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Illinois Tool Works, Inc.$135.67($.52)(.38%)

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 ITW Reports Record Third Quarter 2016 Financial Results
   Thursday, October 20, 2016 8:01:26 AM ET

-- GAAP EPS of $1.50 (+8%)

-- Record quarterly operating margin of 23.1% (23.9% excluding EF&C acquisition dilution)

-- Record quarterly operating income of $808 million (+6%)

-- Record after-tax ROIC of 23% (+140 basis points vs. year ago)

-- Total revenue +4%, Organic revenue +2% (including ~1% negative PLS impact)

-- FCF of 101% of net income

-- Raising full-year 2016 GAAP EPS guidance mid-point

Illinois Tool Works Inc. (ITW ) today reported third quarter 2016 diluted earnings per share (EPS) of $1.50, an 8% increase compared to the year-ago period. Currency translation reduced EPS by $0.02 in the quarter. Operating margin increased 40 basis points to 23.1%, including 80 basis points of margin dilution from the third quarter 2016 acquisition of Engineered Fasteners & Components (EF&C). Excluding the EF&C dilution impact, third quarter operating margin was 23.9%. Operating income of $808 million was up 6%, and after-tax return on invested capital increased by 140 basis points to 23%. Organic revenue increased 2% and the company’s ongoing Product Line Simplification (PLS) activities reduced organic revenue growth by approximately 1 percentage point.

"The ITW team delivered another quarter of quality execution and earnings growth marked by all-time record operating income and continued strong margin expansion driven by our Enterprise Strategy initiatives. In addition, continued progress in executing our pivot to growth in combination with our diversified portfolio of seven highly differentiated businesses allowed us to deliver positive organic growth in the third quarter despite a macro environment that remains challenging," said E. Scott Santi, Chairman and Chief Executive Officer.

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

-- Total revenue was $3.5 billion, an increase of 4%. Organic revenue grew 2% with 1% growth in North America and 3% in International.

-- Operating margin improved 40 basis points to 23.1%, an all-time record for the company, as enterprise initiatives contributed 120 basis points. The acquisition of EF&C diluted operating margin by 80 basis points. Excluding the EF&C dilution impact, third quarter operating margin was 23.9%.

-- Operating income grew 6% to an all-time quarterly record of $808 million.

-- GAAP EPS of $1.50 increased 8% due to strong margin performance. Currency translation reduced EPS by $0.02 in the quarter.

-- After-tax return on invested capital was 23%, an all-time high and an increase of 140 basis points.

-- Free cash flow was solid at 101% of net income. Share repurchases totaled $500 million and the company announced an 18% dividend increase on August 5, 2016.

-- Six of seven segments achieved positive organic revenue growth as Automotive OEM and Test & Measurement/Electronics both grew 7%, Construction Products grew 2%, Polymers & Fluids and Food Equipment Group both grew 1% and Specialty Products grew 0.1%. Welding declined by 9%.

-- All seven segments achieved operating margin at or above 21% with Food Equipment at 27.4%, Welding at 26.5%, Specialty Products at 26.1%, Automotive OEM at 21.8% (25.5% excluding EF&C), Construction at 22.6%, Test & Measurement/Electronics and Polymers & Fluids both at 21%.

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

ITW is raising its 2016 full-year GAAP EPS guidance range to $5.56 to $5.66, a year-over-year increase of 9% at the mid-point. Consistent with prior guidance the full-year organic growth forecast is 1 to 2% and includes approximately 1 percentage point of PLS impact. Operating margin is forecast to exceed 22.5%.

For the fourth quarter 2016, the company expects GAAP EPS to be in a range of $1.31 to $1.41, an increase of 11% at the mid-point. Organic revenue is forecast to be 0 to 2%, and operating margin to be approximately 21.5%. Guidance is based on current foreign exchange rates.

<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 and enterprise initiatives, operating margin, after-tax return on invested capital and the expected impact of acquisitions on financial results. 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 2015 and Form 10-Q for the second quarter of 2016.

