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CST: 19/08/2019 09:49:46   

ITW Reports Fourth Quarter and Full Year Results

199 Days ago

Delivers Double Digit Earnings Growth in 2018

Fourth-Quarter Highlights

  • Total revenue $3.6 billion; organic growth +1%; North America +4%
  • Operating margin 24.0%, an increase of 70 bps
  • GAAP EPS $1.83 vs. 2017 GAAP EPS of $(0.22); Excluding one-time 2017 tax charge of $658 million, EPS increased 8%, +10% excluding $(0.04) currency impact

Full-Year Highlights

  • Total revenue $14.8 billion, an increase of 3%; organic growth +2%
  • Operating margin 24.3%, an increase of 60 bps excluding 2017 legal settlement of $95 million
  • After-tax ROIC 28.2%, an increase of 390 bps
  • GAAP EPS $7.60, up 56% vs. 2017 GAAP EPS of $4.86; Excluding one-time 2017 tax charge and legal settlement, EPS increased 15%

GLENVIEW, Ill., Feb. 01, 2019 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its fourth-quarter and full-year 2018 results.

“The fourth quarter closed out another year of strong execution and financial performance by the ITW team. For the quarter, the company delivered 10 percent EPS growth excluding currency impact and the 2017 tax charge, operating margin expansion of 70 basis points and after-tax return on invested capital of 27.7 percent,” said E. Scott Santi, Chairman and Chief Executive Officer.

“For the year, excluding the 2017 one-time items, we grew EPS by 15 percent, expanded operating margin by 60 basis points to a record 24.3 percent, grew Free Cash Flow 10 percent and returned $3 billion cash to shareholders in the form of dividends and share repurchases. The fact that we achieved these results despite significant raw material cost headwinds and a decline in auto builds in North America, Europe and China clearly demonstrates the power of ITW’s highly differentiated business model and the resilience of our high quality diversified business portfolio.”

“We enter 2019 well-positioned to deliver another year of differentiated performance and continued progress in executing our long-term strategy to leverage the power of the ITW Business Model to its full potential,” Santi concluded.

Fourth-quarter revenue was essentially flat at $3.6 billion as organic growth of one percent was more than offset by the impact of foreign currency translation. Organic revenue growth increased four percent in North America, offset by a two percent decline in International.  As expected, Product Line Simplification (PLS) activities reduced organic revenue growth by 90 basis points. Excluding a tax charge in the prior year, fourth quarter EPS increased eight percent to $1.83. Excluding the unfavorable foreign currency translation impact of $(0.04) and one-time 2017 tax charge, EPS grew 10 percent. Operating margin was 24.0 percent, an increase of 70 basis points, with enterprise initiatives contributing 110 basis points and more than offsetting 40 basis points of price/cost headwind. Fourth quarter Free Cash Flow increased 18 percent to $727 million.

Full year revenue grew three percent to $14.8 billion, with organic growth of two percent. As previously disclosed, the company recorded a favorable legal settlement of $95 million in 2017.  Excluding this settlement and the 2017 fourth quarter tax charge, 2018 full-year EPS increased 15 percent to $7.60.  Operating margin was 24.3 percent, an increase of 60 basis points excluding the 2017 legal settlement, with enterprise initiatives contributing 110 basis points of margin improvement, more than offsetting 50 basis points of price/cost headwind.  After-tax return on invested capital was 28.2 percent, an improvement of 390 basis points.

2018 Free Cash Flow increased 10 percent to $2.4 billion. The company repurchased $2 billion of its own shares and raised its dividend 28 percent in August 2018 to an annualized $4.00 per share.

2019 Guidance
The company re-affirmed its full-year EPS guidance in a range of $7.90 to $8.20 per share. Organic growth is expected to be in the range of one to three percent based on current run rates. Operating margin is expected to improve by approximately 100 basis points with enterprise initiatives contributing 100 basis points. Free cash flow is expected to be at or above 100 percent of net income.  The company expects to repurchase approximately $1.5 billion of its shares in 2019. 

For the first quarter 2019, the company expects EPS of $1.73 to $1.83. This incorporates higher estimated restructuring expense of $0.07 per share, foreign currency translation headwind of $0.07 per share and a tax rate in the range of 24.5 to 25.5 percent, which represents a $0.05 per share headwind year-over-year.

