Earnings Release
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
Illinois Tool Works Inc. (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 (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
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
Net Income
$
587
$
525
$
1,123
$
993
Basic
$
1.70
$
1.47
$
3.25
$
2.76
Diluted
$
1.69
$
1.46
$
3.23
$
2.75
Cash Dividends Per Share:
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
Cash and equivalents
$
2,496
$
2,472
Trade receivables
2,629
2,357
Prepaid expenses and other current assets
246
218
Total current assets
6,570
6,123
Net plant and equipment
1,726
1,652
Intangible assets
1,366
1,463
Deferred income taxes
488
449
Liabilities and Stockholders’ Equity
Accrued expenses
1,172
1,202
Cash dividends payable
224
226
Income taxes payable
157
169
Total current liabilities
2,826
2,760
Deferred income taxes
121
134
Total noncurrent liabilities
8,322
8,182
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
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
Three Months Ended June 30, 2017
Dollars in millions
Total
Operating
Operating
Automotive OEM
$
820
$
182
22.3 %
Food Equipment
529
139
26.4 %
Test & Measurement and Electronics 519
114
21.9 %
Polymers & Fluids
437
94
21.4 %
Construction Products
425
102
24.0 %
Specialty Products
490
139
28.3 %
Total Segments
3,599
875
24.3 %
Total Company
$
3,599
$
874
24.3 %
Six Months Ended June 30, 2017
Dollars in millions
Total
Operating
Operating
Automotive OEM
$
1,648
$
384
23.3 %
Food Equipment
1,026
264
25.8 %
Test & Measurement and Electronics 999
210
21.0 %
Polymers & Fluids
863
182
21.0 %
Construction Products
820
191
23.3 %
Specialty Products
953
263
27.6 %
Total Segments
7,070
1,706
24.1 %
Total Company
$
7,070
$
1,683
23.8 %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
Q2 2017 vs. Q2 2016 Favorable/(Unfavorable)
Operating Revenue Automotive
Food
Test &
Welding
Polymers &
Construction
Specialty
Total
OEM
Equipment
Measurement
Fluids
Products
Products
ITW
Organic
4.4
%
0.6
%
4.3
%
3.3
%
(1.0
)%
1.6
%
3.9
%
2.6
%
Acquisitions/
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 Food
Test &
Welding
Polymers & Construction
Specialty
Total
OEM
Equipment
Measurement
Fluids
Products
Products
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/
(270) bps
--
--
--
--
--
30 bps
(60) bps
Restructuring/Other
(80) bps
40 bps
10 bps
160 bps
(30) bps
70 bps
20 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
1H 2017 vs 1H 2016 Favorable/(Unfavorable)
Operating Revenue Automotive
Food
Test &
Welding
Polymers
Construction
Specialty
Total
OEM
Equipment
Measurement
& Fluids
Products
Products
ITW
Organic
6.7
%
1.3
%
4.9
%
1.5
%
0.2
%
2.2
%
2.4
%
3.0
%
Acquisitions/
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 Food
Test &
Welding
Polymers
Construction
Specialty
Total
OEM
Equipment
Measurement
& Fluids
Products
Products
ITW
Operating Leverage
90 bps
20 bps
140 bps
40 bps
--
50 bps
60 bps
60 bps
Changes in Variable Margin & OH Costs
(50) bps
40 bps
250 bps
110 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/
(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
Food
Test &
Welding
Polymers
Construction
Specialty
Total
OEM
Equipment
Measurement
& Fluids
Products
Products
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)
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
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
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
Dollars in millions
2017
2017
Pension contribution adjustment
115
160
Adjusted free cash flow
$
502
$
946
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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