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| 8-K - 8-K - ILLINOIS TOOL WORKS INC | itw8k2q18.htm |
Exhibit 99.1
ITW Delivers $1.97 Earnings per Share, up 17%
• | Total revenue was $3.8 billion, an increase of 7%; organic growth was 4% |
• | Operating margin was 24.3%, an increase of 10 bps, 50 bps excluding 2017 legal settlement |
• | Operating income was up 7% to $932 million, up 9% excluding the legal settlement |
• | Full year guidance adjusted to reflect impact of currency translation in the second half 2018 based on current exchange rates. Expect EPS in the range of $7.50 to $7.70 per share, up 15% versus prior year at the midpoint |
GLENVIEW, Ill., July 23, 2018 - Illinois Tool Works Inc. (NYSE: ITW) today reported second quarter 2018 GAAP earnings of $1.97 per share, a 17 percent increase compared to the year ago period. As previously disclosed, the company recorded an EPS benefit of $0.03 per share related to a legal settlement in the second quarter of 2017. Excluding this item, earnings per share increased 19 percent. In addition, currency had a $0.03 negative impact to earnings per share versus guidance provided for the second quarter.
“ITW delivered another strong quarter with good growth momentum and excellent operational execution,” said E. Scott Santi, Chairman and Chief Executive Officer. “The company’s ability to overcome near-term inflationary and currency challenges and generate four percent organic revenue growth, core operating earnings growth of nine percent, core EPS growth of 19 percent, and continue to expand margins is a direct result of the strength and resilience of the ITW Business Model and the dedicated team of ITW professionals around the world who leverage it to serve our customers and execute our strategy with excellence each and every day.”
Revenue was up seven percent with four percent organic growth. Operating income was $932 million in the quarter, an increase of seven percent, and operating margin was 24.3 percent, an increase of 10 basis points. Excluding the second quarter 2017 legal settlement, operating income was up nine percent and operating margin increased 50 basis points. Enterprise Initiatives contributed 110 basis points of margin improvement, more than offsetting 70 basis points of unfavorable price/cost impact. Year-to-date on a dollar-for-dollar basis, pricing actions essentially offset the impact of raw material cost inflation.
All seven of the company’s business segments delivered positive year on year organic revenue growth, led by Welding with 13 percent. Organic growth of four percent was driven by five percent growth in North America.
After-tax return on invested capital was 28.7 percent, an improvement of 440 basis points, of which 400 basis points resulted from new U.S tax rules and regulations.
In the second quarter, Free Cash Flow was $533 million, an increase of 38 percent. The company repurchased $500 million of its own shares.
2018 Guidance
Based on current foreign exchange rates, second half earnings per share are projected to have a $0.12 negative currency impact versus prior guidance. ITW adjusted 2018 full-year EPS guidance to reflect this impact, and expects earnings in a range of $7.50 to $7.70 per share, or 15 percent growth at the midpoint. The company also revised its outlook for operating margin to a range of 24 to 25 percent reflecting price/cost related margin dilution. The company continues to expect to recover the impact of raw material cost increases through price actions on a dollar for dollar basis for the full year and as a result, expects the full year price/cost impact on the company’s earnings per share to be neutral (as it was in the first half of 2018). The company continues to expect organic growth of three to four percent, free cash flow at or above 100 percent of net income, and an effective tax rate of approximately 25 percent for the year. The company now expects to repurchase $1.5 billion of its own shares in 2018.
For the third quarter 2018, the company expects earnings to be in the range of $1.80 to $1.90 per share, with revenue up two to three percent and organic growth of three to four percent. As a reminder, prior year third quarter GAAP EPS of $1.85 included a $0.14 benefit from a legal settlement. Excluding this item, adjusted EPS was $1.71 per share.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, foreign exchange rates, organic revenue growth, operating margin, price/cost impact, free cash flow, effective tax rate, after-tax return on invested capital, and timing and amount of share repurchases. 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 2017 and subsequently filed Form 10-Qs.
About Illinois Tool Works
ITW (NYSE: 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.
