Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II - Other Information
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Exhibits
EX-31
itw1q19-exhibit31.htm
EX-32
itw1q19-exhibit32.htm
Illinois Tool Works Earnings 2019-03-31
ITW 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 itw-20190331x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
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
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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
o
Emerging growth company
o
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 o No x
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
2.125% Euro Notes due 2030
ITW30
New York Stock Exchange
3.00% Euro Notes due 2034
ITW34
New York Stock Exchange
The number of shares of registrant’s common stock, $0.01 par value, outstanding at March 31, 2019: 325,775,111.
Selling, administrative, and research and development expenses
611
612
Amortization and impairment of intangible assets
43
48
Operating Income
839
903
Interest expense
(63
)
(66
)
Other income (expense)
14
12
Income Before Taxes
790
849
Income Taxes
193
197
Net Income
$
597
$
652
Net Income Per Share:
Basic
$
1.82
$
1.92
Diluted
$
1.81
$
1.90
Shares of Common Stock Outstanding During the Period:
Average
327.3
340.2
Average assuming dilution
329.6
342.8
The Notes to Financial Statements are an integral part of this statement.
3
Illinois Tool Works Inc. and Subsidiaries
Statement of Comprehensive Income (Unaudited)
Three Months Ended
March 31,
In millions
2019
2018
Net Income
$
597
$
652
Other Comprehensive Income (Loss):
Foreign currency translation adjustments, net of tax
31
83
Pension and other postretirement benefit adjustments, net of tax
4
9
Comprehensive Income
$
632
$
744
The Notes to Financial Statements are an integral part of this statement.
4
Illinois Tool Works Inc. and Subsidiaries
Statement of Financial Position (Unaudited)
In millions except per share amounts
March 31, 2019
December 31, 2018
Assets
Current Assets:
Cash and equivalents
$
1,755
$
1,504
Trade receivables
2,715
2,622
Inventories
1,346
1,318
Prepaid expenses and other current assets
259
334
Total current assets
6,075
5,778
Net plant and equipment
1,765
1,791
Goodwill
4,621
4,633
Intangible assets
1,044
1,084
Deferred income taxes
547
554
Other assets
1,274
1,030
$
15,326
$
14,870
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt
$
1,760
$
1,351
Accounts payable
568
524
Accrued expenses
1,228
1,271
Cash dividends payable
326
328
Income taxes payable
79
68
Total current liabilities
3,961
3,542
Noncurrent Liabilities:
Long-term debt
5,981
6,029
Deferred income taxes
727
707
Noncurrent income taxes payable
495
495
Other liabilities
962
839
Total noncurrent liabilities
8,165
8,070
Stockholders’ Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2019 and 2018
Outstanding- 325.8 shares in 2019 and 328.1 shares in 2018
6
6
Additional paid-in-capital
1,255
1,253
Retained earnings
21,488
21,217
Common stock held in treasury
(17,911
)
(17,545
)
Accumulated other comprehensive income (loss)
(1,642
)
(1,677
)
Noncontrolling interest
4
4
Total stockholders’ equity
3,200
3,258
$
15,326
$
14,870
The Notes to Financial Statements are an integral part of this statement.
5
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, 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 share-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
)
Pension and other postretirement benefit adjustments
—
—
—
—
4
—
4
Currency translation adjustments
—
—
—
—
31
—
31
Balance at March 31, 2019
$
6
$
1,255
$
21,488
$
(17,911
)
$
(1,642
)
$
4
$
3,200
Three Months Ended March 31, 2018:
Balance at December 31, 2017
$
6
$
1,218
$
20,210
$
(15,562
)
$
(1,287
)
$
4
$
4,589
Net income
—
—
652
—
—
—
652
Adoption of new accounting guidance
—
—
(370
)
—
(45
)
—
(415
)
Common stock issued for share-based compensation
—
(7
)
—
7
—
—
—
Stock-based compensation expense
—
9
—
—
—
—
9
Repurchases of common stock
—
—
—
(500
)
—
—
(500
)
Dividends declared ($0.78 per share)
—
—
(264
)
—
—
—
(264
)
Pension and other postretirement benefit adjustments
—
—
—
—
9
—
9
Currency translation adjustments
—
—
—
—
83
—
83
Balance at March 31, 2018
$
6
$
1,220
$
20,228
$
(16,055
)
$
(1,240
)
$
4
$
4,163
The Notes to Financial Statements are an integral part of this statement.
6
Illinois Tool Works Inc. and Subsidiaries
Statement of Cash Flows (Unaudited)
Three Months Ended
March 31,
In millions
2019
2018
Cash Provided by (Used for) Operating Activities:
Net income
$
597
$
652
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation
67
67
Amortization and impairment of intangible assets
43
48
Change in deferred income taxes
22
(5
)
Provision for uncollectible accounts
2
1
(Income) loss from investments
(7
)
(3
)
(Gain) loss on sale of plant and equipment
—
(1
)
(Gain) loss on sale of operations and affiliates
2
—
Stock-based compensation expense
10
9
Other non-cash items, net
4
4
Change in assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in-
Trade receivables
(106
)
(192
)
Inventories
(32
)
(68
)
Prepaid expenses and other assets
(22
)
(29
)
Increase (decrease) in-
Accounts payable
48
55
Accrued expenses and other liabilities
(99
)
(90
)
Income taxes
87
90
Net cash provided by operating activities
616
538
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates
(4
)
—
Additions to plant and equipment
(77
)
(94
)
Proceeds from investments
7
5
Proceeds from sale of plant and equipment
2
2
Other, net
—
(2
)
Net cash provided by (used for) investing activities
(72
)
(89
)
Cash Provided by (Used for) Financing Activities:
Cash dividends paid
(328
)
(266
)
Issuance of common stock
11
10
Repurchases of common stock
(375
)
(500
)
Net proceeds from (repayments of) debt with original maturities of three months or less
1,058
(840
)
Repayments of debt with original maturities of more than three months
(650
)
—
Other, net
(11
)
(12
)
Net cash provided by (used for) financing activities
(295
)
(1,608
)
Effect of Exchange Rate Changes on Cash and Equivalents
2
5
Cash and Equivalents:
Increase (decrease) during the period
251
(1,154
)
Beginning of period
1,504
3,094
End of period
$
1,755
$
1,940
Supplementary Cash Flow Information:
Cash Paid During the Period for Interest
$
63
$
65
Cash Paid During the Period for Income Taxes, Net of Refunds
$
84
$
113
Cash Paid During the Period for Lease Liabilities
$
19
Right-of-Use Assets Obtained in Exchange for Lease Liabilities
$
6
The Notes to Financial Statements are an integral part of this statement.
7
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 2018 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 May 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance to change the criteria for revenue recognition. The core principle of the new guidance is that revenue should be recognized to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, expanded revenue disclosures are required. The Company's sales arrangements with customers are predominantly short-term in nature and generally provide for transfer of control and risks and rewards of ownership at the time of product shipment or delivery of service. As such, the timing of revenue recognition under both the prior and new guidance is the same for the majority of the Company’s transactions. Effective January 1, 2018, the Company adopted the new revenue recognition guidance under the modified retrospective method and recorded a cumulative-effect adjustment reducing retained earnings by $9 million as of January 1, 2018.
In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. The primary change under the new guidance is that a lessee is required to recognize a lease liability and corresponding right-of-use asset for its operating leases. The new guidance also requires additional disclosures. Effective January 1, 2019, the Company adopted the new guidance prospectively for all operating lease transactions as of and after the effective date with a noncancellable lease term greater than one year. Upon adoption, the Company recorded a lease liability of $205 million and a corresponding right-of-use asset. The new guidance did not have a material impact on the results of operations or cash flows for the three months ended March 31, 2019. Refer to Note 5. Leases for additional information regarding the Company’s lease transactions.
In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the prior guidance. The provisions of the new guidance are being applied prospectively to intra-entity asset transfers on or after January 1, 2018 and may result in future tax rate volatility. Upon adoption of the new guidance on January 1, 2018, the Company recorded a cumulative-effect adjustment reducing deferred tax assets and retained earnings by $406 million.
In August 2017, the FASB issued authoritative guidance which includes targeted improvements to simplify the application of hedge accounting and improve financial reporting of hedging activities. Effective January 1, 2019, the Company adopted the new guidance which did not have a material impact on the results of operations, financial position or cash flows.
