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ITW Reports Third Quarter 2019 Results

October 25, 2019 8:00 AM

GLENVIEW, Ill., Oct. 25, 2019 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its third-quarter 2019 results including GAAP earnings per share (EPS) of $2.04 compared to $1.90 in the third quarter of 2018. Foreign currency had a $0.05 negative impact to earnings per share versus the prior year.

“While the demand environment continued to moderate across a broad cross section of our portfolio, we delivered another solid quarter with excellent operational execution,” said E. Scott Santi, Chairman and Chief Executive Officer. “Our ability to overcome near-term macro challenges and deliver seven percent earnings per share growth, expand margins to 25 percent, and grow free cash flow by 12 percent is a direct result of our high quality business portfolio, the performance power of the ITW Business Model, and focused execution by our team of dedicated ITW professionals around the world,” Santi concluded.

Revenue of $3.5 billion was down 3.7 percent with unfavorable foreign currency translation impact of 1.8 percent and a decline in organic revenue of 1.7 percent. The company’s ongoing Product Line Simplification (PLS) activities reduced organic growth by 60 basis points. The third quarter 2019 benefited from one extra shipping day versus the prior year. Adjusting for this impact, organic revenues declined 3.2 percent on an equal day basis versus a decline of 2.8 percent in the second quarter.

Operating margin was 25.0 percent as enterprise initiatives contributed 120 basis points. Price/cost was favorable 20 basis points. Free Cash Flow was $830 million, an increase of 12 percent versus the prior year and 126 percent of net income. In the quarter, the company repurchased $375 million of its own shares and raised its dividend seven percent to an annualized $4.28 per share.

After-tax return on invested capital was 29.2 percent, an improvement of 120 basis points. The effective tax rate in the third quarter was 21.6 percent, and benefited from a $21 million or $0.07 EPS adjustment to the company’s estimated U.S. federal tax liability for tax year 2018.

2019 Full-Year Guidance

The company is maintaining its full-year GAAP EPS guidance of $7.55 to $7.85 per share, as compared to GAAP EPS of $7.60 in 2018. Year-over-year headwinds from foreign currency translation impact and higher restructuring expenses are expected to impact 2019 EPS by approximately $0.30. The company expects organic revenue down one to three percent, and operating margin of approximately 24 percent. Free cash flow is expected to exceed 100 percent of net income and the company is on pace to repurchase approximately $1.5 billion of its shares.

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 2018.

About Illinois Tool WorksITW (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 SUBSIDIARIESSTATEMENT OF INCOME (UNAUDITED)

Three Months Ended Nine Months Ended
September 30, September 30,
In millions except per share amounts2019 2018 2019 2018
Operating Revenue$3,479 $3,613 $10,640 $11,188
Cost of revenue2,007 2,096 6,165 6,508
Selling, administrative, and research and development expenses566 581 1,775 1,813
Amortization and impairment of intangible assets38 47 122 143
Operating Income868 889 2,578 2,724
Interest expense(52) (64) (170) (194)
Other income (expense)26 10 49 48
Income Before Taxes842 835 2,457 2,578
Income Taxes182 197 577 622
Net Income$660 $638 $1,880 $1,956
Net Income Per Share:
Basic$2.05 $1.91 $5.79 $5.81
Diluted$2.04 $1.90 $5.76 $5.77
Cash Dividends Per Share:
Paid$1.00 $0.78 $3.00 $2.34
Declared$1.07 $1.00 $3.07 $2.56
Shares of Common Stock Outstanding During the Period:
Average322.3 333.3 324.8 336.7
Average assuming dilution324.0 335.3 326.6 339.0

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSTATEMENT OF FINANCIAL POSITION (UNAUDITED)

