Earnings Release
ITW Reports Fourth-Quarter and Full-Year 2017 Results
Fourth-Quarter 2017 Highlights:
-- Total revenue was $3.6 billion, an increase of 7%; organic growth was 4%
-- Operating margin was 23.4%, an increase of 160 bps
-- GAAP EPS was $(0.22), including a $658 million one-time tax charge
-- Excluding the one-time tax charge, EPS was $1.70, an increase of 17%
Full-Year 2017 Highlights:
-- Total revenue was $14.3 billion, an increase of 5%; organic growth was 3%
-- Operating margin was 24.4%, an increase of 190 bps
-- After-tax ROIC was 24.4%, an increase of 230 bps
• GAAP EPS was $4.86, including the one-time tax charge and a previously disclosed favorable legal settlement
-- EPS was $6.59 excluding these two items, an increase of 16%
2018 Guidance:
• Raising GAAP EPS guidance by 6% at the midpoint to $7.45 to $7.65 and accelerating previously announced plans to increase dividend pay-out ratio
Illinois Tool Works Inc. (ITW) today reported its fourth-quarter and full-year 2017 results.
"The ITW team delivered another year of strong execution and performance in 2017," said E. Scott Santi, Chairman and Chief Executive Officer. "In 2017, excluding one-time tax and legal items, we grew EPS 16%, improved operating margin by 120 basis points to an all-time high of 23.7% and increased after-tax return on invested capital 230 basis points to a record 24.4%."
"We also continued to make meaningful progress on our focused efforts to accelerate organic growth. Our 2017 organic growth rate of 3% was up almost 2 percentage points versus 2016. In addition, our Q4 organic growth rate of 4% gives us good momentum going into 2018."
"Overall, these results demonstrate continued progress in our efforts to position ITW to generate consistent differentiated performance on a sustained basis," Santi added. "Through the combination of ITW’s high quality business portfolio and our ongoing focus on leveraging ITW’s powerful business model to full potential, we are well positioned to deliver strong results in 2018 and beyond."
Fourth-quarter revenue grew 7% to $3.6 billion as organic revenue increased 4% and foreign currency translation increased revenue by 3%. GAAP EPS of $(0.22) includes a one-time $658 million charge associated with the passage of the "Tax Cuts and Jobs Act." The charge encompasses several elements, including a repatriation tax on accumulated overseas earnings and a benefit from the revaluation of deferred tax assets and liabilities. Excluding this one-time item, EPS increased 17% to $1.70. Operating margin was 23.4%, an increase of 160 basis points, with enterprise initiatives contributing 140 basis points of margin improvement.
Organic revenue growth was positive in six of seven segments led by Test & Measurement and Electronics (+9%), Welding (+6%) and Specialty Products (+5%).
Full-year 2017 revenue increased 5% to $14.3 billion with organic growth of 3%. GAAP EPS of $4.86 includes the above-mentioned unfavorable tax impact and a $0.17 benefit from a previously disclosed favorable legal item. Excluding these one-time items, EPS was $6.59, an increase of 16% year-on-year. Operating margin was 24.4% and includes a 70 basis point benefit from the legal item. Excluding this item, operating margin was 23.7%, an increase of 120 basis points.
Full-Year and First Quarter 2018 Guidance
ITW is raising its 2018 full-year guidance by $0.40 at the midpoint to reflect the benefits of a reduction in the tax rate to an estimated range of 25 to 26% and current foreign exchange rates. The company expects 2018 GAAP earnings to be in the range of $7.45 to $7.65 per share with organic growth of 3 to 4%.
The company forecasts first quarter 2018 GAAP earnings to be in the range of $1.80 to $1.90 per share with organic growth of 3 to 4%.
Subject to formal Board approval, ITW expects to accelerate previously announced plans to increase its dividend pay-out ratio from 43% to approximately 50% of Free Cash Flow on a run rate basis in August of 2018.
