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ITW Delivers $1.97 Earnings per Share, up 17%

Company Release - 7/23/2018 8:00 AM ET
  • Total revenue was $3.8 billion, an increase of 7%; organic growth was 4%
  • Operating margin was 24.3%, an increase of 10 bps, 50 bps excluding 2017 legal settlement
  • Operating income was up 7% to $932 million, up 9% excluding the legal settlement
  • Full year guidance adjusted to reflect impact of currency translation in the second half 2018 based on current exchange rates.  Expect EPS in the range of $7.50 to $7.70 per share, up 15% versus prior year at the midpoint

GLENVIEW, Ill., July 23, 2018 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE:ITW) today reported second quarter 2018 GAAP earnings of $1.97 per share, a 17 percent increase compared to the year ago period.  As previously disclosed, the company recorded an EPS benefit of $0.03 per share related to a legal settlement in the second quarter of 2017.  Excluding this item, earnings per share increased 19 percent.  In addition, currency had a $0.03 negative impact to earnings per share versus guidance provided for the second quarter.

“ITW delivered another strong quarter with good growth momentum and excellent operational execution,” said E. Scott Santi, Chairman and Chief Executive Officer.  “The company’s ability to overcome near-term inflationary and currency challenges and generate four percent organic revenue growth, core operating earnings growth of nine percent, core EPS growth of 19 percent, and continue to expand margins is a direct result of the strength and resilience of the ITW Business Model and the dedicated team of ITW professionals around the world who leverage it to serve our customers and execute our strategy with excellence each and every day.”       

Revenue was up seven percent with four percent organic growth. Operating income was $932 million in the quarter, an increase of seven percent, and operating margin was 24.3 percent, an increase of 10 basis points.  Excluding the second quarter 2017 legal settlement, operating income was up nine percent and operating margin increased 50 basis points.  Enterprise Initiatives contributed 110 basis points of margin improvement, more than offsetting 70 basis points of unfavorable price/cost impact.  Year-to-date on a dollar-for-dollar basis, pricing actions essentially offset the impact of raw material cost inflation.

All seven of the company’s business segments delivered positive year on year organic revenue growth, led by Welding with 13 percent.  Organic growth of four percent was driven by five percent growth in North America.

After-tax return on invested capital was 28.7 percent, an improvement of 440 basis points, of which 400 basis points resulted from new U.S. tax rules and regulations.

In the second quarter, Free Cash Flow was $533 million, an increase of 38 percent. The company repurchased $500 million of its own shares.

2018 Guidance
Based on current foreign exchange rates, second half earnings per share are projected to have a $0.12 negative currency impact versus prior guidance.  ITW adjusted 2018 full-year EPS guidance to reflect this impact, and expects earnings in a range of $7.50 to $7.70 per share, or 15 percent growth at the midpoint.  The company also revised its outlook for operating margin to a range of 24 to 25 percent reflecting price/cost related margin dilution.  The company continues to expect to recover the impact of raw material cost increases through price actions on a dollar for dollar basis for the full year and as a result, expects the full year price/cost impact on the company’s earnings per share to be neutral (as it was in the first half of 2018).  The company continues to expect organic growth of three to four percent, free cash flow at or above 100 percent of net income, and an effective tax rate of approximately 25 percent for the year.  The company now expects to repurchase $1.5 billion of its own shares in 2018.

For the third quarter 2018, the company expects earnings to be in the range of $1.80 to $1.90 per share, with revenue up two to three percent and organic growth of three to four percent.  As a reminder, prior year third quarter GAAP EPS of $1.85 included a $0.14 benefit from a legal settlement.  Excluding this item, adjusted EPS was $1.71 per share.

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, foreign exchange rates, organic revenue growth, operating margin, price/cost impact, free cash flow, effective tax rate, after-tax return on invested capital, and timing and amount of share repurchases.  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 2017 and subsequently filed Form 10-Qs.

