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Illinois Tool Works, Inc.$147.40$.06.04%

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 ITW Reports Fourth Quarter and Full-Year 2015 Financial Results
   Wednesday, January 27, 2016 8:02:36 AM ET

-- EPS of $1.23, up 4 percent; up 11 percent excluding (0.08) currency impact; $0.03 above guidance mid-point

-- Operating margin 20.7 percent; up 110 basis points driven by ITW’s Enterprise Initiatives

-- Full-year 2015 EPS $5.13, up 10 percent; up 19 percent excluding currency impact

-- Reaffirming full-year 2016 guidance

Illinois Tool Works Inc. (ITW ) today reported fourth quarter 2015 diluted earnings per share (EPS) of $1.23, a 4 percent increase compared to the year-ago period. Operating margin increased 110 basis points to 20.7 percent and organic revenue declined 0.6 percent. The company’s ongoing Product Line Simplification (PLS) activities reduced organic growth by 1 percentage-point.

"We are pleased with ITW’s strong performance in the quarter and for the year," said E. Scott Santi, Chairman and Chief Executive Officer. "In the quarter, the company continued to deliver meaningful improvement in our EPS, operating margin, and return on invested capital metrics, and demand across our business portfolio held steady versus the third quarter. While demand for industrial equipment remains sluggish, we have seen stable underlying demand trends in both Welding and Test & Measurement/Electronics over the past two quarters.

"For full-year 2015, ITW grew EPS 10 percent, expanded operating margin by 150 basis points to a record of 21.4 percent, improved after-tax return on invested capital by 140 basis points to a record of 20.4 percent, and returned more than $2.7 billion to shareholders in the form of dividends and share repurchases. In 2015, the company made meaningful progress on the organic growth component of our Enterprise Strategy as evidenced by 60 percent of the company’s revenues achieving "ready to grow" status and 45 percent growing at 6 percent organically. In the current economic environment and over the long-term, ITW’s unique business model and the execution of our Enterprise Strategy have us well-positioned to continue to deliver differentiated performance," Santi concluded.

<span data-mce-style="text-decoration: underline;" style="text-decoration: underline;">4Q Highlights</span>

-- EPS increased 4 percent to $1.23. Excluding $(0.08) impact from foreign currency translation, EPS would have been up 11 percent.

-- Operating margin increased 110 basis points to a fourth quarter record of 20.7 percent as Enterprise Initiatives contributed 110 basis points.

-- Free cash flow was very strong at $628 million, an increase of 12 percent; free cash flow conversion was 140 percent of net income.

-- After-tax return on invested capital improved 150 basis points to a fourth quarter record of 20.1 percent.

-- Total revenues of $3.3 billion were down 6.5 percent primarily due to the impact from foreign currency translation. Organic revenue declined 0.6 percent as the company’s ongoing PLS activities reduced organic growth by 1 percentage-point.

-- Automotive OEM organic revenue grew 5 percent, including 10 percent growth in Europe, 4 percent growth in North America and 14 percent growth in China.

-- Construction Products organic revenue increased 3 percent driven by 7 percent growth in Asia Pacific and 2 percent growth in North America. Operating margin of 19.9 percent was up 420 basis points.

-- Food Equipment organic revenue increased 2 percent against a challenging prior year comparison with solid growth in international equipment and North America service. Operating margin of 23.9 percent increased 220 basis points.

-- Sequential demand in Welding was up 2 percent compared to the third quarter of 2015, and was flat on a seasonally adjusted basis. Facing challenging year-over-year comparisons, organic revenue declined 11 percent.

-- Test & Measurement/Electronics organic revenue declined 3 percent. Sequential demand was up 6 percent compared to the third quarter of 2015, and up 2 percent on a seasonally adjusted basis. Operating margin of 18.1 percent increased 300 basis points.

