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Illinois Tool Works, Inc.$150.92($.29)(.19%)

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 ITW Reports Fourth Quarter and Full Year Results
   Friday, February 01, 2019 8:00:00 AM ET

Fourth-Quarter Highlights

  • Total revenue $3.6 billion; organic growth +1%; North America +4%
  • Operating margin 24.0%, an increase of 70 bps
  • GAAP EPS $1.83 vs. 2017 GAAP EPS of $(0.22); Excluding one-time 2017 tax charge of $658 million, EPS increased 8%, +10% excluding $(0.04) currency impact

Full-Year Highlights

  • Total revenue $14.8 billion, an increase of 3%; organic growth +2%
  • Operating margin 24.3%, an increase of 60 bps excluding 2017 legal settlement of $95 million
  • After-tax ROIC 28.2%, an increase of 390 bps
  • GAAP EPS $7.60, up 56% vs. 2017 GAAP EPS of $4.86; Excluding one-time 2017 tax charge and legal settlement, EPS increased 15%


GLENVIEW, Ill., Feb. 01, 2019 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its fourth-quarter and full-year 2018 results.

“The fourth quarter closed out another year of strong execution and financial performance by the ITW team. For the quarter, the company delivered 10 percent EPS growth excluding currency impact and the 2017 tax charge, operating margin expansion of 70 basis points and after-tax return on invested capital of 27.7 percent,” said E. Scott Santi, Chairman and Chief Executive Officer.

“For the year, excluding the 2017 one-time items, we grew EPS by 15 percent, expanded operating margin by 60 basis points to a record 24.3 percent, grew Free Cash Flow 10 percent and returned $3 billion cash to shareholders in the form of dividends and share repurchases. The fact that we achieved these results despite significant raw material cost headwinds and a decline in auto builds in North America, Europe and China clearly demonstrates the power of ITW’s highly differentiated business model and the resilience of our high quality diversified business portfolio.”

“We enter 2019 well-positioned to deliver another year of differentiated performance and continued progress in executing our long-term strategy to leverage the power of the ITW Business Model to its full potential,” Santi concluded.

Fourth-quarter revenue was essentially flat at $3.6 billion as organic growth of one percent was more than offset by the impact of foreign currency translation. Organic revenue growth increased four percent in North America, offset by a two percent decline in International.  As expected, Product Line Simplification (PLS) activities reduced organic revenue growth by 90 basis points. Excluding a tax charge in the prior year, fourth quarter EPS increased eight percent to $1.83. Excluding the unfavorable foreign currency translation impact of $(0.04) and one-time 2017 tax charge, EPS grew 10 percent. Operating margin was 24.0 percent, an increase of 70 basis points, with enterprise initiatives contributing 110 basis points and more than offsetting 40 basis points of price/cost headwind. Fourth quarter Free Cash Flow increased 18 percent to $727 million.

Full year revenue grew three percent to $14.8 billion, with organic growth of two percent. As previously disclosed, the company recorded a favorable legal settlement of $95 million in 2017.  Excluding this settlement and the 2017 fourth quarter tax charge, 2018 full-year EPS increased 15 percent to $7.60.  Operating margin was 24.3 percent, an increase of 60 basis points excluding the 2017 legal settlement, with enterprise initiatives contributing 110 basis points of margin improvement, more than offsetting 50 basis points of price/cost headwind.  After-tax return on invested capital was 28.2 percent, an improvement of 390 basis points.

2018 Free Cash Flow increased 10 percent to $2.4 billion. The company repurchased $2 billion of its own shares and raised its dividend 28 percent in August 2018 to an annualized $4.00 per share.

2019 Guidance
The company re-affirmed its full-year EPS guidance in a range of $7.90 to $8.20 per share. Organic growth is expected to be in the range of one to three percent based on current run rates. Operating margin is expected to improve by approximately 100 basis points with enterprise initiatives contributing 100 basis points. Free cash flow is expected to be at or above 100 percent of net income.  The company expects to repurchase approximately $1.5 billion of its shares in 2019. 