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 | 2018 | 2017(1) | 2018 | 2017(1) | |||||||||||
Operating Revenue | $ | 3,831 | $ | 3,599 | $ | 7,575 | $ | 7,070 | |||||||
Cost of revenue | 2,231 | 2,087 | 4,412 | 4,090 | |||||||||||
Selling, administrative, and research and development expenses | 620 | 603 | 1,232 | 1,211 | |||||||||||
Legal settlement (income) | — | (15 | ) | — | (15 | ) | |||||||||
Amortization and impairment of intangible assets | 48 | 52 | 96 | 105 | |||||||||||
Operating Income | 932 | 872 | 1,835 | 1,679 | |||||||||||
Interest expense | (64 | ) | (65 | ) | (130 | ) | (129 | ) | |||||||
Other income (expense) | 26 | 12 | 38 | 18 | |||||||||||
Income Before Taxes | 894 | 819 | 1,743 | 1,568 | |||||||||||
Income Taxes | 228 | 232 | 425 | 445 | |||||||||||
Net Income | $ | 666 | $ | 587 | $ | 1,318 | $ | 1,123 | |||||||
Net Income Per Share: | |||||||||||||||
Basic | $ | 1.98 | $ | 1.70 | $ | 3.90 | $ | 3.25 | |||||||
Diluted | $ | 1.97 | $ | 1.69 | $ | 3.87 | $ | 3.23 | |||||||
Cash Dividends Per Share: | |||||||||||||||
Paid | $ | 0.78 | $ | 0.65 | $ | 1.56 | $ | 1.30 | |||||||
Declared | $ | 0.78 | $ | 0.65 | $ | 1.56 | $ | 1.30 | |||||||
Shares of Common Stock Outstanding During the Period: | |||||||||||||||
Average | 336.7 | 344.7 | 338.5 | 345.4 | |||||||||||
Average assuming dilution | 338.9 | 347.5 | 340.8 | 348.3 | |||||||||||
(1) | The three and six months ended June 30, 2017 have been restated to reflect the adoption of new accounting guidance in 2018 which resulted in the presentation of $2 million and $4 million, respectively, of other net periodic benefit income in Other income (expense) rather than in Operating Income, with no change in Net Income. |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millions | June 30, 2018 | December 31, 2017 | |||||
Assets | |||||||
Current Assets: | |||||||
Cash and equivalents | $ | 1,628 | $ | 3,094 | |||
Trade receivables | 2,878 | 2,628 | |||||
Inventories | 1,320 | 1,220 | |||||
Prepaid expenses and other current assets | 293 | 336 | |||||
Total current assets | 6,119 | 7,278 | |||||
Net plant and equipment | 1,783 | 1,778 | |||||
Goodwill | 4,675 | 4,752 | |||||
Intangible assets | 1,177 | 1,272 | |||||
Deferred income taxes | 595 | 505 | |||||
Other assets | 1,174 | 1,195 | |||||
$ | 15,523 | $ | 16,780 | ||||
Liabilities and Stockholders' Equity | |||||||
Current Liabilities: | |||||||
Short-term debt | $ | 1,350 | $ | 850 | |||
Accounts payable | 623 | 590 | |||||
Accrued expenses | 1,224 | 1,258 | |||||
Cash dividends payable | 262 | 266 | |||||
Income taxes payable | 88 | 89 | |||||
Total current liabilities | 3,547 | 3,053 | |||||
Noncurrent Liabilities: | |||||||
Long-term debt | 6,069 | 7,478 | |||||
Deferred income taxes | 704 | 164 | |||||
Noncurrent income taxes payable | 561 | 614 | |||||
Other liabilities | 854 | 882 | |||||
Total noncurrent liabilities | 8,188 | 9,138 | |||||
Stockholders’ Equity: | |||||||
Common stock | 6 | 6 | |||||
Additional paid-in-capital | 1,231 | 1,218 | |||||
Retained earnings | 20,633 | 20,210 | |||||
Common stock held in treasury | (16,555 | ) | (15,562 | ) | |||
Accumulated other comprehensive income (loss) | (1,530 | ) | (1,287 | ) | |||
Noncontrolling interest | 3 | 4 | |||||
Total stockholders’ equity | 3,788 | 4,589 | |||||
$ | 15,523 | $ | 16,780 | ||||
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended June 30, 2018 | ||||||||
Dollars in millions | Total Revenue | Operating Income | Operating Margin | |||||
Automotive OEM | $ | 879 | $ | 198 | 22.5 | % | ||
Food Equipment | 553 | 140 | 25.4 | % | ||||
Test & Measurement and Electronics | 554 | 131 | 23.5 | % | ||||
Welding | 440 | 129 | 29.3 | % | ||||
Polymers & Fluids | 445 | 95 | 21.2 | % | ||||
Construction Products | 444 | 109 | 24.5 | % | ||||
Specialty Products | 522 | 146 | 28.1 | % | ||||
Intersegment | (6 | ) | — | — | % | |||
Total Segments | 3,831 | 948 | 24.7 | % | ||||
Unallocated | — | (16 | ) | — | % | |||
Total Company | $ | 3,831 | $ | 932 | 24.3 | % | ||
Six Months Ended June 30, 2018 | ||||||||