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, total and organic revenue growth, operating margin, economic and regulatory conditions in various geographic regions, price/cost impact, restructuring expenses, 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 $14.8 billion in 2018. 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 48,000 dedicated colleagues in operations around the world who thrive in the company’s unique, decentralized and entrepreneurial culture.
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 2018   2017(1)   2018   2017(1)
Operating Revenue $ 3,580     $ 3,629     $ 14,768     $ 14,314  
Cost of revenue 2,096     2,124     8,604     8,306  
Selling, administrative, and research and development expenses 578     609     2,391     2,412  
Legal settlement (income)             (95 )
Amortization and impairment of intangible assets 46     50     189     206  
Operating Income 860     846     3,584     3,485  
Interest expense (63 )   (66 )   (257 )   (260 )
Other income (expense) 19     16     67     45  
Income Before Taxes 816     796     3,394     3,270  
Income taxes 209     872     831     1,583  
Net Income (Loss) $ 607     $ (76 )   $ 2,563     $ 1,687  
               
Net Income (Loss) Per Share:              
Basic $ 1.84     $ (0.22 )   $ 7.65     $ 4.90  
Diluted $ 1.83     $ (0.22 )   $ 7.60     $ 4.86  
               
Cash Dividends Per Share:              
Paid $ 1.00     $ 0.78     $ 3.34     $ 2.73  
Declared $ 1.00     $ 0.78     $ 3.56     $ 2.86  
               
Shares of Common Stock Outstanding During the Period:              
Average 329.8   342.1   335.0   344.1
Average assuming dilution 331.6   342.1   337.1   346.8
  1. The three and twelve months ended December 31, 2017 have been restated to reflect the adoption of new accounting guidance in 2018 which resulted in the presentation of $4 million and $9 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 December 31, 2018   December 31, 2017
Assets      
Current Assets:      
Cash and equivalents $ 1,504     $ 3,094  
Trade receivables 2,622     2,628  
Inventories 1,318     1,220  
Prepaid expenses and other current assets 334     336  
Total current assets 5,778     7,278  
       
Net plant and equipment 1,791     1,778  
Goodwill 4,633     4,752  
Intangible assets 1,084     1,272  
Deferred income taxes 554     505  
Other assets 1,030     1,195  
  $ 14,870     $ 16,780  
       
Liabilities and Stockholders’ Equity      
Current Liabilities:      
Short-term debt $ 1,351     $ 850  
Accounts payable 524     590  
Accrued expenses 1,271     1,258  
Cash dividends payable 328     266  
Income taxes payable 68     89  
Total current liabilities 3,542     3,053  
       
Noncurrent Liabilities:      
Long-term debt 6,029     7,478  
Deferred income taxes 707     164  
Noncurrent income taxes payable 495     614  
Other liabilities 839     882  
Total noncurrent liabilities 8,070     9,138  
       
Stockholders’ Equity:      
Common stock 6     6  
Additional paid-in-capital 1,253     1,218  
Retained earnings 21,217     20,210  
Common stock held in treasury (17,545 )   (15,562 )
Accumulated other comprehensive income (loss) (1,677 )   (1,287 )
Noncontrolling interest 4     4  
Total stockholders’ equity 3,258     4,589  
  $ 14,870     $ 16,780  
               


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Three Months Ended December 31, 2018
Dollars in millions Total
Revenue
Operating
Income
Operating
Margin
Automotive OEM $ 777   $ 168   21.6%
Food Equipment 567   151   26.6%
Test & Measurement and Electronics 538   133   24.8%
Welding 414   111   26.9%
Polymers & Fluids 422   91   21.5%
Construction Products 397   99   24.9%
Specialty Products 469   118   25.4%
Intersegment (4 )   —%
Total Segments 3,580   871   24.4 %
Unallocated   (11 ) —%
Total Company $ 3,580   $ 860   24.0 %


