ITW - ITW Reports Third Quarter 2019 Results
- GAAP EPS of $2.04, +7% year-over-year
- Operating Margin of 25.0%, +40 bps
- Free Cash Flow +12%, 126% of net income
- After-tax ROIC of 29.2%, +120 bps
- Maintaining full-year EPS guidance range of $7.55 to $7.85
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 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 |
| Nine Months Ended |
| September 30, |
| September 30, |
| In millions except per share amounts |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| Operating Revenue |
| $ |
| 3,479 |
| $ |
| 3,613 |
| $ |
| 10,640 |
| $ |
| 11,188 |
| Cost of revenue |
| 2,007 |
| 2,096 |
| 6,165 |
| 6,508 |
| Selling, administrative, and research and development expenses |
| 566 |
| 581 |
| 1,775 |
| 1,813 |
| Amortization and impairment of intangible assets |
| 38 |
| 47 |
| 122 |
| 143 |
| Operating Income |
| 868 |
| 889 |
| 2,578 |
| 2,724 |
| Interest expense |
| (52 |
| ) |
| (64 |
| ) |
| (170 |
| ) |
| (194 |
| ) |
| Other income (expense) |
| 26 |
| 10 |
| 49 |
| 48 |
| Income Before Taxes |
| 842 |
| 835 |
| 2,457 |
| 2,578 |
| Income Taxes |
| 182 |
| 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: |
| Average |
| 322.3 |
| 333.3 |
| 324.8 |
| 336.7 |
| Average assuming dilution |
| 324.0 |
| 335.3 |
| 326.6 |
| 339.0 |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
| In millions |
| September 30, 2019 |
| December 31, 2018 |
| Assets |
| Current Assets: |
| Cash and equivalents |
| $ |
| 1,825 |
| $ |
| 1,504 |
| Trade receivables |
| 2,499 |
| 2,622 |
| Inventories |
| 1,209 |
| 1,318 |
| Prepaid expenses and other current assets |
| 292 |
| 334 |
| Assets held for sale |
| 420 |
| — |
| Total current assets |
| 6,245 |
| 5,778 |
| Net plant and equipment |
| 1,693 |
| 1,791 |
| Goodwill |
| 4,430 |
| 4,633 |
| Intangible assets |
| 890 |
| 1,084 |
| Deferred income taxes |
| 479 |
| 554 |
| Other assets |
| 1,223 |
| 1,030 |
| $ |
| 14,960 |
| $ |
| 14,870 |
| Liabilities and Stockholders' Equity |
| Current Liabilities: |
| Short-term debt |
| $ |
| — |
| $ |
| 1,351 |
| Accounts payable |
| 493 |
| 524 |
| Accrued expenses |
| 1,229 |
| 1,271 |
| Cash dividends payable |
| 344 |
| 328 |
| Income taxes payable |
| 61 |
| 68 |
| Liabilities held for sale |
| 96 |
| — |
| Total current liabilities |
| 2,223 |
| 3,542 |
| Noncurrent Liabilities: |
| Long-term debt |
| 7,643 |
| 6,029 |
| Deferred income taxes |
| 716 |
| 707 |
| Noncurrent income taxes payable |
| 462 |
| 495 |
| Other liabilities |
| 946 |
| 839 |
| Total noncurrent liabilities |
| 9,767 |
| 8,070 |
| Stockholders’ Equity: |
| Common stock |
| 6 |
| 6 |
| Additional paid-in-capital |
| 1,286 |
| 1,253 |
| Retained earnings |
| 22,104 |
| 21,217 |
| Common stock held in treasury |
| (18,632 |
| ) |
| (17,545 |
| ) |
| Accumulated other comprehensive income (loss) |
| (1,798 |
| ) |
| (1,677 |
| ) |
| Noncontrolling interest |
| 4 |
| 4 |
| Total stockholders’ equity |
| 2,970 |
| 3,258 |
| $ |
| 14,960 |
| $ |
| 14,870 |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| Three Months Ended September 30, 2019 |
| Dollars in millions |
| Total Revenue |
| Operating Income |
| Operating Margin |
| Automotive OEM |
| $ |
| 744 |
| $ |
| 164 |
| 22.1 |
| % |
| Food Equipment |
| 551 |
| 152 |
| 27.5 |
| % |
| Test & Measurement and Electronics |
| 512 |
| 130 |
| 25.6 |
| % |
| Welding |
| 402 |
| 113 |
| 28.2 |
| % |
| Polymers & Fluids |
| 418 |
| 101 |
| 24.1 |
| % |
| Construction Products |
| 416 |
| 105 |
| 25.1 |
| % |
| Specialty Products |
| 441 |
| 116 |
| 26.2 |
| % |
| Intersegment |
| (5 |
| ) |
| — |
| — |
| % |
| Total Segments |
| 3,479 |
| 881 |
| 25.3 |
| % |
| Unallocated |
| — |
| (13 |
| ) |
| — |
| % |
| Total Company |
| $ |
| 3,479 |
| $ |
| 868 |
| 25.0 |
| % |
| Nine Months Ended September 30, 2019 |
| Dollars in millions |
| Total Revenue |
| Operating Income |
| Operating Margin |
| Automotive OEM |
| $ |
| 2,338 |
| $ |
| 505 |
| 21.6 |
| % |
| Food Equipment |
| 1,617 |
| 421 |
| 26.0 |
| % |
| Test & Measurement and Electronics |
| 1,569 |
| 387 |
| 24.7 |
| % |