In February 2018, the FASB issued authoritative guidance which allows for an optional one-time reclassification of the stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the "Tax Cuts and Jobs Act" (the "Act") from accumulated other comprehensive income ("AOCI") to retained earnings. The guidance was effective January 1, 2019, with early adoption permitted. The Company elected to early adopt this guidance as of January 1, 2018 and to reclassify the stranded tax effects related to the Act, which resulted in an increase of $45 million to both retained earnings and accumulated other comprehensive loss.
8
(2) Operating Revenue
The Company's 87 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, 2019 and 2018 was as follows:
Three Months Ended
March 31,
In millions
2019
2018
Automotive OEM
$
806
$
901
Food Equipment
518
527
Test & Measurement and Electronics
524
543
Welding
427
423
Polymers & Fluids
416
442
Construction Products
401
428
Specialty Products
465
485
Intersegment revenue
(5
)
(5
)
Total
$
3,552
$
3,744
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.
9
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, industrial capital goods, automotive original equipment manufacturers and tiers, 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 and related consumable solder materials;
•
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;
•
metal arc welding consumables and related accessories; and
•
metal jacketing and other insulation products.
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.
10
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, consumer durables, general industrial, printing and publishing and industrial capital goods 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.
(3) Income Taxes
The Company's effective tax rate for the three months ended March 31, 2019 and 2018 was 24.4% and 23.2%, respectively. The first quarter 2019 effective tax rate was higher primarily as a result of a discrete tax benefit of $14 million related to foreign tax credits in the first quarter of 2018. Additionally, the effective tax rate for both periods included discrete income tax benefits related to excess tax benefits from stock-based compensation of $5 million and $6 million in 2019 and 2018, respectively.
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 $36 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues.
(4) Inventories
Inventories as of March 31, 2019 and December 31, 2018 were as follows:
In millions
March 31, 2019
December 31, 2018
Raw material
$
508
$
523
Work-in-process
171
161
Finished goods
755
731
LIFO reserve
(88
)
(97
)
Total inventories
$
1,346
$
1,318
(5) Leases
Effective January 1, 2019, the Company adopted the new lease accounting guidance which requires the recognition of a lease liability and corresponding right-of-use asset at inception for all operating leases with a noncancellable lease term of greater than one year. The new guidance did not change the recognition of rental expense for operating leases which is recognized on a straightline basis over the noncancellable lease term based on the minimum lease payments at lease inception. Changes in rent subsequent to commencement that were not included in minimum lease payments at inception are recognized as variable rent in the period incurred.
11
The Company’s lease transactions are primarily for the use of facilities, vehicles and equipment under operating lease arrangements. Total rental expense for operating leases for the three months ended March 31, 2019 was $29 million which included $19 million related to capitalized operating leases and $10 million related to short-term operating leases and variable lease payments. Short-term operating leases have original terms of one year or less, or can be terminated at the Company's option with a short notice period and without significant penalty, and are not capitalized. The right-of-use asset related to operating leases was $223 million as of March 31, 2019 and was included in Other assets. As of March 31, 2019, the current portion of the lease liability for operating leases was $55 million and was included in Accrued expenses, and the long-term portion was $138 million and was included in Other liabilities. Future maturities of operating lease liabilities for the years ended December 31 are as follows:
In millions
April 1, 2019 through December 31, 2019
$
45
2020
50
2021
34
2022
25
2023
18
2024 and future years
34
Total future minimum lease payments
206
Less: Imputed interest
(13
)
Operating lease liability
193
Less: Current portion of operating lease liability
(55
)
Long-term portion of operating lease liability
$
138
As of March 31, 2019, operating leases included in the lease liability had a weighted average remaining lease term of 4.8 years and a weighted average discount rate of 2.63% based on the incremental borrowing rate of the Company and its subsidiaries.
As of December 31, 2018, minimum lease payments under operating leases with noncancellable terms in excess of one year for the years ending December 31 were as follows:
In millions
2019
$
67
2020
48
2021
32
2022
24
2023
18
2024 and future years
34
Total future minimum lease payments
$
223
12
(6) Pension and Other Postretirement Benefits
Pension and other postretirement benefit costs for the three months ended March 31, 2019 and 2018 were as follows:
Three Months Ended
March 31,
Pension
Other Postretirement Benefits
In millions
2019
2018
2019
2018
Components of net periodic benefit cost:
Service cost
$
13
$
15
$
2
$
2
Interest cost
20
18
5
5
Expected return on plan assets
(30
)
(32
)
(6
)
(6
)
Amortization of actuarial loss (gain)
5
11
—
(1
)
Total net periodic benefit cost
$
8
$
12
$
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 $30 million to its pension plans and $5 million to its other postretirement benefit plans in 2019. As of March 31, 2019, contributions of $14 million to pension plans and $1 million to other postretirement benefit plans have been made.
(7) Debt
Short-term debt as of March 31, 2019 included $1.1 billion of commercial paper and $700 million related to the 6.25% notes due April 1, 2019. As of December 31, 2018, short-term debt included $650 million related to the 1.95% notes due March 1, 2019 and $700 million related to the 6.25% notes due April 1, 2019, both of which were repaid on the due date. There was no commercial paper outstanding as of December 31, 2018.
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, 2019 and December 31, 2018 were as follows:
In millions
March 31, 2019
December 31, 2018
Fair value
$
7,201
$
7,665
Carrying value
6,681
7,379
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.
13
(8) Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes in Accumulated other comprehensive income (loss) for the three months ended March 31, 2019 and 2018:
Three Months Ended
March 31,
In millions
2019
2018
Beginning balance
$
(1,677
)
$
(1,287
)
Adoption of new accounting guidance related to reclassification of certain tax effects
—
(45
)
Foreign currency translation adjustments during the period
43
69
Income taxes
(12
)
14
Total foreign currency translation adjustments, net of tax
31
83
Pension and other postretirement benefit adjustments during the period
—
1
Pension and other postretirement benefit adjustments reclassified to income
5
10
Income taxes
(1
)
(2
)
Total pension and other postretirement benefit adjustments, net of tax
4
9
Ending balance
$
(1,642
)
$
(1,240
)
Effective January 1, 2018, the Company elected to early adopt new accounting guidance related to the stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the "Tax Cuts and Jobs Act" (the "Act") and reclassified $45 million of stranded income tax effects from Accumulated other comprehensive income (loss) to Retained earnings. Refer to Note 1. Significant Accounting Policies for additional information.
Pension and other postretirement benefit adjustments reclassified to income relate to the amortization of actuarial losses. Refer to Note 6. Pension and Other Postretirement Benefits for additional information.
The Company designated the €1.0 billion of Euro notes issued in May 2015 and the €1.0 billion of Euro notes issued in May 2014 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. The carrying values of the 2015 and 2014 Euro notes were $1.1 billion and $1.1 billion, respectively, as of March 31, 2019. 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 unrealized pre-tax gain recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was $237 million and $187 million as of March 31, 2019 and December 31, 2018, respectively.
The ending balance of Accumulated other comprehensive income (loss) as of March 31, 2019 and 2018 consisted of cumulative translation adjustment losses, net of tax, of $1.3 billion and $902 million, respectively, and unrecognized pension and other postretirement benefits costs, net of tax, of $360 million and $338 million, respectively.
(9) 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.
14
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 87 divisions in 55 countries. As of December 31, 2018, the Company employed approximately 48,000 people.
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.
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. This business model is the Company’s competitive advantage and defines how ITW creates value for its shareholders and comprises 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 subsequently 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. Since then, ITW has made considerable progress in its path to full potential.
The roots of ITW’s Enterprise Strategy began in late 2011 / early 2012, when 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, ITW developed a strategy to replicate that performance across its operations.
Based on this rigorous evaluation, ITW determined that solid and consistent above-market organic growth must be 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.
15
•
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, at the same time, improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 87 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. The Company’s 80/20-enabled sourcing organization has delivered an average of one percent reduction in spend each year from 2013 through 2018 and is on track to do the same in 2019.
•
With the initial portfolio realignment and scale-up work largely complete, the Company has 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 reach its full potential over the next five years, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on three key areas to finish the job of positioning 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 diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.
