ITW - ITW Reports Second Quarter 2019 Results
GLENVIEW, Ill., July 26, 2019 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its second-quarter 2019 results including GAAP earnings per share (EPS) of $1.91 compared to $1.97 in the second quarter of 2018. Revenue of $3.6 billion was down 5.8 percent with organic revenue down 2.8 percent and unfavorable foreign currency translation impact of 2.7 percent. Operating margin was 24.1 percent.
“In the second quarter, we experienced a deceleration in demand across our portfolio relative to the demand levels we were seeing exiting the first quarter. On a sequential basis, second quarter organic revenue declined approximately two percentage points versus first quarter run rates,” said E. Scott Santi, Chairman and Chief Executive Officer.
“In this more challenging demand environment, the ITW team executed well on the elements within our own control and delivered solid financial results. Operating margin improved year-over-year to 24.4 percent, excluding higher restructuring impact of 30 basis points, as enterprise initiatives contributed 110 basis points. The combination of unfavorable foreign currency translation, higher restructuring expenses and a small loss on two divestitures reduced EPS by $0.09 year-over-year. Excluding these three items, EPS would have increased two percent to $2.00. Free cash flow increased 14 percent year-on-year.”
“We are updating our full year guidance to reflect current levels of demand. All other assumptions remain essentially unchanged. We continue to expect a stronger second half on a relative basis, as known headwinds from foreign currency and higher restructuring expenses dissipate. We expect continued strong contributions from enterprise initiatives, positive price/cost margin dynamics, and strong free cash flow as we progress through the balance of the year. While we will be prudent in making appropriate adjustments due to the near-term demand environment, we remain focused on managing and investing to maximize ITW’s performance over the long term. The highly differentiated nature of ITW’s core competitive advantages and the strength and resilience of our proprietary business model and diversified portfolio position us well for strong financial performance across a wide range of economic scenarios,” Santi concluded.
Revenue of $3.6 billion was down 5.8 percent with organic revenue down 2.8 percent, unfavorable foreign currency translation impact of 2.7 percent, and divestiture impact of 0.3 percent. As expected, the company’s ongoing Product Line Simplification (PLS) activities reduced organic growth by 70 basis points.
Operating margin was 24.1 percent. Excluding 30 basis points of unfavorable margin impact from higher year-over-year restructuring expenses, operating margin improved 10 basis points to 24.4 percent. Free Cash Flow increased 14 percent and the company repurchased $375 million of its own shares. After-tax return on invested capital was 28.6 percent.
2019 Full-Year Guidance
Current levels of demand, adjusted for normal seasonality, project full year organic revenue to be down one to three percent. As a result, the company is updating its full year GAAP EPS guidance to a range of $7.55 to $7.85, which includes approximately $0.25 of headwind from foreign currency translation and higher restructuring expenses. Operating margin is forecast to be flat to up 50 basis points, largely due to strong contributions from enterprise initiatives of 100 basis points, partially offset by 25 basis points of higher restructuring expenses. Free cash flow is expected to be above 100 percent of net income, and the company is on pace to repurchase approximately $1.5 billion of its shares. The effective tax rate for the full year is expected to be in the range of 24 to 25 percent.
