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Illinois Tool Works, Inc.$154.70($.33)(.21%)

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 ITW Reports Second-Quarter 2017 Results
   Monday, July 24, 2017 8:00:17 AM ET

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
                                                               June 30,                  June 30,
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
Income taxes                                                   232          226          445          426
Net Income                                                     $  587       $  525       $  1,123     $  993
Net Income Per Share:
Basic                                                          $  1.70      $  1.47      $  3.25      $  2.76
Diluted                                                        $  1.69      $  1.46      $  3.23      $  2.75
Cash Dividends Per Share:
Paid                                                           $  0.65      $  0.55      $  1.30      $  1.10
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
Assets
Current Assets:
Cash and equivalents                          $     2,496     $     2,472
Trade receivables                             2,629           2,357
Inventories                                   1,199           1,076
Prepaid expenses and other current assets     246             218
Total current assets                          6,570           6,123
Net plant and equipment                       1,726           1,652
Goodwill                                      4,675           4,558
Intangible assets                             1,366           1,463
Deferred income taxes                         488             449
Other assets                                  1,097           956
                                              $     15,922    $     15,201
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt                               $     691       $     652
Accounts payable                              582             511
Accrued expenses                              1,172           1,202
Cash dividends payable                        224             226
Income taxes payable                          157             169
Total current liabilities                     2,826           2,760
Noncurrent Liabilities:
Long-term debt                                7,360           7,177
Deferred income taxes                         121             134
Other liabilities                             841             871
Total noncurrent liabilities                  8,322           8,182
Stockholders’ Equity:
Common stock                                  6               6
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
                                              $     15,922    $     15,201
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended June 30, 2017
Dollars in millions                Total          Operating        Operating
                                   Revenue        Income           Margin
Automotive OEM                     $   820            $   182      22.3 %
Food Equipment                     529            139              26.4 %
Test & Measurement and Electronics 519            114              21.9 %
Welding                            385            105              27.2 %
Polymers & Fluids                  437            94               21.4 %
Construction Products              425            102              24.0 %
Specialty Products                 490            139              28.3 %
Intersegment                       (6        )    --               --   %
Total Segments                     3,599          875              24.3 %
Unallocated                        --             (1          )    --   %
Total Company                      $   3,599          $   874      24.3 %
Six Months Ended June 30, 2017
Dollars in millions                Total        Operating      Operating
                                   Revenue      Income         Margin
Automotive OEM                     $  1,648     $   384        23.3 %
Food Equipment                     1,026        264            25.8 %
Test & Measurement and Electronics 999          210            21.0 %
Welding                            772          212            27.4 %
Polymers & Fluids                  863          182            21.0 %
Construction Products              820          191            23.3 %
Specialty Products                 953          263            27.6 %
Intersegment                       (11      )   --             --   %
Total Segments                     7,070        1,706          24.1 %
Unallocated                        --           (23       )    --   %
Total Company                      $  7,070     $   1,683      23.8 %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q2 2017 vs. Q2 2016 Favorable/(Unfavorable)
Operating Revenue Automotive   Food       Test &           Welding   Polymers &   Construction   Specialty  Total
                  OEM          Equipment  Measurement                Fluids       Products       Products   ITW
                                          and Electronics
Organic           4.4   %      0.6  %     4.3     %        3.3  %    (1.0  )%     1.6    %       3.9  %     2.6  %
Acquisitions/     19.0  %      --   %     --      %        --   %    --    %      --     %       (1.4 )%    3.5  %
Divestitures
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
                                                                                                                                       and Electronics
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
Divestitures
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
SEGMENT DATA (UNAUDITED)
1H 2017 vs 1H 2016 Favorable/(Unfavorable)
Operating Revenue Automotive   Food       Test &           Welding   Polymers   Construction   Specialty  Total
                  OEM          Equipment  Measurement                & Fluids   Products       Products   ITW
                                          and Electronics
Organic           6.7   %      1.3  %     4.9     %        1.5  %    0.2  %     2.2    %       2.4  %     3.0  %
Acquisitions/     19.2  %      --   %     --      %        --   %    --   %     --     %       (1.1 )%    3.6  %
Divestitures
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
                                                                                                                                       and Electronics
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
Divestitures
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
                                          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  %
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
Invested capital:
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
                                             June 30,                                      June 30,
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
                                                      June 30,            June 30,
Dollars in millions                                   2017                2017
Free cash flow                                        $      387          $     786
Pension contribution adjustment                       115                 160
Adjusted free cash flow                               $      502          $     946
Net income                                            $      587          $     1,123
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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