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Illinois Tool Works, Inc.$165.03($1.46)(.88%)

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 ITW Reports Fourth-Quarter and Full-Year 2016 Results
   Wednesday, January 25, 2017 8:02:19 AM ET

<span data-mce-style="text-decoration: underline;" style="text-decoration: underline;">Fourth-quarter highlights:</span>

-- Total revenue was $3.4 billion, an increase of 4%; organic growth was 2%

-- Operating margin was 21.8%, an increase of 110 bps

-- GAAP EPS was $1.45 including $0.06 of non-recurring items, an increase of 18%

<span data-mce-style="text-decoration: underline;" style="text-decoration: underline;">Full-year highlights:</span>

-- Total revenue was $13.6 billion, an increase of 1%; organic growth was 1%

-- Operating margin was 22.5%, an increase of 110 bps; 22.8% excluding EF&C

-- After-tax ROIC was 22.1%, an increase of 170 bps

-- GAAP EPS was $5.70, an increase of 11%

Illinois Tool Works Inc. (ITW ) today reported its fourth-quarter and full-year 2016 results.

"The fourth quarter closed out a year of record financial performance and strong execution by the ITW team. In 2016, we grew EPS 11%, improved operating margin by 110 basis points to an all-time high of 22.5% and increased after tax return on invested capital 170 basis points to a record 22.1%," said E. Scott Santi, Chairman and Chief Executive Officer. "Throughout 2016, we continued to invest in our businesses to sustain above-market organic growth, strengthened our highly differentiated business portfolio and returned more than $2.8 billion of surplus capital to shareholders. We continue to work hard to push our performance to best-in-class levels, and we are well-positioned to deliver continued progress and strong results in 2017.

Fourth-quarter GAAP earnings were $1.45 per share, an increase of 18% versus the fourth quarter of 2015. Foreign currency translation reduced EPS by 2% year-on-year. Revenue grew 4% year-on-year to $3.4 billion. Organic revenue increased 2% while the 2016 acquisition of Engineered Fasteners & Components (EF&C) added 4% to revenue. Foreign currency translation reduced revenue by 2% year-on-year and Product Line Simplification (PLS) reduced revenue by approximately 1%.

During the fourth quarter the company recorded a net EPS benefit of $0.06 per share, related to a dividend distribution from its investment in Wilsonart, which was partially offset by one-time charges related to two small divestitures. Excluding these non-recurring items, fourth quarter earnings were $1.39 per share, an increase of 13% versus the prior year.

Operating income was $742 million and operating margin for the quarter was 21.8%, an increase of 110 basis points year-on-year. Excluding the margin dilution from the 2016 acquisition of EF&C, operating margin was 22.2%, an increase of 150 basis points year-on-year with 130 basis points of margin expansion coming from Enterprise Initiatives. Fourth-quarter net income was $507 million and the company converted 117 percent of net income to free cash flow.

Organic revenue growth was positive in five of seven segments; 7% in Automotive OEM, 3% in Food Equipment and Construction Products, 2% in Polymers & Fluids, 1% in Specialty Products with Test & Measurement/Electronics flat and a decline of 8% in Welding.

Operating margin improved in all seven segments to 24.7% in Food Equipment, 24.4% in Welding, 24% in Specialty Products, 23% in Automotive OEM (25.2% excluding the margin dilution from EF&C), 21.4% in Construction Products, 20.1% in Test & Measurement/Electronics and 19% in Polymers & Fluids.

Full-year 2016 GAAP earnings were $5.70 per share, an increase of 11%. Total revenue increased 1% to $13.6 billion with organic growth of 1%. The acquisition of EF&C increased revenue 2%. Foreign currency translation reduced revenue by 2%.

Full-year operating margin was 22.5%, up 110 basis points versus 2015, or up 140 basis points to 22.8% excluding the margin dilution impact from EF&C. ITW converted 100% of net income to free cash flow for the year and generated 22.1% after-tax return on invested capital. For the full year, ITW paid $821 million in dividends to shareholders and repurchased $2 billion of its own shares.

