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ITW Reports Fourth-Quarter and Full-Year 2016 Results

Fourth-quarter highlights:

  • Total revenue was $3.4 billion, an increase of 4%; organic growth was 2%
  • Operating margin was 21.8%, an increase of 110 bps
  • GAAP EPS was $1.45 including $0.06 of non-recurring items, an increase of 18%

Full-year highlights:

  • Total revenue was $13.6 billion, an increase of 1%; organic growth was 1%
  • Operating margin was 22.5%, an increase of 110 bps; 22.8% excluding EF&C
  • After-tax ROIC was 22.1%, an increase of 170 bps
  • GAAP EPS was $5.70, an increase of 11%

GLENVIEW, Ill., Jan. 25, 2017 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE:ITW) today reported its fourth-quarter and full-year 2016 results.

“The fourth quarter closed out a year of record financial performance and strong execution by the ITW team. In 2016, we grew EPS 11%, improved operating margin by 110 basis points to an all-time high of 22.5% and increased after tax return on invested capital 170 basis points to a record 22.1%,” said E. Scott Santi, Chairman and Chief Executive Officer. “Throughout 2016, we continued to invest in our businesses to sustain above-market organic growth, strengthened our highly differentiated business portfolio and returned more than $2.8 billion of surplus capital to shareholders. We continue to work hard to push our performance to best-in-class levels, and we are well-positioned to deliver continued progress and strong results in 2017.

Fourth-quarter GAAP earnings were $1.45 per share, an increase of 18% versus the fourth quarter of 2015. Foreign currency translation reduced EPS by 2% year-on-year. Revenue grew 4% year-on-year to $3.4 billion. Organic revenue increased 2% while the 2016 acquisition of Engineered Fasteners & Components (EF&C) added 4% to revenue. Foreign currency translation reduced revenue by 2% year-on-year and Product Line Simplification (PLS) reduced revenue by approximately 1%.

During the fourth quarter the company recorded a net EPS benefit of $0.06 per share, related to a dividend distribution from its investment in Wilsonart, which was partially offset by one-time charges related to two small divestitures. Excluding these non-recurring items, fourth quarter earnings were $1.39 per share, an increase of 13% versus the prior year.

Operating income was $742 million and operating margin for the quarter was 21.8%, an increase of 110 basis points year-on-year. Excluding the margin dilution from the 2016 acquisition of EF&C, operating margin was 22.2%, an increase of 150 basis points year-on-year with 130 basis points of margin expansion coming from Enterprise Initiatives. Fourth-quarter net income was $507 million and the company converted 117 percent of net income to free cash flow.

Organic revenue growth was positive in five of seven segments; 7% in Automotive OEM, 3% in Food Equipment and Construction Products, 2% in Polymers & Fluids, 1% in Specialty Products with Test & Measurement/Electronics flat and a decline of 8% in Welding.

Operating margin improved in all seven segments to 24.7% in Food Equipment, 24.4% in Welding, 24% in Specialty Products, 23% in Automotive OEM (25.2% excluding the margin dilution from EF&C), 21.4% in Construction Products, 20.1% in Test & Measurement/Electronics and 19% in Polymers & Fluids.

Full-year 2016 GAAP earnings were $5.70 per share, an increase of 11%. Total revenue increased 1% to $13.6 billion with organic growth of 1%. The acquisition of EF&C increased revenue 2%. Foreign currency translation reduced revenue by 2%.

Full-year operating margin was 22.5%, up 110 basis points versus 2015, or up 140 basis points to 22.8% excluding the margin dilution impact from EF&C. ITW converted 100% of net income to free cash flow for the year and generated 22.1% after-tax return on invested capital. For the full year, ITW paid $821 million in dividends to shareholders and repurchased $2 billion of its own shares.

Full-Year and First Quarter 2017 Guidance
ITW is reaffirming its 2017 full-year performance expectations. The company expects 2017 earnings to be in the range of $6.00 to $6.20 per share with organic growth of 1.5 to 3.5%. ITW also expects operating margin to exceed 23.5% and free cash flow conversion to exceed 100% for the full-year.

The company expects first quarter 2017 earnings to be in the range of $1.39 to $1.49 per share with organic growth of 1 to 2%. The company expects operating margin to exceed 22.5%.

Non-GAAP Measures
This earnings release contains non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures is included in the attached supplemental reconciliation schedule.

Forward-looking Statement
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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 third quarter of 2016.

