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Illinois Tool Works, Inc.$151.21$1.791.20%

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 ITW Reports Fourth-Quarter and Full-Year 2017 Results
   Wednesday, January 24, 2018 8:00:28 AM ET

Fourth-Quarter 2017 Highlights:

-- Total revenue was $3.6 billion, an increase of 7%; organic growth was 4%

-- Operating margin was 23.4%, an increase of 160 bps

-- GAAP EPS was $(0.22), including a $658 million one-time tax charge

-- Excluding the one-time tax charge, EPS was $1.70, an increase of 17%

Full-Year 2017 Highlights:

-- Total revenue was $14.3 billion, an increase of 5%; organic growth was 3%

-- Operating margin was 24.4%, an increase of 190 bps

-- After-tax ROIC was 24.4%, an increase of 230 bps

-- GAAP EPS was $4.86, including the one-time tax charge and a previously disclosed favorable legal settlement

-- EPS was $6.59 excluding these two items, an increase of 16%

2018 Guidance:

-- Raising GAAP EPS guidance by 6% at the midpoint to $7.45 to $7.65 and accelerating previously announced plans to increase dividend pay-out ratio

Illinois Tool Works Inc. (ITW ) today reported its fourth-quarter and full-year 2017 results.

"The ITW team delivered another year of strong execution and performance in 2017," said E. Scott Santi, Chairman and Chief Executive Officer. "In 2017, excluding one-time tax and legal items, we grew EPS 16%, improved operating margin by 120 basis points to an all-time high of 23.7% and increased after-tax return on invested capital 230 basis points to a record 24.4%."

"We also continued to make meaningful progress on our focused efforts to accelerate organic growth. Our 2017 organic growth rate of 3% was up almost 2 percentage points versus 2016. In addition, our Q4 organic growth rate of 4% gives us good momentum going into 2018."

"Overall, these results demonstrate continued progress in our efforts to position ITW to generate consistent differentiated performance on a sustained basis," Santi added. "Through the combination of ITW’s high quality business portfolio and our ongoing focus on leveraging ITW’s powerful business model to full potential, we are well positioned to deliver strong results in 2018 and beyond."

Fourth-quarter revenue grew 7% to $3.6 billion as organic revenue increased 4% and foreign currency translation increased revenue by 3%. GAAP EPS of $(0.22) includes a one-time $658 million charge associated with the passage of the "Tax Cuts and Jobs Act." The charge encompasses several elements, including a repatriation tax on accumulated overseas earnings and a benefit from the revaluation of deferred tax assets and liabilities. Excluding this one-time item, EPS increased 17% to $1.70. Operating margin was 23.4%, an increase of 160 basis points, with enterprise initiatives contributing 140 basis points of margin improvement.

Organic revenue growth was positive in six of seven segments led by Test & Measurement and Electronics (+9%), Welding (+6%) and Specialty Products (+5%).

Full-year 2017 revenue increased 5% to $14.3 billion with organic growth of 3%. GAAP EPS of $4.86 includes the above-mentioned unfavorable tax impact and a $0.17 benefit from a previously disclosed favorable legal item. Excluding these one-time items, EPS was $6.59, an increase of 16% year-on-year. Operating margin was 24.4% and includes a 70 basis point benefit from the legal item. Excluding this item, operating margin was 23.7%, an increase of 120 basis points.

Full-Year and First Quarter 2018 Guidance

ITW is raising its 2018 full-year guidance by $0.40 at the midpoint to reflect the benefits of a reduction in the tax rate to an estimated range of 25 to 26% and current foreign exchange rates. The company expects 2018 GAAP earnings to be in the range of $7.45 to $7.65 per share with organic growth of 3 to 4%.

The company forecasts first quarter 2018 GAAP earnings to be in the range of $1.80 to $1.90 per share with organic growth of 3 to 4%.

Subject to formal Board approval, ITW expects to accelerate previously announced plans to increase its dividend pay-out ratio from 43% to approximately 50% of Free Cash Flow on a run rate basis in August of 2018.

