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.
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 amounts | 2018 | 2017(1) | |||||
| Operating Revenue | $ | 3,744 | $ | 3,471 | |||
| Cost of revenue | 2,181 | 2,003 | |||||
| Selling, administrative, and research and development expenses | 612 | 608 | |||||
| Amortization and impairment of intangible assets | 48 | 53 | |||||
| Operating Income | 903 | 807 | |||||
| Interest expense | (66 | ) | (64 | ) | |||
| Other income (expense) | 12 | 6 | |||||
| Income Before Taxes | 849 | 749 | |||||
| Income Taxes | 197 | 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 millions | March 31, 2018 | December 31, 2017 | |||||
| Assets | |||||||
| Current Assets: | |||||||
| Cash and equivalents | $ | 1,940 | $ | 3,094 | |||
| Trade receivables | 2,874 | 2,628 | |||||
| Inventories | 1,335 | 1,220 | |||||
| Prepaid expenses and other current assets | 274 | 336 | |||||
| Total current assets | 6,423 | 7,278 | |||||
| Net plant and equipment | 1,829 | 1,778 | |||||
| Goodwill | 4,795 | 4,752 | |||||
| Intangible assets | 1,226 | 1,272 | |||||
| Deferred income taxes | 658 | 505 | |||||
| Other assets | 1,232 | 1,195 | |||||
| $ | 16,163 | $ | 16,780 | ||||
| Liabilities and Stockholders' Equity | |||||||
| Current Liabilities: | |||||||
| Short-term debt | $ | 660 | $ | 850 | |||
| Accounts payable | 655 | 590 | |||||
| Accrued expenses | 1,250 | 1,258 | |||||
| Cash dividends payable | 264 | 266 | |||||
| Income taxes payable | 96 | 89 | |||||
| Total current liabilities | 2,925 | 3,053 | |||||
| Noncurrent Liabilities: | |||||||
| Long-term debt | 6,889 | 7,478 | |||||
| Deferred income taxes | 689 | 164 | |||||
| Noncurrent income taxes payable | 614 | 614 | |||||
| Other liabilities | 883 | 882 | |||||
| Total noncurrent liabilities | 9,075 | 9,138 | |||||
| Stockholders’ Equity: | |||||||
| Common stock | 6 | 6 | |||||
| Additional paid-in-capital | 1,220 | 1,218 | |||||
| Retained earnings | 20,228 | 20,210 | |||||
| Common stock held in treasury | (16,055 | ) | (15,562 | ) | |||
| Accumulated other comprehensive income (loss) | (1,240 | ) | (1,287 | ) | |||
| Noncontrolling interest | 4 | 4 | |||||
| Total stockholders’ equity | 4,163 | 4,589 | |||||
| $ | 16,163 | $ | 16,780 | ||||
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| Three Months Ended March 31, 2018 | ||||||||
| Dollars in millions | Total Revenue | Operating Income | Operating Margin | |||||
| Automotive OEM | $ | 901 | $ | 217 | 24.1 | % | ||
| Food Equipment | 527 | 130 | 24.6 | % | ||||
| Test & Measurement and Electronics | 543 | 127 | 23.4 | % | ||||
| Welding | 423 | 117 | 27.7 | % | ||||
| Polymers & Fluids | 442 | 92 | 20.9 | % | ||||
| Construction Products | 428 | 95 | 22.2 | % | ||||
| Specialty Products | 485 | 130 | 26.7 | % | ||||
| Intersegment | (5 | ) | — | — | % | |||
| Total Segments | 3,744 | 908 | 24.3 | % | ||||
| Unallocated | — | (5 | ) | — | % | |||
| Total Company | $ | 3,744 | $ | 903 | 24.1 | % | ||
| Q1 2018 vs. Q1 2017 Favorable/(Unfavorable) | ||||||||||||||||
| Operating Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
| Organic | 1.0 | % | 0.4 | % | 7.6 | % | 7.6 | % | 0.3 | % | 2.9 | % | 0.5 | % | 2.6 | % |
| Acquisitions/ Divestitures | — | % | — | % | — | % | — | % | — | % | — | % | (0.3 | )% | — | % |
| Translation | 7.8 | % | 5.6 | % | 5.5 | % | 1.8 | % | 3.5 | % | 5.4 | % | 4.7 | % | 5.3 | % |
| Operating Revenue | 8.8 | % | 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 Margin | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
| Operating Leverage | 10 bps | 10 bps | 210 bps | 110 bps | 20 bps | 70 bps | 10 bps | 60 bps | ||||||||
| Changes in Variable Margin & OH Costs | (80) bps | (80) bps | 100 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 Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
| Organic | 4.1 | % | 0.5 | % | 4.8 | % | 3.2 | % | 1.0 | % | 2.9 | % | 3.5 | % | 2.9 | % |
| Acquisitions/ Divestitures | 8.9 | % | — | % | — | % | — | % | — | % | — | % | (1.1 | )% | 1.8 | % |
| Translation | 1.2 | % | 0.1 | % | — | % | 0.3 | % | 1.0 | % | 1.0 | % | 0.4 | % | 0.6 | % |
| Operating Revenue | 14.2 | % | 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 millions | 2018 | 2017 | 2017 | ||||||||
| Operating income | $ | 903 | $ | 807 | $ | 3,485 | |||||
| Less: Legal settlement income | — | — | (95 | ) | |||||||
| Adjusted operating income | 903 | 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 | |||||
| Inventories | 1,335 | 1,158 | 1,220 | ||||||||
| Net plant and equipment | 1,829 | 1,674 | 1,778 | ||||||||
| Goodwill and intangible assets | 6,021 | 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 capital | 27.7 | % | 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 millions | 2018 | 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 millions | Full 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. | |