Twelve Months Ended December 31, 2018
Dollars in millions Total
Revenue
Operating
Income
Operating
Margin
Automotive OEM $ 3,338   $ 751   22.5%
Food Equipment 2,214   572   25.8%
Test & Measurement and Electronics 2,171   523   24.1%
Welding 1,691   474   28.0%
Polymers & Fluids 1,724   369   21.4%
Construction Products 1,700   414   24.3%
Specialty Products 1,951   522   26.8%
Intersegment (21 )  
Total Segments 14,768   3,625   24.5 %
Unallocated   (41 )
Total Company $ 14,768   $ 3,584   24.3 %
               


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Q4 2018 vs. Q4 2017 Favorable/(Unfavorable)
Operating Revenue Automotive
OEM
Food
Equipment
Test &
Measurement
and Electronics
Welding Polymers &
Fluids
Construction
Products
Specialty
Products
Total
ITW
Organic (3.6 )% 5.2 % 0.2 % 7.6 % 3.5 % (0.7 )% (2.0 )% 0.9 %
Acquisitions/ Divestitures % % % % (1.0 )% % % (0.1 )%
Translation (2.5 )% (1.7 )% (1.5 )% (0.9 )% (3.4 )% (3.1 )% (1.6 )% (2.2 )%
Operating Revenue (6.1 )% 3.5 % (1.3 )% 6.7 % (0.9 )% (3.8 )% (3.6 )% (1.4 )%


Q4 2018 vs. Q4 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 (70) bps 110 bps 130 bps 80 bps (20) bps (30) bps 20 bps
Changes in Variable Margin & OH Costs (90) bps (50) bps 110 bps (130) bps 20 bps 100 bps (20) bps 30 bps
Total Organic  (160) bps  60 bps  110 bps  100 bps  80 bps  (50) bps  50 bps
Acquisitions/ Divestitures 10 bps
Restructuring/Other 10 bps 20 bps 30 bps 50 bps 50 bps 70 bps 20 bps
Total Operating Margin Change  (150) bps  80 bps  140 bps  50 bps  160 bps  150 bps  (50) bps  70 bps
                 
Total Operating Margin % * 21.6 % 26.6 % 24.8 % 26.9 % 21.5 % 24.9 % 25.4 % 24.0 %
                 
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets  50 bps  70 bps  270 bps  30 bps  380 bps  50 bps  100 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 2018.
 


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Full Year 2018 vs Full Year 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 % 3.5 % 9.7 % 1.0 % 1.2 % (0.4 )% 2.2 %
Acquisitions/ Divestitures % % % % (0.4 )% % (0.1 )% (0.1 )%
Translation 2.0 % 1.5 % 1.4 % 0.2 % (0.6 )% 0.4 % 1.2 % 1.1 %
Operating Revenue 2.0 % 4.3 % 4.9 % 9.9 % % 1.6 % 0.7 % 3.2 %


Full Year 2018 vs Full Year 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  10 bps  60 bps  90 bps  150 bps  30 bps  20 bps  50 bps
Changes in Variable Margin & OH Costs  (50) bps  (110) bps  80 bps  (70) bps  (10) bps  20 bps  (60) bps  (70) bps (1)
Total Organic  (40) bps  (50) bps  170 bps  80 bps  20 bps  40 bps  (60) bps  (20) bps
Acquisitions/ Divestitures
Restructuring/Other  10 bps  10 bps  20 bps  50 bps  20 bps  20 bps
Total Operating Margin Change  (30) bps  (40) bps  170 bps  100 bps  70 bps  40 bps  (40) bps
                 
Total Operating Margin % * 22.5 % 25.8 % 24.1 % 28.0 % 21.4 % 24.3 % 26.8 % 24.3 %
                 
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets  50 bps  70 bps  280 bps  30 bps  380 bps  50 bps  110 bps  130 bps**
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.42) on GAAP earnings per share for 2018.
(1)   Full year 2017 included 60 basis points of favorability from the confidential legal settlement.
 


