ITW Reports Fourth-Quarter and Full-Year 2017 Results - Illinois Tool Works (NYSE:ITW)

Fourth-Quarter 2017 Highlights:

Total revenue was $3.6 billion, an increase of 7%; organic growth was 4%
Operating margin was 23.4%, an increase of 160 bps
GAAP EPS was $(0.22), including a $658 million one-time tax charge
Excluding the one-time tax charge, EPS was $1.70, an increase of 17%

Full-Year 2017 Highlights:

Total revenue was $14.3 billion, an increase of 5%; organic growth was 3%
Operating margin was 24.4%, an increase of 190 bps
After-tax ROIC was 24.4%, an increase of 230 bps
GAAP EPS was $4.86, including the one-time tax charge and a previously disclosed favorable legal settlement
EPS was $6.59 excluding these two items, an increase of 16%

2018 Guidance:

Raising GAAP EPS guidance by 6% at the midpoint to $7.45 to $7.65 and accelerating previously announced plans to increase dividend pay-out ratio

GLENVIEW, Ill., Jan. 24, 2018 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. ITW today reported its fourth-quarter and full-year 2017 results.

"The ITW team delivered another year of strong execution and performance in 2017," said E. Scott Santi, Chairman and Chief Executive Officer. "In 2017, excluding one-time tax and legal items, we grew EPS 16%, improved operating margin by 120 basis points to an all-time high of 23.7% and increased after-tax return on invested capital 230 basis points to a record 24.4%."

"We also continued to make meaningful progress on our focused efforts to accelerate organic growth. Our 2017 organic growth rate of 3% was up almost 2 percentage points versus 2016. In addition, our Q4 organic growth rate of 4% gives us good momentum going into 2018."

"Overall, these results demonstrate continued progress in our efforts to position ITW to generate consistent differentiated performance on a sustained basis," Santi added. "Through the combination of ITW's high quality business portfolio and our ongoing focus on leveraging ITW's powerful business model to full potential, we are well positioned to deliver strong results in 2018 and beyond."

Fourth-quarter revenue grew 7% to $3.6 billion as organic revenue increased 4% and foreign currency translation increased revenue by 3%. GAAP EPS of $(0.22) includes a one-time $658 million charge associated with the passage of the "Tax Cuts and Jobs Act." The charge encompasses several elements, including a repatriation tax on accumulated overseas earnings and a benefit from the revaluation of deferred tax assets and liabilities. Excluding this one-time item, EPS increased 17% to $1.70. Operating margin was 23.4%, an increase of 160 basis points, with enterprise initiatives contributing 140 basis points of margin improvement.

Organic revenue growth was positive in six of seven segments led by Test & Measurement and Electronics (+9%), Welding (+6%) and Specialty Products (+5%).

Full-year 2017 revenue increased 5% to $14.3 billion with organic growth of 3%. GAAP EPS of $4.86 includes the above-mentioned unfavorable tax impact and a $0.17 benefit from a previously disclosed favorable legal item. Excluding these one-time items, EPS was $6.59, an increase of 16% year-on-year. Operating margin was 24.4% and includes a 70 basis point benefit from the legal item. Excluding this item, operating margin was 23.7%, an increase of 120 basis points.

Full-Year and First Quarter 2018 Guidance
ITW is raising its 2018 full-year guidance by $0.40 at the midpoint to reflect the benefits of a reduction in the tax rate to an estimated range of 25 to 26% and current foreign exchange rates. The company expects 2018 GAAP earnings to be in the range of $7.45 to $7.65 per share with organic growth of 3 to 4%.

The company forecasts first quarter 2018 GAAP earnings to be in the range of $1.80 to $1.90 per share with organic growth of 3 to 4%.

Subject to formal Board approval, ITW expects to accelerate previously announced plans to increase its dividend pay-out ratio from 43% to approximately 50% of Free Cash Flow on a run rate basis in August of 2018.

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, exchange rates, free cash flow, effective tax rate, expected dividend pay-out ratio, expected repatriation, 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 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. To learn more about the company and the ITW Business Model, visit 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	2017			2016			2017			2016
Operating Revenue	$	3,629		$	3,399		$	14,314		$	13,599
Cost of revenue	2,124			2,006			8,309			7,896
Selling, administrative, and research and development expenses	605			597			2,400			2,415
Legal settlement (income)	—			—			(95		)	—
Amortization and impairment of intangible assets	50			54			206			224
Operating Income	850			742			3,494			3,064
Interest expense	(66		)	(63		)	(260		)	(237		)
Other income (expense)	12			47			36			81
Income Before Taxes	796			726			3,270			2,908
Income taxes	872			219			1,583			873
Net Income (Loss)	$	(76	)	$	507		$	1,687		$	2,035

Net Income (Loss) Per Share:
Basic	$	(0.22	)	$	1.46		$	4.90		$	5.73
Diluted	$	(0.22	)	$	1.45		$	4.86		$	5.70

Cash Dividends Per Share:
Paid	$	0.78		$	0.65		$	2.73		$	2.30
Declared	$	0.78		$	0.65		$	2.86		$	2.40

