ITW Delivers $1.90 Earnings per Share

Company Release - 10/24/2018 8:00 AM ET
  • Total revenue $3.6 billion; organic growth +2%; North America +4%
  • Operating margin 24.6%, +30 bps ex. 2017 legal settlement
  • GAAP EPS $1.90, +11% ex. 2017 legal settlement
  • Full-year EPS guidance narrowed $7.55 to $7.65; 15% growth at the mid-point             

GLENVIEW, Ill., Oct. 24, 2018 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported third quarter 2018 GAAP earnings of $1.90 per share.  As previously disclosed, the company recorded an EPS benefit of $0.14 per share related to a legal settlement in the third quarter of 2017.  Excluding this item, EPS increased 11 percent.  Excluding unfavorable foreign currency translation impact of $(0.03), EPS grew 13 percent.

“Despite some near-term market challenges in the third quarter, the ITW team delivered 11 percent earnings growth and EPS at the high end of our guidance range. We improved operating margin by 30 basis points to 24.6 percent, with continued strong execution of Enterprise Initiatives contributing 100 basis points of margin expansion. Pricing actions more than offset material cost inflation on a dollar for dollar basis, and price/cost margin percentage dilution showed sequential improvement versus the second quarter,” said E. Scott Santi, Chairman and Chief Executive Officer.  “Overall market conditions in North America remained solid this quarter, while auto production in Europe and China and demand levels in several international end markets served by our Specialty and Polymers & Fluids segments softened versus the first half of the year and were below our expectations heading into the quarter.  Our business model continues to generate strong free cash flow as evidenced by 17 percent free cash flow growth in the quarter, supporting our ability to raise our dividend 28 percent and repurchase $500 million of our shares in the quarter.”

“While we expect that these near-term market challenges will continue in the fourth quarter, we remain firmly on track to deliver our full-year EPS guidance with 15 percent earnings growth at the mid-point,” added Santi.  “Our ability to deliver consistent, strong results across a wide range of economic scenarios is a direct reflection of the resilience of our high-quality diversified business portfolio, the strength of ITW’s proprietary Business Model and our team’s focused execution of ITW’s long-term strategy.” 

Total revenue was flat as two percent organic growth was offset by the unfavorable impact of foreign currency translation. Organic revenue growth increased four percent in North America, offset by a one percent decline in Europe and a two percent decline in Asia Pacific. As expected, ongoing Product Line Simplification (PLS) activities reduced organic revenue growth by 70 basis points.

According to IHS, automotive production in Europe declined five percent in the third quarter following four percent growth in the second quarter, while China automotive production declined four percent following 11 percent growth in the second quarter.  As a result, in the third quarter, our European Automotive OEM business declined six percent, following three percent growth in the second quarter, while our China Auto OEM business was flat, following 17 percent growth in the second quarter.

In North America, organic growth remained solid as Welding grew 10 percent, Automotive OEM seven percent, Food Equipment four percent and Polymers & Fluids three percent.

Operating margin was 24.6 percent, an improvement of 30 basis points excluding the 2017 legal settlement, as Enterprise Initiatives contributed 100 basis points of margin improvement.  Price/cost margin dilution impact in the third quarter improved to (60) basis points from (70) basis points in the second quarter of 2018.

After-tax return on invested capital was 28.0 percent, an improvement of 400 basis points resulting primarily from new U.S. tax rules and regulations. The effective tax rate in the third quarter was 23.7 percent.

Free Cash Flow was $743 million, an increase of 17 percent, and 116 percent of net income. In the quarter, the company repurchased $500 million of its own shares and raised its dividend 28 percent to an annualized $4.00 per share.  Year-to-date, the company has repurchased $1.5 billion of its own shares.

2018 Guidance
Full-year EPS guidance was narrowed to a range of $7.55 to $7.65 per share, or 15 percent growth at the mid-point, with revenue up three to four percent, and organic growth of two to three percent.  Prior year GAAP EPS of $4.86 included a ($1.90) per share impact from tax reform and a $0.17 per share impact from the legal settlement.  Excluding these two items, 2017 adjusted EPS was $6.59 per share.  The company expects to repurchase approximately $2.0 billion of its own shares in 2018. 

