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Section 1: 8-K (8-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): January 31, 2020
_________________________

ILLINOIS TOOL WORKS INC.
(Exact name of registrant as specified in its charter)

Delaware
1-4797
 
36-1258310
(State or other jurisdiction of incorporation)
(Commission File No.)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
 
155 Harlem Avenue
Glenview
IL
 
 
 
60025
(Address of principal executive offices)
 
 
(Zip Code)
Registrant's telephone number, including area code: 847-724-7500

Not Applicable
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
ITW
New York Stock Exchange
1.75% Euro Notes due 2022
ITW22
New York Stock Exchange
1.25% Euro Notes due 2023
ITW23
New York Stock Exchange
0.250% Euro Notes due 2024
ITW24A
New York Stock Exchange
0.625% Euro Notes due 2027
ITW27
New York Stock Exchange
2.125% Euro Notes due 2030
ITW30
New York Stock Exchange
1.00% Euro Notes due 2031
ITW31
New York Stock Exchange
3.00% Euro Notes due 2034
ITW34
New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



Item 2.02    Results of Operations and Financial Condition

On January 31, 2020, Illinois Tool Works Inc. (the “Company”) announced its 2019 fourth quarter results of operations in the press release furnished as Exhibit 99.1.

Non-GAAP Financial Measures

The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company’s financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. A reconciliation of free cash flow to net cash provided by operating activities is included in the press release furnished as Exhibit 99.1.

The Company uses adjusted after-tax return on average invested capital ("ROIC") to measure the effectiveness of its operations’ use of invested capital to generate profits. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. For comparability, the Company excluded the third quarter discrete tax benefit of $21 million from the effective tax rate for the year ended December 31, 2019. Additionally, the Company excluded the third quarter net discrete tax benefit of $15 million from the effective tax rate for the year ended December 31, 2018. Average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations. Average invested capital is calculated using balances at the start of the period and at the end of each quarter. A calculation of ROIC is included in the press release furnished as Exhibit 99.1.



Item 9.01    Financial Statements and Exhibits

(d)
Exhibits
 
 
 
 
 
 
 
Exhibit Number
 
Exhibit Description
 
 
 
 
 
 
 
104
 
Cover Page Interactive Data File (embedded within the Inline XBRL document)




SIGNATURES


Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
 
 
ILLINOIS TOOL WORKS INC.
 
 
 
 
 
 
Dated: January 31, 2020
 
By: /s/ Michael M. Larsen
 
 
Michael M. Larsen
 
 
Senior Vice President & Chief Financial Officer


(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit


Exhibit 99.1

ITW Reports Fourth Quarter and Full Year Results

Fourth-Quarter 2019 Highlights
GAAP EPS $1.99, an increase of 9%, including $0.11 of divestiture gains
Total revenue declined 3.1%; organic revenue down 1.6%
Operating margin of 23.7%; 24.1% excluding 40 basis points of higher restructuring expenses
After-tax ROIC of 28.9%, an increase of 120 basis points
Free cash flow was 114% of net income

Full-Year 2019 Highlights
GAAP EPS $7.74, an increase of 2%
Total revenue declined 4.5%; organic revenue down 1.9%
Operating margin of 24.1%; 24.4% excluding 30 basis points of higher restructuring expenses
After-tax ROIC of 28.7%, an increase of 50 basis points
Free cash flow increased 9% and was 106% of net income

GLENVIEW, IL., January 31, 2020 - Illinois Tool Works Inc. (NYSE: ITW) today reported its fourth-quarter and full-year 2019 results.

“The ITW team closed out 2019 with another quarter of strong execution and resilient financial performance,” said E. Scott Santi, chairman and chief executive officer. “Despite near-term macro challenges, we grew earnings per share nine percent, delivered 24.1 percent operating margin excluding higher restructuring expenses and improved after-tax return on invested capital 120 basis points to 28.9 percent.”

