OREANDA-NEWS. Illinois Tool Works Inc. (NYSE:ITW) today reported second quarter 2016 diluted earnings per share (EPS) of $1.46, a 12% increase compared to the year-ago period. Operating margin increased 180 basis points to 23.1%, operating income of $792 million was up 8%, and after-tax return on invested capital increased by 260 basis points to 22.9%.  Second quarter results for all three of these key metrics were all-time highs for the company.  Organic revenue increased 2% excluding Product Line Simplification (PLS) as six of the company’s seven segments delivered positive year on year growth, while the overall demand environment in the Welding segment remained challenging with revenue down 11% in the quarter.  The company’s ongoing PLS activities reduced overall organic revenue growth by approximately 1 percentage-point resulting in net organic growth for the company of 1% in the quarter. 

"I am very pleased with ITW’s performance in the quarter.  The fact that we achieved best ever operating income, operating margin, and return on invested capital performance reinforces both our conviction in the strength of the differentiated performance potential that resides within the ITW Business Model and the excellent progress that our ITW colleagues around the world continue to make in positioning the company to leverage it to its full potential,” said E. Scott Santi, Chairman and Chief Executive Officer. "I am also pleased with the progress that our segments are making in executing our framework for accelerated organic revenue growth, as evidenced by the fact that six of our seven segments delivered positive year on year organic growth in the quarter.  As a result, we were able to overcome the continued challenging demand environment in our Welding segment and deliver 12% earnings per share growth.”

Second Quarter Highlights

  • GAAP EPS of $1.46 increased 12%, $0.07 above guidance mid-point.
  • Operating margin increased 180 basis points to an all-time quarterly record of 23.1%. Enterprise Initiatives contributed 120 basis points. 
  • Operating income was up 8% to an all-time quarterly record of $792 million.
  • Total revenue was $3.4 billion, down 0.1%. Currency translation reduced revenue by 1.3%.
  • Organic revenue grew 1.2%, as North America grew 0.4% and International grew 2.2%.
  • After-tax return on invested capital improved 260 basis points to an all-time record of 22.9%.
  • Free cash flow was up 23% compared to the year-ago period and conversion of 90% of net income was in line with normal seasonality. 
  • The company repurchased shares for $500 million and paid $198 million in dividends.
  • Six of seven segments achieved positive organic revenue growth as Food Equipment grew 5%, Automotive OEM grew 4%, Test & Measurement/Electronics and Construction Products both grew 3%, Polymers & Fluids grew 2% and Specialty Products grew 0.3%. Welding declined by 11%.
  • Five of seven segments improved operating margin with Construction Products up 440 basis points to 24.3%, Food Equipment up 300 basis points to 25.0%, Test & Measurement/Electronics and Specialty Products up 250 basis points to 18.6% and 26.0% respectively, and Automotive OEM up 130 basis points to 25.8%.  Polymers & Fluids was unchanged at 20.9% and Welding declined 120 basis points to 24.9%, both due to higher restructuring.

2016 Guidance

ITW is raising its 2016 full-year GAAP EPS guidance range by $0.10 to $5.50 to $5.70, a year-over-year increase of 9% at the mid-point. The company is also narrowing its full-year organic growth forecast to 1 to 2% (prior forecast of 1 to 3%) as a result of the lingering difficult market conditions being experienced by the Welding segment.  Consistent with prior guidance, the forecast includes approximately 1%-point of PLS impact.  Operating margin is expected to exceed 22.5% for the full year.  Guidance is based on current foreign exchange rates and includes the expected impact of the Engineered Fasteners & Components (EF&C) acquisition.

On July 1, 2016, the Company completed the acquisition of EF&C for approximately $450 million.  In the second half of 2016, EF&C is expected to add revenues of approximately $220 to $240 million.  After acquisition accounting, EF&C is expected to have no EPS impact in the second half of 2016.

For the third quarter 2016, the company expects GAAP EPS to be in a range of $1.42 to $1.52, and operating margin to be approximately 23%. Organic revenue is forecast to be up 1 to 3%.

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, 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 first quarter of 2016.