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,
16
and products. ITW will continue its efforts to drive 80/20 Front-to-Back practice excellence in every division in the Company, every day.
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. At the same time, the Company consistently reviews its portfolio, assesses businesses that are growth-challenged and evaluates if further portfolio refinements may be needed. The Company is currently exploring options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion. If a decision is made to divest any of these businesses, the Company expects that earnings per share dilution would be offset by incremental share repurchases.
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 2018 Annual Report on Form 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
The Company delivered solid financial results in the first quarter 2019 despite a challenging environment, with a slower than expected start to the quarter that improved as the quarter progressed. As expected, the quarter was negatively impacted by foreign currency translation, accelerated restructuring expenses, one less shipping day and a higher effective tax rate as compared to the prior year. The Company continued to execute well on enterprise initiatives and all segments had operating margins above 20% in the first quarter of 2019.
The Company does not believe that tariffs imposed in the past 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 2019 and 2018 were as follows:
Three Months Ended
Dollars in millions
March 31,
Components of Increase (Decrease)
2019
2018
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
3,552
$
3,744
(5.1
)%
(1.5
)%
(0.2
)%
—
%
(3.4
)%
(5.1
)%
Operating income
$
839
$
903
(7.1
)%
(0.9
)%
—
%
(2.7
)%
(3.5
)%
(7.1
)%
Operating margin %
23.6
%
24.1
%
(50) bps
20 bps
—
(70) bps
—
(50) bps
•
Operating revenue declined in the first quarter primarily due to the unfavorable effect of foreign currency translation and lower organic revenue.
17
•
Organic revenue decreased 1.5% primarily driven by a 6.4% decline in the Automotive OEM segment due to lower automotive production. Excluding the impact of one less shipping day in the quarter, organic revenue growth was flat. Product line simplification activities reduced organic revenue by 70 basis points.
◦
Europe, Middle East and Africa organic revenue declined 2.0% primarily driven by the Automotive OEM, Specialty Products and Welding segments.
◦
Asia Pacific organic revenue decreased 3.4% as a decline in five segments was partially offset by growth in the Welding and Polymers & Fluids segments.
◦
North American organic revenue decreased 0.7% as a decline in the Automotive OEM, Construction Products and Polymers & Fluids segments was partially offset by growth in four segments.
•
Operating income of $839 million decreased 7.1% as compared to the prior year primarily driven by the unfavorable effect of foreign currency translation and higher restructuring expenses.
•
Operating margin of 23.6% decreased 50 basis points. Excluding the unfavorable impact of higher restructuring expenses of 70 basis points, operating margin increased 20 basis points. The benefits of the Company's enterprise initiatives that contributed 100 basis points were partially offset by negative operating leverage of 30 basis points, unfavorable price/cost of 10 basis points and higher employee-related expenses.
•
The effective tax rate for the first quarter of 2019 was 24.4% compared to 23.2% in 2018. The first quarter 2019 effective tax rate was higher primarily as a result of a discrete tax benefit of $14 million related to foreign tax credits in the first quarter of 2018. Additionally, the effective tax rate included discrete income tax benefits of $5 million and $6 million in 2019 and 2018, respectively, related to excess tax benefits from stock-based compensation.
•
Diluted earnings per share (EPS) of $1.81 for the first quarter of 2019 included $0.16 of headwinds compared to the prior year related to unfavorable foreign currency translation, accelerated restructuring expenses and a higher effective tax rate.
•
Free cash flow was $539 million for the first quarter of 2019, an increase of 21.4% compared to the prior year. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
•
The Company repurchased approximately 2.7 million shares of its common stock in the first quarter of 2019 for approximately $375 million.
•
Total cash dividends of $328 million were paid in the first quarter of 2019.
•
Adjusted after-tax return on average invested capital was 27.7% for the first quarter. Refer to the Adjusted 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 2019 and 2018 were as follows:
Three Months Ended March 31,
Dollars in millions
Operating Revenue
Operating Income
2019
2018
2019
2018
Automotive OEM
$
806
$
901
$
167
$
217
Food Equipment
518
527
129
130
Test & Measurement and Electronics
524
543
126
127
Welding
427
423
120
117
Polymers & Fluids
416
442
89
92
Construction Products
401
428
87
95
Specialty Products
465
485
123
130
Intersegment revenue
(5
)
(5
)
—
—
Unallocated
—
—
(2
)
(5
)
Total
$
3,552
$
3,744
$
839
$
903
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.
18
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 2019 and 2018 were as follows:
Three Months Ended
Dollars in millions
March 31,
Components of Increase (Decrease)
2019
2018
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
806
$
901
(10.5
)%
(6.4
)%
—
%
—
%
(4.1
)%
(10.5
)%
Operating income
$
167
$
217
(23.3
)%
(12.7
)%
—
%
(7.0
)%
(3.6
)%
(23.3
)%
Operating margin %
20.6
%
24.1
%
(350) bps
(160) bps
—
(190) bps
—
(350) bps
•
Operating revenue decreased due to lower organic revenue and the unfavorable effect of foreign currency translation.
•
Organic revenue declined 6.4% versus worldwide auto builds which declined 7%. Auto builds for North America, Europe and China, where the Company has higher content, declined 8% in the quarter. Product line simplification activities reduced organic revenue by 110 basis points.
◦
North American organic revenue decreased 6.0% compared to North American auto builds which decreased 2% due to customer mix. Auto builds for the Detroit 3, where the Company has higher content, decreased 6%.
◦
European organic revenue declined 7.4% compared to European auto builds which declined 5% due to customer mix. Organic revenue was negatively impacted by the new emissions testing requirements in Europe which were implemented last year and resulted in automotive production disruption.
◦
Asia Pacific organic revenue decreased 4.9%. China organic revenue declined 7.9% versus Chinese auto builds which declined 13%.
•
Operating margin was 20.6%. The decrease of 350 basis points was primarily driven by higher restructuring expenses of 190 basis points, unfavorable price/cost of 110 basis points, negative operating leverage of 100 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives.
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.
19
The results of operations for the Food Equipment segment for the first quarter of 2019 and 2018 were as follows:
Three Months Ended
Dollars in millions
March 31,
Components of Increase (Decrease)
2019
2018
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
518
$
527
(1.7
)%
1.7
%
—
%
—
%
(3.4
)%
(1.7
)%
Operating income
$
129
$
130
(0.3
)%
6.1
%
—
%
(3.3
)%
(3.1
)%
(0.3
)%
Operating margin %
24.9
%
24.6
%
30 bps
110 bps
—
(80) bps
—
30 bps
•
Operating revenue decreased due to the unfavorable effect of foreign currency translation, partially offset by higher organic revenue.
•
Organic revenue increased 1.7% as equipment organic revenue was flat and service organic revenue increased 4.1%.
◦
North American organic revenue increased 1.6%. Equipment organic revenue was flat as higher end market demand in food retail was offset by lower end market demand in food service. Service organic revenue grew 4.1%.
◦
International organic revenue increased 1.9%. Equipment organic revenue grew 0.8% primarily due to higher demand in the European warewash and cooking end markets, partially offset by lower end market demand in Asia Pacific refrigeration. Service organic revenue increased 4.2%.
•
Operating margin of 24.9% increased 30 basis points primarily due to benefits from the Company's enterprise initiatives, positive operating leverage of 40 basis points and favorable price/cost of 30 basis points, partially offset by higher restructuring expenses of 80 basis points and higher employee-related 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, industrial capital goods, automotive original equipment manufacturers and tiers, 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 and related consumable solder materials;
•
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 2019 and 2018 were as follows:
Three Months Ended
Dollars in millions
March 31,
Components of Increase (Decrease)
2019
2018
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
524
$
543
(3.6
)%
(0.5
)%
—
%
—
%
(3.1
)%
(3.6
)%
Operating income
$
126
$
127
(0.8
)%
3.0
%
—
%
(0.9
)%
(2.9
)%
(0.8
)%
Operating margin %
24.1
%
23.4
%
70 bps
90 bps
—
(20) bps
—
70 bps
•
Operating revenue decreased due to the unfavorable effect of foreign currency translation and lower organic revenue.
•
Organic revenue decreased 0.5%.