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 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 |
| Six Months Ended |
| June 30, |
| June 30, |
| In millions except per share amounts |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| Operating Revenue |
| $ |
| 3,609 |
| $ |
| 3,831 |
| $ |
| 7,161 |
| $ |
| 7,575 |
| Cost of revenue |
| 2,099 |
| 2,231 |
| 4,158 |
| 4,412 |
| Selling, administrative, and research and development expenses |
| 598 |
| 620 |
| 1,209 |
| 1,232 |
| Amortization and impairment of intangible assets |
| 41 |
| 48 |
| 84 |
| 96 |
| Operating Income |
| 871 |
| 932 |
| 1,710 |
| 1,835 |
| Interest expense |
| (55 |
| ) |
| (64 |
| ) |
| (118 |
| ) |
| (130 |
| ) |
| Other income (expense) |
| 9 |
| 26 |
| 23 |
| 38 |
| Income Before Taxes |
| 825 |
| 894 |
| 1,615 |
| 1,743 |
| Income Taxes |
| 202 |
| 228 |
| 395 |
| 425 |
| Net Income |
| $ |
| 623 |
| $ |
| 666 |
| $ |
| 1,220 |
| $ |
| 1,318 |
| Net Income Per Share: |
| Basic |
| $ |
| 1.92 |
| $ |
| 1.98 |
| $ |
| 3.74 |
| $ |
| 3.90 |
| Diluted |
| $ |
| 1.91 |
| $ |
| 1.97 |
| $ |
| 3.72 |
| $ |
| 3.87 |
| Cash Dividends Per Share: |
| Paid |
| $ |
| 1.00 |
| $ |
| 0.78 |
| $ |
| 2.00 |
| $ |
| 1.56 |
| Declared |
| $ |
| 1.00 |
| $ |
| 0.78 |
| $ |
| 2.00 |
| $ |
| 1.56 |
| Shares of Common Stock Outstanding During the Period: |
| Average |
| 324.8 |
| 336.7 |
| 326.0 |
| 338.5 |
| Average assuming dilution |
| 326.6 |
| 338.9 |
| 327.9 |
| 340.8 |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
| In millions |
| June 30, 2019 |
| December 31, 2018 |
| Assets |
| Current Assets: |
| Cash and equivalents |
| $ |
| 1,677 |
| $ |
| 1,504 |
| Trade receivables |
| 2,629 |
| 2,622 |
| Inventories |
| 1,256 |
| 1,318 |
| Prepaid expenses and other current assets |
| 288 |
| 334 |
| Assets held for sale |
| 439 |
| — |
| Total current assets |
| 6,289 |
| 5,778 |
| Net plant and equipment |
| 1,717 |
| 1,791 |
| Goodwill |
| 4,503 |
| 4,633 |
| Intangible assets |
| 928 |
| 1,084 |
| Deferred income taxes |
| 516 |
| 554 |
| Other assets |
| 1,234 |
| 1,030 |
| $ |
| 15,187 |
| $ |
| 14,870 |
| Liabilities and Stockholders' Equity |
| Current Liabilities: |
| Short-term debt |
| $ |
| — |
| $ |
| 1,351 |
| Accounts payable |
| 512 |
| 524 |
| Accrued expenses |
| 1,207 |
| 1,271 |
| Cash dividends payable |
| 323 |
| 328 |
| Income taxes payable |
| 53 |
| 68 |
| Liabilities held for sale |
| 93 |
| — |
| Total current liabilities |
| 2,188 |
| 3,542 |
| Noncurrent Liabilities: |
| Long-term debt |
| 7,809 |
| 6,029 |
| Deferred income taxes |
| 683 |
| 707 |
| Noncurrent income taxes payable |
| 462 |
| 495 |
| Other liabilities |
| 950 |
| 839 |
| Total noncurrent liabilities |
| 9,904 |
| 8,070 |
| Stockholders’ Equity: |
| Common stock |
| 6 |
| 6 |
| Additional paid-in-capital |
| 1,270 |
| 1,253 |
| Retained earnings |
| 21,788 |
| 21,217 |
| Common stock held in treasury |
| (18,276 |
| ) |
| (17,545 |
| ) |
| Accumulated other comprehensive income (loss) |
| (1,697 |
| ) |
| (1,677 |
| ) |
| Noncontrolling interest |
| 4 |
| 4 |