About ITW
ITW (NYSE: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 nearly 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   Six Months Ended
  June 30,   June 30,
In millions except per share amounts 2016   2015   2016   2015
Operating Revenue $ 3,431     $ 3,434     $ 6,705     $ 6,776  
Cost of revenue 1,967     2,024     3,863     3,994  
Selling, administrative, and research and development expenses 617     622     1,214     1,238  
Amortization and impairment of intangible assets 55     58     114     117  
Operating Income 792     730     1,514     1,427  
Interest expense (58 )   (55 )   (116 )   (109 )
Other income (expense) 17     21     21     42  
Income Before Taxes 751     696     1,419     1,360  
Income Taxes 226     216     426     422  
Net Income $ 525     $ 480     $ 993     $ 938  
               
Net Income Per Share:              
Basic $ 1.47     $ 1.31     $ 2.76     $ 2.53  
Diluted $ 1.46     $ 1.30     $ 2.75     $ 2.51  
               
Cash Dividends Per Share:              
Paid $ 0.55     $ 0.485     $ 1.10     $ 0.97  
Declared $ 0.55     $ 0.485     $ 1.10     $ 0.97  
               
Shares of Common Stock Outstanding During the Period:              
Average 356.6     366.2     359.3     371.4  
Average assuming dilution 358.5     368.4     361.2     373.8  
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
 
In millions June 30, 2016   December 31, 2015
Assets      
Current Assets:      
Cash and equivalents $ 2,355     $ 3,090  
Trade receivables 2,413     2,203  
Inventories 1,145     1,086  
Prepaid expenses and other current assets 254     341  
Total current assets 6,167     6,720  
       
Net plant and equipment 1,580     1,577  
Goodwill 4,466     4,439  
Intangible assets 1,441     1,560  
Deferred income taxes 466     346  
Other assets 1,102     1,087  
  $ 15,222     $ 15,729  
       
Liabilities and Stockholders' Equity      
Current Liabilities:      
Short-term debt $ 864     $ 526  
Accounts payable 519     449  
Accrued expenses 1,116     1,136  
Cash dividends payable 195     200  
Income taxes payable 130     57  
Total current liabilities 2,824     2,368  
       
Noncurrent Liabilities:      
Long-term debt 6,300     6,896  
Deferred income taxes 149     256  
Other liabilities 999     981  
Total noncurrent liabilities 7,448     8,133  
       
Stockholders’ Equity:      
Common stock 6     6  
Additional paid-in-capital 1,158     1,135  
Income reinvested in the business 18,916     18,316  
Common stock held in treasury (13,664 )   (12,729 )
Accumulated other comprehensive income (loss) (1,470 )   (1,504 )
Noncontrolling interest 4     4  
Total stockholders’ equity 4,950     5,228  
  $ 15,222     $ 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   Six Months Ended   Twelve Months
Ended
  June 30,   June 30,   December 31,
Dollars in millions 2016   2015   2016   2015   2015
Operating income $ 792     $ 730     $ 1,514     $ 1,427     $ 2,867  
Tax rate 30.0 %   31.0 %   30.0 %   31.0 %   30.1 %
Income taxes (238 )   (226 )   (454 )   (443 )   (864 )
Operating income after taxes $ 554     $ 504     $ 1,060     $ 984     $ 2,003  
                   
Invested capital:                  
Trade receivables $ 2,413     $ 2,412     $ 2,413     $ 2,412     $ 2,203  
Inventories 1,145     1,191     1,145     1,191     1,086  
Net plant and equipment 1,580     1,636     1,580     1,636     1,577  
Goodwill and intangible assets 5,907     6,222     5,907     6,222     5,999  
Accounts payable and accrued expenses (1,635 )   (1,680 )   (1,635 )   (1,680 )   (1,585 )
Other, net 349     437     349     437     280  
Total invested capital $ 9,759     $ 10,218     $ 9,759     $ 10,218     $ 9,560  
                   
Average invested capital $ 9,768     $ 10,021     $ 9,698     $ 10,099     $ 9,943  
Adjustment for Wilsonart (formerly the Decorative Surfaces segment) (112 )   (120 )   (112 )   (127 )   (123 )
Adjusted average invested capital $ 9,656     $ 9,901     $ 9,586     $ 9,972     $ 9,820  
                   
Adjusted return on average invested capital 22.9 %   20.3 %   22.1 %   19.7 %   20.4 %
FREE CASH FLOW (UNAUDITED)
 
  Three Months Ended   Six Months Ended
  June 30,   June 30,
Dollars in millions 2016   2015   2016   2015
Net cash provided by operating activities $ 535     $ 448     $ 1,014     $ 890  
Less: Additions to plant and equipment (64 )   (64 )   (121 )   (147 )
Free cash flow $ 471     $ 384     $ 893     $ 743  
               
