ITW Reports Record Third Quarter 2016 Financial Results

  • GAAP EPS of $1.50 (+8%)
  • Record quarterly operating margin of 23.1% (23.9% excluding EF&C acquisition dilution)
  • Record quarterly operating income of $808 million (+6%)
  • Record after-tax ROIC of 23% (+140 basis points vs. year ago)
  • Total revenue +4%, Organic revenue +2% (including ~1% negative PLS impact)
  • FCF of 101% of net income
  • Raising full-year 2016 GAAP EPS guidance mid-point

GLENVIEW, Ill., Oct. 20, 2016 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE:ITW) today reported third quarter 2016 diluted earnings per share (EPS) of $1.50, an 8% increase compared to the year-ago period. Currency translation reduced EPS by $0.02 in the quarter. Operating margin increased 40 basis points to 23.1%, including 80 basis points of margin dilution from the third quarter 2016 acquisition of Engineered Fasteners & Components (EF&C). Excluding the EF&C dilution impact, third quarter operating margin was 23.9%. Operating income of $808 million was up 6%, and after-tax return on invested capital increased by 140 basis points to 23%. Organic revenue increased 2% and the company’s ongoing Product Line Simplification (PLS) activities reduced organic revenue growth by approximately 1 percentage point.

"The ITW team delivered another quarter of quality execution and earnings growth marked by all-time record operating income and continued strong margin expansion driven by our Enterprise Strategy initiatives. In addition, continued progress in executing our pivot to growth in combination with our diversified portfolio of seven highly differentiated businesses allowed us to deliver positive organic growth in the third quarter despite a macro environment that remains challenging,” said E. Scott Santi, Chairman and Chief Executive Officer.

Third Quarter Highlights

  • Total revenue was $3.5 billion, an increase of 4%. Organic revenue grew 2% with 1% growth in North America and 3% in International.
  • Operating margin improved 40 basis points to 23.1%, an all-time record for the company, as enterprise initiatives contributed 120 basis points. The acquisition of EF&C diluted operating margin by 80 basis points. Excluding the EF&C dilution impact, third quarter operating margin was 23.9%.
  • Operating income grew 6% to an all-time quarterly record of $808 million.
  • GAAP EPS of $1.50 increased 8% due to strong margin performance. Currency translation reduced EPS by $0.02 in the quarter.
  • After-tax return on invested capital was 23%, an all-time high and an increase of 140 basis points.
  • Free cash flow was solid at 101% of net income. Share repurchases totaled $500 million and the company announced an 18% dividend increase on August 5, 2016.
  • Six of seven segments achieved positive organic revenue growth as Automotive OEM and Test & Measurement/Electronics both grew 7%, Construction Products grew 2%, Polymers & Fluids and Food Equipment Group both grew 1% and Specialty Products grew 0.1%. Welding declined by 9%.
  • All seven segments achieved operating margin at or above 21% with Food Equipment at 27.4%, Welding at 26.5%, Specialty Products at 26.1%, Automotive OEM at 21.8% (25.5% excluding EF&C), Construction at 22.6%, Test & Measurement/Electronics and Polymers & Fluids both at 21%.

2016 Guidance

ITW is raising its 2016 full-year GAAP EPS guidance range to $5.56 to $5.66, a year-over-year increase of 9% at the mid-point. Consistent with prior guidance the full-year organic growth forecast is 1 to 2% and includes approximately 1 percentage point of PLS impact. Operating margin is forecast to exceed 22.5%.

For the fourth quarter 2016, the company expects GAAP EPS to be in a range of $1.31 to $1.41, an increase of 11% at the mid-point. Organic revenue is forecast to be 0 to 2%, and operating margin to be approximately 21.5%. Guidance is based on current foreign exchange rates.

Forward-looking Statement
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding diluted earnings per share, organic revenue growth, the impact of product line simplification activities and enterprise initiatives, operating margin, after-tax return on invested capital and the expected impact of acquisitions on financial results. These statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated. Such factors include those contained in ITW's Form 10-K for 2015 and Form 10-Q for the second quarter of 2016.

