OREANDA-NEWS. Illinois Tool Works Inc. (NYSE:ITW) today reported its third-quarter 2017 results.

Third-quarter revenue grew 4% to $3.6 billion as organic revenue and foreign currency translation each increased revenue by 2% in the quarter. GAAP EPS of $1.85 includes a $0.14 benefit from a previously disclosed favorable legal settlement. Excluding this item, EPS increased 14% to $1.71. Operating margin was 26.6% and includes a 220 basis point benefit from the settlement. Excluding this item, operating margin was 24.4%, an increase of 130 basis points, with enterprise initiatives contributing 110 basis points of margin improvement.

“In the third quarter, the ITW team continued to execute at a high level and, as a result, delivered another quarter of strong financial results,” said E. Scott Santi, Chairman and Chief Executive Officer. “I continue to be very pleased with our progress in positioning the company to leverage ITW’s differentiated business model and high quality diversified business portfolio to deliver consistent top tier performance.”

Organic revenue growth was positive in six of seven segments led by Specialty Products (+5%), Welding (+4%) and Construction (+4%).

As previously disclosed, the company entered into a confidential legal settlement in 2017, resulting in a favorable pre-tax impact of $80 million on the third quarter 2017 results.  The following schedule illustrates the impact of this item on the company’s reported third quarter 2017 financial performance.

 

$ Millions

 Q3’16 As
Reported		     Q3’17 As
Reported		     Legal
Settlement		   Q3’17 Ex
Settlement		     Change
year-on-year
Total Revenue $3,495 $3,615 - - +4%
Operating Income $808 $961 +$80 $881 +9%
Operating Margin 23.1% 26.6% +220 bps 24.4% +130 bps
EPS $1.50 $1.85 +$0.14 $1.71 +14%
After-tax ROIC 23.0% 26.3% +220 bps 24.1% +110 bps

Full-Year and Fourth Quarter 2017 Guidance
ITW is raising its 2017 full-year GAAP EPS guidance by $0.25 at the mid-point to a range of $6.62 to $6.72. The company expects full-year organic revenue growth of 2 to 3% and operating margin of approximately 24.5%.

For the fourth quarter 2017, the company expects GAAP EPS to be in the range of $1.55 to $1.65 and organic growth of 2 to 3%.

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 (NYSE: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. 

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 2017   2016   2017   2016
Operating Revenue $ 3,615     $ 3,495     $ 10,685     $ 10,200  
Cost of revenue 2,094     2,027     6,185     5,890  
Selling, administrative, and research and development expenses 589     604     1,795     1,818  
Legal settlement (income) (80 )   —     (95 )   —  
Amortization and impairment of intangible assets 51     56     156     170  
Operating Income 961     808     2,644     2,322  
Interest expense (65 )   (58 )   (194 )   (174 )
Other income (expense) 10     13     24     34  
Income Before Taxes 906     763     2,474     2,182  
Income Taxes 266     228     711     654  
Net Income $ 640     $ 535     $ 1,763     $ 1,528  
               
Net Income Per Share:              
Basic $ 1.86     $ 1.51     $ 5.12     $ 4.28  
Diluted $ 1.85     $ 1.50     $ 5.07     $ 4.25  
               
Cash Dividends Per Share:              
Paid $ 0.65     $ 0.55     $ 1.95     $ 1.65  
Declared $ 0.78     $ 0.65     $ 2.08     $ 1.75  
               
Shares of Common Stock Outstanding During the Period:              
Average   343.4       353.5       344.7       357.3  
Average assuming dilution   346.0       355.5       347.5       359.3  
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
 
In millions September 30, 2017   December 31, 2016
Assets      
Current Assets:      
Cash and equivalents $ 2,785     $ 2,472  
Trade receivables 2,672     2,357  
Inventories 1,225     1,076  
Prepaid expenses and other current assets 230     218  
Total current assets 6,912     6,123  
       