Net income $ 525     $ 480     $ 993     $ 938  
Free cash flow to net income conversion rate 90 %   80 %   90 %   79 %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
 
Three Months Ended June 30, 2016
Dollars in millions Total
Revenue		 Operating
Income		 Operating
Margin
Automotive OEM $ 670   $ 173   25.8 %
Food Equipment 535   134   25.0 %
Test & Measurement and Electronics 507   94   18.6 %
Welding 375   94   24.9 %
Polymers & Fluids 443   93   20.9 %
Construction Products 424   103   24.3 %
Specialty Products 484   126   26.0 %
Intersegment (7 ) —   — %
Total Segments 3,431   817   23.8 %
Unallocated —   (25 ) — %
Total Company $ 3,431   $ 792   23.1 %
Six Months Ended June 30, 2016
Dollars in millions Total
Revenue		 Operating
Income		 Operating
Margin
Automotive OEM $ 1,326   $ 346   26.1 %
Food Equipment 1,034   256   24.8 %
Test & Measurement and Electronics 971   166   17.1 %
Welding 764   187   24.4 %
Polymers & Fluids 861   177   20.6 %
Construction Products 808   184   22.8 %
Specialty Products 952   248   26.0 %
Intersegment (11 ) —   — %
Total Segments 6,705   1,564   23.3 %
Unallocated —   (50 ) — %
Total Company $ 6,705   $ 1,514   22.6 %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
 
Q2 2016 vs. Q2 2015 Favorable/(Unfavorable)
Operating Revenue Automotive
OEM		 Food
Equipment		 Test &
Measurement
and
Electronics		 Welding Polymers &
Fluids		 Construction
Products		 Specialty
Products		 Total
ITW
Organic 4.2 % 4.7 % 2.8 % (11.3 )% 1.9 % 3.1 % 0.3 % 1.2 %
Divestitures — % — % — % — % — % (0.2 )% — % — %
Translation (0.7 )% (1.2 )% (0.8 )% (0.9 )% (2.7 )% (1.7 )% (0.7 )% (1.3 )%
Operating Revenue 3.5 % 3.5 % 2.0 % (12.2 )% (0.8 )% 1.2 % (0.4 )% (0.1 )%
Q2 2016 vs. Q2 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 110 bps 90 bps (220) bps 50 bps 70 bps 10 bps 10 bps
Changes in Variable Margin & OH Costs 40 bps 80 bps 160 bps 240 bps 20 bps 300 bps 230 bps 160 bps
Total Organic 100 bps 190 bps 250 bps 20 bps 70 bps 370 bps 240 bps 170 bps
Restructuring/Other 30 bps 110 bps — (140) bps (70) bps 70 bps 10 bps 10 bps
Total Operating Margin Change 130 bps 300 bps 250 bps (120) bps — 440 bps 250 bps 180 bps
                 
Total Operating Margin % *   25.8 %   25.0 %   18.6 %   24.9 %   20.9 %   24.3 %   26.0 %   23.1 %
                 
*Includes unfavorable operating margin
impact of amortization expense from
acquisition-related intangible assets		 10 bps 80 bps 370 bps 60 bps 420 bps 60 bps 160 bps 160 bps
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
 
FY 2015 vs FY 2014 Favorable/(Unfavorable)
Operating Revenue Automotive
OEM		 Food
Equipment		 Test &
Measurement
and
Electronics		 Welding Polymers &
Fluids		 Construction
Products		 Specialty
Products		 Total
ITW
Organic 5.8 % 3.4 % (5.2 )% (7.6 )% (2.0 )% 3.7 % (2.3 )% (0.4 )%
Divestitures (0.2 )% — % — % (0.1 )% (1.0 )% (0.5 )% — % (0.2 )%
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 )%
1H 2016 vs 1H 2015 Favorable/(Unfavorable)
Operating Revenue Automotive
OEM		 Food
Equipment		 Test &
Measurement
and
Electronics		 Welding Polymers &
Fluids		 Construction
Products		 Specialty
Products		 Total
ITW
Organic 3.4 % 4.0 % 0.5 % (9.9 )% 1.2 % 4.0 % 1.7 % 0.9 %
Divestitures — % — % — % — % (0.5 )% (0.2 )% — % (0.1 )%
Translation (1.5 )% (1.8 )% (1.4 )% (1.2 )% (3.7 )% (2.8 )% (1.2 )% (1.8 )%
Operating Revenue 1.9 % 2.2 % (0.9 )% (11.1 )% (3.0 )% 1.0 % 0.5 % (1.0 )%