Dollars in millions | Total Revenue | Operating Income | Operating Margin | |||||
Automotive OEM | $ | 1,780 | $ | 415 | 23.3 | % | ||
Food Equipment | 1,080 | 270 | 25.0 | % | ||||
Test & Measurement and Electronics | 1,097 | 258 | 23.5 | % | ||||
Welding | 863 | 246 | 28.5 | % | ||||
Polymers & Fluids | 887 | 187 | 21.1 | % | ||||
Construction Products | 872 | 204 | 23.3 | % | ||||
Specialty Products | 1,007 | 276 | 27.4 | % | ||||
Intersegment | (11 | ) | — | — | % | |||
Total Segments | 7,575 | 1,856 | 24.5 | % | ||||
Unallocated | — | (21 | ) | — | % | |||
Total Company | $ | 7,575 | $ | 1,835 | 24.2 | % | ||
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q2 2018 vs. Q2 2017 Favorable/(Unfavorable) | ||||||||||||||||
Operating Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
Organic | 2.8 | % | 1.6 | % | 3.9 | % | 13.3 | % | 0.9 | % | 1.7 | % | 4.0 | % | 3.7 | % |
Acquisitions/Divestitures | — | % | — | % | — | % | — | % | — | % | — | % | (0.1 | )% | — | % |
Translation | 4.4 | % | 3.2 | % | 2.8 | % | 1.0 | % | 0.8 | % | 2.7 | % | 2.6 | % | 2.8 | % |
Operating Revenue | 7.2 | % | 4.8 | % | 6.7 | % | 14.3 | % | 1.7 | % | 4.4 | % | 6.5 | % | 6.5 | % |
Q2 2018 vs. Q2 2017 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 | 30 bps | 100 bps | 200 bps | 20 bps | 40 bps | 70 bps | 70 bps |
Changes in Variable Margin & OH Costs | (40) bps | (90) bps | 120 bps | — | (70) bps | 20 bps | (130) bps | (60) bps |
Total Organic | — | (60) bps | 220 bps | 200 bps | (50) bps | 60 bps | (60) bps | 10 bps |
Acquisitions/Divestitures | — | — | — | — | — | — | — | — |
Restructuring/Other | 20 bps | (40) bps | (60) bps | 10 bps | 30 bps | (10) bps | 40 bps | — |
Total Operating Margin Change | 20 bps | (100) bps | 160 bps | 210 bps | (20) bps | 50 bps | (20) bps | 10 bps |
Total Operating Margin % * | 22.5% | 25.4% | 23.5% | 29.3% | 21.2% | 24.5% | 28.1% | 24.3% |
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets | 50 bps | 70 bps | 270 bps | 30 bps | 370 bps | 40 bps | 100 bps | 130 bps |
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.11) on GAAP earnings per share for the second quarter of 2018. | ||||||||
1H 2018 vs 1H 2017 Favorable/(Unfavorable) | ||||||||||||||||
Operating Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
Organic | 1.9 | % | 1.1 | % | 5.7 | % | 10.4 | % | 0.6 | % | 2.3 | % | 2.3 | % | 3.2 | % |
Acquisitions/Divestitures | — | % | — | % | — | % | — | % | — | % | — | % | (0.2 | )% | — | % |
Translation | 6.1 | % | 4.3 | % | 4.1 | % | 1.4 | % | 2.1 | % | 4.0 | % | 3.6 | % | 3.9 | % |
Operating Revenue | 8.0 | % | 5.4 | % | 9.8 | % | 11.8 | % | 2.7 | % | 6.3 | % | 5.7 | % | 7.1 | % |
1H 2018 vs. 1H 2017 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 | 150 bps | 160 bps | 20 bps | 60 bps | 50 bps | 70 bps |
Changes in Variable Margin & OH Costs | (60) bps | (90) bps | 110 bps | (50) bps | (50) bps | (40) bps | (90) bps | (30) bps |
Total Organic | (30) bps | (70) bps | 260 bps | 110 bps | (30) bps | 20 bps | (40) bps | 40 bps |
Acquisitions/Divestitures | — | — | — | — | — | — | — | — |
Restructuring/Other | 30 bps | (10) bps | (10) bps | — | 40 bps | (20) bps | 20 bps | 10 bps |
Total Operating Margin Change | — | (80) bps | 250 bps | 110 bps | 10 bps | — | (20) bps | 50 bps |
Total Operating Margin % * | 23.3% | 25.0% | 23.5% | 28.5% | 21.1% | 23.3% | 27.4% | 24.2% |
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets | 50 bps | 70 bps | 270 bps | 30 bps | 370 bps | 50 bps | 110 bps | 130 bps |
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.21) on GAAP earnings per share for the first half of 2018. | ||||||||
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 | 2018 | 2017 | 2018 | 2017 | 2017 | ||||||||||||||
Operating income(1) | $ | 932 | $ | 872 | $ | 1,835 | $ | 1,679 | $ | 3,485 | |||||||||
Less: Legal settlement income | — | (15 | ) | — | (15 | ) | (95 | ) | |||||||||||
Adjusted operating income | 932 | 857 | 1,835 | 1,664 | 3,390 | ||||||||||||||
Tax rate(2) | 25.5 | % | 28.4 | % | 25.0 | % | 28.4 | % | 28.3 | % | |||||||||
Income taxes | (238 | ) | (243 | ) | (459 | ) | (472 | ) | (958 | ) | |||||||||