In millionsSeptember 30, 2019 December 31, 2018
Assets
Current Assets:
Cash and equivalents$1,825 $1,504
Trade receivables2,499 2,622
Inventories1,209 1,318
Prepaid expenses and other current assets292 334
Assets held for sale420 —
Total current assets6,245 5,778
Net plant and equipment1,693 1,791
Goodwill4,430 4,633
Intangible assets890 1,084
Deferred income taxes479 554
Other assets1,223 1,030
$14,960 $14,870
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt$— $1,351
Accounts payable493 524
Accrued expenses1,229 1,271
Cash dividends payable344 328
Income taxes payable61 68
Liabilities held for sale96 —
Total current liabilities2,223 3,542
Noncurrent Liabilities:
Long-term debt7,643 6,029
Deferred income taxes716 707
Noncurrent income taxes payable462 495
Other liabilities946 839
Total noncurrent liabilities9,767 8,070
Stockholders’ Equity:
Common stock6 6
Additional paid-in-capital1,286 1,253
Retained earnings22,104 21,217
Common stock held in treasury(18,632) (17,545)
Accumulated other comprehensive income (loss)(1,798) (1,677)
Noncontrolling interest4 4
Total stockholders’ equity2,970 3,258
$14,960 $14,870

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)

Three Months Ended September 30, 2019
Dollars in millionsTotal RevenueOperating IncomeOperating Margin
Automotive OEM$744 $164 22.1%
Food Equipment551 152 27.5%
Test & Measurement and Electronics512 130 25.6%
Welding402 113 28.2%
Polymers & Fluids418 101 24.1%
Construction Products416 105 25.1%
Specialty Products441 116 26.2%
Intersegment(5)— —%
Total Segments3,479 881 25.3%
Unallocated— (13)—%
Total Company$3,479 $868 25.0%

Nine Months Ended September 30, 2019
Dollars in millionsTotal RevenueOperating IncomeOperating Margin
Automotive OEM$2,338 $505 21.6%
Food Equipment1,617 421 26.0%
Test & Measurement and Electronics1,569 387 24.7%
Welding1,251 355 28.4%
Polymers & Fluids1,261 287 22.8%
Construction Products1,241 298 24.0%
Specialty Products1,379 363 26.3%
Intersegment(16)— —%
Total Segments10,640 2,616 24.6%
Unallocated— (38)—%
Total Company$10,640 $2,578 24.2%

Q3 2019 vs. Q3 2018 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic(2.3)%(0.7)%(3.3)%(1.6)%2.8%(0.7)%(4.7)%(1.7)%
Acquisitions/Divestitures—%—%—%(0.8)%0.1%—%(0.8)%(0.2)%
Translation(2.4)%(2.0)%(1.4)%(0.6)%(2.1)%(2.9)%(1.6)%(1.8)%
Operating Revenue(4.7)%(2.7)%(4.7)%(3.0)%0.8%(3.6)%(7.1)%(3.7)%

Q3 2019 vs. Q3 2018 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage(40) bps(20) bps(100) bps(40) bps60 bps(20) bps(100) bps(40) bps
Changes in Variable Margin & OH Costs110 bps80 bps210 bps20 bps170 bps(40) bps20 bps80 bps
Total Organic70 bps60 bps110 bps(20) bps230 bps(60) bps(80) bps40 bps
Acquisitions/Divestitures———20 bps——10 bps—
Restructuring/Other(10) bps30 bps(20) bps—(30) bps(10) bps10 bps—
Total Operating Margin Change60 bps90 bps90 bps—200 bps(70) bps(60) bps40 bps
Total Operating Margin % *22.1%27.5%25.6%28.2%24.1%25.1%26.2%25.0%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets50 bps60 bps180 bps20 bps360 bps30 bps100 bps110 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.09) on GAAP earnings per share for the third quarter of 2019.

YTD 2019 vs YTD 2018 Favorable/(Unfavorable)
Operating RevenueAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Organic(5.4)%0.9%(1.7)%(0.4)%0.7%(0.9)%(4.3)%(2.0)%
Acquisitions/Divestitures—%—%—%(0.7)%(0.6)%—%(0.6)%(0.2)%
Translation(3.3)%(2.7)%(2.3)%(1.0)%(3.2)%(3.9)%(2.0)%(2.7)%
Operating Revenue(8.7)%(1.8)%(4.0)%(2.1)%(3.1)%(4.8)%(6.9)%(4.9)%