For the fourth quarter 2018, the company expects GAAP EPS of $1.78 to $1.88, with revenue essentially flat as the impact of foreign currency translation, at current exchange rates, is expected to offset organic growth of one to two percent based on current levels of demand.  Prior year GAAP EPS of ($0.22) included a $1.92 per share impact from tax reform.  Excluding this item, adjusted EPS was $1.70 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, total and organic revenue growth, operating margin, economic conditions in various geographic regions, 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

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 amounts2018 2017(1) 2018 2017(1)
Operating Revenue$3,613  $3,615  $11,188  $10,685 
Cost of revenue2,096  2,092  6,508  6,182 
Selling, administrative, and research and development expenses581  592  1,813  1,803 
Legal settlement (income)  (80)   (95)
Amortization and impairment of intangible assets47  51  143  156 
Operating Income889  960  2,724  2,639 
Interest expense(64) (65) (194) (194)
Other income (expense)10  11  48  29 
Income Before Taxes835  906  2,578  2,474 
Income Taxes197  266  622  711 
Net Income$638  $640  $1,956  $1,763 
        
Net Income Per Share:       
Basic$1.91  $1.86  $5.81  $5.12 
Diluted$1.90  $1.85  $5.77  $5.07 
        
Cash Dividends Per Share:       
Paid$0.78  $0.65  $2.34  $1.95 
Declared$1.00  $0.78  $2.56  $2.08 
        
Shares of Common Stock Outstanding During the Period:       
Average333.3  343.4  336.7  344.7 
Average assuming dilution335.3  346.0  339.0  347.5 

(1) The three and nine months ended September 30, 2017 have been restated to reflect the adoption of new accounting guidance in 2018 which resulted in the presentation of $1 million and $5 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 millionsSeptember 30, 2018 December 31, 2017
Assets   
Current Assets:   
Cash and equivalents$1,589  $3,094 
Trade receivables2,777  2,628 
Inventories1,338  1,220 
Prepaid expenses and other current assets236  336 
Total current assets5,940  7,278 
    
Net plant and equipment1,799  1,778 
Goodwill4,655  4,752 
Intangible assets1,130  1,272 
Deferred income taxes614  505 
Other assets1,181  1,195 
 $15,319  $16,780 
    
Liabilities and Stockholders' Equity   
Current Liabilities:   
Short-term debt$1,350  $850 
Accounts payable576  590 
Accrued expenses1,268  1,258 
Cash dividends payable332  266 
Income taxes payable137  89 
Total current liabilities3,663  3,053 
    
Noncurrent Liabilities:   
Long-term debt6,054  7,478 
Deferred income taxes707  164 
Noncurrent income taxes payable496  614 
Other liabilities853  882 
Total noncurrent liabilities8,110  9,138 
    
Stockholders’ Equity:   
Common stock6  6 
Additional paid-in-capital1,241  1,218 
Retained earnings20,938  20,210 
Common stock held in treasury(17,054) (15,562)
Accumulated other comprehensive income (loss)(1,589) (1,287)
Noncontrolling interest4  4 
Total stockholders’ equity3,546  4,589 
 $15,319  $16,780 


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

SEGMENT DATA (UNAUDITED)

Three Months Ended September 30, 2018
 Dollars in millionsTotal RevenueOperating IncomeOperating Margin
 Automotive OEM$781 $168 21.5%
 Food Equipment567 151 26.6%
 Test & Measurement and Electronics536 132 24.7%
 Welding414 117 28.2%
 Polymers & Fluids415 91 22.1%
 Construction Products431 111 25.8%
 Specialty Products475 128 26.8%
 Intersegment(6) %
 Total Segments3,613 898 24.8%
 Unallocated (9)%
 Total Company$3,613 $889 24.6%