◦
Organic revenue for the test and measurement businesses decreased 2.0% primarily due to lower semi-conductor end market demand in North America which had a challenging comparable in the prior year period
20
of 17.0% organic revenue growth. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 2.6%.
◦
Electronics organic revenue grew 1.2%. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 2.1% primarily due to growth in North America. The electronics assembly businesses were flat as lower demand in Asia was offset by higher demand in North American end markets.
•
Operating margin of 24.1% increased 70 basis points primarily due to benefits from the Company's enterprise initiatives and favorable price/cost of 10 basis points, partially offset by higher restructuring 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;
•
metal arc welding consumables and related accessories; and
•
metal jacketing and other insulation products.
The results of operations for the Welding segment for the first quarter of 2019 and 2018 were as follows:
Three Months Ended
Dollars in millions
March 31,
Components of Increase (Decrease)
2019
2018
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
427
$
423
1.0
%
2.8
%
(0.5
)%
—
%
(1.3
)%
1.0
%
Operating income
$
120
$
117
2.4
%
3.8
%
(0.1
)%
(0.7
)%
(0.6
)%
2.4
%
Operating margin %
28.1
%
27.7
%
40 bps
30 bps
10 bps
(20) bps
20 bps
40 bps
•
Operating revenue increased due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation and a divestiture.
•
Organic revenue grew 2.8%. Growth in equipment of 2.6% and consumables of 3.2% was primarily driven by stronger demand in the industrial and commercial end markets.
◦
North American organic revenue increased 2.6% primarily due to 3.0% and 4.8% growth in the industrial and commercial end markets, respectively, partially offset by a decline in the oil and gas end markets.
◦
International organic revenue increased 3.8% primarily due to higher demand in Asia in the commercial and oil and gas end markets.
•
Operating margin was 28.1%. The increase of 40 basis points was primarily due to benefits from the Company's enterprise initiatives, favorable price/cost of 100 basis points and positive operating leverage of 60 basis points, partially offset by product mix and higher employee-related expenses.
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.
21
The results of operations for the Polymers & Fluids segment for the first quarter of 2019 and 2018 were as follows:
Three Months Ended
Dollars in millions
March 31,
Components of Increase (Decrease)
2019
2018
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
416
$
442
(6.0
)%
(0.8
)%
(0.9
)%
—
%
(4.3
)%
(6.0
)%
Operating income
$
89
$
92
(4.2
)%
1.3
%
(0.3
)%
(1.0
)%
(4.2
)%
(4.2
)%
Operating margin %
21.3
%
20.9
%
40 bps
50 bps
10 bps
(20) bps
—
40 bps
•
Operating revenue decreased due to the unfavorable effect of foreign currency translation, a divestiture and lower organic revenue.
•
Organic revenue declined 0.8% as lower demand in North America and Europe was partially offset by growth in Asia.
◦
Organic revenue for the automotive aftermarket businesses decreased 3.6% primarily driven by a decline in the tire and body repair businesses in North America and a decrease in the additives business in Europe.
◦
Organic revenue for the polymers businesses increased 1.8% primarily driven by growth in Asia.
◦
Organic revenue for the fluids businesses increased 1.2% due to growth in North America and Europe.
•
Operating margin of 21.3% increased 40 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management, partially offset by unfavorable price/cost of 50 basis points and higher restructuring expenses.
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.
The results of operations for the Construction Products segment for the first quarter of 2019 and 2018 were as follows:
Three Months Ended
Dollars in millions
March 31,
Components of Increase (Decrease)
2019
2018
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
401
$
428
(6.3
)%
(1.4
)%
—
%
—
%
(4.9
)%
(6.3
)%
Operating income
$
87
$
95
(8.0
)%
(0.3
)%
—
%
(3.1
)%
(4.6
)%
(8.0
)%
Operating margin %
21.7
%
22.2
%
(50) bps
20 bps
—
(70) bps
—
(50) bps
•
Operating revenue decreased due to the unfavorable effect of foreign currency translation and lower organic revenue.
•
Organic revenue declined 1.4%. Product line simplification activities reduced organic revenue by 100 basis points.
◦
North American organic revenue decreased 3.0% due to a decline of 4.3% and 1.6% in the commercial and residential end markets, respectively.
◦
International organic revenue was flat. European organic revenue increased 5.2% driven by growth in continental Europe and the Nordic countries. Asia Pacific organic revenue decreased 6.2% primarily due to a decline in the Australia and New Zealand retail and commercial end markets.
•
Operating margin was 21.7%. The decrease of 50 basis points was primarily due to higher restructuring expenses of 70 basis points, negative operating leverage of 40 basis points and unfavorable price/cost of 20 basis points, partially offset by benefits from the Company's enterprise initiatives.
22
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, consumer durables, general industrial, printing and publishing and industrial capital goods 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.
The results of operations for the Specialty Products segment for the first quarter of 2019 and 2018 were as follows:
Three Months Ended
Dollars in millions
March 31,
Components of Increase (Decrease)
2019
2018
Inc (Dec)
Organic
Acquisition/Divestiture
Restructuring
Foreign Currency
Total
Operating revenue
$
465
$
485
(4.3
)%
(1.5
)%
—
%
—
%
(2.8
)%
(4.3
)%
Operating income
$
123
$
130
(4.8
)%
(2.6
)%
—
%
0.3
%
(2.5
)%
(4.8
)%
Operating margin %
26.5
%
26.7
%
(20) bps
(30) bps
—
10 bps
—
(20) bps
•
Operating revenue declined due to the unfavorable effect of foreign currency translation and lower organic revenue.
•
Organic revenue decreased 1.5% as consumables declined 3.3%, partially offset by growth in equipment sales of 5.7%.
◦
North American organic revenue increased 1.5% primarily due to an increase in the ground support equipment, marking & coding, and packaging businesses, partially offset by a decline in the appliance and foils businesses.
◦
International organic revenue decreased 6.2% primarily due to a decline in the graphics, ground support equipment and appliance businesses in Europe and Asia Pacific.
•
Operating margin was 26.5%. The decrease of 20 basis points was primarily driven by product mix, negative operating leverage of 30 basis points and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives.
OTHER FINANCIAL HIGHLIGHTS
•
Interest expense of $63 million in the first quarter of 2019 decreased from $66 million in the first quarter of 2018, primarily due to lower average outstanding commercial paper and the repayment of the $650 million notes due March 1, 2019.
•
Other income (expense) was income of $14 million in the first quarter of 2019 versus $12 million in the prior year period. The year-over-year increase was primarily driven by lower translation losses.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1. Significant Accounting Policies of Item 1. Financial Statements.
23
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of liquidity are free cash flow and short-term credit facilities. In addition, the Company had $1.8 billion of cash and equivalents on hand at March 31, 2019 and also maintains strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:
•
internal investments to support organic growth and sustain core businesses;
•
payment of an attractive dividend to shareholders; and
•
external investments in selective strategic acquisitions that support the Company's organic growth focus, and an active share repurchase program.
The Company believes that, based on its revenue, operating margin, current free cash flow, and credit ratings, it could readily obtain additional financing if necessary.
Cash Flow
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. Summarized cash flow information for the first quarter of 2019 and 2018 was as follows:
Three Months Ended
March 31,
In millions
2019
2018
Net cash provided by operating activities
$
616
$
538
Additions to plant and equipment
(77
)
(94
)
Free cash flow
$
539
$
444
Cash dividends paid
$
(328
)
$
(266
)
Repurchases of common stock
(375
)
(500
)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates
(4
)
—
Net proceeds from (repayments of) debt with original maturities of three months or less
1,058
(840
)
Repayments of debt with original maturities of more than three months
(650
)
—
Other
9
3
Effect of exchange rate changes on cash and equivalents
2
5
Net increase (decrease) in cash and equivalents
$
251
$
(1,154
)
Stock Repurchase Program
On February 13, 2015, the Company's Board of Directors authorized a stock repurchase program which provides for the buyback of up to $6.0 billion of the Company's common stock over an open-ended period of time (the “2015 Program”). Under the 2015 Program, the Company repurchased approximately 3.0 million shares of its common stock at an average price of $164.04 in the first quarter of 2018, approximately 3.4 million shares of its common stock at an average price of $146.24 in the second quarter of 2018, approximately 3.6 million shares of its common stock at an average price of $139.73 in the third quarter of 2018, approximately 3.9 million shares of its common stock at an average price of $128.98 in the fourth quarter of 2018, and approximately 2.7 million shares of its common stock at an average price of $141.34 in the first quarter of 2019. As of March 31, 2019, there were approximately $71 million of authorized repurchases remaining under the 2015 Program.