<span data-mce-style="text-decoration: underline;" style="text-decoration: underline;">Capital Allocation Update</span>

On January 25, 2016, ITW announced that it had reached a definitive agreement to acquire the Engineered Fasteners and Components (EF&C) business, a leading global supplier of engineered fastening systems and interior technical components to the automotive OEM market, from ZF TRW for approximately $450 million. Headquartered in Germany, EF&C operates 13 manufacturing facilities globally and employs approximately 3,500 people. EF&C had revenues of approximately $470 million in 2015. ITW plans to fund a majority of the purchase price with non-U.S. cash. The company expects the acquisition to be slightly accretive to EPS in the first 12 months and to generate long-term return on invested capital at or above the company’s 20-plus percent target. Pending customary closing conditions and regulatory approvals, the transaction is expected to close in the first half of 2016.

In January 2016, ITW tax-efficiently accessed $1.2 billion of non-U.S. cash. As a result, the company is raising its 2016 share repurchase expectation by $1 billion to approximately $2 billion.

<span data-mce-style="text-decoration: underline;" style="text-decoration: underline;">2016 Guidance</span>

The company is reaffirming its 2016 full-year EPS guidance of $5.35 to $5.55, which is a year-over-year increase of 6 percent at the midpoint. Organic revenue for the year is projected to be up 1 to 3 percent, which is in-line with current demand levels. The organic growth forecast includes approximately 90 basis points of impact from the company’s ongoing PLS activities. Operating margin is projected to be approximately 22.5 percent, an increase of more than 100 basis points year-over-year. ITW’s Enterprise Initiatives are expected to improve operating margin by 100 basis points, independent of volume growth.

For the first quarter 2016, the company expects EPS to be in a range of $1.20 to $1.30 and operating margin to be approximately 21.5 percent. Organic revenue is forecast to be flat to up 2 percent.

<span data-mce-style="text-decoration: underline;" style="text-decoration: underline;">Forward-looking statement</span>

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, the impact of product line simplification activities, operating margin and 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 2014 and Form 10-Q for the third quarter of 2015.

<span data-mce-style="text-decoration: underline;" style="text-decoration: underline;">About ITW</span>