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, exchange rates, free cash flow, effective tax rate, expected dividend pay-out ratio, expected repatriation, 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 $14.3 billion in 2017. The company’s seven industry-leading segments leverage the unique ITW Business Model to drive solid growth with best-in-class margins and returns in markets where highly innovative, customer-focused solutions are required. ITW has approximately 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                           2017         2016         2017          2016
Operating Revenue                                              $  3,629     $  3,399     $  14,314     $  13,599
Cost of revenue                                                2,124        2,006        8,309         7,896
Selling, administrative, and research and development expenses 605          597          2,400         2,415
Legal settlement (income)                                      --           --           (95       )   --
Amortization and impairment of intangible assets               50           54           206           224
Operating Income                                               850          742          3,494         3,064
Interest expense                                               (66      )   (63      )   (260      )   (237      )
Other income (expense)                                         12           47           36            81
Income Before Taxes                                            796          726          3,270         2,908
Income taxes                                                   872          219          1,583         873
Net Income (Loss)                                              $  (76   )   $  507       $  1,687      $  2,035
Net Income (Loss) Per Share:
Basic                                                          $  (0.22 )   $  1.46      $  4.90       $  5.73
Diluted                                                        $  (0.22 )   $  1.45      $  4.86       $  5.70
Cash Dividends Per Share:
Paid                                                           $  0.78      $  0.65      $  2.73       $  2.30
Declared                                                       $  0.78      $  0.65      $  2.86       $  2.40
Shares of Common Stock Outstanding During the Period:
Average                                                           342.1        348.3        344.1         355.0
Average assuming dilution                                         342.1        350.4        346.8         357.1

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF FINANCIAL POSITION (UNAUDITED)

In millions                                   December 31, 2017  December 31, 2016
Assets
Current Assets:
Cash and equivalents                          $     3,094        $     2,472
Trade receivables                             2,628              2,357
Inventories                                   1,220              1,076
Prepaid expenses and other current assets     336                218
Total current assets                          7,278              6,123
Net plant and equipment                       1,778              1,652
Goodwill                                      4,752              4,558
Intangible assets                             1,272              1,463
Deferred income taxes                         505                449
Other assets                                  1,195              956
                                              $     16,780       $     15,201
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt                               $     850          $     652
Accounts payable                              590                511
Accrued expenses                              1,258              1,202
Cash dividends payable                        266                226
Income taxes payable                          89                 169
Total current liabilities                     3,053              2,760
Noncurrent Liabilities:
Long-term debt                                7,478              7,177
Deferred income taxes                         164                134
Noncurrent income taxes payable               614                --
Other liabilities                             882                871
Total noncurrent liabilities                  9,138              8,182
Stockholders’ Equity:
Common stock                                  6                  6
Additional paid-in-capital                    1,218              1,188
Retained earnings                             20,210             19,505
Common stock held in treasury                 (15,562      )     (14,638      )
Accumulated other comprehensive income (loss) (1,287       )     (1,807       )
Noncontrolling interest                       4                  5
Total stockholders’ equity                    4,589              4,259
                                              $     16,780       $     15,201

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

SEGMENT DATA (UNAUDITED)

Three Months Ended December 31, 2017
Dollars in millions                Total Revenue   Operating Income Operating Margin
Automotive OEM                     $    828        $     191        23.1     %
Food Equipment                     548             142              25.8     %
Test & Measurement and Electronics 545             127              23.4     %
Welding                            388             103              26.4     %
Polymers & Fluids                  427             85               19.9     %
Construction Products              412             96               23.4     %
Specialty Products                 487             126              25.9     %
Intersegment                       (6         )    --               --       %
Total Segments                     3,629           870              24.0     %
Unallocated                        --              (20         )    --       %
Total Company                      $    3,629      $     850        23.4     %
Twelve Months Ended December 31, 2017
Dollars in millions                Total Revenue    Operating Income Operating Margin
Automotive OEM                     $    3,271       $     747        22.8     %
Food Equipment                     2,123            556              26.2     %
Test & Measurement and Electronics 2,069            464              22.4     %
Welding                            1,538            415              27.0     %
Polymers & Fluids                  1,724            357              20.7     %
Construction Products              1,672            399              23.9     %
Specialty Products                 1,938            527              27.2     %
Intersegment                       (21         )    --               --       %
Total Segments                     14,314           3,465            24.2     %
Unallocated*                       --               29               --       %
Total Company                      $    14,314      $     3,494      24.4     %

* Unallocated for the twelve months ended December 31, 2017 includes the favorable impact from the legal settlement.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

SEGMENT DATA (UNAUDITED)