Shares of Common Stock Outstanding During the Period:
Average		342.1			348.3			344.1			355.0
Average assuming dilution		342.1			350.4			346.8			357.1

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

In millions	December 31, 2017			December 31, 2016
Assets
Current Assets:
Cash and equivalents	$	3,094		$	2,472
Trade receivables	2,628			2,357
Inventories	1,220			1,076
Prepaid expenses and other current assets	336			218
Total current assets	7,278			6,123

Net plant and equipment	1,778			1,652
Goodwill	4,752			4,558
Intangible assets	1,272			1,463
Deferred income taxes	505			449
Other assets	1,195			956
	$	16,780		$	15,201

Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt	$	850		$	652
Accounts payable	590			511
Accrued expenses	1,258			1,202
Cash dividends payable	266			226
Income taxes payable	89			169
Total current liabilities	3,053			2,760

Noncurrent Liabilities:
Long-term debt	7,478			7,177
Deferred income taxes	164			134
Noncurrent income taxes payable	614			—
Other liabilities	882			871
Total noncurrent liabilities	9,138			8,182

Stockholders' Equity:
Common stock	6			6
Additional paid-in-capital	1,218			1,188
Retained earnings	20,210			19,505
Common stock held in treasury	(15,562		)	(14,638		)
Accumulated other comprehensive income (loss)	(1,287		)	(1,807		)
Noncontrolling interest	4			5
Total stockholders' equity	4,589			4,259
	$	16,780		$	15,201

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

Three Months Ended December 31, 2017
Dollars in millions	Total Revenue			Operating Income			Operating Margin
Automotive OEM	$	828		$	191		23.1	%
Food Equipment	548			142			25.8	%
Test & Measurement and Electronics	545			127			23.4	%
Welding	388			103			26.4	%
Polymers & Fluids	427			85			19.9	%
Construction Products	412			96			23.4	%
Specialty Products	487			126			25.9	%
Intersegment	(6		)	—			—	%
Total Segments	3,629			870			24.0	%
Unallocated	—			(20		)	—	%
Total Company	$	3,629		$	850		23.4	%

Twelve Months Ended December 31, 2017
Dollars in millions	Total Revenue			Operating Income		Operating Margin
Automotive OEM	$	3,271		$	747	22.8	%
Food Equipment	2,123			556		26.2	%
Test & Measurement and Electronics	2,069			464		22.4	%
Welding	1,538			415		27.0	%
Polymers & Fluids	1,724			357		20.7	%
Construction Products	1,672			399		23.9	%
Specialty Products	1,938			527		27.2	%
Intersegment	(21		)	—		—	%
Total Segments	14,314			3,465		24.2	%
Unallocated*	—			29		—	%
Total Company	$	14,314		$	3,494	24.4	%

* Unallocated for the twelve months ended December 31, 2017 includes the favorable impact from the legal settlement.

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

Q4 2017 vs. Q4 2016 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	2.5	%	(0.4	)%	8.8	%	6.1	%	2.5	%	3.5	%	4.8	%	3.7	%
Acquisitions/ Divestitures	—	%	—	%	—	%	—	%	—	%	—	%	(0.8	)%	(0.1	)%
Translation	4.5	%	3.4	%	2.9	%	1.3	%	2.4	%	3.2	%	2.9	%	3.2	%
Operating Revenue	7.0	%	3.0	%	11.7	%	7.4	%	4.9	%	6.7	%	6.9	%	6.8	%

Q4 2017 vs. Q4 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

40 bps

(10) bps

230 bps

110 bps

70 bps

80 bps

90 bps

Changes in Variable Margin & OH Costs

—

50 bps

130 bps

140 bps

—

130 bps

40 bps

60 bps

Total Organic

40 bps

360 bps

250 bps

70 bps

210 bps

130 bps

150 bps

Acquisitions/
Divestitures

—

20 bps

—

Restructuring/Other

(30) bps

70 bps

(30) bps

(50) bps

20 bps

(10) bps

40 bps

10 bps

Total Operating Margin Change

10 bps

110 bps

330 bps

200 bps

90 bps

200 bps

190 bps

160 bps

Total Operating Margin % *

23.1

25.8

23.4

26.4

19.9

23.4

25.9

23.4

*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets

50 bps

80 bps

280 bps

40 bps

400 bps

50 bps

130 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 2017.

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

Full Year 2017 vs Full Year 2016 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	4.1	%	0.5	%	4.8	%	3.2	%	1.0	%	2.9	%	3.5	%	2.9	%
Acquisitions/ Divestitures	8.9	%	—	%	—	%	—	%	—	%	—	%	(1.1	)%	1.8	%
Translation	1.2	%	0.1	%	—	%	0.3	%	1.0	%	1.0	%	0.4	%	0.6	%
Operating Revenue	14.2	%	0.6	%	4.8	%	3.5	%	2.0	%	3.9	%	2.8	%	5.3	%

Full Year 2017 vs Full Year 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

60 bps

20 bps

130 bps

70 bps

30 bps

70 bps

Changes in Variable Margin & OH Costs

(30) bps

30 bps

210 bps

90 bps

50 bps

30 bps

90 bps

140 bps

Total Organic

30 bps

50 bps

340 bps

160 bps

80 bps

100 bps

160 bps

210 bps

Acquisitions/
Divestitures

(120) bps

—

30 bps

(30) bps

Restructuring/Other

(40) bps

30 bps

10 bps

50 bps

(40) bps

50 bps

(30) bps

10 bps

Total Operating Margin Change

(130) bps

80 bps

350 bps

210 bps

40 bps

150 bps

160 bps

190 bps

Total Operating Margin % *

22.8

26.2

22.4

27.0

20.7

23.9

27.2

24.4

*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets

60 bps

70 bps

320 bps

40 bps

410 bps

50 bps

130 bps

150 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.42) on GAAP earnings per share for 2017.