Net plant and equipment 1,759     1,652  
Goodwill 4,732     4,558  
Intangible assets 1,319     1,463  
Deferred income taxes 473     449  
Other assets 1,119     956  
  $ 16,314     $ 15,201  
       
Liabilities and Stockholders' Equity      
Current Liabilities:      
Short-term debt $ 698     $ 652  
Accounts payable 585     511  
Accrued expenses 1,231     1,202  
Cash dividends payable 267     226  
Income taxes payable 86     169  
Total current liabilities 2,867     2,760  
       
Noncurrent Liabilities:      
Long-term debt 7,439     7,177  
Deferred income taxes 112     134  
Other liabilities 870     871  
Total noncurrent liabilities 8,421     8,182  
       
Stockholders’ Equity:      
Common stock 6     6  
Additional paid-in-capital 1,207     1,188  
Retained earnings 20,553     19,505  
Common stock held in treasury (15,336 )   (14,638 )
Accumulated other comprehensive income (loss) (1,407 )   (1,807 )
Noncontrolling interest 3     5  
Total stockholders’ equity 5,026     4,259  
  $ 16,314     $ 15,201  
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
 
Three Months Ended September 30, 2017
Dollars in millions Total
Revenue		 Operating
Income		 Operating
Margin
Automotive OEM $ 795   $ 172   21.6 %
Food Equipment 549   150   27.3 %
Test & Measurement and Electronics 525   127   24.1 %
Welding 378   100   26.6 %
Polymers & Fluids 434   90   21.0 %
Construction Products 440   112   25.4 %
Specialty Products 498   138   27.7 %
Intersegment (4 ) —   — %
Total Segments 3,615   889   24.6 %
Unallocated* —   72   — %
Total Company $ 3,615   $ 961   26.6 %
Nine Months Ended September 30, 2017
Dollars in millions Total
Revenue		 Operating
Income		 Operating
Margin
Automotive OEM $ 2,443   $ 556   22.7 %
Food Equipment 1,575   414   26.3 %
Test & Measurement and Electronics 1,524   337   22.1 %
Welding 1,150   312   27.2 %
Polymers & Fluids 1,297   272   21.0 %
Construction Products 1,260   303   24.0 %
Specialty Products 1,451   401   27.6 %
Intersegment (15 ) —   — %
Total Segments 10,685   2,595   24.3 %
Unallocated* —   49   — %
Total Company $ 10,685   $ 2,644   24.7 %

* Unallocated includes the favorable impact from the legal settlement.

 
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
 
Q3 2017 vs. Q3 2016 Favorable/(Unfavorable)
Operating Revenue Automotive
OEM		 Food
Equipment		 Test &
Measurement
and
Electronics		 Welding Polymers &
Fluids		 Construction
Products		 Specialty
Products		 Total
ITW
Organic 1.3 % (0.4 )% 0.8 % 3.9 % 1.0 % 3.5 % 4.5 % 1.9 %
Acquisitions/Divestitures — % — % — % — % — % — % (1.2 )% (0.2 )%
Translation 2.8 % 1.5 % 1.0 % 0.9 % 1.6 % 2.5 % 1.3 % 1.8 %
Operating Revenue 4.1 % 1.1 % 1.8 % 4.8 % 2.6 % 6.0 % 4.6 % 3.5 %
Q3 2017 vs. Q3 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 30 bps —   20 bps 60 bps 20 bps 90 bps 90 bps 50 bps
Changes in Variable Margin & OH Costs (40) bps 20 bps 240 bps 20 bps —   40 bps 140 bps 300 bps
Total Organic  (10) bps  20 bps  260 bps  80 bps  20 bps  130 bps  230 bps  350 bps
Acquisitions/Divestitures —   —   —   —   —   —   30 bps —  
Restructuring/Other (10) bps (30) bps 50 bps (70) bps (20) bps 150 bps (100) bps —  
Total Operating Margin Change  (20) bps  (10) bps  310 bps  10 bps —    280 bps  160 bps  350 bps
                 
Total Operating Margin % * 21.6 % 27.3 % 24.1 % 26.6 % 21.0 % 25.4 % 27.7 % 26.6 %
                 