Q4 2017 vs. Q4 2016 Favorable/(Unfavorable)
Operating Revenue Automotive OEM Food Equipment  Test & Measurement and Electronics Welding Polymers & Fluids Construction Products Specialty Products  Total ITW
Organic           2.5     %      (0.4    )%      8.8               %                6.1 %   2.5      %        3.5        %          4.8       %         3.7  %
Acquisitions/     --      %      --      %       --                %                --  %   --       %        --         %          (0.8      )%        (0.1 )%
Divestitures
Translation       4.5     %      3.4     %       2.9               %                1.3 %   2.4      %        3.2        %          2.9       %         3.2  %
Operating Revenue 7.0     %      3.0     %       11.7              %                7.4 %   4.9      %        6.7        %          6.9       %         6.8  %
Q4 2017 vs. Q4 2016 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                                                                                               40 bps         (10) bps       230 bps                            110 bps     70 bps            80 bps                90 bps             90 bps
Changes in Variable Margin & OH Costs                                                                            --             50 bps         130 bps                            140 bps     --                130 bps               40 bps             60 bps
Total Organic                                                                                                    40 bps         40 bps         360 bps                            250 bps     70 bps            210 bps               130 bps            150 bps
Acquisitions/                                                                                                    --             --             --                                 --          --                --                    20 bps             --
Divestitures
Restructuring/Other                                                                                              (30) bps       70 bps         (30) bps                           (50) bps    20 bps            (10) bps              40 bps             10 bps
Total Operating Margin Change                                                                                    10 bps         110 bps        330 bps                            200 bps     90 bps            200 bps               190 bps            160 bps
Total Operating Margin % *                                                                                       23.1      %    25.8      %    23.4              %                26.4      % 19.9      %       23.4       %          25.9      %        23.4      %
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 50 bps         80 bps         280 bps                            40 bps      400 bps           50 bps                130 bps            140 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.10) on GAAP earnings per share for the fourth quarter of 2017.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

SEGMENT DATA (UNAUDITED)

Full Year 2017 vs Full Year 2016 Favorable/(Unfavorable)
Operating Revenue Automotive OEM Food Equipment Test & Measurement and Electronics Welding Polymers & Fluids Construction Products Specialty Products  Total ITW
Organic           4.1     %      0.5     %      4.8               %                3.2 %   1.0      %        2.9        %          3.5       %         2.9  %
Acquisitions/     8.9     %      --      %      --                %                --  %   --       %        --         %          (1.1      )%        1.8  %
Divestitures
Translation       1.2     %      0.1     %      --                %                0.3 %   1.0      %        1.0        %          0.4       %         0.6  %
Operating Revenue 14.2    %      0.6     %      4.8               %                3.5 %   2.0      %        3.9        %          2.8       %         5.3  %
Full Year 2017 vs Full Year 2016 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         20 bps         130 bps                            70 bps     30 bps            70 bps                70 bps             70 bps
Changes in Variable Margin & OH Costs                                                                            (30) bps       30 bps         210 bps                            90 bps     50 bps            30 bps                90 bps             140 bps
Total Organic                                                                                                    30 bps         50 bps         340 bps                            160 bps    80 bps            100 bps               160 bps            210 bps
Acquisitions/                                                                                                    (120) bps      --             --                                 --         --                --                    30 bps             (30) bps
Divestitures
Restructuring/Other                                                                                              (40) bps       30 bps         10 bps                             50 bps     (40) bps          50 bps                (30) bps           10 bps
Total Operating Margin Change                                                                                    (130) bps      80 bps         350 bps                            210 bps    40 bps            150 bps               160 bps            190 bps
Total Operating Margin % *                                                                                       22.8     %     26.2     %     22.4              %                27.0     % 20.7     %        23.9       %          27.2      %        24.4     %
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 60 bps         70 bps         320 bps                            40 bps     410 bps           50 bps                130 bps            150 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.42) on GAAP earnings per share for 2017.
Q4 2016 vs. Q4 2015 Favorable/(Unfavorable)
Operating Revenue Automotive OEM  Food Equipment  Test & Measurement and Electronics Welding  Polymers & Fluids Construction Products Specialty Products  Total ITW
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  %
Full Year 2016 vs Full Year 2015 Favorable/(Unfavorable)
Operating Revenue Automotive OEM  Food Equipment  Test & Measurement and Electronics Welding   Polymers & Fluids Construction Products Specialty Products  Total ITW
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)

IMPACT OF THE "TAX CUTS AND JOBS ACT" AND LEGAL SETTLEMENT

Following the passing of the "Tax Cuts and Jobs Act" in the U.S., ITW recorded a one-time tax charge of $658 million in the fourth quarter of 2017. Additionally, as previously disclosed, ITW entered into a confidential legal settlement, resulting in a favorable one-time benefit of $95 million in 2017. The following schedules illustrate the impact of these items on the Company’s reported fourth quarter and full-year 2017 financial results.

