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ITW Reports Third-Quarter 2017 Results

Third-Quarter Highlights:

  • GAAP EPS of $1.85 includes $0.14 benefit from a favorable legal settlement; excluding this item EPS was $1.71, an increase of 14%
  • Total revenue of $3.6 billion, an increase of 4%
  • Operating margin of 26.6% includes 220 basis points benefit from the legal settlement; excluding this item operating margin was 24.4%, an increase of 130 bps
  • Updated 2017 full-year outlook: GAAP EPS of $6.62 to $6.72, an increase of $0.25 at the mid-point

GLENVIEW, Ill., Oct. 23, 2017 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE:ITW) today reported its third-quarter 2017 results.

Third-quarter revenue grew 4% to $3.6 billion as organic revenue and foreign currency translation each increased revenue by 2% in the quarter. GAAP EPS of $1.85 includes a $0.14 benefit from a previously disclosed favorable legal settlement. Excluding this item, EPS increased 14% to $1.71. Operating margin was 26.6% and includes a 220 basis point benefit from the settlement. Excluding this item, operating margin was 24.4%, an increase of 130 basis points, with enterprise initiatives contributing 110 basis points of margin improvement.

“In the third quarter, the ITW team continued to execute at a high level and, as a result, delivered another quarter of strong financial results,” said E. Scott Santi, Chairman and Chief Executive Officer. “I continue to be very pleased with our progress in positioning the company to leverage ITW’s differentiated business model and high quality diversified business portfolio to deliver consistent top tier performance.”

Organic revenue growth was positive in six of seven segments led by Specialty Products (+5%), Welding (+4%) and Construction (+4%).

As previously disclosed, the company entered into a confidential legal settlement in 2017, resulting in a favorable pre-tax impact of $80 million on the third quarter 2017 results. The following schedule illustrates the impact of this item on the company’s reported third quarter 2017 financial performance.



$ Millions
Q3’16 As
Reported
Q3’17 As
Reported
Legal
Settlement
Q3’17 Ex
Settlement
Change
year-on-year
Total Revenue$3,495
$3,615
--
+4%
Operating Income$808
$961
+$80$881
+9%
Operating Margin23.1%26.6%+220 bps24.4%+130 bps
EPS$1.50
$1.85
+$0.14$1.71
+14%
After-tax ROIC23.0%26.3%+220 bps24.1%+110 bps

Full-Year and Fourth Quarter 2017 Guidance
ITW is raising its 2017 full-year GAAP EPS guidance by $0.25 at the mid-point to a range of $6.62 to $6.72. The company expects full-year organic revenue growth of 2 to 3% and operating margin of approximately 24.5%.

For the fourth quarter 2017, the company expects GAAP EPS to be in the range of $1.55 to $1.65 and organic growth of 2 to 3%.

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 Nine Months Ended
September 30, September 30,
In millions except per share amounts2017 2016 2017 2016
Operating Revenue$3,615 $3,495 $10,685 $10,200
Cost of revenue2,094 2,027 6,185 5,890
Selling, administrative, and research and development expenses589 604 1,795 1,818
Legal settlement (income)(80) (95)
Amortization and impairment of intangible assets51 56 156 170
Operating Income961 808 2,644 2,322
Interest expense(65) (58) (194) (174)
Other income (expense)10 13 24 34
Income Before Taxes906 763 2,474 2,182
Income Taxes266 228 711 654
Net Income$640 $535 $1,763 $1,528
Net Income Per Share:
Basic$1.86 $1.51 $5.12 $4.28
Diluted$1.85 $1.50 $5.07 $4.25
Cash Dividends Per Share:
Paid$0.65 $0.55 $1.95 $1.65
Declared$0.78 $0.65 $2.08 $1.75
Shares of Common Stock Outstanding During the Period:
Average 343.4 353.5 344.7 357.3
Average assuming dilution 346.0 355.5 347.5 359.3