For the first quarter 2019, the company expects EPS of $1.73 to $1.83. This incorporates higher estimated restructuring expense of $0.07 per share, foreign currency translation headwind of $0.07 per share and a tax rate in the range of 24.5 to 25.5 percent, which represents a $0.05 per share headwind year-over-year.

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, foreign exchange rates, total and organic revenue growth, operating margin, economic and regulatory conditions in various geographic regions, price/cost impact, restructuring expenses, free cash flow, effective tax rate, after-tax return on invested capital, and timing and amount of share repurchases.  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 and subsequently filed Form 10-Qs.

About Illinois Tool Works
ITW (NYSE: ITW) is a Fortune 200 global multi-industrial manufacturing leader with revenues totaling $14.8 billion in 2018. 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 48,000 dedicated colleagues in operations around the world who thrive in the company’s unique, decentralized and entrepreneurial culture.
www.itw.com


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

 Three Months Ended Twelve Months Ended
 December 31, December 31,
In millions except per share amounts2018 2017(1) 2018 2017(1)
Operating Revenue$3,580  $3,629  $14,768  $14,314 
Cost of revenue2,096  2,124  8,604  8,306 
Selling, administrative, and research and development expenses578  609  2,391  2,412 
Legal settlement (income)      (95)
Amortization and impairment of intangible assets46  50  189  206 
Operating Income860  846  3,584  3,485 
Interest expense(63) (66) (257) (260)
Other income (expense)19  16  67  45 
Income Before Taxes816  796  3,394  3,270 
Income taxes209  872  831  1,583 
Net Income (Loss)$607  $(76) $2,563  $1,687 
        
Net Income (Loss) Per Share:       
Basic$1.84  $(0.22) $7.65  $4.90 
Diluted$1.83  $(0.22) $7.60  $4.86 
        
Cash Dividends Per Share:       
Paid$1.00  $0.78  $3.34  $2.73 
Declared$1.00  $0.78  $3.56  $2.86 
        
Shares of Common Stock Outstanding During the Period:       
Average329.8 342.1 335.0 344.1
Average assuming dilution331.6 342.1 337.1 346.8
  1. The three and twelve months ended December 31, 2017 have been restated to reflect the adoption of new accounting guidance in 2018 which resulted in the presentation of $4 million and $9 million, respectively, 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 millionsDecember 31, 2018 December 31, 2017
Assets   
Current Assets:   
Cash and equivalents$1,504  $3,094 
Trade receivables2,622  2,628 
Inventories1,318  1,220 
Prepaid expenses and other current assets334  336 
Total current assets5,778  7,278 
    
Net plant and equipment1,791  1,778 
Goodwill4,633  4,752 
Intangible assets1,084  1,272 
Deferred income taxes554  505 
Other assets1,030  1,195 
 $14,870  $16,780 
    
Liabilities and Stockholders’ Equity   
Current Liabilities:   
Short-term debt$1,351  $850 
Accounts payable524  590 
Accrued expenses1,271  1,258 
Cash dividends payable328  266 
Income taxes payable68  89 
Total current liabilities3,542  3,053 
    
Noncurrent Liabilities:   
Long-term debt6,029  7,478 
Deferred income taxes707  164 
Noncurrent income taxes payable495  614 
Other liabilities839  882 
Total noncurrent liabilities8,070  9,138 
    
Stockholders’ Equity:   
Common stock6  6 
Additional paid-in-capital1,253  1,218 
Retained earnings21,217  20,210 
Common stock held in treasury(17,545) (15,562)
Accumulated other comprehensive income (loss)(1,677) (1,287)
Noncontrolling interest4  4 
Total stockholders’ equity3,258  4,589 
 $14,870  $16,780 
        


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

Three Months Ended December 31, 2018
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$777 $168 21.6%
Food Equipment567 151 26.6%
Test & Measurement and Electronics538 133 24.8%
Welding414 111 26.9%
Polymers & Fluids422 91 21.5%
Construction Products397 99 24.9%
Specialty Products469 118 25.4%
Intersegment(4) —%
Total Segments3,580 871 24.4%
Unallocated (11)—%
Total Company$3,580 $860 24.0%