| Welding |
| 1,251 |
| 355 |
| 28.4 |
| % |
| Polymers & Fluids |
| 1,261 |
| 287 |
| 22.8 |
| % |
| Construction Products |
| 1,241 |
| 298 |
| 24.0 |
| % |
| Specialty Products |
| 1,379 |
| 363 |
| 26.3 |
| % |
| Intersegment |
| (16 |
| ) |
| — |
| — |
| % |
| Total Segments |
| 10,640 |
| 2,616 |
| 24.6 |
| % |
| Unallocated |
| — |
| (38 |
| ) |
| — |
| % |
| Total Company |
| $ |
| 10,640 |
| $ |
| 2,578 |
| 24.2 |
| % |
| Q3 2019 vs. Q3 2018 Favorable/(Unfavorable) |
| Operating Revenue |
| Automotive OEM |
| Food Equipment |
| Test & Measurement and Electronics |
| Welding |
| Polymers & Fluids |
| Construction Products |
| Specialty Products |
| Total 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 Margin |
| Automotive OEM |
| Food Equipment |
| Test & Measurement and Electronics |
| Welding |
| Polymers & Fluids |
| Construction Products |
| Specialty Products |
| Total ITW |
| Operating Leverage |
| (40) bps |
| (20) bps |
| (100) bps |
| (40) bps |
| 60 bps |
| (20) bps |
| (100) bps |
| (40) bps |
| Changes in Variable Margin & OH Costs |
| 110 bps |
| 80 bps |
| 210 bps |
| 20 bps |
| 170 bps |
| (40) bps |
| 20 bps |
| 80 bps |
| Total Organic |
| 70 bps |
| 60 bps |
| 110 bps |
| (20) bps |
| 230 bps |
| (60) bps |
| (80) bps |
| 40 bps |
| Acquisitions/ Divestitures |
| — |
| — |
| — |
| 20 bps |
| — |
| — |
| 10 bps |
| — |
| Restructuring/Other |
| (10) bps |
| 30 bps |
| (20) bps |
| — |
| (30) bps |
| (10) bps |
| 10 bps |
| — |
| Total Operating Margin Change |
| 60 bps |
| 90 bps |
| 90 bps |
| — |
| 200 bps |
| (70) bps |
| (60) bps |
| 40 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 assets |
| 50 bps |
| 60 bps |
| 180 bps |
| 20 bps |
| 360 bps |
| 30 bps |
| 100 bps |
| 110 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 Revenue |
| Automotive OEM |
| Food Equipment |
| Test & Measurement and Electronics |
| Welding |
| Polymers & Fluids |
| Construction Products |
| Specialty Products |
| Total 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 Margin |
| Automotive OEM |
| Food Equipment |
| Test & Measurement and Electronics |
| Welding |
| Polymers & Fluids |
| Construction Products |
| Specialty Products |
| Total 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 SUBSIDIARIES
GAAP 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 millions |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| Operating income |
| $ |
| 868 |
| $ |
| 889 |
| $ |
| 2,578 |
| $ |
| 2,724 |
| Adjusted tax rate |
| 24.1 |
| % |
| 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 |
| Inventories |
| 1,209 |
| 1,338 |
| 1,209 |
| 1,338 |
| Net assets held for sale |
| 324 |
| — |
| 324 |
| — |
| Net plant and equipment |
| 1,693 |
| 1,799 |
| 1,693 |
| 1,799 |
| Goodwill and intangible assets |
| 5,320 |
| 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 capital |
| 29.2 |
| % |
| 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 millions |
| Income Taxes |
| Tax Rate |
| Income Taxes |
| Tax Rate |
| As reported |
| $ |
| 182 |
| 21.6 |
| % |
| $ |
| 577 |
| 23.5 |
| % |
| Discrete tax benefit |
| 21 |
| 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 millions |
| Income Taxes |
| Tax Rate |
| Income Taxes |
| Tax Rate |
| As reported |
| $ |
| 197 |
| 23.7 |
| % |
| $ |
| 622 |
| 24.1 |
| % |
| Net discrete tax benefit |
| 15 |
| 1.8 |
| % |
| 15 |
| 0.6 |
| % |
| As adjusted |
| $ |
| 212 |
| 25.5 |
| % |
| $ |
| 637 |
| 24.7 |
| % |
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
| Dollars in millions |
| Twelve Months Ended December 31, 2018 |
| Operating income |
| $ |
| 3,584 |
| Adjusted 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 2018 net discrete tax benefit of $15 million 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 |
| % |
FREE CASH FLOW (UNAUDITED)
| Three Months Ended |
| Nine Months Ended |
| September 30, |
| September 30, |
| Dollars in millions |
| 2019 |
| 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 rate |
| 126 |
| % |
| 116 |
| % |
| 105 |
| % |
| 88 |
| % |
| 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 |