“For the year, in a contracting industrial demand environment including a six percent decline in global auto builds, ITW grew earnings per share five percent excluding the impact of foreign currency headwinds, higher restructuring expenses and divestiture gains. We expanded operating margin to 24.4 percent excluding higher restructuring expenses, improved after-tax return on invested capital to 28.7 percent, increased free cash flow nine percent and returned $2.8 billion to shareholders in the form of dividends and share repurchases. Throughout 2019, we executed very well on the things within our control and continued to make meaningful progress on our path to full-potential performance through the implementation of our ‘Finish the Job’ enterprise strategy agenda. ITW’s proprietary and powerful business model, diversified high-quality business portfolio and dedicated team of highly skilled ITW colleagues around the world position us well to continue to deliver differentiated performance in 2020 and beyond,” Santi concluded.

2019 Results
Fourth-quarter revenue of $3.5 billion declined 3.1 percent with organic revenue down 1.6 percent. Foreign currency translation and divestitures reduced revenues by 1.0 percent and 0.5 percent, respectively. Product Line Simplification (PLS) activities reduced organic revenue by 60 basis points. GAAP EPS increased nine percent to $1.99 including $0.11 divestiture gains from the sale of three businesses. Operating margin was 23.7 percent. Excluding 40 basis points impact from higher restructuring expenses, operating margin improved 10 basis points to 24.1 percent. Enterprise initiatives contributed 130 basis points and price/cost was positive 30 basis points. Free cash flow was $692 million with a 114 percent conversion rate. The effective tax rate for the fourth quarter was 22.8 percent.

Full year revenue of $14.1 billion declined 4.5 percent with organic revenue down 1.9 percent and unfavorable foreign currency translation impact of 2.3 percent. PLS reduced organic revenue by 60 basis points versus 70 basis points in 2018. 2019 GAAP EPS increased two percent to $7.74 including $0.09 of net gains from divestitures. Operating margin was 24.1 percent. Excluding 30 basis points impact from higher restructuring expenses, operating margin improved 10 bps to 24.4 percent. Enterprise initiatives contributed 120 basis points and price/cost was positive 10 basis points. After-tax return on invested capital was 28.7 percent. Free cash flow increased nine percent to $2.7 billion. The company repurchased $1.5 billion of its own shares and raised its dividend seven percent in August 2019 to an annualized $4.28 per share. The effective tax rate for the full year was 23.3 percent.

2020 Guidance
The company initiated full-year EPS guidance in a range of $7.65 to $8.05 per share. At current levels of demand, organic growth is forecast to be in the range of zero to two percent. Foreign currency translation and divestitures are projected to reduce revenues





by one percentage point each. PLS impact is forecast to moderate to approximately 50 basis points. Operating margin is expected to improve and be in a range of 24.5 to 25 percent, with enterprise initiatives contributing approximately 100 basis points. Free cash flow is expected to be greater than 100 percent of net income. The Company expects an effective tax rate in the range of 23.5 to 24.5 percent and plans to repurchase approximately $2 billion of its shares in 2020.

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 $14.1 billion in 2019. 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’s approximately 45,000 dedicated colleagues around the world thrive in the company’s 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
2019

2018
 
2019
 
2018
Operating Revenue
$
3,469

 
$
3,580

 
$
14,109

 
$
14,768

Cost of revenue
2,022

 
2,096

 
8,187

 
8,604

Selling, administrative, and research and development expenses
586

 
578

 
2,361

 
2,391

Amortization and impairment of intangible assets
37

 
46

 
159

 
189

Operating Income
824

 
860

 
3,402

 
3,584

Interest expense
(51
)
 
(63
)
 
(221
)
 
(257
)
Other income (expense)
58

 
19

 
107

 
67

Income Before Taxes
831

 
816

 
3,288

 
3,394

Income taxes
190

 
209

 
767

 
831

Net Income
$
641

 
$
607

 
$
2,521

 
$
2,563

 
 
 
 
 
 
 
 
Net Income Per Share:
 