Twelve Months Ended December 31, 2018
Dollars in millionsTotal
Revenue
Operating
Income
Operating
Margin
Automotive OEM$3,338 $751 22.5%
Food Equipment2,214 572 25.8%
Test & Measurement and Electronics2,171 523 24.1%
Welding1,691 474 28.0%
Polymers & Fluids1,724 369 21.4%
Construction Products1,700 414 24.3%
Specialty Products1,951 522 26.8%
Intersegment(21) 
Total Segments14,768 3,625 24.5%
Unallocated (41)
Total Company$14,768 $3,584 24.3%
        


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

Q4 2018 vs. Q4 2017 Favorable/(Unfavorable)
Operating RevenueAutomotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Organic(3.6)%5.2%0.2%7.6%3.5%(0.7)%(2.0)%0.9%
Acquisitions/ Divestitures%%%%(1.0)%%%(0.1)%
Translation(2.5)%(1.7)%(1.5)%(0.9)%(3.4)%(3.1)%(1.6)%(2.2)%
Operating Revenue(6.1)%3.5%(1.3)%6.7%(0.9)%(3.8)%(3.6)%(1.4)%


Q4 2018 vs. Q4 2017 Favorable/(Unfavorable)
Change in
Operating Margin
Automotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Operating Leverage(70) bps110 bps130 bps80 bps(20) bps(30) bps20 bps
Changes in Variable Margin & OH Costs(90) bps(50) bps110 bps(130) bps20 bps100 bps(20) bps30 bps
Total Organic (160) bps 60 bps 110 bps 100 bps 80 bps (50) bps 50 bps
Acquisitions/ Divestitures10 bps
Restructuring/Other10 bps20 bps30 bps50 bps50 bps70 bps20 bps
Total Operating Margin Change (150) bps 80 bps 140 bps 50 bps 160 bps 150 bps (50) bps 70 bps
         
Total Operating Margin % *21.6%26.6%24.8%26.9%21.5%24.9%25.4%24.0%
         
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 50 bps 70 bps 270 bps 30 bps 380 bps 50 bps 100 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 2018.
 


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

Full Year 2018 vs Full Year 2017 Favorable/(Unfavorable)
Operating RevenueAutomotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
WeldingPolymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Organic%2.8%3.5%9.7%1.0%1.2%(0.4)%2.2%
Acquisitions/ Divestitures%%%%(0.4)%%(0.1)%(0.1)%
Translation2.0%1.5%1.4%0.2%(0.6)%0.4%1.2%1.1%
Operating Revenue2.0%4.3%4.9%9.9%%1.6%0.7%3.2%


Full Year 2018 vs Full Year 2017 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood
Equipment
Test &
Measurement
and Electronics
WeldingPolymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Operating Leverage 10 bps 60 bps 90 bps 150 bps 30 bps 20 bps 50 bps
Changes in Variable Margin & OH Costs (50) bps (110) bps 80 bps (70) bps (10) bps 20 bps (60) bps (70) bps (1)
Total Organic (40) bps (50) bps 170 bps 80 bps 20 bps 40 bps (60) bps (20) bps
Acquisitions/ Divestitures
Restructuring/Other 10 bps 10 bps 20 bps 50 bps 20 bps 20 bps
Total Operating Margin Change (30) bps (40) bps 170 bps 100 bps 70 bps 40 bps (40) bps
         
Total Operating Margin % *22.5%25.8%24.1%28.0%21.4%24.3%26.8%24.3%
         
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 50 bps 70 bps 280 bps 30 bps 380 bps 50 bps 110 bps 130 bps**
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.42) on GAAP earnings per share for 2018.
(1)  Full year 2017 included 60 basis points of favorability from the confidential legal settlement.
 


