ITW Delivers $1.90 Earnings per Share, up 23%

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| Source: Illinois Tool Works Inc.

Raises guidance for 2018 after solid Q1 financial results

  • GAAP EPS was $1.90, up 23% versus prior year
  • Total revenue was $3.7 billion, an increase of 8%; organic growth was 3%
  • Operating margin was 24.1%, an increase of 90 bps
  • Operating income was up 12% to $903 million and after-tax ROIC was 27.7%
  • Raising full year guidance by $0.15 at the midpoint, up 17% versus prior year

GLENVIEW, Ill., April 26, 2018 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE:ITW) today reported first quarter 2018 GAAP earnings of $1.90 per share, a 23% increase compared to the year ago period. Revenue was up 8% with 3% organic growth.

Operating income was $903 million in the quarter, an increase of 12 percent, and operating margin was 24.1 percent, an increase of 90 basis points. Enterprise Initiatives contributed 110 basis points of margin improvement, more than offsetting 50 basis points of unfavorable price/cost margin impact. While price/cost impact was dilutive to margin percentage, on a dollar basis pricing actions more than offset the impact of raw material cost inflation.

“We are off to a solid start in 2018,” said E. Scott Santi, Chairman and Chief Executive Officer. “Despite lower than expected auto builds impacting our Automotive OEM segment, we delivered three percent organic revenue growth which, along with strong execution on our enterprise initiatives and disciplined price/cost management, resulted in operating earnings growth of 12 percent year on year for the quarter. As we look ahead at the balance of the year, the combination of ITW’s resilient high quality business portfolio, positive underlying demand trends, and additional benefits from enterprise initiatives have the company well positioned for continued top and bottom line growth. As a result, we are raising our full year EPS guidance by $0.15 at the mid-point.”

All seven of the company’s business segments delivered positive year on year organic growth, led by Welding (+8 percent), Test & Measurement and Electronics (+8 percent) and Construction Products (+3 percent).

After-tax return on invested capital was 27.7 percent, an improvement of 400 basis points, of which 350 basis points is a result of the new U.S tax rules and regulations.

In the first quarter, Free Cash Flow was $444 million, an increase of 11 percent. The company repurchased $500 million of its own shares.

2018 Guidance
ITW is raising its 2018 full-year guidance by $0.15 at the mid-point to a range of $7.60 to $7.80 per share, up from prior guidance of $7.45 to $7.65 per share, reflecting 17 percent EPS growth year on year at the midpoint.  The company expects organic growth of three to four percent, operating margin in the range of 25 to 25.5 percent, free cash flow at or above 100 percent of net income, and an effective tax rate of approximately 25 percent for the year.

For the second quarter 2018, the company expects earnings to be in the range of $1.90 to $2.00 per share, up 15 percent at the mid-point, with organic growth of three to four percent.

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, after-tax return on invested capital, timing and amount of share repurchases and expected dividend payout ratio. 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.

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

Hashtags: #ITW

Media Contact
Illinois Tool Works
Trisha Knych
Tel: 224.661.7566
mediarelations@itw.com
                                 Investor Relations
Illinois Tool Works
Karen Fletcher
Tel: 224.661.7433
investorrelations@itw.com
   

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

 Three Months Ended
 March 31,
In millions except per share amounts2018 2017(1)
Operating Revenue$3,744  $3,471 
Cost of revenue2,181  2,003 
Selling, administrative, and research and development expenses612  608 
Amortization and impairment of intangible assets48  53 
Operating Income903  807 
Interest expense(66) (64)
Other income (expense)12  6 
Income Before Taxes849  749 
Income Taxes197  213 
Net Income$652  $536 
    
Net Income Per Share:   
Basic$1.92  $1.55 
Diluted$1.90  $1.54 
    
Cash Dividends Per Share:   
Paid$0.78  $0.65 
Declared$0.78  $0.65 
    
Shares of Common Stock Outstanding During the Period:   
Average 340.2   346.2 
Average assuming dilution 342.8   349.0 
    


(1) The first quarter of 2017 has been restated to reflect the adoption of new accounting guidance in 2018 which resulted in the presentation of $2 million 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 millionsMarch 31, 2018 December 31, 2017
Assets   
Current Assets:   
Cash and equivalents$1,940  $3,094 
Trade receivables2,874  2,628 
Inventories1,335  1,220 
Prepaid expenses and other current assets274  336 
Total current assets6,423  7,278 
    
Net plant and equipment1,829  1,778 
Goodwill4,795  4,752 
Intangible assets1,226  1,272 
Deferred income taxes658  505 
Other assets1,232  1,195 
 $16,163  $16,780 
    
Liabilities and Stockholders' Equity   
Current Liabilities:   
Short-term debt$660  $850 
Accounts payable655  590 
Accrued expenses1,250  1,258 
Cash dividends payable264  266 
Income taxes payable96  89 
Total current liabilities2,925  3,053 
    