24
On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the buyback of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). As of March 31, 2019, there were $3.0 billion of authorized repurchases remaining under the 2018 program.
Adjusted After-Tax Return on Average Invested Capital
The Company uses adjusted 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. For comparability, the Company excluded the first quarter discrete tax benefit of $14 million related to foreign tax credits from the effective tax rate for the three months ended March 31, 2018. 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. ROIC for the first quarter of 2019 and 2018 was as follows:
Three Months Ended
March 31,
Dollars in millions
2019
2018
Operating income
$
839
$
903
Tax rate
24.4
%
24.8
%
Income taxes
(205
)
(224
)
Operating income after taxes
$
634
$
679
Invested capital:
Trade receivables
$
2,715
$
2,874
Inventories
1,346
1,335
Net plant and equipment
1,765
1,829
Goodwill and intangible assets
5,665
6,021
Accounts payable and accrued expenses
(1,796
)
(1,905
)
Other, net
(509
)
(382
)
Total invested capital
$
9,186
$
9,772
Average invested capital
$
9,160
$
9,797
Adjusted return on average invested capital
27.7
%
27.7
%
A reconciliation of the first quarter 2018 effective tax rate excluding the first quarter discrete tax benefit related to foreign tax credits is as follows:
Three Months Ended
March 31, 2018
Dollars in millions
Income Taxes
Tax Rate
As reported
$
197
23.2
%
Discrete tax benefit
14
1.6
%
As adjusted
$
211
24.8
%
Refer to Note 3. Income Taxes in Item 1. Financial Statements for further information regarding the first quarter 2018 discrete tax benefit.
25
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as of March 31, 2019 and December 31, 2018 is summarized as follows:
In millions
March 31, 2019
December 31, 2018
Increase/
(Decrease)
Current assets:
Cash and equivalents
$
1,755
$
1,504
$
251
Trade receivables
2,715
2,622
93
Inventories
1,346
1,318
28
Other
259
334
(75
)
Total current assets
6,075
5,778
297
Current liabilities:
Short-term debt
1,760
1,351
409
Accounts payable and accrued expenses
1,796
1,795
1
Other
405
396
9
Total current liabilities
3,961
3,542
419
Net working capital
$
2,114
$
2,236
$
(122
)
Cash and equivalents as of March 31, 2019 included $700 million from commercial paper issued in anticipation of the repayment of the 6.25% notes due April 1, 2019, which were repaid on the due date.
As of March 31, 2019, a majority of the Company's cash and equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to the U.S. Cash and equivalents held internationally are typically used for international operating needs, reinvested to fund expansion of existing international businesses, used to fund new international acquisitions, or used to repay debt held internationally. In the U.S., the Company utilizes cash flows from domestic operations to fund domestic cash needs, which primarily consist of dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existing U.S. businesses and general corporate needs. The Company also uses its commercial paper program, which is backed by long-term credit facilities, for short-term liquidity needs. The Company believes cash generated domestically and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.
Debt
Total debt as of March 31, 2019 and December 31, 2018 was as follows:
In millions
March 31, 2019
December 31, 2018
Short-term debt
$
1,760
$
1,351
Long-term debt
5,981
6,029
Total debt
$
7,741
$
7,380
Short-term debt as of March 31, 2019 included $1.1 billion of commercial paper and $700 million related to the 6.25% notes due April 1, 2019. As of December 31, 2018, short-term debt included $650 million related to the 1.95% notes due March 1, 2019 and $700 million related to the 6.25% notes due April 1, 2019, both of which were repaid on the due date. There was no commercial paper outstanding as of December 31, 2018.
26
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company’s long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt 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. Total debt to EBITDA for the trailing twelve month periods ended March 31, 2019 and December 31, 2018 was as follows:
Dollars in millions
March 31, 2019
December 31, 2018
Total debt
$
7,741
$
7,380
Net income
$
2,508
$
2,563
Add:
Interest expense
254
257
Other income
(69
)
(67
)
Income taxes
827
831
Depreciation
272
272
Amortization and impairment of intangible assets
184
189
EBITDA
$
3,976
$
4,045
Total debt to EBITDA ratio
1.9
1.8
Total debt as of March 31, 2019 included $700 million related to the 6.25% notes due April 1, 2019, which were repaid with cash on the due date.
Stockholders’ Equity
The changes to stockholders’ equity during 2019 were as follows:
In millions
Total stockholders’ equity, December 31, 2018
$
3,258
Net income
597
Repurchases of common stock
(375
)
Cash dividends declared
(326
)
Foreign currency translation adjustments, net of tax
31
Other
15
Total stockholders’ equity, March 31, 2019
$
3,200
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe," "expect," "plans," "intends," "may," "strategy," "prospects," "estimate," "project," "target," "anticipate," "guidance," "forecast," and other similar words, including, without limitation, statements regarding potential acquisitions and divestitures and the expected performance of acquired businesses and impact of divested businesses, the impact of tariffs and raw material cost inflation, economic and regulatory conditions in various geographic regions, the timing and amount of share repurchases, the timing and amount of benefits from the Company's enterprise initiatives, the adequacy of internally generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency of U.S. generated cash to fund cash requirements in the U.S., the impact of enacted U.S. tax legislation, the cost and availability of additional financing, the Company's portion of future benefit payments related to pension and postretirement benefits, the availability of raw materials and energy, the expiration of any one of the Company's patents, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the impact of failure of the Company's employees to comply with applicable laws and
27
regulations, the impact of foreign currency fluctuations, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the resolution of tax matters. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include (1) weaknesses or downturns in the markets served by the Company, (2) changes or deterioration in international and domestic political and economic conditions, (3) the timing and amount of benefits from the Company’s enterprise initiatives and their impact on organic revenue growth, (4) market conditions and availability of financing to fund the Company's share repurchases, (5) the risk of intentional acts of the Company's employees, agents or business partners that violate anti-corruption and other laws, (6) the unfavorable impact of foreign currency fluctuations, (7) a delay or decrease in the introduction of new products into the Company’s product lines or failure to protect the Company's intellectual property, (8) the potential negative impact of acquisitions on the Company’s profitability and returns, (9) negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (10) potential negative impact of impairments to goodwill and other intangible assets on the Company’s profitability and return on invested capital, (11) increases in funding costs or decreases in credit availability due to market conditions or changes to the Company's credit ratings, (12) raw material price increases and supply shortages, (13) unfavorable tax law changes and tax authority rulings, (14) financial market risks to the Company’s obligations under its defined benefit pension plans, (15) potential adverse outcomes in legal proceedings, (16) uncertainties related to climate change regulation, and (17) negative effects of service interruptions, data corruption, cyber-based attacks, network security breaches, or violations of data privacy laws. A more detailed description of these risks is contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Any forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.
ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-public information or other confidential commercial information. Shareholders should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
ITEM 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e)) as of March 31, 2019. Based on such evaluation, the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer have concluded that, as of March 31, 2019, the Company’s disclosure controls and procedures were effective.
In connection with the evaluation by management, including the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, no changes in the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended March 31, 2019 were identified that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1A. Risk Factors
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 recent results or from anticipated future results. Refer to the description of the Company's risk factors previously disclosed in Part I - Item 1A - Risk Factors in the Company's 2018 Annual Report on Form 10-K.
28
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 13, 2015, the Company's Board of Directors authorized a stock repurchase program which provides for the repurchase of up to $6.0 billion of the Company's common stock over an open-ended period of time (the “2015 Program”). As of March 31, 2019, there were approximately $71 million of authorized repurchases remaining under the 2015 Program.
On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the buyback of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). As of March 31, 2019, there were $3.0 billion of authorized repurchases remaining under the 2018 program.