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
 December 31, December 31,
Dollars in millions2018 2017 2018 2017
Operating income(1)$860  $846  $3,584  $3,485 
Less: Legal settlement income      (95)
Adjusted operating income860  846  3,584  3,390 
Adjusted tax rate25.5% 26.9% 24.9% 28.3%
Income taxes(219) (227) (893) (958)
Operating income after taxes$641  $619  $2,691  $2,432 
        
Invested capital:       
Trade receivables$2,622  $2,628  $2,622  $2,628 
Inventories1,318  1,220  1,318  1,220 
Net plant and equipment1,791  1,778  1,791  1,778 
Goodwill and intangible assets5,717  6,024  5,717  6,024 
Accounts payable and accrued expenses(1,795) (1,848) (1,795) (1,848)
Other, net(519) 21  (519) 21 
Total invested capital$9,134  $9,823  $9,134  $9,823 
        
Average invested capital$9,247  $10,101  $9,533  $10,005 
Return on average invested capital27.7% 24.5% 28.2% 24.3%
  1. The 2017 results have been restated to reflect the adoption of new accounting guidance in 2018 related to the presentation of net periodic benefit costs. The adoption of this guidance resulted in the presentation of $4 million and $9 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the fourth quarter 2017 and full year 2017, respectively, with no change in Net Income.


ROIC for the three months ended December 31, 2018 was 27.7%, an improvement of 320 basis points. ROIC for the twelve months ended December 31, 2018 was 28.2%, an improvement of 390 basis points. The improvement in both periods was primarily the result of the new U.S. tax rules and regulations.

A reconciliation of the 2018 effective tax rate to the adjusted tax rate excluding the third quarter 2018 net discrete tax benefit is as follows:

 Twelve Months Ended
 December 31, 2018
 Income Taxes Tax Rate
As reported$831  24.5%
Net discrete tax benefit related to third quarter15  0.4%
As adjusted$846  24.9%
       


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

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%
              


FREE CASH FLOW (UNAUDITED)

 Three Months Ended Twelve Months Ended 
 December 31, December 31, 
Dollars in millions2018 2017 2018 2017 
Net cash provided by operating activities$809  $695  $2,811  $2,402  
Less: Additions to plant and equipment(82) (78) (364) (297) 
Free cash flow$727  $617  $2,447  $2,105 *
         
Net income (loss), as reported$607  $(76) $2,563  $1,687  
Discrete tax charge related to 2017 U.S. tax legislation  658    658  
Adjusted net income$607  $582  $2,563  $2,345  

*  Excluding $115 million related to an additional discretionary pension contribution, free cash flow would have been $2.2 billion for the twelve months ended December 31, 2017.


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 fourth quarter and full year 2017 financial results:

Fourth Quarter

 Dollars in millionsQ4 '17
As 
Reported(1)
Tax
Charge
Q4 '17
Excl. Item
Q4 '18
As Reported
Change Vs.
Prior Year
 Total Revenue$3,629$3,629$3,580(1)%
 Operating Income$846$846$860+2%
 Operating Margin23.3%23.3%24.0%+70 bps
 Tax Rate109.6%+82.7%-pts26.9%25.5%(1.4)%-pts
 Net Income (Loss)$(76)$(658)$582$607+4%
 EPS$(0.22)$(1.92)$1.70$1.83+8%

Full Year

Dollars in millions2017
As 
Reported(1)
Legal
Item
Tax
Charge
2017
Excl. Items
2018
As Reported
Change Vs.
Prior Year
Total Revenue$14,314$14,314$14,768+3%
Operating Income$3,485+$95$3,390$3,584+6%
Operating Margin24.3%+60 bps23.7%24.3%+60 bps
Tax Rate48.4%+20.1%-pts28.3%24.5%(3.8)%-pts
Net Income (Loss)$1,687+$59$(658)$2,286$2,563+12%
EPS$4.86+$0.17$(1.90)$6.59$7.60+15%
  1. The 2017 results have been restated to reflect the adoption of new accounting guidance in 2018 related to the presentation of net periodic benefit costs. The adoption of this guidance resulted in the presentation of $4 million and $9 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the fourth quarter 2017 and full year 2017, respectively, with no change in Net Income.


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 logo

Source: Illinois Tool Works Inc.


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