	117		$	129		(9.4	)%	(10.2	)%	—	%	1.8	%	(1.0	)%	(9.4	)%
Operating margin %	24.3		%	24.9		%	(60) bps		(120) bps		—		50 bps		10 bps		(60) bps


•	Operating revenue declined due to lower organic revenue and the unfavorable effect of foreign currency translation.


•	Organic revenue decreased 5.6% as equipment and service organic revenue declined 7.7% and 2.0%, respectively.


◦	North American organic revenue declined 4.1% as equipment organic revenue declined 5.7% primarily driven by lower demand in restaurants and food retail, partially offset by growth in institutional end markets. Service organic revenue decreased 1.7%.


◦	International organic revenue decreased 7.6% as equipment organic revenue declined 10.1% primarily due to lower demand in the European cooking and warewash end markets and lower demand in Asia. Service organic revenue decreased 2.5%.


•	Operating margin of 24.3% decreased 60 basis points primarily due to negative operating leverage of 130 basis points and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives, favorable price/cost of 60 basis points and lower restructuring expenses.

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, automotive original equipment manufacturers and tiers, industrial capital goods, 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 2020 and 2019 were as follows:



	Three Months Ended
Dollars in millions	March 31,								Components of Increase (Decrease)
	2020			2019			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	485		$	524		(7.5	)%	(3.3	)%	(3.1	)%	—	%	(1.1	)%	(7.5	)%
Operating income	$	121		$	126		(3.8	)%	(2.3	)%	(1.2	)%	0.7	%	(1.0	)%	(3.8	)%
Operating margin %	25.1		%	24.1		%	100 bps		20 bps		60 bps		20 bps		—		100 bps


•	Operating revenue declined due to lower organic revenues, a divestiture and the unfavorable effect of foreign currency translation.


•	Organic revenue decreased 3.3% as North America was essentially flat and international was down 7.3%.


◦	Organic revenue for the test and measurement businesses decreased 2.4% primarily driven by lower end market demand in Europe, partially offset by higher semi-conductor demand in North America. Instron, where demand is more closely tied to the capital spending environment, had an organic revenue decline of 15.4%.


◦	Electronics organic revenue declined 4.3%. The electronics assembly businesses decreased 10.1% primarily due to lower demand in North America. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, declined 0.8% due to a decrease in Asia Pacific and Europe, partially offset by growth in North America.


•	Operating margin of 25.1% increased 100 basis points primarily due to benefits from the Company's enterprise initiatives, lower intangible asset amortization expense, the impact of a divestiture and favorable price/cost of 30 basis points, partially offset by negative operating leverage of 100 basis points and higher employee-related expenses.

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.

The results of operations for the Welding segment for the first quarter of 2020 and 2019 were as follows:



	Three Months Ended
Dollars in millions	March 31,								Components of Increase (Decrease)
	2020			2019			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	372		$	427		(12.8	)%	(9.0	)%	(3.4	)%	—	%	(0.4	)%	(12.8	)%
Operating income	$	109		$	120		(9.7	)%	(10.1	)%	(0.9	)%	1.4	%	(0.1	)%	(9.7	)%
Operating margin %	29.1		%	28.1		%	100 bps		(30) bps		80 bps		40 bps		10 bps		100 bps


•	Operating revenue decreased due to lower organic revenue, a divestiture and the unfavorable effect of foreign currency translation.


•	Organic revenue declined 9.0% driven by a decrease in equipment and consumable sales of 9.7% and 7.9%, respectively, primarily due to lower demand in the industrial end markets.


◦	North American organic revenue decreased 6.9% primarily due to a decline in the industrial and commercial end markets of 10.3% and 4.1%, respectively, partially offset by an increase of 3.3% in the oil and gas end markets.


◦	International organic revenue decreased 18.8% primarily due to a decline in the oil and gas end markets.