<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 more than 51,000 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        Nine Months Ended
                                                               September 30,             September 30,
In millions except per share amounts                           2016         2015         2016          2015
Operating Revenue                                              $  3,495     $  3,354     $  10,200     $  10,130
Cost of revenue                                                2,027        1,953        5,890         5,947
Selling, administrative, and research and development expenses 604          581          1,818         1,819
Amortization and impairment of intangible assets               56           59           170           176
Operating Income                                               808          761          2,322         2,188
Interest expense                                               (58      )   (59      )   (174      )   (168      )
Other income (expense)                                         13           23           34            65
Income Before Taxes                                            763          725          2,182         2,085
Income Taxes                                                   228          214          654           636
Net Income                                                     $  535       $  511       $  1,528      $  1,449
Net Income Per Share:
Basic                                                          $  1.51      $  1.40      $  4.28       $  3.92
Diluted                                                        $  1.50      $  1.39      $  4.25       $  3.90
Cash Dividends Per Share:
Paid                                                           $  0.55      $  0.485     $  1.65       $  1.455
Declared                                                       $  0.65      $  0.55      $  1.75       $  1.52
Shares of Common Stock Outstanding During the Period:
Average                                                        353.5        365.1        357.3         369.3
Average assuming dilution                                      355.5        367.1        359.3         371.6
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millions                                   September 30, 2016  December 31, 2015
Assets
Current Assets:
Cash and equivalents                          $      2,299        $     3,090
Trade receivables                             2,496               2,203
Inventories                                   1,167               1,086
Prepaid expenses and other current assets     223                 341
Total current assets                          6,185               6,720
Net plant and equipment                       1,702               1,577
Goodwill                                      4,711               4,439
Intangible assets                             1,480               1,560
Deferred income taxes                         467                 346
Other assets                                  1,164               1,087
                                              $      15,709       $     15,729
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt                               $      1,364        $     526
Accounts payable                              582                 449
Accrued expenses                              1,180               1,136
Cash dividends payable                        228                 200
Income taxes payable                          132                 57
Total current liabilities                     3,486               2,368
Noncurrent Liabilities:
Long-term debt                                6,329               6,896
Deferred income taxes                         131                 256
Other liabilities                             970                 981
Total noncurrent liabilities                  7,430               8,133
Stockholders’ Equity:
Common stock                                  6                   6
Additional paid-in-capital                    1,174               1,135
Income reinvested in the business             19,223              18,316
Common stock held in treasury                 (14,147       )     (12,729      )
Accumulated other comprehensive income (loss) (1,468        )     (1,504       )
Noncontrolling interest                       5                   4
Total stockholders’ equity                    4,793               5,228
                                              $      15,709       $     15,729
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
                                                                    Three Months Ended              Nine Months Ended               Twelve
                                                                                                                                    Months
                                                                                                                                    Ended
                                                                                                                                    December 31,
                                                                    September 30,                   September 30,
Dollars in millions                                                 2016            2015            2016            2015            2015
Operating income                                                    $   808         $   761         $   2,322       $   2,188       $    2,867
Tax rate                                                            30.0       %    29.6       %    30.0       %    30.5       %    30.1       %
Income taxes                                                        (243       )    (225       )    (697       )    (668       )    (864       )
Operating income after taxes                                        $   565         $   536         $   1,625       $   1,520       $    2,003
Invested capital:
Trade receivables                                                   $   2,496       $   2,339       $   2,496       $   2,339       $    2,203
Inventories                                                         1,167           1,153           1,167           1,153           1,086
Net plant and equipment                                             1,702           1,601           1,702           1,601           1,577
Goodwill and intangible assets                                      6,191           6,088           6,191           6,088           5,999
Accounts payable and accrued expenses                               (1,762     )    (1,635     )    (1,762     )    (1,635     )    (1,585     )
Other, net                                                          393             313             393             313             280
Total invested capital                                              $   10,187      $   9,859       $   10,187      $   9,859       $    9,560
Average invested capital                                            $   9,973       $   10,038      $   9,821       $   10,039      $    9,943
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) (116       )    (121       )    (114       )    (126       )    (123       )
Adjusted average invested capital                                   $   9,857       $   9,917       $   9,707       $   9,913       $    9,820
Adjusted return on average invested capital                         23.0       %    21.6       %    22.3       %    20.5       %    20.4       %
FREE CASH FLOW
                                             Three Months Ended    Nine Months Ended
                                             September 30,         September 30,
Dollars in millions                          2016       2015       2016         2015
Net cash provided by operating activities    $  624     $  706     $  1,638     $  1,596
Less: Additions to plant and equipment       (81    )   (62    )   (202     )   (209     )
Free cash flow                               $  543     $  644     $  1,436     $  1,387
Net income                                   $  535     $  511     $  1,528     $  1,449
Free cash flow to net income conversion rate 101    %   126    %   94       %   96       %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended September 30, 2016
Dollars in millions                Total           Operating      Operating