Nine Months Ended September 30, 2018
 Dollars in millionsTotal RevenueOperating IncomeOperating Margin
 Automotive OEM$2,561 $583 22.8%
 Food Equipment1,647 421 25.6%
 Test & Measurement and Electronics1,633 390 23.9%
 Welding1,277 363 28.4%
 Polymers & Fluids1,302 278 21.4%
 Construction Products1,303 315 24.2%
 Specialty Products1,482 404 27.2%
 Intersegment(17) %
 Total Segments11,188 2,754 24.6%
 Unallocated (30)%
 Total Company$11,188 $2,724 24.3%

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

Q3 2018 vs. Q3 2017 Favorable/(Unfavorable)
 Operating RevenueAutomotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers
& Fluids
Construction
Products
Specialty
Products
Total ITW
 Organic(0.2)%3.8 %2.9 %10.3 %(0.7)%0.9 %(3.8)%1.5 %
 Acquisitions/
 Divestitures
 % % % %(0.6)% % %(0.1)%
 Translation(1.7)%(0.7)%(0.7)%(0.9)%(3.1)%(2.9)%(0.9)%(1.5)%
 Operating Revenue(1.9)%3.1 %2.2 %9.4 %(4.4)%(2.0)%(4.7)%(0.1)%


Q3 2018 vs. Q3 2017 Favorable/(Unfavorable)
 Change in
 Operating Margin
 Automotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers
& Fluids
Construction
Products
Specialty
Products
Total ITW
 Operating Leverage  (10) bps 70 bps 70 bps 160 bps (20) bps 20 bps (70) bps 20 bps
 Changes in Variable
 Margin & OH Costs
  40 bps (180) bps (10) bps (40) bps 80 bps 40 bps (40) bps (230) bps (1)
 Total Organic  30 bps (110) bps 60 bps 120 bps 60 bps 60 bps (110) bps (210) bps
 Acquisitions/
 Divestitures
  10 bps
 Restructuring/Other  (40) bps 40 bps 40 bps 40 bps (20) bps 20 bps 10 bps
 Total Operating
 Margin Change
  (10) bps (70) bps 60 bps 160 bps 110 bps 40 bps (90) bps (200) bps
          
 Total Operating
 Margin % *
 21.5%26.6%24.7%28.2%22.1%25.8%26.8%24.6%
          
 *Includes unfavorable
 operating margin impact of
 amortization expense from
 acquisition-related intangible
 assets
 50 bps 70 bps 270 bps 30 bps 390 bps 40 bps 110 bps 130 bps**
 ** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.11) on GAAP earnings per share for the third quarter of 2018.
 (1) The third quarter of 2017 included 230 basis points of favorability from the confidential legal settlement.


YTD 2018 vs YTD 2017 Favorable/(Unfavorable)
 Operating RevenueAutomotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers
& Fluids
Construction
Products
Specialty
Products
Total ITW
 Organic1.2%2.0%4.7%10.4%0.2 %1.8%0.2 %2.6%
 Acquisitions/
 Divestitures
%%%%(0.2)%%(0.1)%%
 Translation3.6%2.6%2.5%0.6%0.4 %1.6%2.0 %2.1%
 Operating Revenue4.8%4.6%7.2%11.0%0.4 %3.4%2.1 %4.7%


YTD 2018 vs. YTD 2017 Favorable/(Unfavorable)
 Change in
 Operating Margin
 Automotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers
& Fluids
Construction
Products
Specialty
Products
Total ITW
 Operating Leverage  30 bps 40 bps 120 bps 150 bps 10 bps 50 bps 10 bps 50 bps
 Changes in Variable
 Margin & OH Costs
  (30) bps (120) bps 70 bps (40) bps (10) bps (10) bps (70) bps (100) bps (1)
 Total Organic  (80) bps 190 bps 110 bps 40 bps (60) bps (50) bps
 Acquisitions/
 Divestitures
 
 Restructuring/Other  10 bps 10 bps (10) bps 10 bps 40 bps (20) bps 20 bps 10 bps
 Total Operating
 Margin Change
  10 bps (70) bps 180 bps 120 bps 40 bps 20 bps (40) bps (40) bps
          
 Total Operating
 Margin % *
 22.8%25.6%23.9%28.4%21.4%24.2%27.2%24.3%
          
 *Includes unfavorable
 operating margin impact of
 amortization expense from
 acquisition-related intangible
 assets
 50 bps 70 bps 270 bps 30 bps 380 bps 40 bps 110 bps 140 bps**
 ** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.32) on GAAP earnings per share for the first nine months of 2018.
 (1) The year-to-date period of 2017 included 90 basis points of favorability from the confidential legal settlement.


