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ITW Reports Second-Quarter 2017 Results

Second-quarter highlights:

  • GAAP EPS of $1.69, an increase of 16%
  • Total revenue of $3.6 billion, an increase of 4.9%; organic growth of 2.6%
  • Operating margin of 24.3%, an increase of 120 bps and an all-time record for the company
  • Company now expects 2017 earnings to be in the range of $6.32 to $6.52 per share

GLENVIEW, Ill., July 24, 2017 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE:ITW) today reported its second-quarter 2017 results.

Second-quarter GAAP earnings were $1.69 per share, an increase of 16% versus the second quarter of 2016. Revenue grew 4.9% to $3.6 billion. Organic revenue increased 2.6% while the 2016 acquisition of Engineered Fasteners & Components (EF&C) added 3.5% to revenue. Foreign currency translation reduced revenue by 1.2%.

Operating income of $874 million for the second quarter was up 10% and was the highest quarterly income total in the company’s history. Operating margin for the quarter was 24.3%, an increase of 120 basis points. Excluding the margin impact from EF&C, operating margin was 24.9%, an increase of 180 basis points year-on-year with 100 basis points of structural margin improvement from Enterprise Initiatives. After-tax return on invested capital was 24.8%, an improvement of 190 basis points. Second-quarter net income was $587 million.

“Our second quarter performance reflects continued progress in our focus on leveraging ITW’s differentiated business model and diversified high-quality business portfolio to full potential,” said E. Scott Santi, Chairman and Chief Executive Officer. “I once again thank the entire ITW team for the great job that they continue to do in serving our customers and executing our strategy with excellence. Due to their efforts, ITW is well-positioned to continue to deliver differentiated performance through the balance of 2017 and beyond.”

Organic revenue growth was positive in six of seven segments: 4% in Automotive OEM, 4% in Test & Measurement/Electronics, 4% in Specialty Products, 3% in Welding, 2% in Construction Products, and 1% in Food Equipment. Polymers & Fluids was down 1%.

During the second quarter, the company recorded an EPS benefit of $0.03 per share related to a legal settlement. Excluding this item, second quarter earnings were $1.66 per share, an increase of 14% versus the prior year.

Full-Year and Third Quarter 2017 Guidance
As a result of the company’s strong second quarter results, ITW is raising its 2017 full-year EPS guidance by $0.12 at the mid-point. The company now expects earnings to be in the range of $6.32 to $6.52 per share, up from prior guidance of $6.20 to $6.40 per share, with organic revenue growth of 2 to 4%. ITW expects operating margin of approximately 24% and free cash flow to exceed 100% of net income. The company expects an effective tax rate of approximately 29%.

For the third quarter 2017, the company expects earnings to be in the range of $1.57 to $1.67 per share with organic growth of 1 to 3%.

The company’s third quarter and revised full-year EPS guidance does not include any EPS benefit from the previously disclosed legal settlement beyond the $0.03 per share recorded in the second quarter.

Non-GAAP Measures
This earnings release contains certain 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, operating margin, free cash flow, effective tax rate and after-tax return on invested capital. 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 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 Six Months Ended
June 30, June 30,
In millions except per share amounts2017 2016 2017 2016
Operating Revenue$3,599 $3,431 $7,070 $6,705
Cost of revenue2,087 1,967 4,091 3,863
Selling, administrative, and research and development expenses586 617 1,191 1,214
Amortization and impairment of intangible assets52 55 105 114
Operating Income874 792 1,683 1,514
Interest expense(65) (58) (129) (116)
Other income (expense)10 17 14 21
Income Before Taxes819 751 1,568 1,419
Income taxes232 226 445 426
Net Income$587 $525 $1,123 $993
Net Income Per Share:
Basic$1.70 $1.47 $3.25 $2.76
Diluted$1.69 $1.46 $3.23 $2.75
Cash Dividends Per Share:
Paid$0.65 $0.55 $1.30 $1.10
Declared$0.65 $0.55 $1.30 $1.10
Shares of Common Stock Outstanding During the Period:
Average344.7 356.6 345.4 359.3
Average assuming dilution347.5 358.5 348.3 361.2