<span data-mce-style="text-decoration: underline;" style="text-decoration: underline;">Full-Year and First Quarter 2017 Guidance</span>

ITW is reaffirming its 2017 full-year performance expectations. The company expects 2017 earnings to be in the range of $6.00 to $6.20 per share with organic growth of 1.5 to 3.5%. ITW also expects operating margin to exceed 23.5% and free cash flow conversion to exceed 100% for the full-year.

The company expects first quarter 2017 earnings to be in the range of $1.39 to $1.49 per share with organic growth of 1 to 2%. The company expects operating margin to exceed 22.5%.

<span data-mce-style="text-decoration: underline;" style="text-decoration: underline;">Non-GAAP Measures</span>

This earnings release contains non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures is included in the attached supplemental reconciliation schedule.

<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 third 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 $13.6 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        Twelve Months Ended
                                                               December 31,              December 31,
In millions except per share amounts                           2016         2015         2016          2015
Operating Revenue                                              $  3,399     $  3,275     $  13,599     $  13,405
Cost of revenue                                                2,006        1,941        7,896         7,888
Selling, administrative, and research and development expenses 597          598          2,415         2,417
Amortization and impairment of intangible assets               54           57           224           233
Operating Income                                               742          679          3,064         2,867
Interest expense                                               (63      )   (58      )   (237      )   (226      )
Other income (expense)                                         47           13           81            78
Income Before Taxes                                            726          634          2,908         2,719
Income taxes                                                   219          184          873           820
Net Income                                                     $  507       $  450       $  2,035      $  1,899
Net Income Per Share:
Basic                                                          $  1.46      $  1.24      $  5.73       $  5.16
Diluted                                                        $  1.45      $  1.23      $  5.70       $  5.13
Cash Dividends Per Share:
Paid                                                           $  0.65      $  0.55      $  2.30       $  2.005
Declared                                                       $  0.65      $  0.55      $  2.40       $  2.07
Shares of Common Stock Outstanding During the Period:
Average                                                        348.3        363.7        355.0         367.9
Average assuming dilution                                      350.4        365.9        357.1         370.1
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millions                                   December 31, 2016  December 31, 2015
Assets
Current Assets:
Cash and equivalents                          $     2,472        $     3,090
Trade receivables                             2,357              2,203
Inventories                                   1,076              1,086
Prepaid expenses and other current assets     218                341
Total current assets                          6,123              6,720
Plant and equipment                           1,652              1,577
Goodwill                                      4,558              4,439
Intangible assets                             1,463              1,560
Deferred income taxes                         449                346
Other assets                                  956                1,087
                                              $     15,201       $     15,729
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt                               $     652          $     526
Accounts payable                              511                449
Accrued expenses                              1,202              1,136
Cash dividends payable                        226                200
Income taxes payable                          169                57
Total current liabilities                     2,760              2,368
Noncurrent Liabilities:
Long-term debt                                7,177              6,896
Deferred income taxes                         134                256
Other liabilities                             871                981
Total noncurrent liabilities                  8,182              8,133
Stockholders’ Equity:
Common stock:                                 6                  6
Additional paid-in-capital                    1,188              1,135
Retained earnings                             19,505             18,316
Common stock held in treasury                 (14,638      )     (12,729      )
Accumulated other comprehensive income (loss) (1,807       )     (1,504       )
Noncontrolling interest                       5                  4
Total stockholders’ equity                    4,259              5,228
                                              $     15,201       $     15,729
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended December 31, 2016
Dollars in millions                Total           Operating      Operating
                                   Revenue         Income         Margin
Automotive OEM                     $    773        $    178       23.0 %
Food Equipment                     532             132            24.7 %
Test & Measurement and Electronics 487             98             20.1 %
Welding                            361             88             24.4 %
Polymers & Fluids                  408             77             19.0 %
Construction Products              386             83             21.4 %
Specialty Products                 456             109            24.0 %