Fourth Quarter

Dollars in millions Q4’16 As Reported Q4’17 As Reported Tax        Q4 ’17 Ex. Tax Charge Change Vs. Prior Year
                                                        Charge
Total Revenue       $3,399            $3,629            --         $3,629                +7%
Operating Income    $742              $850              --         $850                  +14%
Operating Margin    21.8%             23.4%             --         23.4%                 +160 bps
Tax Rate            30.0%             109.6%            +82.7%-pts 26.9%                 (310) bps
Net Income (Loss)   $507              ($76)             ($658)     $582                  +15%
EPS                 $1.45             ($0.22)           ($1.92)    $1.70                 +17%

Full-Year

Dollars in millions 2016 As Reported 2017 As Reported Legal   Tax        2017 Ex. Items Change Vs. Prior Year
                                                      Item    Charge
Total Revenue       $13,599          $14,314          --      --         $14,314        +5%
Operating Income    $3,064           $3,494           +$95    --         $3,399         +11%
Operating Margin    22.5%            24.4%            +70 bps --         23.7%          +120 bps
Tax Rate            30.0%            48.4%            --      +20.1%-pts 28.3%          (170) bps
Net Income          $2,035           $1,687           +$59    ($658)     $2,286         +12%
EPS                 $5.70            $4.86            +$0.17  ($1.90)    $6.59          +16%

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                                                 2017           2016          2017           2016
Operating income                                                    $   850        $   742       $   3,494      $   3,064
Less: Legal settlement income                                       --             --            (95        )   --
Adjusted operating income                                           850            742           3,399          3,064
Adjusted tax rate                                                   26.9       %   30.0      %   28.3       %   30.0      %
Income taxes                                                        (229       )   (222      )   (961       )   (919      )
Operating income after taxes                                        $   621        $   520       $   2,438      $   2,145
Invested capital:
Trade receivables                                                   $   2,628      $   2,357     $   2,628      $   2,357
Inventories                                                         1,220          1,076         1,220          1,076
Net plant and equipment                                             1,778          1,652         1,778          1,652
Goodwill and intangible assets                                      6,024          6,021         6,024          6,021
Accounts payable and accrued expenses                               (1,848     )   (1,713    )   (1,848     )   (1,713    )
Other, net                                                          21             223           21             223
Total invested capital                                              $   9,823      $   9,616     $   9,823      $   9,616
Average invested capital                                            $   10,101     $   9,902     $   10,005     $   9,780
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) --             (59       )   --             (91       )
Adjusted average invested capital                                   $   10,101     $   9,843     $   10,005     $   9,689
Adjusted return on average invested capital                         24.6       %   21.1      %   24.4       %   22.1      %

A reconciliation of the 2017 effective tax rate to the adjusted tax rate excluding the discrete tax charge related to the 2017 U.S. tax legislation is as follows:

                                                         Three Months Ended          Twelve Months Ended
                                                         December 31, 2017           December 31, 2017
                                                         Income Taxes    Tax Rate    Income Taxes     Tax Rate
As reported                                              $    872        109.6 %     $    1,583       48.4  %
Discrete tax charge related to 2017 U.S. tax legislation (658      )     (82.7 )%    (658       )     (20.1 )%
As adjusted                                              $    214        26.9  %     $    925         28.3  %

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                                      2017       2016       2017           2016
Net cash provided by operating activities                $  695     $  664     $  2,402       $  2,302
Less: Additions to plant and equipment                   (78    )   (71    )   (297     )     (273     )
Free cash flow                                           $  617     $  593     $  2,105    *  $  2,029
Net income (loss), as reported                           $  (76 )   $  507     $  1,687       $  2,035
Discrete tax charge related to 2017 U.S. tax legislation 658        --         658            --
Adjusted net income                                      $  582     $  507     $  2,345       $  2,035
Free cash flow to adjusted net income conversion rate    106    %   117    %   90       %  *  100      %

* Excluding $115 million related to an additional discretionary pension contribution, free cash flow would have been $2.2 billion (or 95% of adjusted net income) for the twelve months ended December 31, 2017.

Investor Contact: Karen Fletcher 224.661.7433 or kfletcher@itw.com

Media Contact: Trisha Knych 224.661.7566 or tknych@itw.com

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