Noncurrent Liabilities:   
Long-term debt6,889  7,478 
Deferred income taxes689  164 
Noncurrent income taxes payable614  614 
Other liabilities883  882 
Total noncurrent liabilities9,075  9,138 
    
Stockholders’ Equity:   
Common stock6  6 
Additional paid-in-capital1,220  1,218 
Retained earnings20,228  20,210 
Common stock held in treasury(16,055) (15,562)
Accumulated other comprehensive income (loss)(1,240) (1,287)
Noncontrolling interest4  4 
Total stockholders’ equity4,163  4,589 
 $16,163  $16,780 
        

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

Three Months Ended March 31, 2018
Dollars in millionsTotal RevenueOperating IncomeOperating Margin
Automotive OEM$901 $217 24.1%
Food Equipment527 130 24.6%
Test & Measurement and Electronics543 127 23.4%
Welding423 117 27.7%
Polymers & Fluids442 92 20.9%
Construction Products428 95 22.2%
Specialty Products485 130 26.7%
Intersegment(5) %
Total Segments3,744 908 24.3%
Unallocated (5)%
Total Company$3,744 $903 24.1%
         


Q1 2018 vs. Q1 2017 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic1.0%0.4%7.6%7.6%0.3%2.9%0.5%2.6%
Acquisitions/
Divestitures
%%%%%%(0.3)%%
Translation7.8%5.6%5.5%1.8%3.5%5.4%4.7%5.3%
Operating Revenue8.8%6.0%13.1%9.4%3.8%8.3%4.9%7.9%
                 

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

Q1 2018 vs. Q1 2017 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood EquipmentTest &
Measurement
and
Electronics
WeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage10 bps10 bps210 bps110 bps20 bps70 bps10 bps 60 bps
Changes in Variable Margin & OH Costs(80) bps(80) bps100 bps(100) bps(40) bps(90) bps(40) bps 
Total Organic (70) bps (70) bps 310 bps 10 bps (20) bps (20) bps (30) bps 60 bps
Acquisitions/
Divestitures
        
Restructuring/Other 40 bps 20 bps 30 bps(10) bps 50 bps (10) bps 10 bps 30 bps
Total Operating Margin Change (30) bps (50) bps 340 bps  30 bps (30) bps (20) bps 90 bps
         
Total Operating Margin % *24.1%24.6%23.4%27.7%20.9%22.2%26.7%24.1%
         
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 50 bps 70 bps 280 bps 30 bps 380 bps 40 bps 120 bps 140 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.11) on GAAP earnings per share for the first quarter of 2018.
 


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%
                 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)

AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)

 Three Months Ended Twelve Months Ended
 March 31, December 31,
Dollars in millions2018 2017 2017
Operating income$903  $807  $3,485 
Less: Legal settlement income    (95)
Adjusted operating income903  807  3,390 
Tax rate(1)25.0% 28.3% 28.3%
Income taxes(226) (229) (958)
Operating income after taxes$677  $578  $2,432 
      
Invested capital:     
Trade receivables$2,874  $2,534  $2,628 
Inventories1,335  1,158  1,220 
Net plant and equipment1,829  1,674  1,778 
Goodwill and intangible assets6,021  6,016  6,024 
Accounts payable and accrued expenses(1,905) (1,723) (1,848)
Other, net(382) 222  21 
Total invested capital$9,772  $9,881  $9,823 
      
Average invested capital$9,797  $9,748  $10,005 
Annualized return on average invested capital27.7% 23.7% 24.3%
         


(1) The tax rate for the three months ended March 31, 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.
   

After-tax return on invested capital for the three months ended March 31, 2018 was 27.7 percent, an improvement of 400 basis points, of which 350 basis points is a result of 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
 March 31,
Dollars in millions2018 2017
Net cash provided by operating activities$538  $463 
Less: Additions to plant and equipment(94) (64)
Free cash flow$444  $399 
        

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 in 2017. The following schedule illustrates the impact of these items on the Company’s full-year 2017 financial results:

Dollars in millionsFull Year 2017(1)Legal
Item
Tax
Charge
Full Year 2017
Ex. Items
Total Revenue$14,314    $14,314 
Operating Income 3,485 +$95   3,390 
Operating Margin 24.3%+60 bps   23.7%
Tax Rate 48.4%  +20.1%-pts  28.3%
Net Income$1,687 +$59$(658)$2,286 
EPS$4.86 +$0.17$(1.90)$6.59 
            


(1) Full year 2017 has been restated to reflect the adoption of new accounting guidance in 2018 which resulted in the presentation of $9 million of other net periodic benefit income in Other income (expense) rather than in Operating Income, with no change in Net Income.