Intersegment                       (4         )    --             --   %
Total Segments                     3,399           765            22.5 %
Unallocated                        --              (23       )    --   %
Total Company                      $    3,399      $    742       21.8 %
Twelve Months Ended December 31, 2016
Dollars in millions                Total            Operating       Operating
                                   Revenue          Income          Margin
Automotive OEM                     $    2,864       $    690        24.1 %
Food Equipment                     2,110            537             25.4 %
Test & Measurement and Electronics 1,974            372             18.9 %
Welding                            1,486            370             24.9 %
Polymers & Fluids                  1,691            343             20.3 %
Construction Products              1,609            361             22.4 %
Specialty Products                 1,885            482             25.6 %
Intersegment                       (20         )    --              --   %
Total Segments                     13,599           3,155           23.2 %
Unallocated                        --               (91        )    --   %
Total Company                      $    13,599      $    3,064      22.5 %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q4 2016 vs. Q4 2015 Favorable/(Unfavorable)
Operating         Automotive  Food      Test &          Welding  Polymers &  Construction  Specialty Total
Revenue           OEM         Equipment Measurement              Fluids      Products      Products  ITW
                                        and Electronics
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  %
Divestitures
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  %
Q4 2016 vs. Q4 2015 Favorable/(Unfavorable)
Change in                                                                                                        Automotive OEM Food Equipment Test &          Welding   Polymers & Fluids Construction Products Specialty Products Total ITW
Operating Margin                                                                                                                               Measurement
                                                                                                                                               and Electronics
Operating Leverage                                                                                               100 bps        50 bps         (10) bps        (160) bps 60 bps            60 bps                30 bps             40 bps
Changes in Variable Margin & OH Costs                                                                            160 bps        20 bps         230 bps         320 bps   40 bps            120 bps               180 bps            130 bps
Total Organic                                                                                                    260 bps        70 bps         220 bps         160 bps   100 bps           180 bps               210 bps            170 bps
Acquisitions/                                                                                                    (220) bps      -              -               -         -                 (10) bps              20 bps             (30) bps
Divestitures
Restructuring/Other                                                                                              60 bps         10 bps         (20) bps        30 bps    (20) bps          (20) bps              (130) bps          (30) bps
Total Operating Margin Change                                                                                    100 bps        80 bps         200 bps         190 bps   80 bps            150 bps               100 bps            110 bps
Total Operating Margin % *                                                                                       23.0    %      24.7    %      20.1    %       24.4 %    19.0     %        21.4       %          24.0      %        21.8 %
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 50 bps         80 bps         380 bps         60 bps    450 bps           60 bps                140 bps            170 bps
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Full Year 2016 vs Full Year 2015 Favorable/(Unfavorable)
Operating         Automotive  Food      Test &      Welding   Polymers &  Construction  Specialty Total
Revenue           OEM         Equipment Measurement           Fluids      Products      Products  ITW
                                        and
                                        Electronics
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  %
Divestitures
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  %
Full Year 2016 vs Full Year 2015 Favorable/(Unfavorable)
Change in                                                                                                        Automotive OEM Food Equipment Test &          Welding   Polymers & Fluids Construction Products Specialty Products Total ITW
Operating Margin                                                                                                                               Measurement
                                                                                                                                               and Electronics
Operating Leverage                                                                                               80 bps         60 bps         60 bps          (190) bps 30 bps            80 bps                30 bps             30 bps
Changes in Variable Margin & OH Costs                                                                            50 bps         80 bps         190 bps         210 bps   40 bps            180 bps               200 bps            110 bps
Total Organic                                                                                                    130 bps        140 bps        250 bps         20 bps    70 bps            260 bps               230 bps            140 bps
Acquisitions/                                                                                                    (160) bps      -              -               -         -                 -                     10 bps             (30) bps
