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Text: I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen.
During today's call, we will discuss ITW's first quarter financial results and update our guidance for full year 2021.
In Q1, we saw continued improvement in both the breadth and pace of the recovery, with six of our seven segments delivering strong growth in the quarter, with revenue increases at the segment level ranging from 6% to 13%, and that's with one less shipping day in Q1 of this year versus last year.
At the enterprise level, organic growth was plus 6% in Q1 or plus 8% on an equal days basis, and that was despite the fact that our Food Equipment segment was still down 10% in the quarter.
The fundamental strength of our 80/20 front-to-back business system and the skill and dedication of our people around the world, combined with the Win the Recovery actions that we initiated over the course of the past year allowed us to meet our customers' increasing needs while at the same time delivering strong profitability leverage, as evidenced by our 19% earnings growth, 45% incremental margins, and 120 basis points of margin benefits from our enterprise initiatives in the quarter.
Despite rising raw material costs and a tight supply chain environment, we maintained our world-class service levels to our customers while also establishing several all-time Q1 performance records for the company, including earnings per share of $2.11, operating income of $905 million, and an operating margin of 25.5%.
Based on our first quarter results and our normal practice of projecting current demand rates through the balance of the year, we are adjusting our 2021 guidance.
For the full year, we now expect organic growth of 10% to 12%, operating margin in the range of 25% to 26%, and earnings per share of $8.20 to $8.60 per share, which at the $8.40 midpoint represents 27% earnings growth versus last year.
At the midpoint of our revised guidance, 2021 full year revenues would be up 1% versus 2019 and earnings per share would be up 9%.
Now, stating the obvious, there's still a lot of ground to cover between now and the end of the year, and the near-term environment is certainly not without its challenges.
That being said, I have no doubt that we are well positioned to respond to whatever comes our way as we move through the remainder of the year and to continue to deliver differentiated performance in 2021 and beyond.
Solid demand momentum we had coming out of the fourth quarter continued to gain strength across a broad cross-section of our business portfolio in Q1.
Our operating teams around the world responded to our customers' increasing needs, as they always do, and delivered revenue growth of 10%.
Organic growth of 6% was the highest organic growth rate for ITW in almost 10 years.
And as Scott mentioned, Q1 had one less day this year.
And on an equal days basis, organic revenue grew 8%.
Organic growth was positive across all major geographies, with China leading the way with 62%, North America was up 4% and Europe grew 1%.
Relative to Q4, a new trend that emerged in Q1 was a meaningful pickup in demand in our capex-driven equipment businesses, Test & Measurement and Electronics which grew 11%; and Welding, which grew 6%.
GAAP earnings per share of $2.11 was up 19% and an all-time earnings per share record for continuing operations.
Operating leverage was a real highlight this quarter with incremental margins of 45% as operating income grew 19% year-over-year.
Operating margins improved to 25.5% in the quarter, an increase of almost 200 basis points as a result of volume leverage and a continued strong contribution of 120 basis points from our enterprise initiatives, partially offset by the margin impact of price cost.
Excluding the third quarter of 2017, which had the benefit of a one-time legal settlement, operating margin of 25.5% was our highest quarterly margin performance ever.
As you know, supply chains around the world are under significant pressure, and ITW's operating teams certainly had to deal with their fair share of supply challenges and disruptions in the quarter.
By leveraging our produce where we sell supply chain strategy, our proprietary 80/20 front-to-back business system and supported by the fact that we were fully staffed for this uptick in demand due to our Win the Recovery initiative, we were able to maintain our normal service levels to our customers.
And once again, our ability to deal with the impact of some pretty meaningful supply chain challenges and disruptions and still take care of our customers, with strong levels of profitability, speaks to the quality of the execution at ITW.
In the quarter, we experienced raw material cost increases, particularly in categories such as steel, resins and chemicals.
And across the company, our operating teams have already initiated pricing plans and actions that will offset all incurred as well as known but not yet incurred raw material cost increases on a dollar per dollar basis, as per our usual process.
As a result, price cost is expected to be EPS-neutral for the year.
As you know, given our high-margin profile, offsetting cost increases with price on a dollar per dollar basis causes some modest dilution of our operating margin percentage and our incremental margin percentage in the near term.
In Q1, for example, our operating margin was impacted 60 basis points due to price costs.
And our incremental margin would actually have been 52%, not 45% if it wasn't for this impact from price costs.