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, exchange rates, free cash flow, effective tax rate, expected dividend pay-out ratio, expected repatriation, 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 (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. 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
Twelve Months Ended
In millions except per share amounts
2017
2016
2017
2016
Operating Revenue
$
3,629
$
3,399
$
14,314
$
13,599
Cost of revenue
2,124
2,006
8,309
7,896
Selling, administrative, and research and development expenses 605
597
2,400
2,415
Legal settlement (income)
--
--
(95
)
--
Amortization and impairment of intangible assets
50
54
206
224
Operating Income
850
742
3,494
3,064
Interest expense
(66
)
(63
)
(260
)
(237
)
Other income (expense)
12
47
36
81
Income Before Taxes
796
726
3,270
2,908
Income taxes
872
219
1,583
873
Net Income (Loss)
$
(76
)
$
507
$
1,687
$
2,035
Net Income (Loss) Per Share:
Basic
$
(0.22 )
$
1.46
$
4.90
$
5.73
Diluted
$
(0.22 )
$
1.45
$
4.86
$
5.70
Cash Dividends Per Share:
Declared
$
0.78
$
0.65
$
2.86
$
2.40
Shares of Common Stock Outstanding During the Period:
Average
342.1
348.3
344.1
355.0
Average assuming dilution
342.1
350.4
346.8
357.1
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millions
December 31, 2017
December 31, 2016
Cash and equivalents
$
3,094
$
2,472
Trade receivables
2,628
2,357
Prepaid expenses and other current assets
336
218
Total current assets
7,278
6,123
Net plant and equipment
1,778
1,652
Intangible assets
1,272
1,463
Deferred income taxes
505
449
Liabilities and Stockholders’ Equity
Accrued expenses
1,258
1,202
Cash dividends payable
266
226
Income taxes payable
89
169
Total current liabilities
3,053
2,760
Deferred income taxes
164
134
Noncurrent income taxes payable
614
--
Total noncurrent liabilities
9,138
8,182
Additional paid-in-capital
1,218
1,188
Retained earnings
20,210
19,505
Common stock held in treasury
(15,562
)
(14,638
)
Accumulated other comprehensive income (loss) (1,287
)
(1,807
)
Noncontrolling interest
4
5
Total stockholders’ equity
4,589
4,259
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended December 31, 2017
Dollars in millions
Total Revenue
Operating Income Operating Margin
Automotive OEM
$
828
$
191
23.1
%
Food Equipment
548
142
25.8
%
Test & Measurement and Electronics 545
127
23.4
%
Polymers & Fluids
427
85
19.9
%
Construction Products
412
96
23.4
%
Specialty Products
487
126
25.9
%
Total Segments
3,629
870
24.0
%
Total Company
$
3,629
$
850
23.4
%
Twelve Months Ended December 31, 2017
Dollars in millions
Total Revenue
Operating Income Operating Margin
Automotive OEM
$
3,271
$
747
22.8
%
Food Equipment
2,123
556
26.2
%
Test & Measurement and Electronics 2,069
464
22.4
%
Polymers & Fluids
1,724
357
20.7
%
Construction Products
1,672
399
23.9
%
Specialty Products
1,938
527
27.2
%
Total Segments
14,314
3,465
24.2
%
Total Company
$
14,314
$
3,494
24.4
%
* Unallocated for the twelve months ended December 31, 2017 includes the favorable impact from the legal settlement.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q4 2017 vs. Q4 2016 Favorable/(Unfavorable)
Operating Revenue Automotive OEM Food Equipment
Test & Measurement and Electronics Welding Polymers & Fluids Construction Products Specialty Products
Total ITW
Organic
2.5
%
(0.4
)%
8.8
%
6.1 %
2.5
%
3.5
%
4.8
%
3.7
%
Acquisitions/
--
%
--
%
--
%
--
%
--
%
--
%
(0.8
)%
(0.1 )%
Translation
4.5
%
3.4
%
2.9
%
1.3 %
2.4
%
3.2
%
2.9
%
3.2
%
Operating Revenue 7.0
%
3.0
%
11.7
%
7.4 %
4.9
%
6.7
%
6.9
%
6.8
%
Q4 2017 vs. Q4 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
40 bps
(10) bps
230 bps
110 bps
70 bps
80 bps
90 bps
90 bps
Changes in Variable Margin & OH Costs
--
50 bps
130 bps
140 bps
--
130 bps
40 bps
60 bps
Total Organic
40 bps
40 bps
360 bps
250 bps
70 bps
210 bps
130 bps
150 bps
Acquisitions/
--
--
--
--
--
--
20 bps
--
Restructuring/Other
(30) bps
70 bps
(30) bps
(50) bps
20 bps
(10) bps
40 bps
10 bps
Total Operating Margin Change
10 bps
110 bps
330 bps
200 bps
90 bps
200 bps
190 bps
160 bps
Total Operating Margin % *
23.1
%
25.8
%
23.4
%
26.4
% 19.9
%
23.4
%
25.9
%
23.4
%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 50 bps
80 bps
280 bps
40 bps
400 bps
50 bps
130 bps
140 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.10) on GAAP earnings per share for the fourth quarter of 2017.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
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/
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
%
Full Year 2017 vs Full Year 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
60 bps
20 bps
130 bps
70 bps
30 bps
70 bps
70 bps
70 bps
Changes in Variable Margin & OH Costs
(30) bps
30 bps
210 bps
90 bps
50 bps
30 bps
90 bps
140 bps
Total Organic
30 bps
50 bps
340 bps
160 bps
80 bps
100 bps
160 bps
210 bps
Acquisitions/
(120) bps
--
--
--
--
--
30 bps
(30) bps
Restructuring/Other
(40) bps
30 bps
10 bps
50 bps
(40) bps
50 bps
(30) bps
10 bps
Total Operating Margin Change
(130) bps
80 bps
350 bps
210 bps
40 bps
150 bps
160 bps
190 bps
Total Operating Margin % *
22.8
%
26.2
%
22.4
%
27.0
% 20.7
%
23.9
%
27.2
%
24.4
%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 60 bps
70 bps
320 bps
40 bps
410 bps
50 bps
130 bps
150 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.42) on GAAP earnings per share for 2017.
