ITW Reports Fourth-Quarter and Full-Year 2017 Results

Fourth-Quarter 2017 Highlights:

  • Total revenue was $3.6 billion, an increase of 7%; organic growth was 4%
  • Operating margin was 23.4%, an increase of 160 bps
  • GAAP EPS was $(0.22), including a $658 million one-time tax charge
  • Excluding the one-time tax charge, EPS was $1.70, an increase of 17%

Full-Year 2017 Highlights:

  • Total revenue was $14.3 billion, an increase of 5%; organic growth was 3%
  • Operating margin was 24.4%, an increase of 190 bps
  • After-tax ROIC was 24.4%, an increase of 230 bps
  • GAAP EPS was $4.86, including the one-time tax charge and a previously disclosed favorable legal settlement
  • EPS was $6.59 excluding these two items, an increase of 16%

2018 Guidance:

  • Raising GAAP EPS guidance by 6% at the midpoint to $7.45 to $7.65 and accelerating previously announced plans to increase dividend pay-out ratio

GLENVIEW, Ill., Jan. 24, 2018 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE:ITW) today reported its fourth-quarter and full-year 2017 results.

“The ITW team delivered another year of strong execution and performance in 2017,” said E. Scott Santi, Chairman and Chief Executive Officer. “In 2017, excluding one-time tax and legal items, we grew EPS 16%, improved operating margin by 120 basis points to an all-time high of 23.7% and increased after-tax return on invested capital 230 basis points to a record 24.4%.”

“We also continued to make meaningful progress on our focused efforts to accelerate organic growth. Our 2017 organic growth rate of 3% was up almost 2 percentage points versus 2016. In addition, our Q4 organic growth rate of 4% gives us good momentum going into 2018.”

“Overall, these results demonstrate continued progress in our efforts to position ITW to generate consistent differentiated performance on a sustained basis,” Santi added. “Through the combination of ITW’s high quality business portfolio and our ongoing focus on leveraging ITW’s powerful business model to full potential, we are well positioned to deliver strong results in 2018 and beyond.”

Fourth-quarter revenue grew 7% to $3.6 billion as organic revenue increased 4% and foreign currency translation increased revenue by 3%. GAAP EPS of $(0.22) includes a one-time $658 million charge associated with the passage of the “Tax Cuts and Jobs Act.” The charge encompasses several elements, including a repatriation tax on accumulated overseas earnings and a benefit from the revaluation of deferred tax assets and liabilities. Excluding this one-time item, EPS increased 17% to $1.70. Operating margin was 23.4%, an increase of 160 basis points, with enterprise initiatives contributing 140 basis points of margin improvement.

Organic revenue growth was positive in six of seven segments led by Test & Measurement and Electronics (+9%), Welding (+6%) and Specialty Products (+5%).

Full-year 2017 revenue increased 5% to $14.3 billion with organic growth of 3%. GAAP EPS of $4.86 includes the above-mentioned unfavorable tax impact and a $0.17 benefit from a previously disclosed favorable legal item. Excluding these one-time items, EPS was $6.59, an increase of 16% year-on-year. Operating margin was 24.4% and includes a 70 basis point benefit from the legal item. Excluding this item, operating margin was 23.7%, an increase of 120 basis points.

Full-Year and First Quarter 2018 Guidance
ITW is raising its 2018 full-year guidance by $0.40 at the midpoint to reflect the benefits of a reduction in the tax rate to an estimated range of 25 to 26% and current foreign exchange rates. The company expects 2018 GAAP earnings to be in the range of $7.45 to $7.65 per share with organic growth of 3 to 4%.

The company forecasts first quarter 2018 GAAP earnings to be in the range of $1.80 to $1.90 per share with organic growth of 3 to 4%.

Subject to formal Board approval, ITW expects to accelerate previously announced plans to increase its dividend pay-out ratio from 43% to approximately 50% of Free Cash Flow on a run rate basis in August of 2018.

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, exchange rates, free cash flow, effective tax rate, expected dividend pay-out ratio, expected repatriation, 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 $14.3 billion in 2017. 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 approximately 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 amounts2017 2016 2017 2016
Operating Revenue$3,629 $3,399 $14,314 $13,599
Cost of revenue2,124 2,006 8,309 7,896
Selling, administrative, and research and development expenses605 597 2,400 2,415
Legal settlement (income) (95)
Amortization and impairment of intangible assets50 54 206 224
Operating Income850 742 3,494 3,064
Interest expense(66) (63) (260) (237)
Other income (expense)12 47 36 81
Income Before Taxes796 726 3,270 2,908
Income taxes872 219 1,583 873
Net Income (Loss)$(76) $507 $1,687 $2,035
Net Income (Loss) Per Share:
Basic$(0.22) $1.46 $4.90 $5.73
Diluted$(0.22) $1.45 $4.86 $5.70
Cash Dividends Per Share:
Paid$0.78 $0.65 $2.73 $2.30
Declared$0.78 $0.65 $2.86 $2.40
Shares of Common Stock Outstanding During the Period:
Average 342.1 348.3 344.1 355.0
Average assuming dilution 342.1 350.4 346.8 357.1