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millionsJune 30, 2017 December 31, 2016
Assets
Current Assets:
Cash and equivalents$2,496 $2,472
Trade receivables2,629 2,357
Inventories1,199 1,076
Prepaid expenses and other current assets246 218
Total current assets6,570 6,123
Net plant and equipment1,726 1,652
Goodwill4,675 4,558
Intangible assets1,366 1,463
Deferred income taxes488 449
Other assets1,097 956
$15,922 $15,201
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt$691 $652
Accounts payable582 511
Accrued expenses1,172 1,202
Cash dividends payable224 226
Income taxes payable157 169
Total current liabilities2,826 2,760
Noncurrent Liabilities:
Long-term debt7,360 7,177
Deferred income taxes121 134
Other liabilities841 871
Total noncurrent liabilities8,322 8,182
Stockholders’ Equity:
Common stock6 6
Additional paid-in-capital1,196 1,188
Retained earnings20,180 19,505
Common stock held in treasury(15,095) (14,638)
Accumulated other comprehensive income (loss)(1,516) (1,807)
Noncontrolling interest3 5
Total stockholders’ equity4,774 4,259
$15,922 $15,201


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended June 30, 2017
Dollars in millionsTotal
Revenue

Operating
Income

Operating
Margin

Automotive OEM$820 $182 22.3%
Food Equipment529 139 26.4%
Test & Measurement and Electronics519 114 21.9%
Welding385 105 27.2%
Polymers & Fluids437 94 21.4%
Construction Products425 102 24.0%
Specialty Products490 139 28.3%
Intersegment(6) %
Total Segments3,599 875 24.3%
Unallocated (1) %
Total Company$3,599 $874 24.3%


Six Months Ended June 30, 2017
Dollars in millionsTotal
Revenue

Operating
Income

Operating
Margin

Automotive OEM$1,648 $384 23.3%
Food Equipment1,026 264 25.8%
Test & Measurement and Electronics999 210 21.0%
Welding772 212 27.4%
Polymers & Fluids863 182 21.0%
Construction Products820 191 23.3%
Specialty Products953 263 27.6%
Intersegment(11) %
Total Segments7,070 1,706 24.1%
Unallocated (23) %
Total Company$7,070 $1,683 23.8%


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q2 2017 vs. Q2 2016 Favorable/(Unfavorable)
Operating RevenueAutomotive
OEM

Food
Equipment

Test &
Measurement
and Electronics

Welding
Polymers &
Fluids

Construction
Products

Specialty
Products

Total
ITW

Organic4.4% 0.6% 4.3% 3.3% (1.0)% 1.6% 3.9% 2.6%
Acquisitions/
Divestitures
19.0% % % % % % (1.4)% 3.5%
Translation(1.2)% (2.0)% (1.8)% (0.4)% (0.3)% (1.2)% (1.4)% (1.2)%
Operating Revenue22.2% (1.4)% 2.5% 2.9% (1.3)% 0.4% 1.1% 4.9%


Q2 2017 vs. Q2 2016 Favorable/(Unfavorable)
Change in Operating MarginAutomotive
OEM

Food
Equipment

Test &
Measurement
and Electronics

Welding
Polymers &
Fluids

Construction
Products

Specialty
Products

Total
ITW

Operating Leverage70 bps10 bps120 bps60 bps(20) bps40 bps80 bps50 bps
Changes in Variable Margin & OH Costs(70) bps90 bps200 bps10 bps100 bps(140) bps100 bps110 bps
Total Organic 100 bps 320 bps 70 bps 80 bps (100) bps 180 bps 160 bps
Acquisitions/
Divestitures
(270) bps 30 bps(60) bps
Restructuring/Other(80) bps40 bps10 bps160 bps(30) bps70 bps20 bps20 bps
Total Operating Margin Change (350) bps 140 bps 330 bps 230 bps 50 bps (30) bps 230 bps 120 bps
Total Operating Margin % *22.3% 26.4% 21.9% 27.2% 21.4% 24.0% 28.3% 24.3%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets50 bps80 bps320 bps40 bps400 bps60 bps120 bps150 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.10) on GAAP net income diluted earnings per share for the second quarter of 2017.