About Illinois Tool Works
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.

www.itw.com

Media Contact  Investor Relations
Illinois Tool Works  Illinois Tool Works
Trisha Knych  Karen Fletcher
Tel: 224.661.7566  Tel: 224.661.7433
mediarelations@itw.com  investorrelations@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 amounts2018 2017(1) 2018 2017(1)
Operating Revenue$3,831  $3,599  $7,575  $7,070 
Cost of revenue2,231  2,087  4,412  4,090 
Selling, administrative, and research and development expenses620  603  1,232  1,211 
Legal settlement (income)  (15)   (15)
Amortization and impairment of intangible assets48  52  96  105 
Operating Income932  872  1,835  1,679 
Interest expense(64) (65) (130) (129)
Other income (expense)26  12  38  18 
Income Before Taxes894  819  1,743  1,568 
Income Taxes228  232  425  445 
Net Income$666  $587  $1,318  $1,123 
        
Net Income Per Share:       
Basic$1.98  $1.70  $3.90  $3.25 
Diluted$1.97  $1.69  $3.87  $3.23 
        
Cash Dividends Per Share:       
Paid$0.78  $0.65  $1.56  $1.30 
Declared$0.78  $0.65  $1.56  $1.30 
        
Shares of Common Stock Outstanding During the Period:       
Average336.7  344.7  338.5  345.4 
Average assuming dilution338.9  347.5  340.8  348.3 

(1) The three and six months ended June 30, 2017 have been restated to reflect the adoption of new accounting guidance in 2018 which resulted in the presentation of $2 million and $4 million, respectively, of other net periodic benefit income in Other income (expense) rather than in Operating Income, with no change in Net Income.

 
 
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
 
In millionsJune 30, 2018 December 31, 2017
Assets   
Current Assets:   
Cash and equivalents$1,628  $3,094 
Trade receivables2,878  2,628 
Inventories1,320  1,220 
Prepaid expenses and other current assets293  336 
Total current assets6,119  7,278 
    
Net plant and equipment1,783  1,778 
Goodwill4,675  4,752 
Intangible assets1,177  1,272 
Deferred income taxes595  505 
Other assets1,174  1,195 
 $15,523  $16,780 
    
Liabilities and Stockholders' Equity   
Current Liabilities:   
Short-term debt$1,350  $850 
Accounts payable623  590 
Accrued expenses1,224  1,258 
Cash dividends payable262  266 
Income taxes payable88  89 
Total current liabilities3,547  3,053 
    
Noncurrent Liabilities:   
Long-term debt6,069  7,478 
Deferred income taxes704  164 
Noncurrent income taxes payable561  614 
Other liabilities854  882 
Total noncurrent liabilities8,188  9,138 
    
Stockholders’ Equity:   
Common stock6  6 
Additional paid-in-capital1,231  1,218 
Retained earnings20,633  20,210 
Common stock held in treasury(16,555) (15,562)
Accumulated other comprehensive income (loss)(1,530) (1,287)
Noncontrolling interest3  4 
Total stockholders’ equity3,788  4,589 
 $15,523  $16,780 
 


 
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
 
Three Months Ended June 30, 2018
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$879 $198 22.5% 
Food Equipment553 140 25.4% 
Test & Measurement and Electronics554 131 23.5% 
Welding440 129 29.3% 
Polymers & Fluids445 95 21.2% 
Construction Products444 109 24.5% 
Specialty Products522 146 28.1% 
Intersegment(6) —% 
Total Segments3,831 948 24.7% 
Unallocated (16)—% 
Total Company$3,831 $932 24.3% 


Six Months Ended June 30, 2018
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$1,780 $415 23.3% 
Food Equipment1,080 270 25.0% 
Test & Measurement and Electronics1,097 258 23.5% 
Welding863 246 28.5% 
Polymers & Fluids887 187 21.1% 
Construction Products872 204 23.3% 
Specialty Products1,007 276 27.4% 
Intersegment(11) —% 
Total Segments7,575 1,856 24.5% 
Unallocated (21)—% 
Total Company$7,575 $1,835 24.2% 