Q4 2016 vs. Q4 2015 Favorable/(Unfavorable)
Operating Revenue Automotive OEM
Food Equipment
Test & Measurement and Electronics Welding
Polymers & Fluids Construction Products Specialty Products
Total ITW
Organic
7.0
%
2.6
%
(0.3
)%
(7.9 )%
2.1
%
2.7
%
1.2
%
1.5
%
Acquisitions/
20.8
%
--
%
--
%
--
%
--
%
(0.2
)%
(0.5
)%
3.8
%
Translation
(2.0
)%
(2.8
)%
(2.1
)%
(0.7 )%
(0.8
)%
(0.5
)%
(1.2
)%
(1.6 )%
Operating Revenue 25.8
%
(0.2
)%
(2.4
)%
(8.6 )%
1.3
%
2.0
%
(0.5
)%
3.7
%
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/
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)
IMPACT OF THE "TAX CUTS AND JOBS ACT" AND LEGAL SETTLEMENT
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 schedules illustrate the impact of these items on the Company’s reported fourth quarter and full-year 2017 financial results.
Fourth Quarter
Dollars in millions Q4’16 As Reported Q4’17 As Reported Tax
Q4 ’17 Ex. Tax Charge Change Vs. Prior Year
Total Revenue
$3,399
$3,629
--
$3,629
+7%
Operating Income
$742
$850
--
$850
+14%
Operating Margin
21.8%
23.4%
--
23.4%
+160 bps
Tax Rate
30.0%
109.6%
+82.7%-pts 26.9%
(310) bps
Net Income (Loss)
$507
($76)
($658)
$582
+15%
EPS
$1.45
($0.22)
($1.92)
$1.70
+17%
Full-Year
Dollars in millions 2016 As Reported 2017 As Reported Legal
Tax
2017 Ex. Items Change Vs. Prior Year
Total Revenue
$13,599
$14,314
--
--
$14,314
+5%
Operating Income
$3,064
$3,494
+$95
--
$3,399
+11%
Operating Margin
22.5%
24.4%
+70 bps --
23.7%
+120 bps
Tax Rate
30.0%
48.4%
--
+20.1%-pts 28.3%
(170) bps
Net Income
$2,035
$1,687
+$59
($658)
$2,286
+12%
EPS
$5.70
$4.86
+$0.17
($1.90)
$6.59
+16%
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
Three Months Ended
Twelve Months Ended
Dollars in millions
2017
2016
2017
2016
Operating income
$
850
$
742
$
3,494
$
3,064
Less: Legal settlement income
--
--
(95
)
--
Adjusted operating income
850
742
3,399
3,064
Adjusted tax rate
26.9
%
30.0
%
28.3
%
30.0
%
Income taxes
(229
)
(222
)
(961
)
(919
)
Operating income after taxes
$
621
$
520
$
2,438
$
2,145
Trade receivables
$
2,628
$
2,357
$
2,628
$
2,357
Inventories
1,220
1,076
1,220
1,076
Net plant and equipment
1,778
1,652
1,778
1,652
Goodwill and intangible assets
6,024
6,021
6,024
6,021
Accounts payable and accrued expenses
(1,848
)
(1,713
)
(1,848
)
(1,713
)
Total invested capital
$
9,823
$
9,616
$
9,823
$
9,616
Average invested capital
$
10,101
$
9,902
$
10,005
$
9,780
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) --
(59
)
--
(91
)
Adjusted average invested capital
$
10,101
$
9,843
$
10,005
$
9,689
Adjusted return on average invested capital
24.6
%
21.1
%
24.4
%
22.1
%
A reconciliation of the 2017 effective tax rate to the adjusted tax rate excluding the discrete tax charge related to the 2017 U.S. tax legislation is as follows:
Three Months Ended
Twelve Months Ended
December 31, 2017
December 31, 2017
Income Taxes
Tax Rate
Income Taxes
Tax Rate
As reported
$
872
109.6 %
$
1,583
48.4
%
Discrete tax charge related to 2017 U.S. tax legislation (658
)
(82.7 )%
(658
)
(20.1 )%
As adjusted
$
214
26.9
%
$
925
28.3
%
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
FREE CASH FLOW (UNAUDITED)
Three Months Ended
Twelve Months Ended
Dollars in millions
2017
2016
2017
2016
Net cash provided by operating activities
$
695
$
664
$
2,402
$
2,302
Less: Additions to plant and equipment
(78
)
(71
)
(297
)
(273
)
Free cash flow
$
617
$
593
$
2,105
*
$
2,029
Net income (loss), as reported
$
(76 )
$
507
$
1,687
$
2,035
Discrete tax charge related to 2017 U.S. tax legislation 658
--
658
--
Adjusted net income
$
582
$
507
$
2,345
$
2,035
Free cash flow to adjusted net income conversion rate
106
%
117
%
90
%
*
100
%
* Excluding $115 million related to an additional discretionary pension contribution, free cash flow would have been $2.2 billion (or 95% of adjusted net income) for the twelve months ended December 31, 2017.
Investor Contact: Karen Fletcher 224.661.7433 or kfletcher@itw.com
Media Contact: Trisha Knych 224.661.7566 or tknych@itw.com
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