Divestitures
Restructuring/Other                                                                                              20 bps         30 bps         10 bps          (50) bps  -                 (10) bps              (10) bps           -
Total Operating Margin Change                                                                                    (10) bps       170 bps        260 bps         (30) bps  70 bps            250 bps               230 bps            110 bps
Total Operating Margin % *                                                                                       24.1    %      25.4    %      18.9    %       24.9 %    20.3     %        22.4       %          25.6      %        22.5 %
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 40 bps         80 bps         380 bps         80 bps    430 bps           60 bps                150 bps            170 bps
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Full Year 2015 vs Full Year 2014 Favorable/(Unfavorable)
Operating Automotive        Food      Test &          Welding   Polymers &  Construction  Specialty Total
Revenue   OEM               Equipment Measurement               Fluids      Products      Products  ITW
                                      and Electronics
Organic            5.8  %   3.4  %    (5.2    )%      (7.6  )%  (2.0  )%    3.7    %      (2.3 )%   (0.4 )%
Acquisitions/      (0.2 )%  --   %    --      %       (0.1  )%  (1.0  )%    (0.5   )%     --   %    (0.2 )%
Divestitures
Translation        (8.0 )%  (7.1 )%   (5.5    )%      (3.1  )%  (8.2  )%    (10.2  )%     (6.0 )%   (6.8 )%
Operating Revenue  (2.4 )%  (3.7 )%   (10.7   )%      (10.8 )%  (11.2 )%    (7.0   )%     (8.3 )%   (7.4 )%
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
                                                                    Three Months Ended            Twelve Months Ended
                                                                    December 31,                  December 31,
Dollars in millions                                                 2016           2015           2016           2015           2012
Operating income                                                    $   742        $   679        $   3,064      $   2,867      $   2,475
Adjustment for Decorative Surfaces                                  --             --             --             --             (143       )
Adjusted operating income                                           742            679            3,064          2,867          2,332
Tax rate (as adjusted for discrete charge in 4Q 2012)               30.0      %    29.0      %    30.0      %    30.1      %    29.2       %
Income taxes                                                        (222      )    (196      )    (919      )    (864      )    (681       )
Operating income after taxes                                        $   520        $   483        $   2,145      $   2,003      $   1,651
Invested capital:
Trade receivables                                                   $   2,357      $   2,203      $   2,357      $   2,203      $   2,742
Inventories                                                         1,076          1,086          1,076          1,086          1,585
Net plant and equipment                                             1,652          1,577          1,652          1,577          1,994
Goodwill and intangible assets                                      6,021          5,999          6,021          5,999          7,788
Accounts payable and accrued expenses                               (1,713    )    (1,585    )    (1,713    )    (1,585    )    (2,068     )
Other, net                                                          223            280            223            280            773
Total invested capital                                              $   9,616      $   9,560      $   9,616      $   9,560      $   12,814
Average invested capital                                            $   9,902      $   9,709      $   9,780      $   9,943      $   13,140
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) (59       )    (118      )    (91       )    (123      )    (274       )
Adjusted for Industrial Packaging                                   --             --             --             --             (1,504     )
Adjusted average invested capital                                   $   9,843      $   9,591      $   9,689      $   9,820      $   11,362
Adjusted return on average invested capital                         21.1      %    20.1      %    22.1      %    20.4      %    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 charge (36       )     (1.1 )%
As adjusted         $    937        29.2 %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
FREE CASH FLOW (UNAUDITED)
                                             Three Months Ended    Twelve Months Ended
                                             December 31,          December 31,
Dollars in millions                          2016       2015       2016         2015
Net cash provided by operating activities    $  664     $  703     $  2,302     $  2,299
Less: Additions to plant and equipment       (71    )   (75    )   (273     )   (284     )
Free cash flow                               $  593     $  628     $  2,029     $  2,015
Net income                                   $  507     $  450     $  2,035     $  1,899
Free cash flow to net income conversion rate 117    %   140    %   100      %   106      %
2012 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 Surfaces operating results            0.21
As adjusted for the Decorative Surfaces business $                   3.21
2016 ADJUSTED NET INCOME PER SHARE - DILUTED (UNAUDITED)
                                   Three Months Ended
                                   December 31, 2016
As reported                        $              1.45
Gain related to Wilsonart dividend (0.10                         )
Loss related to divestitures       0.04
As adjusted                        $              1.39
Contact: Mike Drazin 224.661.7433 or mdrazin@itw.com

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