Share repurchase activity for the first quarter of 2019 was as follows:
In millions except per share amounts
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum Value of Shares That May Yet Be Purchased Under Programs
The following financial and related information from the Illinois Tool Works Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 is formatted in Extensible Business Reporting Language (XBRL) and submitted electronically herewith: (i) Statement of Income, (ii) Statement of Comprehensive Income, (iii) Statement of Financial Position, (iv) Statement of Changes in Stockholders' Equity, (v) Statement of Cash Flows, and (vi) related Notes to Financial Statements.
* Management contract or compensation plan or arrangement.
30
SIGNATURES
Pursuant to the requirements of the Securities 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 2, 2019
By:
/s/ Randall J. Scheuneman
Randall J. Scheuneman
Vice President & Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized Officer)
31
falsedesktopITW2019-03-31000004982619000055{"post_metric": "https://q10k.com/post-metric", "tbl_copy_plus_disp": "https://q10k.com/tbl-copy-plus-disp", "tbl_copy_plus_copy": "https://q10k.com/tbl-copy-plus-copy", "tbl_sim": "https://q10k.com/tbl-sim", "search": "https://q10k.com/search"}{"q10k_tbl_0": "x\tQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE\n\tSECURITIES EXCHANGE ACT OF 1934\n\tFor the quarterly period ended March 31, 2019\n\tOR\no\tTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE\n\tSECURITIES EXCHANGE ACT OF 1934\n\tFor the transition period from _______________ to _______________\n", "q10k_tbl_1": "Title of Each Class\tTrading Symbol(s)\tName of Each Exchange on Which Registered\nCommon Stock\tITW\tNew York Stock Exchange\n1.75% Euro Notes due 2022\tITW22\tNew York Stock Exchange\n1.25% Euro Notes due 2023\tITW23\tNew York Stock Exchange\n2.125% Euro Notes due 2030\tITW30\tNew York Stock Exchange\n3.00% Euro Notes due 2034\tITW34\tNew York Stock Exchange\n", "q10k_tbl_2": "\tThree Months Ended\t\n\tMarch 31,\t\nIn millions except per share amounts\t2019\t2018\nOperating Revenue\t3,552\t3,744\nCost of revenue\t2,059\t2,181\nSelling, administrative, and research and development expenses\t611\t612\nAmortization and impairment of intangible assets\t43\t48\nOperating Income\t839\t903\nInterest expense\t(63)\t(66)\nOther income (expense)\t14\t12\nIncome Before Taxes\t790\t849\nIncome Taxes\t193\t197\nNet Income\t597\t652\nNet Income Per Share:\t\t\nBasic\t1.82\t1.92\nDiluted\t1.81\t1.90\nShares of Common Stock Outstanding During the Period:\t\t\nAverage\t327.3\t340.2\nAverage assuming dilution\t329.6\t342.8\n", "q10k_tbl_3": "\tThree Months Ended\t\n\tMarch 31,\t\nIn millions\t2019\t2018\nNet Income\t597\t652\nOther Comprehensive Income (Loss):\t\t\nForeign currency translation adjustments, net of tax\t31\t83\nPension and other postretirement benefit adjustments, net of tax\t4\t9\nComprehensive Income\t632\t744\n", "q10k_tbl_4": "In millions except per share amounts\tMarch 31, 2019\tDecember 31, 2018\nAssets\t\t\nCurrent Assets:\t\t\nCash and equivalents\t1,755\t1,504\nTrade receivables\t2,715\t2,622\nInventories\t1,346\t1,318\nPrepaid expenses and other current assets\t259\t334\nTotal current assets\t6,075\t5,778\nNet plant and equipment\t1,765\t1,791\nGoodwill\t4,621\t4,633\nIntangible assets\t1,044\t1,084\nDeferred income taxes\t547\t554\nOther assets\t1,274\t1,030\n\t15,326\t14,870\nLiabilities and Stockholders' Equity\t\t\nCurrent Liabilities:\t\t\nShort-term debt\t1,760\t1,351\nAccounts payable\t568\t524\nAccrued expenses\t1,228\t1,271\nCash dividends payable\t326\t328\nIncome taxes payable\t79\t68\nTotal current liabilities\t3,961\t3,542\nNoncurrent Liabilities:\t\t\nLong-term debt\t5,981\t6,029\nDeferred income taxes\t727\t707\nNoncurrent income taxes payable\t495\t495\nOther liabilities\t962\t839\nTotal noncurrent liabilities\t8,165\t8,070\nStockholders' Equity:\t\t\nCommon stock (par value of $0.01 per share):\t\t\nIssued- 550.0 shares in 2019 and 2018 Outstanding- 325.8 shares in 2019 and 328.1 shares in 2018\t6\t6\nAdditional paid-in-capital\t1,255\t1,253\nRetained earnings\t21,488\t21,217\nCommon stock held in treasury\t(17,911)\t(17,545)\nAccumulated other comprehensive income (loss)\t(1,642)\t(1,677)\nNoncontrolling interest\t4\t4\nTotal stockholders' equity\t3,200\t3,258\n\t15,326\t14,870\n", "q10k_tbl_5": "In millions except per share amounts\tCommon Stock\tAdditional Paid-in Capital\tRetained Earnings\tCommon Stock Held in Treasury\tAccumulated Other Comprehensive Income (Loss)\tNon-controlling Interest\tTotal\nThree Months Ended March 31, 2019:\t\t\t\t\t\t\t\nBalance at December 31, 2018\t6\t1,253\t21,217\t(17,545)\t(1,677)\t4\t3,258\nNet income\t-\t-\t597\t-\t-\t-\t597\nCommon stock issued for share-based compensation\t-\t(8)\t-\t9\t-\t-\t1\nStock-based compensation expense\t-\t10\t-\t-\t-\t-\t10\nRepurchases of common stock\t-\t-\t-\t(375)\t-\t-\t(375)\nDividends declared ($1.00 per share)\t-\t-\t(326)\t-\t-\t-\t(326)\nPension and other postretirement benefit adjustments\t-\t-\t-\t-\t4\t-\t4\nCurrency translation adjustments\t-\t-\t-\t-\t31\t-\t31\nBalance at March 31, 2019\t6\t1,255\t21,488\t(17,911)\t(1,642)\t4\t3,200\nThree Months Ended March 31, 2018:\t\t\t\t\t\t\t\nBalance at December 31, 2017\t6\t1,218\t20,210\t(15,562)\t(1,287)\t4\t4,589\nNet income\t-\t-\t652\t-\t-\t-\t652\nAdoption of new accounting guidance\t-\t-\t(370)\t-\t(45)\t-\t(415)\nCommon stock issued for share-based compensation\t-\t(7)\t-\t7\t-\t-\t-\nStock-based compensation expense\t-\t9\t-\t-\t-\t-\t9\nRepurchases of common stock\t-\t-\t-\t(500)\t-\t-\t(500)\nDividends declared ($0.78 per share)\t-\t-\t(264)\t-\t-\t-\t(264)\nPension and other postretirement benefit adjustments\t-\t-\t-\t-\t9\t-\t9\nCurrency translation adjustments\t-\t-\t-\t-\t83\t-\t83\nBalance at March 31, 2018\t6\t1,220\t20,228\t(16,055)\t(1,240)\t4\t4,163\n", "q10k_tbl_6": "\tThree Months Ended\t\n\tMarch 31,\t\nIn millions\t2019\t2018\nCash Provided by (Used for) Operating Activities:\t\t\nNet income\t597\t652\nAdjustments to reconcile net income to cash provided by operating activities:\t\t\nDepreciation\t67\t67\nAmortization and impairment of intangible assets\t43\t48\nChange in deferred income taxes\t22\t(5)\nProvision for uncollectible accounts\t2\t1\n(Income) loss from investments\t(7)\t(3)\n(Gain) loss on sale of