Q2 2018 vs. Q2 2017 Favorable/(Unfavorable)
         
Operating RevenueAutomotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Organic2.8% 1.6% 3.9% 13.3% 0.9% 1.7% 4.0% 3.7% 
Acquisitions/
Divestitures
—% —% —% —% —% —% (0.1)% —% 
Translation4.4% 3.2% 2.8% 1.0% 0.8% 2.7% 2.6% 2.8% 
Operating
Revenue
7.2% 4.8% 6.7% 14.3% 1.7% 4.4% 6.5% 6.5% 


 
 
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
 
Q2 2018 vs. Q2 2017 Favorable/(Unfavorable)
         
Change in Operating
Margin
Automotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers
& Fluids
Construction
Products
Specialty
Products
Total ITW
Operating Leverage40 bps30 bps100 bps200 bps20 bps40 bps70 bps70 bps
         
Changes in Variable
Margin & OH Costs
(40) bps(90) bps120 bps(70) bps20 bps(130) bps(60) bps
Total Organic (60) bps 220 bps 200 bps (50) bps 60 bps (60) bps 10 bps
Acquisitions/
Divestitures
Restructuring/Other20 bps(40) bps(60) bps10 bps30 bps(10) bps40 bps
Total Operating
Margin Change
 20 bps (100) bps 160 bps 210 bps (20) bps 50 bps (20) bps 10 bps
         
Total Operating
Margin % *
22.5%25.4%23.5%29.3%21.2%24.5%28.1%24.3%
         
*Includes unfavorable
operating margin
impact of
amortization expense
from acquisition-
related intangible
assets
 50 bps 70 bps 270 bps30 bps 370 bps 40 bps 100 bps 130 bps
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.11) on GAAP earnings per share for the second quarter of 2018.


1H 2018 vs 1H 2017 Favorable/(Unfavorable)
Operating RevenueAutomotive
OEM
Food
Equipment
Test &
Measurement
and
Electronics
WeldingPolymers &
Fluids
Construction
Products
Specialty
Products
Total ITW
Organic1.9% 1.1% 5.7% 10.4% 0.6% 2.3% 2.3% 3.2% 
Acquisitions/
Divestitures
—% —% —% —% —% —% (0.2)% —% 
Translation6.1% 4.3% 4.1% 1.4% 2.1% 4.0% 3.6% 3.9% 
Operating
Revenue
8.0% 5.4% 9.8% 11.8% 2.7% 6.3% 5.7% 7.1% 


 
 
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
 
1H 2018 vs. 1H 2017 Favorable/(Unfavorable)
Change in
Operating Margin
Automotive
OEM
Food
Equipment
Test &
Measurement
and
Electronics
WeldingPolymers
& Fluids
Construction
Products
Specialty
Products
Total ITW
Operating Leverage30 bps20 bps150 bps160 bps20 bps60 bps50 bps70 bps
Changes in Variable
Margin & OH
Costs
(60) bps(90) bps110 bps(50) bps(50) bps(40) bps(90) bps(30) bps
Total Organic (30) bps (70) bps 260 bps 110 bps (30) bps 20 bps (40) bps 40 bps
Acquisitions/
Divestitures
Restructuring/Other30 bps(10) bps(10) bps40 bps(20) bps20 bps10 bps
Total Operating
Margin Change
 (80) bps 250 bps 110 bps 10 bps (20) bps 50 bps
         
Total Operating
Margin % *
23.3%25.0%23.5%28.5%21.1%23.3%27.4%24.2%
         
*Includes unfavorable
operating margin
impact of
amortization expense
from acquisition-
related intangible
assets
 50 bps 70 bps 270 bps 30 bps 370 bps 50 bps 110 bps 130 bps
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.21) on GAAP earnings per share for the first half of 2018.
 