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)

In millionsDecember 31, 2017 December 31, 2016
Assets
Current Assets:
Cash and equivalents$3,094 $2,472
Trade receivables2,628 2,357
Inventories1,220 1,076
Prepaid expenses and other current assets336 218
Total current assets7,278 6,123
Net plant and equipment1,778 1,652
Goodwill4,752 4,558
Intangible assets1,272 1,463
Deferred income taxes505 449
Other assets1,195 956
$16,780 $15,201
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt$850 $652
Accounts payable590 511
Accrued expenses1,258 1,202
Cash dividends payable266 226
Income taxes payable89 169
Total current liabilities3,053 2,760
Noncurrent Liabilities:
Long-term debt7,478 7,177
Deferred income taxes164 134
Noncurrent income taxes payable614
Other liabilities882 871
Total noncurrent liabilities9,138 8,182
Stockholders’ Equity:
Common stock6 6
Additional paid-in-capital1,218 1,188
Retained earnings20,210 19,505
Common stock held in treasury(15,562) (14,638)
Accumulated other comprehensive income (loss)(1,287) (1,807)
Noncontrolling interest4 5
Total stockholders’ equity4,589 4,259
$16,780 $15,201


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Three Months Ended December 31, 2017
Dollars in millionsTotal RevenueOperating IncomeOperating Margin
Automotive OEM$828 $191 23.1%
Food Equipment548 142 25.8%
Test & Measurement and Electronics545 127 23.4%
Welding388 103 26.4%
Polymers & Fluids427 85 19.9%
Construction Products412 96 23.4%
Specialty Products487 126 25.9%
Intersegment(6) %
Total Segments3,629 870 24.0%
Unallocated (20)%
Total Company$3,629 $850 23.4%


Twelve Months Ended December 31, 2017
Dollars in millionsTotal RevenueOperating IncomeOperating Margin
Automotive OEM$3,271 $747 22.8%
Food Equipment2,123 556 26.2%
Test & Measurement and Electronics2,069 464 22.4%
Welding1,538 415 27.0%
Polymers & Fluids1,724 357 20.7%
Construction Products1,672 399 23.9%
Specialty Products1,938 527 27.2%
Intersegment(21) %
Total Segments14,314 3,465 24.2%
Unallocated* 29 %
Total Company$14,314 $3,494 24.4%

* Unallocated for the twelve months ended December 31, 2017 includes the favorable impact from the legal settlement.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Q4 2017 vs. Q4 2016 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic2.5%(0.4)%8.8%6.1%2.5%3.5%4.8%3.7%
Acquisitions/
Divestitures
%%%%%%(0.8)%(0.1)%
Translation4.5%3.4%2.9%1.3%2.4%3.2%2.9%3.2%
Operating Revenue7.0%3.0%11.7%7.4%4.9%6.7%6.9%6.8%


Q4 2017 vs. Q4 2016 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage 40 bps (10) bps 230 bps 110 bps 70 bps 80 bps 90 bps 90 bps
Changes in Variable Margin & OH Costs 50 bps 130 bps 140 bps 130 bps 40 bps 60 bps
Total Organic 40 bps 40 bps 360 bps 250 bps 70 bps 210 bps 130 bps 150 bps
Acquisitions/
Divestitures
20 bps
Restructuring/Other (30) bps 70 bps (30) bps (50) bps 20 bps (10) bps 40 bps 10 bps
Total Operating Margin Change 10 bps 110 bps 330 bps 200 bps 90 bps 200 bps 190 bps 160 bps
Total Operating Margin % *23.1%25.8%23.4%26.4%19.9%23.4%25.9%23.4%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 50 bps 80 bps 280 bps 40 bps 400 bps 50 bps 130 bps 140 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.10) on GAAP earnings per share for the fourth quarter of 2017.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Full Year 2017 vs Full Year 2016 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic4.1%0.5%4.8%3.2%1.0%2.9%3.5%2.9%
Acquisitions/
Divestitures
8.9%%%%%%(1.1)%1.8%
Translation1.2%0.1%%0.3%1.0%1.0%0.4%0.6%
Operating Revenue14.2%0.6%4.8%3.5%2.0%3.9%2.8%5.3%


Full Year 2017 vs Full Year 2016 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage 60 bps 20 bps 130 bps 70 bps 30 bps 70 bps 70 bps 70 bps
Changes in Variable Margin & OH Costs (30) bps 30 bps 210 bps 90 bps 50 bps 30 bps 90 bps 140 bps
Total Organic 30 bps 50 bps 340 bps 160 bps 80 bps 100 bps 160 bps 210 bps
Acquisitions/
Divestitures
(120) bps 30 bps (30) bps
Restructuring/Other (40) bps 30 bps 10 bps 50 bps (40) bps 50 bps (30) bps 10 bps
Total Operating Margin Change (130) bps 80 bps 350 bps 210 bps 40 bps 150 bps 160 bps 190 bps
Total Operating Margin % *22.8%26.2%22.4%27.0%20.7%23.9%27.2%24.4%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 60 bps 70 bps 320 bps 40 bps 410 bps 50 bps 130 bps 150 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.42) on GAAP earnings per share for 2017.