ITW (ITW ) is a Fortune 200 global multi-industrial manufacturing leader with revenues totaling $13.4 billion in 2015. 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 nearly 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
                                                               December 31,              December 31,
In millions except per share amounts                           2015         2014         2015          2014
Operating Revenue                                              $  3,275     $  3,504     $  13,405     $  14,484
Cost of revenue                                                1,941        2,114        7,888         8,673
Selling, administrative, and research and development expenses 598          644          2,417         2,678
Amortization of intangible assets                              57           60           231           242
Impairment of goodwill and other intangible assets             --           --           2             3
Operating Income                                               679          686          2,867         2,888
Interest expense                                               (58      )   (54      )   (226      )   (250      )
Other income (expense)                                         13           25           78            61
Income from Continuing Operations Before Income Taxes          634          657          2,719         2,699
Income Taxes                                                   184          196          820           809
Income from Continuing Operations                              450          461          1,899         1,890
Income (Loss) from Discontinued Operations                     --           (11      )   --            1,056
Net Income                                                     $  450       $  450       $  1,899      $  2,946
Income Per Share from Continuing Operations:
Basic                                                          $  1.24      $  1.19      $  5.16       $  4.70
Diluted                                                        $  1.23      $  1.18      $  5.13       $  4.67
Income (Loss) Per Share from Discontinued Operations:
Basic                                                          $  --        $  (0.02 )   $  --         $  2.63
Diluted                                                        $  --        $  (0.02 )   $  --         $  2.61
Net Income Per Share:
Basic                                                          $  1.24      $  1.17      $  5.16       $  7.33
Diluted                                                        $  1.23      $  1.16      $  5.13       $  7.28
Shares of Common Stock Outstanding During the Period:
Average                                                        363.7        386.4        367.9         401.7
Average assuming dilution                                      365.9        389.2        370.1         404.6
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
                                              December 31,
In millions                                   2015            2014
Assets
Current Assets:
Cash and equivalents                          $     3,090     $     3,990
Trade receivables                             2,203           2,293
Inventories                                   1,086           1,180
Prepaid expenses and other current assets     341             401
Total current assets                          6,720           7,864
Net plant and equipment                       1,577           1,686
Goodwill                                      4,439           4,667
Intangible assets                             1,560           1,799
Deferred income taxes                         346             338
Other assets                                  1,087           1,111
                                              $     15,729    $     17,465
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt                               $     526       $     1,476
Accounts payable                              449             512
Accrued expenses                              1,136           1,287
Cash dividends payable                        200             186
Income taxes payable                          57              64
Total current liabilities                     2,368           3,525
Noncurrent Liabilities:
Long-term debt                                6,896           5,943
Deferred income taxes                         256             171
Other liabilities                             981             1,002
Total noncurrent liabilities                  8,133           7,116
Stockholders’ Equity:
Common stock                                  6               6
Additional paid-in-capital                    1,135           1,096
Income reinvested in the business             18,316          17,173
Common stock held in treasury                 (12,729      )  (10,798      )
Accumulated other comprehensive income (loss) (1,504       )  (658         )
Noncontrolling interest                       4               5
Total stockholders’ equity                    5,228           6,824
                                              $     15,729    $     17,465
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
                                                                    Three Months Ended           Twelve Months Ended
                                                                    December 31,                 December 31,
Dollars in millions                                                 2015          2014           2015          2014           2012
Operating income                                                    $   679       $   686        $   2,867     $   2,888      $   2,475
Adjustment for Decorative Surfaces                                  --            --             --            --             (143       )
Adjusted operating income                                           679           686            2,867         2,888          2,332
Tax rate (as adjusted for discrete tax charge in 4Q 2012)           29.0      %   30.0       %   30.1      %   30.0       %   29.2       %
Income taxes                                                        (196      )   (206       )   (864      )   (866       )   (681       )
Adjusted operating income after taxes                               $   483       $   480        $   2,003     $   2,022      $   1,651
Invested capital:
Trade receivables                                                   $   2,203     $   2,293      $   2,203     $   2,293      $   2,742
Inventories                                                         1,086         1,180          1,086         1,180          1,585
Net plant and equipment                                             1,577         1,686          1,577         1,686          1,994
Goodwill and intangible assets                                      5,999         6,466          5,999         6,466          7,788
Accounts payable and accrued expenses                               (1,585    )   (1,799     )   (1,585    )   (1,799     )   (2,068     )
Other, net                                                          280           427            280           427            773
Total invested capital                                              $   9,560     $   10,253     $   9,560     $   10,253     $   12,814
Average invested capital                                            $   9,709     $   10,362     $   9,943     $   11,215     $   13,140
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) (118      )   (147       )   (123      )   (154       )   (274       )