About ITW
ITW (NYSE:ITW) is a Fortune 200 global multi-industrial manufacturing leader with revenues totaling $13.4 billion in 2015. The company’s seven industry-leading segments leverage the unique ITW Business Model to drive solid growth with best-in-class margins and returns in markets where highly innovative, customer-focused solutions are required. ITW has more than 51,000 dedicated colleagues in operations around the world who thrive in the company’s unique decentralized and entrepreneurial culture. To learn more about the company and the ITW Business Model, visit www.itw.com.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
In millions except per share amounts2016 2015 2016 2015
Operating Revenue$3,495 $3,354 $10,200 $10,130
Cost of revenue2,027 1,953 5,890 5,947
Selling, administrative, and research and development expenses604 581 1,818 1,819
Amortization and impairment of intangible assets56 59 170 176
Operating Income808 761 2,322 2,188
Interest expense(58) (59) (174) (168)
Other income (expense)13 23 34 65
Income Before Taxes763 725 2,182 2,085
Income Taxes228 214 654 636
Net Income$535 $511 $1,528 $1,449
Net Income Per Share:
Basic$1.51 $1.40 $4.28 $3.92
Diluted$1.50 $1.39 $4.25 $3.90
Cash Dividends Per Share:
Paid$0.55 $0.485 $1.65 $1.455
Declared$0.65 $0.55 $1.75 $1.52
Shares of Common Stock Outstanding During the Period:
Average353.5 365.1 357.3 369.3
Average assuming dilution355.5 367.1 359.3 371.6


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millionsSeptember 30, 2016 December 31, 2015
Assets
Current Assets:
Cash and equivalents$2,299 $3,090
Trade receivables2,496 2,203
Inventories1,167 1,086
Prepaid expenses and other current assets223 341
Total current assets6,185 6,720
Net plant and equipment1,702 1,577
Goodwill4,711 4,439
Intangible assets1,480 1,560
Deferred income taxes467 346
Other assets1,164 1,087
$15,709 $15,729
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt$1,364 $526
Accounts payable582 449
Accrued expenses1,180 1,136
Cash dividends payable228 200
Income taxes payable132 57
Total current liabilities3,486 2,368
Noncurrent Liabilities:
Long-term debt6,329 6,896
Deferred income taxes131 256
Other liabilities970 981
Total noncurrent liabilities7,430 8,133
Stockholders’ Equity:
Common stock6 6
Additional paid-in-capital1,174 1,135
Income reinvested in the business19,223 18,316
Common stock held in treasury(14,147) (12,729)
Accumulated other comprehensive income (loss)(1,468) (1,504)
Noncontrolling interest5 4
Total stockholders’ equity4,793 5,228
$15,709 $15,729


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
Three Months Ended Nine Months Ended Twelve
Months
Ended

December 31,
September 30, September 30,
Dollars in millions2016 2015 2016 2015 2015
Operating income$808 $761 $2,322 $2,188 $2,867
Tax rate30.0% 29.6% 30.0% 30.5% 30.1%
Income taxes(243) (225) (697) (668) (864)
Operating income after taxes$565 $536 $1,625 $1,520 $2,003
Invested capital:
Trade receivables$2,496 $2,339 $2,496 $2,339 $2,203
Inventories1,167 1,153 1,167 1,153 1,086
Net plant and equipment1,702 1,601 1,702 1,601 1,577
Goodwill and intangible assets6,191 6,088 6,191 6,088 5,999
Accounts payable and accrued expenses(1,762) (1,635) (1,762) (1,635) (1,585)
Other, net393 313 393 313 280
Total invested capital$10,187 $9,859 $10,187 $9,859 $9,560
Average invested capital$9,973 $10,038 $9,821 $10,039 $9,943
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)(116) (121) (114) (126) (123)
Adjusted average invested capital$9,857 $9,917 $9,707 $9,913 $9,820
Adjusted return on average invested capital23.0% 21.6% 22.3% 20.5% 20.4%


FREE CASH FLOW
Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in millions2016 2015 2016 2015
Net cash provided by operating activities$624 $706 $1,638 $1,596
Less: Additions to plant and equipment(81) (62) (202) (209)
Free cash flow$543 $644 $1,436 $1,387
Net income$535 $511 $1,528 $1,449
Free cash flow to net income conversion rate101% 126% 94% 96%



ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended September 30, 2016
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$765 $166 21.8%
Food Equipment544 149 27.4%
Test & Measurement and Electronics516 108 21.0%
Welding361 95 26.5%
Polymers & Fluids422 89 21.0%
Construction Products415 94 22.6%
Specialty Products477 125 26.1%
Intersegment(5) %
Total Segments3,495 826 23.7%
Unallocated (18)%
Total Company$3,495 $808 23.1%


Nine Months Ended September 30, 2016
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$2,091 $512 24.5%
Food Equipment1,578 405 25.7%
Test & Measurement and Electronics1,487 274 18.4%
Welding1,125 282 25.1%
Polymers & Fluids1,283 266 20.7%
Construction Products1,223 278 22.7%
Specialty Products1,429 373 26.1%
Intersegment(16) %
Total Segments10,200 2,390 23.4%
Unallocated (68)%
Total Company$10,200 $2,322 22.8%



ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q3 2016 vs. Q3 2015 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest &
Measurement
and Electronics
WeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic6.6%0.7%6.6%(8.5)%0.8%1.5%0.1%1.6%
Acquisitions/
Divestitures
19.2%%%%%(0.2)%%3.5%
Translation(1.0)%(2.0)%(1.3)%(0.4)%(0.8)%0.3%(0.7)%(0.9)%
Operating Revenue24.8%(1.3)%5.3%(8.9)%%1.6%(0.6)%4.2%


Q3 2016 vs. Q3 2015 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage90 bps10 bps190 bps(160) bps20 bps30 bps - 30 bps
Changes in Variable Margin & OH Costs(60) bps110 bps230 bps290 bps120 bps110 bps180 bps100 bps
Total Organic30 bps120 bps420 bps130 bps140 bps140 bps180 bps130 bps
Acquisitions/
Divestitures
(370) bps - - - - - - (80) bps
Restructuring/Other(20) bps(10) bps20 bps40 bps60 bps(190) bps30 bps(10) bps
Total Operating Margin Change(360) bps110 bps440 bps170 bps200 bps(50) bps210 bps40 bps
Total Operating Margin % * 21.8% 27.4% 21.0% 26.5% 21.0% 22.6% 26.1% 23.1%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets80 bps80 bps360 bps60 bps430 bps60 bps140 bps170 bps



ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
YTD 2016 vs YTD 2015 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest &
Measurement
and Electronics
WeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic4.4%2.8%2.5%(9.4)%1.1%3.1%1.2%1.2%
Acquisitions/
Divestitures
6.1%%%%(0.3)%(0.2)%%1.1%
Translation(1.3)%(1.8)%(1.3)%(1.0)%(2.8)%(1.7)%(1.1)%(1.6)%
Operating Revenue9.2%1.0%1.2%(10.4)%(2.0)%1.2%0.1%0.7%


YTD 2016 vs YTD 2015 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage60 bps60 bps70 bps(190) bps40 bps80 bps20 bps20 bps
Changes in Variable Margin & OH Costs20 bps100 bps190 bps180 bps20 bps200 bps210 bps120 bps
Total Organic80 bps160 bps260 bps(10) bps60 bps280 bps230 bps140 bps
Acquisitions/
Divestitures
(140) bps - - - - (10) bps - (20) bps
Restructuring/Other10 bps40 bps - (80) bps10 bps10 bps40 bps -
Total Operating Margin Change(50) bps200 bps260 bps(90) bps70 bps280 bps270 bps120 bps
Total Operating Margin % * 24.5% 25.7% 18.4% 25.1% 20.7% 22.7% 26.1% 22.8%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets40 bps80 bps390 bps90 bps430 bps60 bps150 bps170 bps


Total ITW Operating Revenue
Operating RevenueYTD 2016Full Year 2015Favorable/
(Unfavorable)
Organic1.2%(0.4)%160 bps
Acquisitions/
Divestitures
1.1%(0.2)%130 bps
Translation(1.6)%(6.8)%520 bps
Operating Revenue0.7%(7.4)%810 bps


Investors Contact: Mike Drazin 224.661.7433 mdrazin@itw.com Media Contact: Mallory Ramp 224.661.7431 mramp@itw.com

Source:Illinois Tool Works