Q4 2016 vs. Q4 2015 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal 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 Revenue25.8%(0.2)%(2.4)%(8.6)%1.3%2.0%(0.5)%3.7%


Full Year 2016 vs Full Year 2015 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal 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)

IMPACT OF THE "TAX CUTS AND JOBS ACT" AND LEGAL SETTLEMENT

Following the passing of the “Tax Cuts and Jobs Act” in the U.S., ITW recorded a one-time tax charge of $658 million in the fourth quarter of 2017. Additionally, as previously disclosed, ITW entered into a confidential legal settlement, resulting in a favorable one-time benefit of $95 million in 2017. The following schedules illustrate the impact of these items on the Company’s reported fourth quarter and full-year 2017 financial results.

Fourth Quarter

Dollars in millionsQ4’16 As ReportedQ4’17 As ReportedTax
Charge
Q4 '17 Ex. Tax ChargeChange Vs. Prior Year
Total Revenue$3,399$3,629$3,629+7%
Operating Income$742$850$850+14%
Operating Margin21.8%23.4%23.4%+160 bps
Tax Rate30.0%109.6%+82.7%-pts26.9%(310) bps
Net Income (Loss)$507($76)($658)$582+15%
EPS$1.45($0.22)($1.92)$1.70+17%

Full-Year

Dollars in millions2016 As Reported2017 As ReportedLegal
Item
Tax
Charge
2017 Ex. ItemsChange Vs. Prior Year
Total Revenue$13,599$14,314$14,314+5%
Operating Income$3,064$3,494+$95$3,399+11%
Operating Margin22.5%24.4%+70 bps23.7%+120 bps
Tax Rate30.0%48.4%+20.1%-pts28.3%(170) bps
Net Income$2,035$1,687+$59($658)$2,286+12%
EPS$5.70$4.86+$0.17($1.90)$6.59+16%

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 millions2017 2016 2017 2016
Operating income$850 $742 $3,494 $3,064
Less: Legal settlement income (95)
Adjusted operating income850 742 3,399 3,064
Adjusted tax rate26.9% 30.0% 28.3% 30.0%
Income taxes(229) (222) (961) (919)
Operating income after taxes$621 $520 $2,438 $2,145
Invested capital:
Trade receivables$2,628 $2,357 $2,628 $2,357
Inventories1,220 1,076 1,220 1,076
Net plant and equipment1,778 1,652 1,778 1,652
Goodwill and intangible assets6,024 6,021 6,024 6,021
Accounts payable and accrued expenses(1,848) (1,713) (1,848) (1,713)
Other, net21 223 21 223
Total invested capital$9,823 $9,616 $9,823 $9,616
Average invested capital$10,101 $9,902 $10,005 $9,780
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) (59) (91)
Adjusted average invested capital$10,101 $9,843 $10,005 $9,689
Adjusted return on average invested capital24.6% 21.1% 24.4% 22.1%

A reconciliation of the 2017 effective tax rate to the adjusted tax rate excluding the discrete tax charge related to the 2017 U.S. tax legislation is as follows:

Three Months Ended Twelve Months Ended
December 31, 2017 December 31, 2017
Income Taxes Tax Rate Income Taxes Tax Rate
As reported$872 109.6% $1,583 48.4%
Discrete tax charge related to 2017 U.S. tax legislation(658) (82.7)% (658) (20.1)%
As adjusted$214 26.9% $925 28.3%

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 millions2017 2016 2017 2016
Net cash provided by operating activities$695 $664 $2,402 $2,302
Less: Additions to plant and equipment(78) (71) (297) (273)
Free cash flow$617 $593 $2,105 *$2,029
Net income (loss), as reported$(76) $507 $1,687 $2,035
Discrete tax charge related to 2017 U.S. tax legislation658 658
Adjusted net income$582 $507 $2,345 $2,035
Free cash flow to adjusted net income conversion rate106% 117% 90%*100%

* Excluding $115 million related to an additional discretionary pension contribution, free cash flow would have been $2.2 billion (or 95% of adjusted net income) for the twelve months ended December 31, 2017.

Investor Contact: Karen Fletcher 224.661.7433 or kfletcher@itw.com

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

Source:Illinois Tool Works Inc.