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millionsSeptember 30, 2017 December 31, 2016
Assets
Current Assets:
Cash and equivalents$2,785 $2,472
Trade receivables2,672 2,357
Inventories1,225 1,076
Prepaid expenses and other current assets230 218
Total current assets6,912 6,123
Net plant and equipment1,759 1,652
Goodwill4,732 4,558
Intangible assets1,319 1,463
Deferred income taxes473 449
Other assets1,119 956
$16,314 $15,201
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt$698 $652
Accounts payable585 511
Accrued expenses1,231 1,202
Cash dividends payable267 226
Income taxes payable86 169
Total current liabilities2,867 2,760
Noncurrent Liabilities:
Long-term debt7,439 7,177
Deferred income taxes112 134
Other liabilities870 871
Total noncurrent liabilities8,421 8,182
Stockholders’ Equity:
Common stock6 6
Additional paid-in-capital1,207 1,188
Retained earnings20,553 19,505
Common stock held in treasury(15,336) (14,638)
Accumulated other comprehensive income (loss)(1,407) (1,807)
Noncontrolling interest3 5
Total stockholders’ equity5,026 4,259
$16,314 $15,201


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended September 30, 2017
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$795 $172 21.6%
Food Equipment549 150 27.3%
Test & Measurement and Electronics525 127 24.1%
Welding378 100 26.6%
Polymers & Fluids434 90 21.0%
Construction Products440 112 25.4%
Specialty Products498 138 27.7%
Intersegment(4) %
Total Segments3,615 889 24.6%
Unallocated* 72 %
Total Company$3,615 $961 26.6%


Nine Months Ended September 30, 2017
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$2,443 $556 22.7%
Food Equipment1,575 414 26.3%
Test & Measurement and Electronics1,524 337 22.1%
Welding1,150 312 27.2%
Polymers & Fluids1,297 272 21.0%
Construction Products1,260 303 24.0%
Specialty Products1,451 401 27.6%
Intersegment(15) %
Total Segments10,685 2,595 24.3%
Unallocated* 49 %
Total Company$10,685 $2,644 24.7%

* Unallocated includes the favorable impact from the legal settlement.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q3 2017 vs. Q3 2016 Favorable/(Unfavorable)
Operating RevenueAutomotive
OEM
Food
Equipment
Test &
Measurement
and
Electronics
WeldingPolymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Organic1.3%(0.4)%0.8%3.9%1.0%3.5%4.5%1.9%
Acquisitions/Divestitures%%%%%%(1.2)%(0.2)%
Translation2.8%1.5%1.0%0.9%1.6%2.5%1.3%1.8%
Operating Revenue4.1%1.1%1.8%4.8%2.6%6.0%4.6%3.5%


Q3 2017 vs. Q3 2016 Favorable/(Unfavorable)
Change in Operating MarginAutomotive
OEM
Food
Equipment
Test &
Measurement
and
Electronics
WeldingPolymers
& Fluids
Construction
Products
Specialty
Products
Total
ITW
Operating Leverage30 bps 20 bps60 bps20 bps90 bps90 bps50 bps
Changes in Variable Margin & OH Costs(40) bps20 bps240 bps20 bps 40 bps140 bps300 bps
Total Organic (10) bps 20 bps 260 bps 80 bps 20 bps 130 bps 230 bps 350 bps
Acquisitions/Divestitures 30 bps
Restructuring/Other(10) bps(30) bps50 bps(70) bps(20) bps150 bps(100) bps
Total Operating Margin Change (20) bps (10) bps 310 bps 10 bps 280 bps 160 bps 350 bps
Total Operating Margin % *21.6%27.3%24.1%26.6%21.0%25.4%27.7%26.6%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 50 bps 70 bps 300 bps 40 bps 400 bps 50 bps 120 bps 150 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 third quarter of 2017.