 
 
 
 
 
 
Basic
$
2.00

 
$
1.84

 
$
7.78

 
$
7.65

Diluted
$
1.99

 
$
1.83

 
$
7.74

 
$
7.60

 
 
 
 
 
 
 
 
Cash Dividends Per Share:
 
 
 
 
 
 
 
Paid
$
1.07

 
$
1.00

 
$
4.07

 
$
3.34

Declared
$
1.07

 
$
1.00

 
$
4.14

 
$
3.56

 
 
 
 
 
 
 
 
Shares of Common Stock Outstanding During the Period:
 
 
 
 
 
 
 
Average
321.2

 
329.8

 
323.9

 
335.0

Average assuming dilution
322.9

 
331.6

 
325.6

 
337.1







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

In millions
December 31, 2019
 
December 31, 2018
Assets
 
 
 
Current Assets:
 
 
 
Cash and equivalents
$
1,981

 
$
1,504

Trade receivables
2,461

 
2,622

Inventories
1,164

 
1,318

Prepaid expenses and other current assets
296

 
334

Assets held for sale
351

 

Total current assets
6,253

 
5,778

 
 
 
 
Net plant and equipment
1,729

 
1,791

Goodwill
4,492

 
4,633

Intangible assets
851

 
1,084

Deferred income taxes
516

 
554

Other assets
1,227

 
1,030

 
$
15,068

 
$
14,870

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Current Liabilities:
 

 
 

Short-term debt
$
4

 
$
1,351

Accounts payable
472

 
524

Accrued expenses
1,217

 
1,271

Cash dividends payable
342

 
328

Income taxes payable
48

 
68

Liabilities held for sale
71

 

Total current liabilities
2,154

 
3,542

 
 
 
 
Noncurrent Liabilities:
 

 
 

Long-term debt
7,754

 
6,029

Deferred income taxes
668

 
707

Noncurrent income taxes payable
462

 
495

Other liabilities
1,000

 
839

Total noncurrent liabilities
9,884

 
8,070

 
 
 
 
Stockholders’ Equity:
 

 
 

Common stock
6

 
6

Additional paid-in-capital
1,304

 
1,253

Retained earnings
22,403

 
21,217

Common stock held in treasury
(18,982
)
 
(17,545
)
Accumulated other comprehensive income (loss)
(1,705
)
 
(1,677
)
Noncontrolling interest
4

 
4

Total stockholders’ equity
3,030

 
3,258

 
$
15,068

 
$
14,870







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

Three Months Ended December 31, 2019
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
725

$
154

21.2
%
Food Equipment
571

157

27.5
%
Test & Measurement and Electronics
552

155

28.1
%
Welding
387

98

25.4
%
Polymers & Fluids
408

94

23.0
%
Construction Products
384

85

22.2
%
Specialty Products
446

109

24.5
%
Intersegment
(4
)

%
Total Segments
3,469

852

24.6
%
Unallocated

(28
)
%
Total Company
$
3,469

$
824

23.7
%

Twelve Months Ended December 31, 2019
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
3,063

$
659

21.5
%
Food Equipment
2,188

578

26.4
%
Test & Measurement and Electronics
2,121

542

25.6
%
Welding
1,638

453

27.7
%
Polymers & Fluids
1,669

381

22.8
%
Construction Products
1,625

383

23.6
%
Specialty Products
1,825

472

25.9
%
Intersegment
(20
)

%
Total Segments
14,109

3,468

24.6
%
Unallocated

(66
)
%
Total Company
$
14,109

$
3,402

24.1
%





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

Q4 2019 vs. Q4 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
)%
1.7
 %
4.0
 %
(3.7
)%
(2.0
)%
(1.2
)%
(3.4
)%
(1.6
)%
Acquisitions/ Divestitures
 %
 %
(0.7
)%
(2.5
)%
 %
 %
(0.8
)%
(0.5
)%
Translation
(1.4
)%
(1.1
)%
(0.7
)%
(0.2
)%
(1.4
)%
(1.9
)%
(0.8
)%
(1.0
)%
Operating Revenue
(6.8
)%
0.6
 %
2.6
 %
(6.4
)%
(3.4
)%
(3.1
)%
(5.0
)%
(3.1
)%