| Total stockholders’ equity |
| 3,095 |
| 3,258 |
| $ |
| 15,187 |
| $ |
| 14,870 |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| Three Months Ended June 30, 2019 |
| Dollars in millions |
| Total Revenue |
| Operating Income |
| Operating Margin |
| Automotive OEM |
| $ |
| 788 |
| $ |
| 174 |
| 22.1 |
| % |
| Food Equipment |
| 548 |
| 140 |
| 25.6 |
| % |
| Test & Measurement and Electronics |
| 533 |
| 131 |
| 24.5 |
| % |
| Welding |
| 422 |
| 122 |
| 28.8 |
| % |
| Polymers & Fluids |
| 427 |
| 97 |
| 22.8 |
| % |
| Construction Products |
| 424 |
| 106 |
| 25.0 |
| % |
| Specialty Products |
| 473 |
| 124 |
| 26.1 |
| % |
| Intersegment |
| (6 |
| ) |
| — |
| — |
| % |
| Total Segments |
| 3,609 |
| 894 |
| 24.8 |
| % |
| Unallocated |
| — |
| (23 |
| ) |
| — |
| % |
| Total Company |
| $ |
| 3,609 |
| $ |
| 871 |
| 24.1 |
| % |
| Six Months Ended June 30, 2019 |
| Dollars in millions |
| Total Revenue |
| Operating Income |
| Operating Margin |
| Automotive OEM |
| $ |
| 1,594 |
| $ |
| 341 |
| 21.4 |
| % |
| Food Equipment |
| 1,066 |
| 269 |
| 25.3 |
| % |
| Test & Measurement and Electronics |
| 1,057 |
| 257 |
| 24.3 |
| % |
| Welding |
| 849 |
| 242 |
| 28.5 |
| % |
| Polymers & Fluids |
| 843 |
| 186 |
| 22.1 |
| % |
| Construction Products |
| 825 |
| 193 |
| 23.4 |
| % |
| Specialty Products |
| 938 |
| 247 |
| 26.3 |
| % |
| Intersegment |
| (11 |
| ) |
| — |
| — |
| % |
| Total Segments |
| 7,161 |
| 1,735 |
| 24.2 |
| % |
| Unallocated |
| — |
| (25 |
| ) |
| — |
| % |
| Total Company |
| $ |
| 7,161 |
| $ |
| 1,710 |
| 23.9 |
| % |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| Q2 2019 vs. Q2 2018 Favorable/(Unfavorable) |
| Operating Revenue |
| Automotive OEM |
| Food Equipment |
| Test & Measurement and Electronics |
| Welding |
| Polymers & Fluids |
| Construction Products |
| Specialty Products |
| Total ITW |
| Organic |
| (7.1 |
| )% |
| 1.7 |
| % |
| (1.3 |
| )% |
| (2.4 |
| )% |
| 0.1 |
| % |
| (0.7 |
| )% |
| (6.4 |
| )% |
| (2.8 |
| )% |
| Acquisitions/ Divestitures |
| — |
| % |
| — |
| % |
| — |
| % |
| (0.8 |
| )% |
| (0.8 |
| )% |
| — |
| % |
| (0.8 |
| )% |
| (0.3 |
| )% |
| Translation |
| (3.3 |
| )% |
| (2.7 |
| )% |
| (2.3 |
| )% |
| (1.0 |
| )% |
| (3.2 |
| )% |
| (3.8 |
| )% |
| (2.1 |
| )% |
| (2.7 |
| )% |
| Operating Revenue |
| (10.4 |
| )% |
| (1.0 |
| )% |
| (3.6 |
| )% |
| (4.2 |
| )% |
| (3.9 |
| )% |
| (4.5 |
| )% |
| (9.3 |
| )% |
| (5.8 |
| )% |
| Q2 2019 vs. Q2 2018 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 |
| (120) bps |
| 40 bps |
| (40) bps |
| (40) bps |
| 10 bps |
| (20) bps |
| (130) bps |
| (60) bps |
| Changes in Variable Margin & OH Costs |
| 90 bps |
| — |
| 90 bps |
| 10 bps |
| 170 bps |
| 60 bps |
| (50) bps |
| 60 bps |
| Total Organic |
| (30) bps |
| 40 bps |
| 50 bps |
| (30) bps |
| 180 bps |
| 40 bps |
| (180) bps |
| — |
| Acquisitions/ Divestitures |
| — |
| — |
| — |
| 20 bps |
| 20 bps |
| — |
| 30 bps |
| 10 bps |
| Restructuring/Other |
| (10) bps |
| (20) bps |
| 50 bps |
| (40) bps |
| (40) bps |
| 10 bps |
| (50) bps |
| (30) bps |