 
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 millions2018 2017 2018 2017 2017
Operating income(1)$932  $872  $1,835  $1,679  $3,485 
Less: Legal settlement income  (15)   (15) (95)
Adjusted operating income932  857  1,835  1,664  3,390 
Tax rate(2)25.5% 28.4% 25.0% 28.4% 28.3%
Income taxes(238) (243) (459) (472) (958)
Operating income after taxes$694  $614  $1,376  $1,192  $2,432 
          
Invested capital:         
Trade receivables$2,878  $2,629  $2,878  $2,629  $2,628 
Inventories1,320  1,199  1,320  1,199  1,220 
Net plant and equipment1,783  1,726  1,783  1,726  1,778 
Goodwill and intangible assets5,852  6,041  5,852  6,041  6,024 
Accounts payable and accrued expenses(1,847) (1,754) (1,847) (1,754) (1,848)
Other, net(407) 488  (407) 488  21 
Total invested capital$9,579  $10,329  $9,579  $10,329  $9,823 
          
Average invested capital$9,675  $10,105  $9,724  $9,942  $10,005 
Annualized return on average invested capital28.7% 24.3% 28.3% 24.0% 24.3%

(1) The 2017 results have been restated to reflect the adoption of new accounting guidance in 2018 related to the presentation of net periodic benefit costs. The adoption of this guidance resulted in the presentation of $9 million, $4 million and $2 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the full year 2017, first half 2017 and second quarter 2017, respectively, with no change in Net Income.

(2) The tax rate for the six months ended June 30, 2018 represents the estimated effective tax rate for the full year of 2018. The tax rate for the twelve months ended December 31, 2017 excludes the impact of the $658 million discrete tax charge related to the 2017 U.S. tax legislation.

ROIC for the three months ended June 30, 2018 was 28.7%, an improvement of 440 basis points, of which 400 basis points related to the new U.S. tax rules and regulations. ROIC for the six months ended June 30, 2018 was 28.3%, an improvement of 430 basis points, of which 380 basis points related to the new U.S. tax rules and regulations.

 
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 millions2018 2017 2018 2017
Net cash provided by operating activities$620  $464  $1,158  $927 
Less: Additions to plant and equipment(87) (77) (181) (141)
Free cash flow$533  $387  $977  $786 
 

IMPACT OF THE "TAX CUTS AND JOBS ACT" AND LEGAL SETTLEMENT ON 2017 RESULTS

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, of which $15 million was recognized in the second quarter of 2017 and $80 million was recognized in the third quarter of 2017. The following schedules illustrate the impact of these items on the Company’s full year, first half and second quarter 2017 financial results:

 
  Full Year 2017
Dollars in millions As
Reported(1)
Legal
Item
Tax
Charge
Ex. Items
Total Revenue $14,314$14,314
Operating Income 3,485+$953,390
Operating Margin 24.3%+60 bps23.7%
Tax Rate 48.4%+20.1%-pts28.3%
Net Income $1,687+$59($658)$2,286
EPS $4.86+$0.17($1.90)$6.59


  First Half 2017 Second Quarter 2017
Dollars in millions As
Reported(1)
Legal
Item
Ex. Legal
Item
 As
Reported(1)
Legal
Item
Ex. Legal
Item
Total Revenue $7,070$7,070 $3,599$3,599
Operating Income 1,679+$151,664 872+$15857
Operating Margin 23.7%+20 bps23.5% 24.2%+40 bps23.8%
EPS $3.23+$0.03$3.20 $1.69+$0.03$1.66

(1) The 2017 results have been restated to reflect the adoption of new accounting guidance in 2018 related to the presentation of net periodic benefit costs. The adoption of this guidance resulted in the presentation of $9 million, $4 million and $2 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the full year 2017, first half 2017 and second quarter 2017, respectively, with no change in Net Income.

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Source: Illinois Tool Works Inc.