About ITW
ITW (NYSE:ITW) is a Fortune 200 global multi-industrial manufacturing leader with revenues totaling $13.6 billion in 2016. 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 50,000 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 Twelve Months Ended
December 31, December 31,
In millions except per share amounts2016 2015 2016 2015
Operating Revenue$3,399 $3,275 $13,599 $13,405
Cost of revenue2,006 1,941 7,896 7,888
Selling, administrative, and research and development expenses 597 598 2,415 2,417
Amortization and impairment of intangible assets54 57 224 233
Operating Income742 679 3,064 2,867
Interest expense(63) (58) (237) (226)
Other income (expense)47 13 81 78
Income Before Taxes726 634 2,908 2,719
Income taxes219 184 873 820
Net Income$507 $450 $2,035 $1,899
Net Income Per Share:
Basic$1.46 $1.24 $5.73 $5.16
Diluted$1.45 $1.23 $5.70 $5.13
Cash Dividends Per Share:
Paid$0.65 $0.55 $2.30 $2.005
Declared$0.65 $0.55 $2.40 $2.07
Shares of Common Stock Outstanding During the Period:
Average348.3 363.7 355.0 367.9
Average assuming dilution350.4 365.9 357.1 370.1


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millionsDecember 31, 2016 December 31, 2015
Assets
Current Assets:
Cash and equivalents$2,472 $3,090
Trade receivables2,357 2,203
Inventories1,076 1,086
Prepaid expenses and other current assets218 341
Total current assets6,123 6,720
Plant and equipment1,652 1,577
Goodwill4,558 4,439
Intangible assets1,463 1,560
Deferred income taxes449 346
Other assets956 1,087
$15,201 $15,729
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt$652 $526
Accounts payable511 449
Accrued expenses1,202 1,136
Cash dividends payable226 200
Income taxes payable169 57
Total current liabilities2,760 2,368
Noncurrent Liabilities:
Long-term debt7,177 6,896
Deferred income taxes134 256
Other liabilities871 981
Total noncurrent liabilities8,182 8,133
Stockholders’ Equity:
Common stock:6 6
Additional paid-in-capital1,188 1,135
Retained earnings19,505 18,316
Common stock held in treasury(14,638) (12,729)
Accumulated other comprehensive income (loss) (1,807) (1,504)
Noncontrolling interest5 4
Total stockholders’ equity4,259 5,228
$15,201 $15,729


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended December 31, 2016
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$773 $178 23.0%
Food Equipment532 132 24.7%
Test & Measurement and Electronics 487 98 20.1%
Welding361 88 24.4%
Polymers & Fluids408 77 19.0%
Construction Products386 83 21.4%
Specialty Products456 109 24.0%
Intersegment(4) %
Total Segments3,399 765 22.5%
Unallocated (23)%
Total Company$3,399 $742 21.8%


Twelve Months Ended December 31, 2016
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$2,864 $690 24.1%
Food Equipment2,110 537 25.4%
Test & Measurement and Electronics 1,974 372 18.9%
Welding1,486 370 24.9%
Polymers & Fluids1,691 343 20.3%
Construction Products1,609 361 22.4%
Specialty Products1,885 482 25.6%
Intersegment(20) %
Total Segments13,599 3,155 23.2%
Unallocated (91)%
Total Company$13,599 $3,064 22.5%


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q4 2016 vs. Q4 2015 Favorable/(Unfavorable)
Operating
Revenue
Automotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Organic7.0%2.6%(0.3)%(7.9)%2.1%2.7%1.2%1.5%
Acquisitions/
Divestitures
20.8%%%%%(0.2)%(0.5)%3.8%
Translation(2.0)%(2.8)%(2.1)%(0.7)%(0.8)%(0.5)%(1.2)%(1.6)%
Operating Revenue 25.8%(0.2)%(2.4)%(8.6)%1.3%2.0%(0.5)%3.7%


Q4 2016 vs. Q4 2015 Favorable/(Unfavorable)
Change in
Operating Margin
Automotive OEMFood EquipmentTest &
Measurement
and Electronics
WeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage100 bps50 bps(10) bps(160) bps60 bps60 bps30 bps40 bps
Changes in Variable Margin & OH Costs160 bps20 bps230 bps320 bps40 bps120 bps180 bps130 bps
Total Organic260 bps70 bps220 bps160 bps100 bps180 bps210 bps170 bps
Acquisitions/
Divestitures
(220) bps- - - - (10) bps20 bps(30) bps
Restructuring/Other60 bps10 bps(20) bps30 bps(20) bps(20) bps(130) bps(30) bps
Total Operating Margin Change100 bps80 bps200 bps190 bps80 bps150 bps100 bps110 bps
Total Operating Margin % *23.0%24.7%20.1%24.4%19.0%21.4%24.0%21.8%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets50 bps80 bps380 bps60 bps450 bps60 bps140 bps170 bps


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Full Year 2016 vs Full Year 2015 Favorable/(Unfavorable)
Operating
Revenue
Automotive
OEM
Food
Equipment
Test &
Measurement
and
Electronics
Welding Polymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Organic5.1%2.8%1.8%(9.1)%1.3%3.0%1.2%1.2%
Acquisitions/
Divestitures
9.7%%%%(0.2)%(0.2)%(0.1)%1.7%
Translation(1.5)%(2.1)%(1.5)%(0.9)%(2.3)%(1.4)%(1.1)%(1.5)%
Operating Revenue 13.3%0.7%0.3%(10.0)%(1.2)%1.4%%1.4%