| Total Operating Margin Change |
| (40) bps |
| 20 bps |
| 100 bps |
| (50) bps |
| 160 bps |
| 50 bps |
| (200) bps |
| (20) bps |
| Total Operating Margin % * |
| 22.1% |
| 25.6% |
| 24.5% |
| 28.8% |
| 22.8% |
| 25.0% |
| 26.1% |
| 24.1% |
| *Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets |
| 50 bps |
| 70 bps |
| 220 bps |
| 30 bps |
| 350 bps |
| 30 bps |
| 100 bps |
| 120 bps ** |
| ** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.09) on GAAP earnings per share for the second quarter of 2019. |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| 1H 2019 vs 1H 2018 Favorable/(Unfavorable) |
| Operating Revenue |
| Automotive OEM |
| Food Equipment |
| Test & Measurement and Electronics |
| Welding |
| Polymers & Fluids |
| Construction Products |
| Specialty Products |
| Total ITW |
| Organic |
| (6.7 |
| )% |
| 1.7 |
| % |
| (0.9 |
| )% |
| 0.2 |
| % |
| (0.4 |
| )% |
| (1.0 |
| )% |
| (4.1 |
| )% |
| (2.2 |
| )% |
| Acquisitions/ Divestitures |
| — |
| % |
| — |
| % |
| — |
| % |
| (0.7 |
| )% |
| (0.9 |
| )% |
| — |
| % |
| (0.4 |
| )% |
| (0.2 |
| )% |
| Translation |
| (3.7 |
| )% |
| (3.0 |
| )% |
| (2.7 |
| )% |
| (1.1 |
| )% |
| (3.7 |
| )% |
| (4.4 |
| )% |
| (2.4 |
| )% |
| (3.1 |
| )% |
| Operating Revenue |
| (10.4 |
| )% |
| (1.3 |
| )% |
| (3.6 |
| )% |
| (1.6 |
| )% |
| (5.0 |
| )% |
| (5.4 |
| )% |
| (6.9 |
| )% |
| (5.5 |
| )% |
| 1H 2019 vs. 1H 2018 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 |
| (110) bps |
| 40 bps |
| (30) bps |
| 10 bps |
| (10) bps |
| (10) bps |
| (90) bps |
| (40) bps |
| Changes in Variable Margin & OH Costs |
| 20 bps |
| 40 bps |
| 100 bps |
| (10) bps |
| 120 bps |
| 50 bps |
| (10) bps |
| 50 bps |
| Total Organic |
| (90) bps |
| 80 bps |
| 70 bps |
| — |
| 110 bps |
| 40 bps |
| (100) bps |
| 10 bps |
| Acquisitions/ Divestitures |
| — |
| — |
| — |
| 20 bps |
| 20 bps |
| — |
| 20 bps |
| 10 bps |
| Restructuring/Other |
| (100) bps |
| (50) bps |
| 10 bps |
| (20) bps |
| (30) bps |
| (30) bps |
| (30) bps |
| (50) bps |
| Total Operating Margin Change |
| (190) bps |
| 30 bps |
| 80 bps |
| — |
| 100 bps |
| 10 bps |
| (110) bps |
| (30) bps |
| Total Operating Margin % * |
| 21.4% |
| 25.3% |
| 24.3% |
| 28.5% |
| 22.1% |
| 23.4% |
| 26.3% |
| 23.9% |
| *Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets |
| 50 bps |
| 70 bps |
| 240 bps |
| 20 bps |
| 350 bps |
| 30 bps |
| 100 bps |
| 120 bps ** |
| ** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.19) on GAAP earnings per share for the first half of 2019. |
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 |
| June 30, |
| June 30, |
| Dollars in millions |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| Operating income |
| $ |
| 871 |
| $ |
| 932 |
| $ |
| 1,710 |
| $ |
| 1,835 |
| Tax rate |
| 24.5 |
| % |
| 25.5 |
| % |
| 24.5 |
| % |
| 25.2 |
| % |
| Income taxes |
| (213 |
| ) |
| (238 |
| ) |
| (418 |
| ) |
| (462 |
| ) |
| Operating income after taxes |
| $ |
| 658 |
| $ |
| 694 |
| $ |
| 1,292 |
| $ |
| 1,373 |
| Invested capital: |
| Trade receivables |
| $ |