•	Operating margin of 29.1% increased 100 basis points compared to the prior year as benefits from the Company's enterprise initiatives, the impact of a divestiture and lower restructuring expenses were partially offset by negative operating leverage of 160 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 2020 and 2019 were as follows:



	Three Months Ended
Dollars in millions	March 31,						Components of Increase (Decrease)
	2020		2019		Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	393	$	416	(5.5	)%	(3.2	)%	—	%	—	%	(2.3	)%	(5.5	)%
Operating income	$	93	$	89	4.9	%	4.8	%	—	%	2.3	%	(2.2	)%

Price	154.94	EPS	8
Shares	327	P/E	20
MCap	50,603	P/FCF	23
Net Debt	6,757	EBIT	3,234
TEV	57,360	TEV/EBIT	18
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-08
10-K	2019-12-31	Filed 2020-02-14
10-Q	2019-09-30	Filed 2019-10-28
10-Q	2019-06-30	Filed 2019-08-02
10-Q	2019-03-31	Filed 2019-05-03
10-K	2018-12-31	Filed 2019-02-15
10-Q	2018-09-30	Filed 2018-11-01
10-Q	2018-06-30	Filed 2018-08-03
10-Q	2018-03-30	Filed 2018-05-04
10-K	2017-12-31	Filed 2018-02-15
10-Q	2017-09-30	Filed 2017-10-27
10-Q	2017-06-30	Filed 2017-08-04
10-Q	2017-03-31	Filed 2017-05-05
10-K	2016-12-31	Filed 2017-02-10
10-Q	2016-09-30	Filed 2016-10-28
10-Q	2016-06-30	Filed 2016-08-04
10-Q	2016-03-31	Filed 2016-05-06
10-K	2015-12-31	Filed 2016-02-12
10-Q	2015-09-30	Filed 2015-10-30
10-Q	2015-06-30	Filed 2015-08-07
10-Q	2015-03-31	Filed 2015-05-07
10-K	2014-12-31	Filed 2015-02-13
10-Q	2014-09-30	Filed 2014-10-31
10-Q	2014-06-30	Filed 2014-08-08
10-Q	2014-03-31	Filed 2014-05-02
10-K	2013-12-31	Filed 2014-02-14
10-Q	2013-09-30	Filed 2013-11-01
10-Q	2013-06-30	Filed 2013-08-02
10-Q	2013-03-31	Filed 2013-05-03
10-K	2012-12-31	Filed 2013-02-19
10-Q	2012-09-30	Filed 2012-10-26
10-Q	2012-08-03	Filed 2012-08-03
10-Q	2012-05-03	Filed 2012-05-04
10-K	2011-12-31	Filed 2012-02-17
10-Q	2011-10-28	Filed 2011-10-28
10-Q	2011-08-05	Filed 2011-08-05
10-Q	2011-05-05	Filed 2011-05-06
10-K	2010-12-31	Filed 2011-02-28
10-Q	2010-10-29	Filed 2010-10-29
10-Q	2010-08-06	Filed 2010-08-06
10-Q	2010-03-31	Filed 2010-05-07
10-K	2009-12-31	Filed 2010-02-26

8-K	2020-05-08	Officers, Shareholder Vote
8-K	2020-05-05	Earnings, Other Events, Exhibits
8-K	2020-02-05	Other Events, Exhibits
8-K	2020-01-31	Earnings, Exhibits
8-K	2019-10-25	Earnings, Exhibits
8-K	2019-09-27	Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K	2019-07-26	Regulation FD
8-K	2019-07-26	Earnings, Exhibits
8-K	2019-06-10	Officers
8-K	2019-06-05	Other Events, Exhibits
8-K	2019-05-29	Other Events, Exhibits
8-K	2019-05-03	Shareholder Vote
8-K	2019-04-25	Earnings, Exhibits
8-K	2019-02-14	Other Events, Exhibits
8-K	2019-02-01	Earnings, Exhibits
8-K	2018-12-21	Regulation FD, Exhibits
8-K	2018-10-24	Earnings, Exhibits
8-K	2018-07-23	Earnings, Exhibits
8-K	2018-05-04	Shareholder Vote
8-K	2018-04-26	Earnings, Exhibits
8-K	2018-01-24	Earnings, Exhibits

EX-31	itw1q20-exhibit31.htm
EX-32	itw1q20-exhibit32.htm

ITW 10Q Quarterly Report

Illinois Tool Works Earnings 2020-03-31