                                   Revenue         Income         Margin
Automotive OEM                     $    765        $    166       21.8 %
Food Equipment                     544             149            27.4 %
Test & Measurement and Electronics 516             108            21.0 %
Welding                            361             95             26.5 %
Polymers & Fluids                  422             89             21.0 %
Construction Products              415             94             22.6 %
Specialty Products                 477             125            26.1 %
Intersegment                       (5         )    --             --   %
Total Segments                     3,495           826            23.7 %
Unallocated                        --              (18       )    --   %
Total Company                      $    3,495      $    808       23.1 %
Nine Months Ended September 30, 2016
Dollars in millions                Total            Operating       Operating
                                   Revenue          Income          Margin
Automotive OEM                     $    2,091       $    512        24.5 %
Food Equipment                     1,578            405             25.7 %
Test & Measurement and Electronics 1,487            274             18.4 %
Welding                            1,125            282             25.1 %
Polymers & Fluids                  1,283            266             20.7 %
Construction Products              1,223            278             22.7 %
Specialty Products                 1,429            373             26.1 %
Intersegment                       (16         )    --              --   %
Total Segments                     10,200           2,390           23.4 %
Unallocated                        --               (68        )    --   %
Total Company                      $    10,200      $    2,322      22.8 %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q3 2016 vs. Q3 2015 Favorable/(Unfavorable)
Operating Revenue Automotive OEM  Food Equipment  Test &          Welding  Polymers & Fluids Construction Products Specialty Products  Total ITW
                                                  Measurement
                                                  and Electronics
Organic           6.6     %       0.7     %       6.6     %       (8.5 )%  0.8      %        1.5        %          0.1       %         1.6  %
Acquisitions/     19.2    %       --      %       --      %       --   %   --       %        (0.2       )%         --        %         3.5  %
Divestitures
Translation       (1.0    )%      (2.0    )%      (1.3    )%      (0.4 )%  (0.8     )%       0.3        %          (0.7      )%        (0.9 )%
Operating Revenue 24.8    %       (1.3    )%      5.3     %       (8.9 )%  --       %        1.6        %          (0.6      )%        4.2  %
Q3 2016 vs. Q3 2015 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                                                                                               90 bps         10 bps         190 bps                            (160) bps    20 bps            30 bps                       -           30 bps
Changes in Variable Margin & OH Costs                                                                            (60) bps       110 bps        230 bps                            290 bps      120 bps           110 bps               180 bps            100 bps
Total Organic                                                                                                    30 bps         120 bps        420 bps                            130 bps      140 bps           140 bps               180 bps            130 bps
Acquisitions/                                                                                                    (370) bps           -                     -                          -              -                   -                    -           (80) bps
Divestitures
Restructuring/Other                                                                                              (20) bps       (10) bps       20 bps                             40 bps       60 bps            (190) bps             30 bps             (10) bps
Total Operating Margin Change                                                                                    (360) bps      110 bps        440 bps                            170 bps      200 bps           (50) bps              210 bps            40 bps
Total Operating Margin % *                                                                                            21.8 %         27.4 %                21.0        %              26.5 %         21.0  %             22.6    %            26.1   %        23.1 %
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 80 bps         80 bps         360 bps                            60 bps       430 bps           60 bps                140 bps            170 bps
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
YTD 2016 vs YTD 2015 Favorable/(Unfavorable)
Operating Revenue Automotive OEM  Food Equipment  Test &          Welding   Polymers & Fluids Construction Products Specialty Products  Total ITW
                                                  Measurement
                                                  and Electronics
Organic           4.4     %       2.8     %       2.5     %       (9.4  )%  1.1      %        3.1        %          1.2       %         1.2  %
Acquisitions/     6.1     %       --      %       --      %       --    %   (0.3     )%       (0.2       )%         --        %         1.1  %
Divestitures
Translation       (1.3    )%      (1.8    )%      (1.3    )%      (1.0  )%  (2.8     )%       (1.7       )%         (1.1      )%        (1.6 )%
Operating Revenue 9.2     %       1.0     %       1.2     %       (10.4 )%  (2.0     )%       1.2        %          0.1       %         0.7  %
YTD 2016 vs YTD 2015 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         60 bps         70 bps                             (190) bps    40 bps            80 bps                20 bps             20 bps
Changes in Variable Margin & OH Costs                                                                            20 bps         100 bps        190 bps                            180 bps      20 bps            200 bps               210 bps            120 bps
Total Organic                                                                                                    80 bps         160 bps        260 bps                            (10) bps     60 bps            280 bps               230 bps            140 bps
Acquisitions/                                                                                                    (140) bps           -                     -                          -              -           (10) bps                     -           (20) bps
Divestitures
Restructuring/Other                                                                                              10 bps         40 bps                     -                      (80) bps     10 bps            10 bps                40 bps                 -
Total Operating Margin Change                                                                                    (50) bps       200 bps        260 bps                            (90) bps     70 bps            280 bps               270 bps            120 bps
Total Operating Margin % *                                                                                            24.5 %         25.7 %                18.4        %              25.1 %         20.7  %             22.7    %            26.1   %        22.8 %
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 40 bps         80 bps         390 bps                            90 bps       430 bps           60 bps                150 bps            170 bps
Total ITW Operating Revenue
Operating Revenue YTD 2016  Full Year 2015  Favorable/
                                            (Unfavorable)
Organic           1.2  %    (0.4    )%      160 bps
Acquisitions/     1.1  %    (0.2    )%      130 bps
Divestitures
Translation       (1.6 )%   (6.8    )%      520 bps
Operating Revenue 0.7  %    (7.4    )%      810 bps
Investors Contact: Mike Drazin 224.661.7433 mdrazin@itw.com
Media Contact: Mallory Ramp 224.661.7431 mramp@itw.com

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