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 2018   2017   2018   2017
Operating income(1) $ 860     $ 846     $ 3,584     $ 3,485  
Less: Legal settlement income             (95 )
Adjusted operating income 860     846     3,584     3,390  
Adjusted tax rate 25.5 %   26.9 %   24.9 %   28.3 %
Income taxes (219 )   (227 )   (893 )   (958 )
Operating income after taxes $ 641     $ 619     $ 2,691     $ 2,432  
               
Invested capital:              
Trade receivables $ 2,622     $ 2,628     $ 2,622     $ 2,628  
Inventories 1,318     1,220     1,318     1,220  
Net plant and equipment 1,791     1,778     1,791     1,778  
Goodwill and intangible assets 5,717     6,024     5,717     6,024  
Accounts payable and accrued expenses (1,795 )   (1,848 )   (1,795 )   (1,848 )
Other, net (519 )   21     (519 )   21  
Total invested capital $ 9,134     $ 9,823     $ 9,134     $ 9,823  
               
Average invested capital $ 9,247     $ 10,101     $ 9,533     $ 10,005  
Return on average invested capital 27.7 %   24.5 %   28.2 %   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 $4 million and $9 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the fourth quarter 2017 and full year 2017, respectively, with no change in Net Income.


ROIC for the three months ended December 31, 2018 was 27.7%, an improvement of 320 basis points. ROIC for the twelve months ended December 31, 2018 was 28.2%, an improvement of 390 basis points. The improvement in both periods was primarily the result of the new U.S. tax rules and regulations.

A reconciliation of the 2018 effective tax rate to the adjusted tax rate excluding the third quarter 2018 net discrete tax benefit is as follows:

  Twelve Months Ended
  December 31, 2018
  Income Taxes   Tax Rate
As reported $ 831     24.5 %
Net discrete tax benefit related to third quarter 15     0.4 %
As adjusted $ 846     24.9 %
             


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)

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 %
                           


FREE CASH FLOW (UNAUDITED)

  Three Months Ended   Twelve Months Ended  
  December 31,   December 31,  
Dollars in millions 2018   2017   2018   2017  
Net cash provided by operating activities $ 809     $ 695     $ 2,811     $ 2,402    
Less: Additions to plant and equipment (82 )   (78 )   (364 )   (297 )  
Free cash flow $ 727     $ 617     $ 2,447     $ 2,105   *
                 
Net income (loss), as reported $ 607     $ (76 )   $ 2,563     $ 1,687    
Discrete tax charge related to 2017 U.S. tax legislation     658         658    
Adjusted net income $ 607     $ 582     $ 2,563     $ 2,345    

*  Excluding $115 million related to an additional discretionary pension contribution, free cash flow would have been $2.2 billion for the twelve months ended December 31, 2017.


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 fourth quarter and full year 2017 financial results:

Fourth Quarter

  Dollars in millions Q4 '17
As 
Reported (1)
Tax
Charge
Q4 '17
Excl. Item
Q4 '18
As Reported
Change Vs.
Prior Year
  Total Revenue $3,629 $3,629 $3,580 (1)%
  Operating Income $846 $846 $860 +2%
  Operating Margin 23.3% 23.3% 24.0% +70 bps
  Tax Rate 109.6% +82.7%-pts 26.9% 25.5% (1.4)%-pts
  Net Income (Loss) $(76) $(658) $582 $607 +4%
  EPS $(0.22) $(1.92) $1.70 $1.83 +8%

Full Year

Dollars in millions 2017
As 
Reported (1)
Legal
Item
Tax
Charge
2017
Excl. Items
2018
As Reported
Change Vs.
Prior Year
Total Revenue $14,314 $14,314 $14,768 +3%
Operating Income $3,485 +$95 $3,390 $3,584 +6%
Operating Margin 24.3% +60 bps 23.7% 24.3% +60 bps
Tax Rate 48.4% +20.1%-pts 28.3% 24.5% (3.8)%-pts
Net Income (Loss) $1,687 +$59 $(658) $2,286 $2,563 +12%
EPS $4.86 +$0.17 $(1.90) $6.59 $7.60 +15%
  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 $4 million and $9 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the fourth quarter 2017 and full year 2017, respectively, with no change in Net Income.


Media Contact 
Illinois Tool Works
Trisha Knych
Tel: 224.661.7566 
mediarelations@itw.com

Investor Relations
Illinois Tool Works
Karen Fletcher
Tel: 224.661.7433
investorrelations@itw.com

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