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
YTD 2017 vs YTD 2016 Favorable/(Unfavorable)
Operating RevenueAutomotive
OEM
Food
Equipment
Test &
Measurement
and
Electronics
WeldingPolymers
& Fluids
Construction
Products
Specialty
Products
Total ITW
Organic4.7%0.7%3.5%2.2%0.5%2.7%3.1%2.7%
Acquisitions/Divestitures12.2%%%%%%(1.1)%2.3%
Translation%(0.9)%(1.0)%0.1%0.5%0.3%(0.5)%(0.2)%
Operating Revenue16.9%(0.2)%2.5%2.3%1.0%3.0%1.5%4.8%


YTD 2017 vs. YTD 2016 Favorable/(Unfavorable)
Change in Operating MarginAutomotive
OEM
Food
Equipment
Test &
Measurement
and
Electronics
WeldingPolymers
& Fluids
Construction
Products
Specialty
Products
Total ITW
Operating Leverage 80 bps 20 bps 110 bps 40 bps 10 bps 70 bps 70 bps 50 bps
Changes in Variable Margin & OH Costs (50) bps 20 bps 230 bps 80 bps 70 bps 100 bps 180 bps
Total Organic 30 bps 40 bps 340 bps 120 bps 80 bps 70 bps 170 bps 230 bps
Acquisitions/Divestitures (160) bps 30 bps (40) bps
Restructuring/Other (50) bps 20 bps 30 bps 90 bps (50) bps 60 bps (50) bps
Total Operating Margin Change (180) bps 60 bps 370 bps 210 bps 30 bps 130 bps 150 bps 190 bps
Total Operating Margin % *22.7%26.3%22.1%27.2%21.0%24.0%27.6%24.7%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 60 bps 80 bps 320 bps 40 bps 410 bps 60 bps 130 bps 160 bps**
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.31) on GAAP net income diluted earnings per share for the first nine months of 2017.


Full Year 2016 vs Full Year 2015 Favorable/(Unfavorable)
Operating RevenueAutomotive
OEM
Food
Equipment
Test &
Measurement
and
Electronics
WeldingPolymers &
Fluids
Construction
Products
Specialty
Products
Total ITW
Organic5.1%2.8%1.8%(9.1)%1.3%3.0%1.2%1.2%
Acquisitions/Divestitures9.7%%%%(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 Twelve
Months Ended
September 30, December 31,
Dollars in millions2017 2016 2016
Operating income$961 $808 $3,064
Tax rate29.3% 30.0% 30.0%
Income taxes(282) (243) (919)
Operating income after taxes$679 $565 $2,145
Invested capital:
Trade receivables$2,672 $2,496 $2,357
Inventories1,225 1,167 1,076
Net plant and equipment1,759 1,702 1,652
Goodwill and intangible assets6,051 6,191 6,021
Accounts payable and accrued expenses(1,816) (1,762) (1,713)
Other, net487 393 223
Total invested capital$10,378 $10,187 $9,616
Average invested capital$10,354 $9,973 $9,780
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) (116) (91)
Adjusted average invested capital$10,354 $9,857 $9,689
Adjusted return on average invested capital26.3%*23.0% 22.1%


FREE CASH FLOW (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in millions2017 2016 2017 2016
Net cash provided by operating activities$780 $624 $1,707 $1,638
Less: Additions to plant and equipment(78) (81) (219) (202)
Free cash flow$702 *$543 $1,488 $1,436
Net income$640 $535 $1,763 $1,528
Free cash flow to net income conversion rate110%*101% 84% 94%

* Excluding the impact of the confidential legal settlement in 2017, ROIC would have been 24.1% and free cash flow would have been $637 million (or 108% of net income) for the three months ended September 30, 2017.

Investor Contact: Mike Drazin 224.661.7433 or mdrazin@itw.com

Media Contact: Trisha Knych 224.661.7566 or tknych@itw.com

Source:Illinois Tool Works Inc.