For the balance of the year and embedded in our guidance are all known raw material increases and the corresponding pricing actions that have either already been implemented or will be, again, EPS-neutral for the full year.
At this early stage in the recovery, our 25.5% operating margins are already exceeding our pre-COVID operating margins.
Four of the seven segments delivered operating margin of around 28% or better in Q1, with one segment, Welding, above 30% in a quarter for the first time ever.
I think it says a lot of our operating teams, that when faced with the challenges of the global pandemic, they stayed focused on our long-term enterprise strategy and continue to make progress toward our long-term margin performance goal of 28% plus.
After-tax return on capital was a record 32.1%, and free cash flow was solid at $541 million with a conversion of 81% of net income, in line with typical seasonality for Q1.
We continue to expect a 100% plus conversion for the full year.
As planned, we repurchased 250 million of our shares this quarter, and the effective tax rate was 22.4%, slightly below prior year.
So in summary, the first quarter was solid for ITW with broad-based organic growth of 6%, strong profitability leverage, 19% earnings growth, 45% incremental profitability and record operating margin and earnings per share performance.
And the information on the left side of the page summarizes the organic revenue growth rate versus prior year by segment for Q1 this year compared to Q4 last year.
And it illustrates the broad-based demand recovery that we're seeing in our businesses.
And obviously, there's a positive impact as the easier comparisons begin on a year-over-year basis.
With the exception of Automotive OEM, every segment had a higher organic growth rate in Q1 than they did in Q4, and six of our seven segments delivered strong organic growth in the quarter, with double-digit growth in Construction Products, and Test & Measurement and Electronics, which were also the most improved segments in this sequential view, going down -- going from down 3% in Q4 to up 11% in Q1.
Welding improved eight percentage points, growing 6% in Q1, providing further evidence that the industrial capex recovery is beginning to take hold as visibility and confidence is coming back.
At the enterprise level, ITW's organic growth rate went from down 1% in Q4 to up 6%.
And I would just highlight that this is 6% organic growth with one of our segments, Food Equipment, while on its way to recovery is still down 10% year-over-year.
As we go through the segment slides, you'll see that this robust organic growth, combined with strong enterprise initiative impact contributed to some pretty strong operating margin performance in our segments.
So let's go into a little more detail for each segment, starting with Automotive OEM.
And the demand recovery in the fourth quarter continued this quarter with organic growth of 8% and total revenue growth of 13%.
North America revenue was down 2% as customers continue to adjust their production schedules in response to the well-publicized shortage of certain components, including semiconductor chips.
We estimate this impacted our Q1 sales by about $25 million, and it is likely to continue to impact our revenues to the tune of about $50 million in Q2 and another $50 million in the second half of the year.
As you can appreciate, the situation is obviously pretty fluid, but as we sit here today, that is our best estimate, and that is also what we embedded in our updated guidance.
Looking past the near-term supply chain issues affecting the auto industry, we're pretty optimistic about the medium-term growth prospects as consumer demand remains strong and dealer inventories are very low by historical standards.
By region, North America being down in Q1 was more than offset by Europe, which was up 4%, and China up 58%.
And finally, the team delivered solid operating margin performance of 24.1%, an improvement of 320 basis points.
So, revenue was down 7%, with organic revenue down 10%, but like I said, much improved versus Q4.
And there are solid signs that demand is beginning to recover, as evidenced by orders picking up and a backlog that is up significantly versus prior year.
Overall, North America was down 6%, with equipment down only 1% as compared to a 22% decline in Q4.
Institutional, which represents about 35% of our North American equipment business was down 7%, with healthcare about flat and education still down about 10%.
Restaurants, which represents 25% of our equipment business was down in the mid-teens, with full-service restaurants down about 30%, but fast casual up low single-digits.
Retail, which is now 25% of the business, was up more than 20% as a result of strong demand and new product rollouts.
International was down 15% and is really a tale of two regions.
As you would expect, Europe was down 22% due to COVID-19-related lockdowns.
And on the other hand, Asia-Pacific was up 44%, with China up 99%.
Overall, equipment sales were down 4% and service down 19%.
Test & Measurement and Electronics delivered revenue growth of 14% with 11% organic growth.
Test & Measurement was up 7% with continued strength in semiconductors and healthcare end markets now supplemented by strengthening demand in the capital equipment businesses as evidenced by the Instron business growing 12%.
The Electronics business grew 16%, with strong demand for clean room technology products, automotive applications, and consumer electronics.