Q4 2016 vs. Q4 2015 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	7.0	%	2.6	%	(0.3	)%	(7.9	)%	2.1	%	2.7	%	1.2	%	1.5	%
Acquisitions/ Divestitures	20.8	%	—	%	—	%	—	%	—	%	(0.2	)%	(0.5	)%	3.8	%
Translation	(2.0	)%	(2.8	)%	(2.1	)%	(0.7	)%	(0.8	)%	(0.5	)%	(1.2	)%	(1.6	)%
Operating Revenue	25.8	%	(0.2	)%	(2.4	)%	(8.6	)%	1.3	%	2.0	%	(0.5	)%	3.7	%

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)

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 reported fourth quarter and full-year 2017 financial results.

Fourth Quarter

Dollars in millions	Q4'16 As Reported	Q4'17 As Reported	Tax Charge	Q4 '17 Ex. Tax Charge	Change Vs. Prior Year
Total Revenue	$3,399	$3,629	—	$3,629	+7%
Operating Income	$742	$850	—	$850	+14%
Operating Margin	21.8%	23.4%	—	23.4%	+160 bps
Tax Rate	30.0%	109.6%	+82.7%-pts	26.9%	(310) bps
Net Income (Loss)	$507	($76)	($658)	$582	+15%
EPS	$1.45	($0.22)	($1.92)	$1.70	+17%

Full-Year

Dollars in millions	2016 As Reported	2017 As Reported	Legal Item	Tax Charge	2017 Ex. Items	Change Vs. Prior Year
Total Revenue	$13,599	$14,314	—	—	$14,314	+5%
Operating Income	$3,064	$3,494	+$95	—	$3,399	+11%
Operating Margin	22.5%	24.4%	+70 bps	—	23.7%	+120 bps
Tax Rate	30.0%	48.4%	—	+20.1%-pts	28.3%	(170) bps
Net Income	$2,035	$1,687	+$59	($658)	$2,286	+12%
EPS	$5.70	$4.86	+$0.17	($1.90)	$6.59	+16%

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	2017			2016			2017			2016
Operating income	$	850		$	742		$	3,494		$	3,064
Less: Legal settlement income	—			—			(95		)	—
Adjusted operating income	850			742			3,399			3,064
Adjusted tax rate	26.9		%	30.0		%	28.3		%	30.0		%
Income taxes	(229		)	(222		)	(961		)	(919		)
Operating income after taxes	$	621		$	520		$	2,438		$	2,145

Invested capital:
Trade receivables	$	2,628		$	2,357		$	2,628		$	2,357
Inventories	1,220			1,076			1,220			1,076
Net plant and equipment	1,778			1,652			1,778			1,652
Goodwill and intangible assets	6,024			6,021			6,024			6,021
Accounts payable and accrued expenses	(1,848		)	(1,713		)	(1,848		)	(1,713		)
Other, net	21			223			21			223
Total invested capital	$	9,823		$	9,616		$	9,823		$	9,616

Average invested capital	$	10,101		$	9,902		$	10,005		$	9,780
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)	—			(59		)	—			(91		)
Adjusted average invested capital	$	10,101		$	9,843		$	10,005		$	9,689

Adjusted return on average invested capital	24.6		%	21.1		%	24.4		%	22.1		%

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	%

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

FREE CASH FLOW (UNAUDITED)

	Three Months Ended						Twelve Months Ended
	December 31,						December 31,
Dollars in millions	2017			2016			2017				2016
Net cash provided by operating activities	$	695		$	664		$	2,402			$	2,302
Less: Additions to plant and equipment	(78		)	(71		)	(297		)		(273		)
Free cash flow	$	617		$	593		$	2,105		*	$	2,029

Net income (loss), as reported	$	(76	)	$	507		$	1,687			$	2,035
Discrete tax charge related to 2017 U.S. tax legislation	658			—			658				—
Adjusted net income	$	582		$	507		$	2,345			$	2,035
Free cash flow to adjusted net income conversion rate	106		%	117		%	90		%	*	100		%

* Excluding $115 million related to an additional discretionary pension contribution, free cash flow would have been $2.2 billion (or 95% of adjusted net income) for the twelve months ended December 31, 2017.

Investor Contact: Karen Fletcher 224.661.7433 or kfletcher@itw.com

Media Contact: Trisha Knych 224.661.7566 or tknych@itw.com

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