Operating income after taxes | $ | 694 | $ | 614 | $ | 1,376 | $ | 1,192 | $ | 2,432 | |||||||||
Invested capital: | |||||||||||||||||||
Trade receivables | $ | 2,878 | $ | 2,629 | $ | 2,878 | $ | 2,629 | $ | 2,628 | |||||||||
Inventories | 1,320 | 1,199 | 1,320 | 1,199 | 1,220 | ||||||||||||||
Net plant and equipment | 1,783 | 1,726 | 1,783 | 1,726 | 1,778 | ||||||||||||||
Goodwill and intangible assets | 5,852 | 6,041 | 5,852 | 6,041 | 6,024 | ||||||||||||||
Accounts payable and accrued expenses | (1,847 | ) | (1,754 | ) | (1,847 | ) | (1,754 | ) | (1,848 | ) | |||||||||
Other, net | (407 | ) | 488 | (407 | ) | 488 | 21 | ||||||||||||
Total invested capital | $ | 9,579 | $ | 10,329 | $ | 9,579 | $ | 10,329 | $ | 9,823 | |||||||||
Average invested capital | $ | 9,675 | $ | 10,105 | $ | 9,724 | $ | 9,942 | $ | 10,005 | |||||||||
Annualized return on average invested capital | 28.7 | % | 24.3 | % | 28.3 | % | 24.0 | % | 24.3 | % | |||||||||
(1) | The 2017 results have been restated to reflect the adoption of new accounting guidance in 2018 related to the presentation of net periodic benefit costs. The adoption of this guidance resulted in the presentation of $9 million, $4 million and $2 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the full year 2017, first half 2017 and second quarter 2017, respectively, with no change in Net Income. |
(2) | The tax rate for the six months ended June 30, 2018 represents the estimated effective tax rate for the full year of 2018. The tax rate for the twelve months ended December 31, 2017 excludes the impact of the $658 million discrete tax charge related to the 2017 U.S. tax legislation. |
ROIC for the three months ended June 30, 2018 was 28.7%, an improvement of 440 basis points, of which 400 basis points related to the new U.S. tax rules and regulations. ROIC for the six months ended June 30, 2018 was 28.3%, an improvement of 430 basis points, of which 380 basis points related to the new U.S. tax rules and regulations.
FREE CASH FLOW (UNAUDITED)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
Dollars in millions | 2018 | 2017 | 2018 | 2017 | |||||||||||
Net cash provided by operating activities | $ | 620 | $ | 464 | $ | 1,158 | $ | 927 | |||||||
Less: Additions to plant and equipment | (87 | ) | (77 | ) | (181 | ) | (141 | ) | |||||||
Free cash flow | $ | 533 | $ | 387 | $ | 977 | $ | 786 | |||||||
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
IMPACT OF THE "TAX CUTS AND JOBS ACT" AND LEGAL SETTLEMENT ON 2017 RESULTS
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, of which $15 million was recognized in the second quarter of 2017 and $80 million was recognized in the third quarter of 2017. The following schedules illustrate the impact of these items on the Company’s full year, first half and second quarter 2017 financial results:
Full Year 2017 | |||||
Dollars in millions | As Reported(1) | Legal Item | Tax Charge | Ex. Items | |
Total Revenue | $14,314 | — | — | $14,314 | |
Operating Income | 3,485 | +$95 | — | 3,390 | |
Operating Margin | 24.3% | +60 bps | — | 23.7% | |
Tax Rate | 48.4% | — | +20.1%-pts | 28.3% | |
Net Income | $1,687 | +$59 | ($658) | $2,286 | |
EPS | $4.86 | +$0.17 | ($1.90) | $6.59 | |
First Half 2017 | Second Quarter 2017 | |||||||
Dollars in millions | As Reported(1) | Legal Item | Ex. Legal Item | As Reported(1) | Legal Item | Ex. Legal Item | ||
Total Revenue | $7,070 | — | $7,070 | $3,599 | — | $3,599 | ||
Operating Income | 1,679 | +$15 | 1,664 | 872 | +$15 | 857 | ||
Operating Margin | 23.7% | +20 bps | 23.5% | 24.2% | +40 bps | 23.8% | ||
EPS | $3.23 | +$0.03 | $3.20 | $1.69 | +$0.03 | $1.66 | ||
(1) | The 2017 results have been restated to reflect the adoption of new accounting guidance in 2018 related to the presentation of net periodic benefit costs. The adoption of this guidance resulted in the presentation of $9 million, $4 million and $2 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the full year 2017, first half 2017 and second quarter 2017, respectively, with no change in Net Income. |