Full Year 2016 vs Full Year 2015 Favorable/(Unfavorable)
Change in
Operating Margin
Automotive OEMFood EquipmentTest &
Measurement
and Electronics
Welding Polymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage80 bps60 bps60 bps(190) bps30 bps80 bps30 bps30 bps
Changes in Variable Margin & OH Costs50 bps80 bps190 bps210 bps40 bps180 bps200 bps110 bps
Total Organic130 bps140 bps250 bps20 bps70 bps260 bps230 bps140 bps
Acquisitions/
Divestitures
(160) bps- - - - - 10 bps(30) bps
Restructuring/Other20 bps30 bps10 bps(50) bps- (10) bps(10) bps-
Total Operating Margin Change(10) bps170 bps260 bps(30) bps70 bps250 bps230 bps110 bps
Total Operating Margin % *24.1%25.4%18.9%24.9%20.3%22.4%25.6%22.5%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets40 bps80 bps380 bps80 bps430 bps60 bps150 bps170 bps


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Full Year 2015 vs Full Year 2014 Favorable/(Unfavorable)
Operating
Revenue
Automotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
Welding Polymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Organic5.8%3.4%(5.2)%(7.6)%(2.0)%3.7%(2.3)%(0.4)%
Acquisitions/
Divestitures
(0.2)%%%(0.1)%(1.0)%(0.5)%%(0.2)%
Translation(8.0)%(7.1)%(5.5)%(3.1)%(8.2)%(10.2)%(6.0)%(6.8)%
Operating Revenue(2.4)%(3.7)%(10.7)%(10.8)%(11.2)%(7.0)%(8.3)%(7.4)%


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
Three Months Ended Twelve Months Ended
December 31, December 31,
Dollars in millions2016 2015 2016 2015 2012
Operating income$742 $679 $3,064 $2,867 $2,475
Adjustment for Decorative Surfaces (143)
Adjusted operating income742 679 3,064 2,867 2,332
Tax rate (as adjusted for discrete charge in 4Q 2012)30.0% 29.0% 30.0% 30.1% 29.2%
Income taxes(222) (196) (919) (864) (681)
Operating income after taxes$520 $483 $2,145 $2,003 $1,651
Invested capital:
Trade receivables$2,357 $2,203 $2,357 $2,203 $2,742
Inventories1,076 1,086 1,076 1,086 1,585
Net plant and equipment1,652 1,577 1,652 1,577 1,994
Goodwill and intangible assets6,021 5,999 6,021 5,999 7,788
Accounts payable and accrued expenses(1,713) (1,585) (1,713) (1,585) (2,068)
Other, net223 280 223 280 773
Total invested capital$9,616 $9,560 $9,616 $9,560 $12,814
Average invested capital$9,902 $9,709 $9,780 $9,943 $13,140
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) (59) (118) (91) (123) (274)
Adjusted for Industrial Packaging (1,504)
Adjusted average invested capital$9,843 $9,591 $9,689 $9,820 $11,362
Adjusted return on average invested capital21.1% 20.1% 22.1% 20.4% 14.5%

A reconciliation of the 2012 effective tax rate to the adjusted tax rate excluding the discrete tax charge is as follows:

Twelve Months Ended
Dollars in millionsDecember 31, 2012
Income Taxes Tax Rate
As reported$973 30.3%
Discrete tax charge (36) (1.1)%
As adjusted$937 29.2%


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
FREE CASH FLOW (UNAUDITED)
Three Months Ended Twelve Months Ended
December 31, December 31,
Dollars in millions2016 2015 2016 2015
Net cash provided by operating activities$664 $703 $2,302 $2,299
Less: Additions to plant and equipment(71) (75) (273) (284)
Free cash flow$593 $628 $2,029 $2,015
Net income$507 $450 $2,035 $1,899
Free cash flow to net income conversion rate 117% 140% 100% 106%


2012 ADJUSTED INCOME PER SHARE FROM CONTINUING OPERATIONS - DILUTED (UNAUDITED)
Twelve Months Ended
December 31, 2012
As reported$4.72
Decorative Surfaces net gain1.34
Decorative Surfaces equity interest(0.04)
Decorative Surfaces operating results0.21
As adjusted for the Decorative Surfaces business$3.21


2016 ADJUSTED NET INCOME PER SHARE - DILUTED (UNAUDITED)
Three Months Ended
December 31, 2016
As reported$1.45
Gain related to Wilsonart dividend (0.10)
Loss related to divestitures0.04
As adjusted$1.39


Contact: Mike Drazin 224.661.7433 or mdrazin@itw.com

Source:Illinois Tool Works