Adjustment for Industrial Packaging                                 --            95             --            (424       )   (1,504     )
Adjusted average invested capital                                   $   9,591     $   10,310     $   9,820     $   10,637     $   11,362
Annualized adjusted return on average invested capital              20.1      %   18.6       %   20.4      %   19.0       %   14.5       %
A reconciliation of the 2012 effective tax rate to the adjusted tax rate excluding the discrete tax charge is as follows:
                     Twelve Months Ended
Dollars in millions  December 31, 2012
                     Income Taxes             Tax Rate
As reported          $                 973    30.3              %
Discrete tax charges (36                   )  (1.1              )%
As adjusted          $                 937    29.2              %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED FREE CASH FLOW (UNAUDITED)
                                                               Three Months Ended    Twelve Months Ended
Dollars in millions                                            December 31,          December 31,
                                                               2015       2014       2015         2014
Net cash provided by operating activities                      $  703     $  458     $  2,299     $   1,616
Less: Additions to plant and equipment                         (75    )   (89    )   (284     )   (361      )
Free cash flow                                                 628        369        2,015        1,255
Plus: Taxes paid related to sale of Industrial Packaging       --         191        --           724
Adjusted free cash flow                                        $  628     $  560     $  2,015     $   1,979
Net Income - As reported                                       $  450     $  450     $  1,899     $   2,946
Less: Industrial Packaging gain on sale, after taxes           --         --         --           (1,148    )
Adjusted net income                                            $  450     $  450     $  1,899     $   1,798
Adjusted free cash flow to adjusted net income conversion rate 140    %   124    %   106      %   110       %
ADJUSTED INCOME PER SHARE FROM CONTINUING OPERATIONS - DILUTED (UNAUDITED)
                                     Twelve Months Ended
                                     December 31, 2012
As reported                          $                  4.72
Decorative Surfaces net gain         1.34
Decorative Surfaces equity interest  (0.04                                 )
Decorative Surface operating results 0.21
As adjusted                          $                  3.21
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
For the Three Months Ended December 31, 2015
Dollars in millions                Total           Operating      Operating
                                   Revenue         Income         Margin
Automotive OEM                     $    615        $    135       22.0 %
Test & Measurement and Electronics 500             90             18.1 %
Food Equipment                     532             128            23.9 %
Polymers & Fluids                  402             73             18.2 %
Welding                            395             89             22.5 %
Construction Products              378             75             19.9 %
Specialty Products                 458             105            23.0 %
Intersegment                       (5         )    --             --   %
Total Segments                     3,275           695            21.2 %
Unallocated                        --              (16       )    --   %
Total Company                      $    3,275      $    679       20.7 %
For the Twelve Months Ended December 31, 2015
Dollars in millions                Total            Operating       Operating
                                   Revenue          Income          Margin
Automotive OEM                     $    2,529       $    613        24.2 %
Test & Measurement and Electronics 1,969            322             16.3 %
Food Equipment                     2,096            498             23.7 %
Polymers & Fluids                  1,712            335             19.6 %
Welding                            1,650            415             25.2 %
Construction Products              1,587            316             19.9 %
Specialty Products                 1,885            439             23.3 %
Intersegment                       (23         )    --              --   %
Total Segments                     13,405           2,938           21.9 %
Unallocated                        --               (71        )    --   %
Total Company                      $    13,405      $    2,867      21.4 %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q4 2015 vs. Q4 2014 Favorable/(Unfavorable)
Operating Revenue Automotive  Test & Measurement and Food      Polymers &  Welding   Construction  Specialty Total
                  OEM         Electronics            Equipment Fluids                Products      Products  ITW
Organic           5.2   %     (3.1        )%         2.4  %    (2.9  )%    (10.8 )%  3.0    %      0.1  %    (0.6 )%
Divestitures      --    %     --          %          --   %    (0.9  )%    (0.1  )%  --     %      --   %    (0.1 )%
Translation       (6.1  )%    (4.6        )%         (6.3 )%   (7.3  )%    (2.7  )%  (8.8   )%     (5.3 )%   (5.8 )%
Operating Revenue (0.9  )%    (7.7        )%         (3.9 )%   (11.1 )%    (13.6 )%  (5.8   )%     (5.2 )%   (6.5 )%
Q4 2015 vs. Q4 2014 Favorable/(Unfavorable)
Change in Operating Margin                                                                                       Automotive OEM Test & Measurement and Electronics Food Equipment Polymers & Fluids Welding      Construction Products Specialty Products Total ITW
Operating Leverage                                                                                               80 bps         (100) bps                          60 bps         (80) bps          (200) bps    80 bps                - bps              (20) bps
Changes in Variable Margin & OH Costs                                                                                 (70  )                280                         210             180             (90  )           150                  270             110
Total Organic                                                                                                    10 bps         180 bps                            270 bps        100 bps           (290) bps    230 bps               270 bps            90 bps
Restructuring/Other                                                                                                   (40  )                120                         (50  )          (30   )     --                   190                  130             20
Total Operating Margin Change                                                                                    (30) bps       300 bps                            220 bps        70 bps            (290) bps    420 bps               400 bps            110 bps
Total Operating Margin % *                                                                                            22.0 %                18.1        %               23.9 %          18.2  %         22.5 %           19.9    %            23.0   %        20.7 %
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 10 bps         400 bps                            80 bps         460 bps           70 bps       70 bps                180 bps            180 bps
Investors Contact: Aaron Hoffman 224.661.7429 ahoffman@itw.com
Media Contact: Alison Donnelly 224.661.7427 adonnelly@itw.com

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