ITW Reports Second-Quarter 2017 Results Second-q

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Posted On: 07/24/2017 9:00:23 AM

Posted By: News Desk 2018

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 amounts	2017			2016			2017			2016
Operating Revenue	$	3,599		$	3,431		$	7,070		$	6,705
Cost of revenue	2,087			1,967			4,091			3,863
Selling, administrative, and research and development expenses	586			617			1,191			1,214
Amortization and impairment of intangible assets	52			55			105			114
Operating Income	874			792			1,683			1,514
Interest expense	(65		)	(58		)	(129		)	(116		)
Other income (expense)	10			17			14			21
Income Before Taxes	819			751			1,568			1,419
Income taxes	232			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:
Average	344.7			356.6			345.4			359.3
Average assuming dilution	347.5			358.5			348.3			361.2


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

In millions	June 30, 2017			December 31, 2016
Assets
Current Assets:
Cash and equivalents	$	2,496		$	2,472
Trade receivables	2,629			2,357
Inventories	1,199			1,076
Prepaid expenses and other current assets	246			218
Total current assets	6,570			6,123

Net plant and equipment	1,726			1,652
Goodwill	4,675			4,558
Intangible assets	1,366			1,463
Deferred income taxes	488			449
Other assets	1,097			956
	$	15,922		$	15,201

Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt	$	691		$	652
Accounts payable	582			511
Accrued expenses	1,172			1,202
Cash dividends payable	224			226
Income taxes payable	157			169
Total current liabilities	2,826			2,760

Noncurrent Liabilities:
Long-term debt	7,360			7,177
Deferred income taxes	121			134
Other liabilities	841			871
Total noncurrent liabilities	8,322			8,182

Stockholders’ Equity:
Common stock	6			6
Additional paid-in-capital	1,196			1,188
Retained earnings	20,180			19,505
Common stock held in treasury	(15,095		)	(14,638		)
Accumulated other comprehensive income (loss)	(1,516		)	(1,807		)
Noncontrolling interest	3			5
Total stockholders’ equity	4,774			4,259
	$	15,922		$	15,201


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

Three Months Ended June 30, 2017
Dollars in millions	Total Revenue			Operating Income				Operating Margin
Automotive OEM	$	820			$	182		22.3	%
Food Equipment	529			139				26.4	%
Test & Measurement and Electronics	519			114				21.9	%
Welding	385			105				27.2	%
Polymers & Fluids	437			94				21.4	%
Construction Products	425			102				24.0	%
Specialty Products	490			139				28.3	%
Intersegment	(6		)	—				—	%
Total Segments	3,599			875				24.3	%
Unallocated	—			(1			)	—	%
Total Company	$	3,599			$	874		24.3	%


Six Months Ended June 30, 2017
Dollars in millions	Total Revenue			Operating Income			Operating Margin
Automotive OEM	$	1,648		$	384		23.3	%
Food Equipment	1,026			264			25.8	%
Test & Measurement and Electronics	999			210			21.0	%
Welding	772			212			27.4	%
Polymers & Fluids	863			182			21.0	%
Construction Products	820			191			23.3	%
Specialty Products	953			263			27.6	%
Intersegment	(11		)	—			—	%
Total Segments	7,070			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 Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	4.4	%	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 Revenue	22.2	%	(1.4	)%	2.5	%	2.9	%	(1.3	)%	0.4	%	1.1	%	4.9	%

Q2 2017 vs. Q2 2016 Favorable/(Unfavorable)

Change in Operating Margin

Automotive OEM

Food Equipment

Test & Measurement and Electronics

Welding

Polymers & Fluids

Construction Products

Specialty Products

Total ITW

Operating Leverage

70 bps

10 bps

120 bps

60 bps

(20) bps

40 bps

80 bps

50 bps

Changes in Variable Margin & OH Costs

(70) bps

90 bps

200 bps

10 bps

100 bps

(140) bps

100 bps

110 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) bps

40 bps

10 bps

160 bps

(30) bps

70 bps

20 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 assets

50 bps

80 bps

320 bps

40 bps

400 bps

60 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 second quarter of 2017.


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

1H 2017 vs 1H 2016 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	6.7	%	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 Revenue	24.2	%	(0.9	)%	2.9	%	1.1	%	0.3	%	1.5	%	—	%	5.4	%

1H 2017 vs. 1H 2016 Favorable/(Unfavorable)

Change in Operating Margin

Automotive OEM

Food Equipment

Test & Measurement and Electronics

Welding

Polymers & Fluids

Construction Products

Specialty Products

Total ITW

Operating Leverage

90 bps

20 bps

140 bps

40 bps

—

50 bps

60 bps

Changes in Variable Margin & OH Costs

(50) bps

40 bps

250 bps

110 bps

(20) bps

90 bps

110 bps

Total Organic

40 bps

60 bps

390 bps

150 bps

110 bps

30 bps

150 bps

170 bps

Acquisitions/ Divestitures

(270) bps

—

30 bps

(60) bps

Restructuring/Other

(50) bps

40 bps

—

150 bps

(70) bps

20 bps

(20) bps

10 bps

Total Operating Margin Change

(280) bps

100 bps

390 bps

300 bps

40 bps

50 bps

160 bps

120 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 assets

60 bps

80 bps

340 bps

50 bps

410 bps

60 bps

130 bps

150 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 Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	5.1	%	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 Revenue	13.3	%	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 millions	2017			2016			2017			2016			2016
Operating income	$	874		$	792		$	1,683		$	1,514		$	3,064
Tax rate	28.4		%	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
Inventories	1,199			1,145			1,199			1,145			1,076
Net plant and equipment	1,726			1,580			1,726			1,580			1,652
Goodwill and intangible assets	6,041			5,907			6,041			5,907			6,021
Accounts payable and accrued expenses	(1,754		)	(1,635		)	(1,754		)	(1,635		)	(1,713		)
Other, net	488			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 capital	24.8		%	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 millions	2017				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 rate	66		%	*	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 millions	2017			2017
Free cash flow	$	387		$	786
Pension contribution adjustment	115			160
Adjusted free cash flow	$	502		$	946

Net income	$	587		$	1,123
Adjusted free cash flow to net income conversion rate	85		%	84		%

Contact: Mike Drazin 224.661.7433 or mdrazin@itw.com

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