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
1H 2017 vs 1H 2016 Favorable/(Unfavorable)
Operating RevenueAutomotive
OEM

Food
Equipment

Test &
Measurement
and Electronics

Welding
Polymers
& Fluids

Construction
Products

Specialty
Products

Total
ITW

Organic6.7% 1.3% 4.9% 1.5% 0.2% 2.2% 2.4% 3.0%
Acquisitions/
Divestitures
19.2% % % % % % (1.1)% 3.6%
Translation(1.7)% (2.2)% (2.0)% (0.4)% 0.1% (0.7)% (1.3)% (1.2)%
Operating Revenue24.2% (0.9)% 2.9% 1.1% 0.3% 1.5% % 5.4%


1H 2017 vs. 1H 2016 Favorable/(Unfavorable)
Change in Operating MarginAutomotive
OEM

Food
Equipment

Test &
Measurement
and Electronics

Welding
Polymers
& Fluids

Construction
Products

Specialty
Products

Total
ITW

Operating Leverage90 bps20 bps140 bps40 bps 50 bps60 bps60 bps
Changes in Variable Margin & OH Costs(50) bps40 bps250 bps110 bps110 bps(20) bps90 bps110 bps
Total Organic40 bps60 bps390 bps150 bps110 bps30 bps150 bps170 bps
Acquisitions/
Divestitures
(270) bps 30 bps(60) bps
Restructuring/Other(50) bps40 bps 150 bps(70) bps20 bps(20) bps10 bps
Total Operating Margin Change(280) bps100 bps390 bps300 bps40 bps50 bps160 bps120 bps
Total Operating Margin % *23.3% 25.8% 21.0% 27.4% 21.0% 23.3% 27.6% 23.8%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets60 bps80 bps340 bps50 bps410 bps60 bps130 bps150 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.21) on GAAP net income diluted earnings per share for the first half of 2017.


Full Year 2016 vs Full Year 2015 Favorable/(Unfavorable)
Operating RevenueAutomotive
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 Revenue13.3% 0.7% 0.3% (10.0)% (1.2)% 1.4% % 1.4%


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, December 31,
Dollars in millions2017 2016 2017 2016 2016
Operating income$874 $792 $1,683 $1,514 $3,064
Tax rate28.4% 30.0% 28.4% 30.0% 30.0%
Income taxes(248) (238) (477) (454) (919)
Operating income after taxes$626 $554 $1,206 $1,060 $2,145
Invested capital:
Trade receivables$2,629 $2,413 $2,629 $2,413 $2,357
Inventories1,199 1,145 1,199 1,145 1,076
Net plant and equipment1,726 1,580 1,726 1,580 1,652
Goodwill and intangible assets6,041 5,907 6,041 5,907 6,021
Accounts payable and accrued expenses(1,754) (1,635) (1,754) (1,635) (1,713)
Other, net488 349 488 349 223
Total invested capital$10,329 $9,759 $10,329 $9,759 $9,616
Average invested capital$10,105 $9,768 $9,942 $9,698 $9,780
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) (112) (112) (91)
Adjusted average invested capital$10,105 $9,656 $9,942 $9,586 $9,689
Adjusted return on average invested capital24.8% 22.9% 24.3% 22.1% 22.1%


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
FREE CASH FLOW (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
Dollars in millions2017 2016 2017 2016
Net cash provided by operating activities$464 $535 $927 $1,014
Less: Additions to plant and equipment(77) (64) (141) (121)
Free cash flow$387 $471 $786 $893
Net income$587 $525 $1,123 $993
Free cash flow to net income conversion rate66%*90% 70%*90%
* Excluding $115 million related to an additional discretionary pension contribution, the free cash flow to net income conversion rate for the three months ended June 30, 2017 would have been 85%. Excluding $160 million of discretionary pension contributions for the six months ended June 30, 2017 as compared to the prior year period, the free cash flow to net income conversion rate would have been 84%.


Three Months Ended Six Months Ended
June 30, June 30,
Dollars in millions2017 2017
Free cash flow$387 $786
Pension contribution adjustment115 160
Adjusted free cash flow$502 $946
Net income$587 $1,123
Adjusted free cash flow to net income conversion rate85% 84%


Contact: Mike Drazin 224.661.7433 or mdrazin@itw.com

Source:Illinois Tool Works