Operating margin of 28.4% was up 330 basis points.
Moving to slide 6, as I mentioned earlier, we saw a strong sequential improvement in Welding as the segment delivered organic growth of 6%, the highest growth rate in almost three years.
The commercial business, which serves smaller businesses and individual users, usually leads the way in a recovery, and Q1 was their third quarter in a row with double-digit growth, up 17% this quarter.
The industrial business continued its sequential improvement trend and was down only 1% with customer capex spend picking up and backlogs building.
Overall, equipment sales were up 10% and consumables were flat versus prior year.
North America was up 7% and international growth of 4% was primarily driven by recovery in China and some early signs of demand picking up in oil and gas.
Solid volume leverage and enterprise initiatives contributed to a record margin performance of 30.3%, which, as I said, marked the first time an ITW segment delivered operating margins above 30%.
Polymers & Fluids delivered organic growth of 9%, with Polymers up 16%, driven by strength in MRO applications, particularly for heavy industries.
The automotive aftermarket business continued to benefit from strong retail sales with organic growth of 9%, while fluids, which has a larger presence in Europe was down 1%.
Operating margin benefited from solid volume leverage and enterprise initiatives to deliver margins of 25.7%.
Moving to slide 7, construction was the fastest-growing segment this quarter with organic growth of 13%.
North America was up 12%, with continued strong demand in residential renovation and in the home center channel.
Commercial construction, which is only about 15% of our U.S. sales was up 3%.
European sales grew 19% with double-digit growth in the UK and Continental Europe.
Australia and New Zealand grew 7% with strength in both residential and commercial markets.
Operating margin of 27.6% was an improvement of 420 basis points.
Specialty revenues were up 10%, with organic revenue of 7% and positive growth in all regions.
North America was up 6%; Europe, up 5%; and Asia Pacific was up 24%.
Demand for consumer packaging remained solid at 6%.
And per our usual process, and with the caveat that we're only one quarter into the New Year and a significant number of uncertainties and challenges are still in front of us, we are raising our guidance on all key performance metrics, including organic growth, operating margin and EPS.
In doing so, we've obviously factored in our solid Q1 results.
And per our usual process, we are projecting current levels of demand exit in Q1, into the future and addressing them for typical seasonality.
And as discussed, we've made an allowance for the estimated impact of semiconductor chip shortages on our Auto OEM customers.
The outcome of that exercise is an organic growth forecast of 10% to 12% at the enterprise level.
This compares to a prior organic growth guidance of 7% to 10%.
Foreign currency at today's exchange rates adds 2 percentage points to revenue for total revenue growth forecast of 12% to 14%.
As you saw, we're off to a strong start on operating leverage and enterprise initiatives, and we are raising our operating margin guidance by 100 basis points to a new range of 25% to 26%, which incorporates all known raw material cost increases and the corresponding pricing actions.
Relative to 2020, our 2021 operating margins of 25% to 26% are 250 basis points higher at the midpoint and they are almost 150 basis points higher than our pre-COVID 2019 operating margins of 24.1%.
As we continue to make progress toward our long-term performance goal of 28% plus, as I mentioned earlier.
Our incremental margins for the full year are expected to be above our typical 35% to 40% range.
Finally, we are raising our GAAP earnings per share guidance by $0.60 and or 8% to a new range of $8.20 to $8.60.
The new midpoint of $8.40 represents an earnings growth rate of 27% versus prior year and a 9% increase relative to pre-COVID 2019 earnings per share of $7.74.
A few final housekeeping items to wrap it up, with no changes to: one, the forecast for free cash flow; two, our plan to repurchase approximately $1 billion of our own shares; and three, our expected tax rate of 23% to 24%.
As per usual process, our guidance is for the core business only and excludes the previously announced acquisition of the MTS Test & Simulation business.
The process to close the acquisition by midyear remains on track.
And once the acquisition closes, we'll provide an update.
As we've said before, we do not expect a material financial impact to earnings in 2021.
So in summary, a quarter of quality execution in a challenging environment, and as a result, we're off to a solid start to the year.

user
compname reports q1 earnings per share of $2.11.
q1 gaap earnings per share $2.11.
q1 revenue rose 10 percent to $3.5 billion.
sees fy gaap earnings per share $8.20 to $8.60.
plans to repurchase approximately $1 billion of its shares in 2021 and expects an effective tax rate of 23 to 24 percent.

assistant