plant and equipment\t-\t(1)\n(Gain) loss on sale of operations and affiliates\t2\t-\nStock-based compensation expense\t10\t9\nOther non-cash items, net\t4\t4\nChange in assets and liabilities, net of acquisitions and divestitures:\t\t\n(Increase) decrease in-\t\t\nTrade receivables\t(106)\t(192)\nInventories\t(32)\t(68)\nPrepaid expenses and other assets\t(22)\t(29)\nIncrease (decrease) in-\t\t\nAccounts payable\t48\t55\nAccrued expenses and other liabilities\t(99)\t(90)\nIncome taxes\t87\t90\nNet cash provided by operating activities\t616\t538\nCash Provided by (Used for) Investing Activities:\t\t\nAcquisition of businesses (excluding cash and equivalents) and additional interest in affiliates\t(4)\t-\nAdditions to plant and equipment\t(77)\t(94)\nProceeds from investments\t7\t5\nProceeds from sale of plant and equipment\t2\t2\nOther, net\t-\t(2)\nNet cash provided by (used for) investing activities\t(72)\t(89)\nCash Provided by (Used for) Financing Activities:\t\t\nCash dividends paid\t(328)\t(266)\nIssuance of common stock\t11\t10\nRepurchases of common stock\t(375)\t(500)\nNet proceeds from (repayments of) debt with original maturities of three months or less\t1,058\t(840)\nRepayments of debt with original maturities of more than three months\t(650)\t-\nOther, net\t(11)\t(12)\nNet cash provided by (used for) financing activities\t(295)\t(1,608)\nEffect of Exchange Rate Changes on Cash and Equivalents\t2\t5\nCash and Equivalents:\t\t\nIncrease (decrease) during the period\t251\t(1,154)\nBeginning of period\t1,504\t3,094\nEnd of period\t1,755\t1,940\nSupplementary Cash Flow Information:\t\t\nCash Paid During the Period for Interest\t63\t65\nCash Paid During the Period for Income Taxes, Net of Refunds\t84\t113\nCash Paid During the Period for Lease Liabilities\t19\t\nRight-of-Use Assets Obtained in Exchange for Lease Liabilities\t6\t\n", "q10k_tbl_7": "\tThree Months Ended\t\n\tMarch 31,\t\nIn millions\t2019\t2018\nAutomotive OEM\t806\t901\nFood Equipment\t518\t527\nTest & Measurement and Electronics\t524\t543\nWelding\t427\t423\nPolymers & Fluids\t416\t442\nConstruction Products\t401\t428\nSpecialty Products\t465\t485\nIntersegment revenue\t(5)\t(5)\nTotal\t3,552\t3,744\n", "q10k_tbl_8": "In millions\tMarch 31, 2019\tDecember 31, 2018\nRaw material\t508\t523\nWork-in-process\t171\t161\nFinished goods\t755\t731\nLIFO reserve\t(88)\t(97)\nTotal inventories\t1,346\t1,318\n", "q10k_tbl_9": "In millions\t\nApril 1, 2019 through December 31, 2019\t45\n2020\t50\n2021\t34\n2022\t25\n2023\t18\n2024 and future years\t34\nTotal future minimum lease payments\t206\nLess: Imputed interest\t(13)\nOperating lease liability\t193\nLess: Current portion of operating lease liability\t(55)\nLong-term portion of operating lease liability\t138\n", "q10k_tbl_10": "In millions\t\n2019\t67\n2020\t48\n2021\t32\n2022\t24\n2023\t18\n2024 and future years\t34\nTotal future minimum lease payments\t223\n", "q10k_tbl_11": "\tThree Months Ended\t\t\t\n\tMarch 31,\t\t\t\n\tPension\t\tOther Postretirement Benefits\t\nIn millions\t2019\t2018\t2019\t2018\nComponents of net periodic benefit cost:\t\t\t\t\nService cost\t13\t15\t2\t2\nInterest cost\t20\t18\t5\t5\nExpected return on plan assets\t(30)\t(32)\t(6)\t(6)\nAmortization of actuarial loss (gain)\t5\t11\t-\t(1)\nTotal net periodic benefit cost\t8\t12\t1\t-\n", "q10k_tbl_12": "In millions\tMarch 31, 2019\tDecember 31, 2018\nFair value\t7,201\t7,665\nCarrying value\t6,681\t7,379\n", "q10k_tbl_13": "\tThree Months Ended\t\n\tMarch 31,\t\nIn millions\t2019\t2018\nBeginning balance\t(1,677)\t(1,287)\nAdoption of new accounting guidance related to reclassification of certain tax effects\t-\t(45)\nForeign currency translation adjustments during the period\t43\t69\nIncome taxes\t(12)\t14\nTotal foreign currency translation adjustments, net of tax\t31\t83\nPension and other postretirement benefit adjustments during the period\t-\t1\nPension and other postretirement benefit adjustments reclassified to income\t5\t10\nIncome taxes\t(1)\t(2)\nTotal pension and other postretirement benefit adjustments, net of tax\t4\t9\nEnding balance\t(1,642)\t(1,240)\n", "q10k_tbl_14": "\tThree Months Ended\t\t\t\t\t\t\t\nDollars in millions\tMarch 31,\t\t\tComponents of Increase (Decrease)\t\t\t\t\n\t2019\t2018\tInc (Dec)\tOrganic\tAcquisition/Divestiture\tRestructuring\tForeign Currency\tTotal\nOperating revenue\t3,552\t3,744\t(5.1)%\t(1.5)%\t(0.2)%\t-%\t(3.4)%\t(5.1)%\nOperating income\t839\t903\t(7.1)%\t(0.9)%\t-%\t(2.7)%\t(3.5)%\t(7.1)%\nOperating margin %\t23.6%\t24.1%\t(50) bps\t20 bps\t-\t(70) bps\t-\t(50) bps\n", "q10k_tbl_15": "\tThree Months Ended March 31,\t\t\t\nDollars in millions\tOperating Revenue\t\tOperating Income\t\n\t2019\t2018\t2019\t2018\nAutomotive OEM\t806\t901\t167\t217\nFood Equipment\t518\t527\t129\t130\nTest & Measurement and Electronics\t524\t543\t126\t127\nWelding\t427\t423\t120\t117\nPolymers & Fluids\t416\t442\t89\t92\nConstruction Products\t401\t428\t87\t95\nSpecialty Products\t465\t485\t123\t130\nIntersegment revenue\t(5)\t(5)\t-\t-\nUnallocated\t-\t-\t(2)\t(5)\nTotal\t3,552\t3,744\t839\t903\n", "q10k_tbl_16": "\tThree Months Ended\t\t\t\t\t\t\t\nDollars in millions\tMarch 31,\t\t\tComponents of Increase (Decrease)\t\t\t\t\n\t2019\t2018\tInc (Dec)\tOrganic\tAcquisition/Divestiture\tRestructuring\tForeign Currency\tTotal\nOperating revenue\t806\t901\t(10.5)%\t(6.4)%\t-%\t-%\t(4.1)%\t(10.5)%\nOperating income\t167\t217\t(23.3)%\t(12.7)%\t-%\t(7.0)%\t(3.6)%\t(23.3)%\nOperating margin %\t20.6%\t24.1%\t(350) bps\t(160) bps\t-\t(190) bps\t-\t(350) bps\n", "q10k_tbl_17": "\tThree Months Ended\t\t\t\t\t\t\t\nDollars in millions\tMarch 31,\t\t\tComponents of Increase (Decrease)\t\t\t\t\n\t2019\t2018\tInc (Dec)\tOrganic\tAcquisition/Divestiture\tRestructuring\tForeign Currency\tTotal\nOperating revenue\t518\t527\t(1.7)%\t1.7%\t-%\t-%\t(3.4)%\t(1.7)%\nOperating income\t129\t130\t(0.3)%\t6.1%\t-%\t(3.3)%\t(3.1)%\t(0.3)%\nOperating margin %\t24.9%\t24.6%\t30 bps\t110 bps\t-\t(80) bps\t-\t30 bps\n", "q10k_tbl_18": "\tThree Months Ended\t\t\t\t\t\t\t\nDollars in millions\tMarch 31,\t\t\tComponents of Increase (Decrease)\t\t\t\t\n\t2019\t2018\tInc (Dec)\tOrganic\tAcquisition/Divestiture\tRestructuring\tForeign Currency\tTotal\nOperating revenue\t524\t543\t(3.6)%\t(0.5)%\t-%\t-%\t(3.1)%\t(3.6)%\nOperating income\t126\t127\t(0.8)%\t3.0%\t-%\t(0.9)%\t(2.9)%\t(0.8)%\nOperating margin %\t24.1%\t23.4%\t70 bps\t90 bps\t-\t(20) bps\t-\t70 bps\n", "q10k_tbl_19": "\tThree Months Ended\t\t\t\t\t\t\t\nDollars in millions\tMarch 31,\t\t\tComponents of Increase (Decrease)\t\t\t\t\n\t2019\t2018\tInc (Dec)\tOrganic\tAcquisition/Divestiture\tRestructuring\tForeign Currency\tTotal\nOperating revenue\t427\t423\t1.0%\t2.8%\t(0.5)%\t-%\t(1.3)%\t1.0%\nOperating income\t120\t117\t2.4%\t3.8%\t(0.1)%\t(0.7)%\t(0.6)%\t2.4%\nOperating margin %\t28.1%\t27.7%\t40 bps\t30 bps\t10 bps\t(20) bps\t20 bps\t40 bps\n", "q10k_tbl_20": "\tThree Months Ended\t\t\t\t\t\t\t\nDollars in millions\tMarch 31,\t\t\tComponents of Increase (Decrease)\t\t\t\t\n\t2019\t2018\tInc (Dec)\tOrganic\tAcquisition/Divestiture\tRestructuring\tForeign Currency\tTotal\nOperating revenue\t416\t442\t(6.0)%\t(0.8)%\t(0.9)%\t-%\t(4.3)%\t(6.0)%\nOperating income\t89\t92\t(4.2)%\t1.3%\t(0.3)%\t(1.0)%\t(4.2)%\t(4.2)%\nOperating margin %\t21.3%\t20.9%\t40 bps\t50 bps\t10 bps\t(20) bps\t-\t40 bps\n", "q10k_tbl_21": "\tThree Months Ended\t\t\t\t\t\t\t\nDollars in millions\tMarch 31,\t\t\tComponents of Increase (Decrease)\t\t\t\t\n\t2019\t2018\tInc (Dec)\tOrganic\tAcquisition/Divestiture\tRestructuring\tForeign Currency\tTotal\nOperating revenue\t401\t428\t(6.3)%\t(1.4)%\t-%\t-%\t(4.9)%\t(6.3)%\nOperating income\t87\t95\t(8.0)%\t(0.3)%\t-%\t(3.1)%\t(4.6)%\t(8.0)%\nOperating margin %\t21.7%\t22.2%\t(50) bps\t20 bps\t-\t(70) bps\t-\t(50) bps\n", "q10k_tbl_22": "\tThree Months Ended\t\t\t\t\t\t\t\nDollars in millions\tMarch 31,\t\t\tComponents of Increase (Decrease)\t\t\t\t\n\t2019\t2018\tInc (Dec)\tOrganic\tAcquisition/Divestiture\tRestructuring\tForeign Currency\tTotal\nOperating revenue\t465\t485\t(4.3)%\t(1.5)%\t-%\t-%\t(2.8)%\t(4.3)%\nOperating income\t123\t130\t(4.8)%\t(2.6)%\t-%\t0.3%\t(2.5)%\t(4.8)%\nOperating margin %\t26.5%\t26.7%\t(20) bps\t(30) bps\t-\t10 bps\t-\t(20) bps\n", "q10k_tbl_23": "\tThree Months Ended\t\n\tMarch 31,\t\nIn millions\t2019\t2018\nNet cash provided by operating activities\t616\t538\nAdditions to plant and equipment\t(77)\t(94)\nFree cash flow\t539\t444\nCash dividends paid\t(328)\t(266)\nRepurchases of common stock\t(375)\t(500)\nAcquisition of businesses (excluding cash and equivalents) and additional interest in affiliates\t(4)\t-\nNet proceeds from (repayments of) debt with original maturities of three months or less\t1,058\t(840)\nRepayments of debt with original maturities of more than three months\t(650)\t-\nOther\t9\t3\nEffect of exchange rate changes on cash and equivalents\t2\t5\nNet increase (decrease) in cash and equivalents\t251\t(1,154)\n", "q10k_tbl_24": "\tThree Months Ended\t\n\tMarch 31,\t\nDollars in millions\t2019\t2018\nOperating income\t839\t903\nTax rate\t24.4%\t24.8%\nIncome taxes\t(205)\t(224)\nOperating income after taxes\t634\t679\nInvested capital:\t\t\nTrade receivables\t2,715\t2,874\nInventories\t1,346\t1,335\nNet plant and equipment\t1,765\t1,829\nGoodwill and intangible assets\t5,665\t6,021\nAccounts payable and accrued expenses\t(1,796)\t(1,905)\nOther, net\t(509)\t(382)\nTotal invested capital\t9,186\t9,772\nAverage invested capital\t9,160\t9,797\nAdjusted return on average invested capital\t27.7%\t27.7%\n", "q10k_tbl_25": "\tThree Months Ended\t\n\tMarch 31, 2018\t\nDollars in millions\tIncome Taxes\tTax Rate\nAs reported\t197\t23.2%\nDiscrete tax benefit\t14\t1.6%\nAs adjusted\t211\t24.8%\n", "q10k_tbl_26": "In millions\tMarch 31, 2019\tDecember 31, 2018\tIncrease/ (Decrease)\nCurrent assets:\t\t\t\nCash and equivalents\t1,755\t1,504\t251\nTrade receivables\t2,715\t2,622\t93\nInventories\t1,346\t1,318\t28\nOther\t259\t334\t(75)\nTotal current assets\t6,075\t5,778\t297\nCurrent liabilities:\t\t\t\nShort-term debt\t1,760\t1,351\t409\nAccounts payable and accrued expenses\t1,796\t1,795\t1\nOther\t405\t396\t9\nTotal current liabilities\t3,961\t3,542\t419\nNet working capital\t2,114\t2,236\t(122)\n", "q10k_tbl_27": "In millions\tMarch 31, 2019\tDecember 31, 2018\nShort-term debt\t1,760\t1,351\nLong-term debt\t5,981\t6,029\nTotal debt\t7,741\t7,380\n", "q10k_tbl_28": "Dollars in millions\tMarch 31, 2019\tDecember 31, 2018\nTotal debt\t7,741\t7,380\nNet income\t2,508\t2,563\nAdd:\t\t\nInterest expense\t254\t257\nOther income\t(69)\t(67)\nIncome taxes\t827\t831\nDepreciation\t272\t272\nAmortization and impairment of intangible assets\t184\t189\nEBITDA\t3,976\t4,045\nTotal debt to EBITDA ratio\t1.9\t1.8\n", "q10k_tbl_29": "In millions\t\nTotal stockholders' equity, December 31, 2018\t3,258\nNet income\t597\nRepurchases of common stock\t(375)\nCash dividends declared\t(326)\nForeign currency translation adjustments, net of tax\t31\nOther\t15\nTotal stockholders' equity, March 31, 2019\t3,200\n", "q10k_tbl_30": "In millions except per share amounts\t\t\t\t\nPeriod\tTotal Number of Shares Purchased\tAverage Price Paid Per Share\tTotal Number of Shares Purchased as Part of Publicly Announced Program\tMaximum Value of Shares That May Yet Be Purchased Under Programs\nJanuary 2019\t-\t-\t-\t3,446\nFebruary 2019\t1.5\t140.00\t1.5\t3,243\nMarch 2019\t1.2\t142.94\t1.2\t3,071\nTotal\t2.7\t\t2.7\t\n", "q10k_tbl_31": "Exhibit Number\tExhibit Description\n10.1*\tForm of stock option terms pursuant to the Illinois Tool Works Inc. 2015 Long-Term Incentive Plan filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference.\n10.2*\tForm of performance share unit terms pursuant to the Illinois Tool Works Inc. 2015 Long-Term Incentive Plan filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed on February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference.\n10.3*\tForm of performance cash terms pursuant to the Illinois Tool Works Inc. 2015 Long-Term Incentive Plan filed as Exhibit 99.3 to the Company's Current Report on Form 8-K filed on February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference.\n31\tRule 13a-14(a) Certification.\n32\tSection 1350 Certification.\n101\tThe following financial and related information from the Illinois Tool Works Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 is formatted in Extensible Business Reporting Language (XBRL) and submitted electronically herewith: (i) Statement of Income, (ii) Statement of Comprehensive Income, (iii) Statement of Financial Position, (iv) Statement of Changes in Stockholders' Equity, (v) Statement of Cash Flows, and (vi) related Notes to Financial Statements.\n"}{"bs": "q10k_tbl_4", "is": "q10k_tbl_2", "cf": "q10k_tbl_6"}