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)

ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)

 Three Months Ended Nine Months Ended Twelve Months Ended
 September 30, September 30, December 31,
Dollars in millions2018 2017 2018 2017 2017
Operating income(1)$889  $960  $2,724  $2,639  $3,485 
Less: Legal settlement income  (80)   (95) (95)
Adjusted operating income889  880  2,724  2,544  3,390 
Tax rate(2)25.5% 29.3% 25.0% 28.7% 28.3%
Income taxes(227) (259) (681) (731) (958)
Operating income after taxes$662  $621  $2,043  $1,813  $2,432 
          
Invested capital:         
Trade receivables$2,777  $2,672  $2,777  $2,672  $2,628 
Inventories1,338  1,225  1,338  1,225  1,220 
Net plant and equipment1,799  1,759  1,799  1,759  1,778 
Goodwill and intangible assets5,785  6,051  5,785  6,051  6,024 
Accounts payable and accrued expenses(1,844) (1,816) (1,844) (1,816) (1,848)
Other, net(494) 487  (494) 487  21 
Total invested capital$9,361  $10,378  $9,361  $10,378  $9,823 
          
Average invested capital$9,470  $10,354  $9,634  $10,051  $10,005 
Annualized return on average invested capital28.0% 24.0% 28.3% 24.1% 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, $5 million and $1 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the full year 2017, first nine months of 2017 and third quarter 2017, respectively, with no change in Net Income.

(2) The tax rate for the three months ended September 30, 2018 excludes a net discrete tax benefit of $15 million. The tax rate for the nine months ended September 30, 2018 represents the estimated effective tax rate for the full year of 2018, excluding the third quarter net discrete tax benefit. 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 September 30, 2018 was 28%, an improvement of 400 basis points. ROIC for the nine months ended September 30, 2018 was 28.3%, an improvement of 420 basis points. The improvement in both periods was primarily the result of the new U.S. tax rules and regulations.

ADJUSTED FREE CASH FLOW (UNAUDITED)

 Three Months Ended Nine Months Ended
 September 30, September 30,
In millions2018 2017 2018 2017
Net cash provided by operating activities$844  $780  $2,002  $1,707 
Less: Additions to plant and equipment(101) (78) (282) (219)
Free cash flow$743  $702  $1,720  $1,488 
Less: 2017 legal settlement  (65)   (95)
Adjusted free cash flow$743  $637  $1,720  $1,393 


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)

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, fourth quarter and third quarter 2017 financial results:

   Fourth Quarter 2017 Full Year 2017
 Dollars in millions  As
Reported(1)
Tax
Charge
Ex. Tax
Charge
 As
Reported(1)
Legal
Item
Tax
Charge
Ex. Items
 Total Revenue  $3,629$3,629 $14,314$14,314
 Operating Income  846846 3,485+$953,390
 Operating Margin  23.3%23.3% 24.3%+60 bps23.7%
 Tax Rate  109.6%+82.7%-pts26.9% 48.4%+20.1%-pts28.3%
 Net Income (Loss)  ($76)($658)$582 $1,687+$59($658)$2,286
 EPS  ($0.22)($1.92)$1.70 $4.86+$0.17($1.90)$6.59


    Third Quarter 2017
 Dollars in millions   As
Reported(1)
Legal
Item
Ex. Legal
Item
 Total Revenue   $3,615 —$3,615
 Operating Income    960+$80880
 Operating Margin   26.6%+230 bps24.3%
 EPS   $1.85+$0.14$1.71


(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 $1 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the full year 2017, fourth quarter 2017 and third quarter 2017, respectively, with no change in Net Income.

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

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Source: Illinois Tool Works Inc.