| 2,629 |
| $ |
| 2,878 |
| $ |
| 2,629 |
| $ |
| 2,878 |
| Inventories |
| 1,256 |
| 1,320 |
| 1,256 |
| 1,320 |
| Net assets held for sale |
| 346 |
| — |
| 346 |
| — |
| Net plant and equipment |
| 1,717 |
| 1,783 |
| 1,717 |
| 1,783 |
| Goodwill and intangible assets |
| 5,431 |
| 5,852 |
| 5,431 |
| 5,852 |
| Accounts payable and accrued expenses |
| (1,719 |
| ) |
| (1,847 |
| ) |
| (1,719 |
| ) |
| (1,847 |
| ) |
| Other, net |
| (433 |
| ) |
| (407 |
| ) |
| (433 |
| ) |
| (407 |
| ) |
| Total invested capital |
| $ |
| 9,227 |
| $ |
| 9,579 |
| $ |
| 9,227 |
| $ |
| 9,579 |
| Average invested capital |
| $ |
| 9,206 |
| $ |
| 9,675 |
| $ |
| 9,182 |
| $ |
| 9,724 |
| Adjusted return on average invested capital |
| 28.6 |
| % |
| 28.7 |
| % |
| 28.1 |
| % |
| 28.2 |
| % |
A reconciliation of the tax rate for the six month period ended June 30, 2018 excluding the first quarter 2018 discrete tax benefit related to foreign tax credits is as follows:
| Six Months Ended |
| June 30, 2018 |
| Dollars in millions |
| Income Taxes |
| Tax Rate |
| As reported |
| $ |
| 425 |
| 24.4 |
| % |
| Discrete tax benefit |
| 14 |
| 0.8 |
| % |
| As adjusted |
| $ |
| 439 |
| 25.2 |
| % |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
| Dollars in millions |
| Twelve Months Ended December 31, 2018 |
| Operating income |
| $ |
| 3,584 |
| Tax rate |
| 24.9 |
| % |
| Income taxes |
| (893 |
| ) |
| Operating income after taxes |
| $ |
| 2,691 |
| Invested capital: |
| Trade receivables |
| $ |
| 2,622 |
| Inventories |
| 1,318 |
| Net plant and equipment |
| 1,791 |
| Goodwill and intangible assets |
| 5,717 |
| 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 capital |
| 28.2 |
| % |
A reconciliation of the full year 2018 effective tax rate excluding the third quarter net discrete tax benefit is as follows:
| Twelve Months Ended |
| December 31, 2018 |
| Dollars in millions |
| Income Taxes |
| Tax Rate |
| As reported |
| $ |
| 831 |
| 24.5 |
| % |
| Net discrete tax benefit |
| 15 |
| 0.4 |
| % |
| As adjusted |
| $ |
| 846 |
| 24.9 |
| % |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
FREE CASH FLOW (UNAUDITED)
| Three Months Ended |
| Six Months Ended |
| June 30, |
| June 30, |
| Dollars in millions |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| Net cash provided by operating activities |
| $ |
| 685 |
| $ |
| 620 |
| $ |
| 1,301 |
| $ |
| 1,158 |
| Less: Additions to plant and equipment |
| (77 |
| ) |
| (87 |
| ) |
| (154 |
| ) |
| (181 |
| ) |
| Free cash flow |
| $ |
| 608 |
| $ |
| 533 |
| $ |
| 1,147 |
| $ |
| 977 |
| Net income |
| $ |
| 623 |
| $ |
| 666 |
| $ |
| 1,220 |
| $ |
| 1,318 |
| Free cash flow to net income conversion rate |
| 98 |
| % |
| 80 |
| % |
| 94 |
| % |
| 74 |
| % |
ADJUSTED NET INCOME PER SHARE - DILUTED (UNAUDITED)
| Three Months Ended |
| June 30, 2019 |
| As reported |
| $ |
| 1.91 |
| Foreign currency translation |
| 0.06 |
| Higher restructuring expenses |
| 0.02 |
| Loss on divestitures |
| 0.01 |
| As adjusted |
| $ |
| 2.00 |
| 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 |