YTD 2019 vs. YTD 2018 Favorable/(Unfavorable)
Change in Operating MarginAutomotive OEMFood EquipmentTest & Measurement and ElectronicsWeldingPolymers & FluidsConstruction ProductsSpecialty ProductsTotal ITW
Operating Leverage (100) bps 10 bps (50) bps (10) bps 10 bps (20) bps (80) bps (40) bps
Changes in Variable Margin & OH Costs 50 bps 50 bps 130 bps— 140 bps 20 bps (20) bps 60 bps
Total Organic (50) bps 60 bps 80 bps (10) bps 150 bps— (100) bps 20 bps
Acquisitions/Divestitures——— 20 bps 10 bps— 20 bps—
Restructuring/Other (70) bps (20) bps— (10) bps (20) bps (20) bps (10) bps (30) bps
Total Operating Margin Change (120) bps 40 bps 80 bps— 140 bps (20) bps (90) bps (10) bps
Total Operating Margin % *21.6%26.0%24.7%28.4%22.8%24.0%26.3%24.2%
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 50 bps 70 bps 220 bps 20 bps 350 bps 30 bps 100 bps 120 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.28) on GAAP earnings per share for the first nine months of 2019.

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

ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)

Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in millions2019 2018 2019 2018
Operating income$868 $889 $2,578 $2,724
Adjusted tax rate24.1% 25.5% 24.3% 24.7%
Income taxes(210) (227) (628) (674)
Operating income after taxes$658 $662 $1,950 $2,050
Invested capital:
Trade receivables$2,499 $2,777 $2,499 $2,777
Inventories1,209 1,338 1,209 1,338
Net assets held for sale324 — 324 —
Net plant and equipment1,693 1,799 1,693 1,799
Goodwill and intangible assets5,320 5,785 5,320 5,785
Accounts payable and accrued expenses(1,722) (1,844) (1,722) (1,844)
Other, net(535) (494) (535) (494)
Total invested capital$8,788 $9,361 $8,788 $9,361
Average invested capital$9,007 $9,470 $9,083 $9,634
Adjusted return on average invested capital29.2% 28.0% 28.6% 28.4%

A reconciliation of the tax rate for the three and nine month periods ended September 30, 2019 excluding the third quarter 2019 discrete tax benefit of $21 million is as follows:

Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2019
Dollars in millionsIncome Taxes Tax Rate Income Taxes Tax Rate
As reported$182 21.6% $577 23.5%
Discrete tax benefit21 2.5% 21 0.8%
As adjusted$203 24.1% $598 24.3%

A reconciliation of the tax rate for the three and nine month periods ended September 30, 2018 excluding the third quarter 2018 net discrete tax benefit of $15 million is as follows:

Three Months Ended Nine Months Ended
September 30, 2018 September 30, 2018
Dollars in millionsIncome Taxes Tax Rate Income Taxes Tax Rate
As reported$197 23.7% $622 24.1%
Net discrete tax benefit15 1.8% 15 0.6%
As adjusted$212 25.5% $637 24.7%

ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)

Dollars in millionsTwelve Months EndedDecember 31,2018
Operating income$3,584
Adjusted tax rate24.9%
Income taxes(893)
Operating income after taxes$2,691
Invested capital:
Trade receivables$2,622
Inventories1,318
Net plant and equipment1,791
Goodwill and intangible assets5,717
Accounts payable and accrued expenses(1,795)
Other, net(519)
Total invested capital$9,134
Average invested capital$9,533
Adjusted return on average invested capital28.2%

A reconciliation of the full year 2018 effective tax rate excluding the third quarter 2018 net discrete tax benefit of $15 million is as follows:

Twelve Months Ended
December 31, 2018
Dollars in millionsIncome Taxes Tax Rate
As reported$831 24.5%
Net discrete tax benefit15 0.4%
As adjusted$846 24.9%

FREE CASH FLOW (UNAUDITED)

Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in millions2019 2018 2019 2018
Net cash provided by operating activities$920 $844 $2,221 $2,002
Less: Additions to plant and equipment(90) (101) (244) (282)
Free cash flow$830 $743 $1,977 $1,720
Net income$660 $638 $1,880 $1,956
Free cash flow to net income conversion rate126% 116% 105% 88%

Media Contact Illinois Tool Works Trisha Knych Tel: 224.661.7566 [email protected] Investor RelationsIllinois Tool WorksKaren FletcherTel: 224.661.7433[email protected]

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Source: Illinois Tool Works Inc.

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