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets  50 bps  70 bps  300 bps  40 bps  400 bps  50 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 third quarter of 2017.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
 
YTD 2017 vs YTD 2016 Favorable/(Unfavorable)
Operating Revenue Automotive
OEM		 Food
Equipment		 Test &
Measurement
and
Electronics		 Welding Polymers
& Fluids		 Construction
Products		 Specialty
Products		 Total ITW
Organic 4.7 % 0.7 % 3.5 % 2.2 % 0.5 % 2.7 % 3.1 % 2.7 %
Acquisitions/Divestitures 12.2 % — % — % — % — % — % (1.1 )% 2.3 %
Translation — % (0.9 )% (1.0 )% 0.1 % 0.5 % 0.3 % (0.5 )% (0.2 )%
Operating Revenue 16.9 % (0.2 )% 2.5 % 2.3 % 1.0 % 3.0 % 1.5 % 4.8 %
YTD 2017 vs. YTD 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  80 bps  20 bps  110 bps  40 bps  10 bps  70 bps  70 bps  50 bps
Changes in Variable Margin & OH Costs  (50) bps  20 bps  230 bps  80 bps  70 bps —    100 bps  180 bps
Total Organic  30 bps  40 bps  340 bps  120 bps  80 bps  70 bps  170 bps  230 bps
Acquisitions/Divestitures  (160) bps —   —   —   —   —    30 bps  (40) bps
Restructuring/Other  (50) bps  20 bps  30 bps  90 bps  (50) bps  60 bps  (50) bps —  
Total Operating Margin Change  (180) bps  60 bps  370 bps  210 bps  30 bps  130 bps  150 bps  190 bps
                 
Total Operating Margin % * 22.7 % 26.3 % 22.1 % 27.2 % 21.0 % 24.0 % 27.6 % 24.7 %
                 
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets  60 bps  80 bps  320 bps  40 bps  410 bps  60 bps  130 bps  160 bps**
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.31) on GAAP net income diluted earnings per share for the first nine months of 2017.
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/Divestitures 9.7 % — % — % — % (0.2 )% (0.2 )% (0.1 )% 1.7 %
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   Twelve
Months Ended
  September 30,   December 31,
Dollars in millions 2017   2016   2016
Operating income $ 961     $ 808     $ 3,064  
Tax rate 29.3 %   30.0 %   30.0 %
Income taxes (282 )   (243 )   (919 )
Operating income after taxes $ 679     $ 565     $ 2,145  
           
Invested capital:          
Trade receivables $ 2,672     $ 2,496     $ 2,357  
Inventories 1,225     1,167     1,076  
Net plant and equipment 1,759     1,702     1,652  
Goodwill and intangible assets 6,051     6,191     6,021  
Accounts payable and accrued expenses (1,816 )   (1,762 )   (1,713 )
Other, net 487     393     223  
Total invested capital $ 10,378     $ 10,187     $ 9,616  
           
Average invested capital $ 10,354     $ 9,973     $ 9,780  
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) —     (116 )   (91 )
Adjusted average invested capital $ 10,354     $ 9,857     $ 9,689  
Adjusted return on average invested capital 26.3 % * 23.0 %   22.1 %
FREE CASH FLOW (UNAUDITED)
       
  Three Months Ended   Nine Months Ended
  September 30,   September 30,
Dollars in millions 2017   2016   2017   2016
Net cash provided by operating activities $ 780     $ 624     $ 1,707     $ 1,638  
Less: Additions to plant and equipment (78 )   (81 )   (219 )   (202 )
Free cash flow $ 702   * $ 543     $ 1,488     $ 1,436  
               
Net income $ 640     $ 535     $ 1,763     $ 1,528  
Free cash flow to net income conversion rate 110 % * 101 %   84 %   94 %

* Excluding the impact of the confidential legal settlement in 2017, ROIC would have been 24.1% and free cash flow would have been $637 million (or 108% of net income) for the three months ended September 30, 2017.