Q4 2019 vs. Q4 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
 20 bps
 90 bps
 (60) bps
 (40) bps
 (20) bps
 (70) bps
 (30) bps
Changes in Variable Margin & OH Costs
 90 bps
 130 bps
 230 bps
 (20) bps
 270 bps
 (210) bps
 (20) bps
 40 bps
Total Organic
 (10) bps
 150 bps
 320 bps
 (80) bps
 230 bps
 (230) bps
 (90) bps
 10 bps
Acquisitions/ Divestitures
 20 bps
 20 bps
 20 bps
 10 bps
Restructuring/Other
 (30) bps
 (60) bps
 (10) bps
 (90) bps
 (80) bps
 (40) bps
 (20) bps
 (50) bps
Total Operating Margin Change
 (40) bps
 90 bps
 330 bps
 (150) bps
 150 bps
 (270) bps
 (90) bps
 (30) bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
21.2%
27.5%
28.1%
25.4%
23.0%
22.2%
24.5%
23.7%
 
 
 
 
 
 
 
 
 
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
 50 bps
 60 bps
 150 bps
 30 bps
 360 bps
 30 bps
 90 bps
110 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.09) on GAAP earnings per share for the fourth quarter of 2019.





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

Full Year 2019 vs Full Year 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
)%
1.1
 %
(0.3
)%
(1.2
)%
 %
(1.0
)%
(4.1
)%
(1.9
)%
Acquisitions/ Divestitures
 %
 %
(0.2
)%
(1.1
)%
(0.4
)%
 %
(0.6
)%
(0.3
)%
Translation
(2.8
)%
(2.3
)%
(1.8
)%
(0.8
)%
(2.8
)%
(3.4
)%
(1.8
)%
(2.3
)%
Operating Revenue
(8.2
)%
(1.2
)%
(2.3
)%
(3.1
)%
(3.2
)%
(4.4
)%
(6.5
)%
(4.5
)%

Full Year 2019 vs Full Year 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
 (90) bps
 30 bps
 (10) bps
 (20) bps
 (10) bps
 (90) bps
 (50) bps
Changes in Variable Margin & OH Costs
 50 bps
 60 bps
 150 bps
 170 bps
 (40) bps
 (10) bps
 60 bps
Total Organic
 (40) bps
 90 bps
 140 bps
 (20) bps
 170 bps
 (50) bps
 (100) bps
 10 bps
Acquisitions/ Divestitures
 10 bps
 20 bps
 20 bps
Restructuring/Other
 (60) bps
 (30) bps
 (30) bps
 (30) bps
 (20) bps
 (10) bps
 (30) bps
Total Operating Margin Change
 (100) bps
 60 bps
 150 bps
 (30) bps
 140 bps
 (70) bps
 (90) bps
 (20) bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
21.5%
26.4%
25.6%
27.7%
22.8%
23.6%
25.9%
24.1%
 
 
 
 
 
 
 
 
 
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
 50 bps
 70 bps
 200 bps
 20 bps
 360 bps
 30 bps
 90 bps
120 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.37) on GAAP earnings per share for 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
 
Twelve Months Ended

December 31,
 
December 31,
Dollars in millions
2019

2018
 
2019
 
2018
Operating income
$
824

 
$
860

 
$
3,402

 
$
3,584

Adjusted tax rate
22.8
%
 
25.5
%
 
24.0
%
 
24.9
%
Income taxes
(188
)
 
(219
)
 
(815
)
 
(893
)
Operating income after taxes
$
636

 
$
641

 
$
2,587

 
$
2,691

 
 
 
 
 
 
 
 
Invested capital:
 
 
 

 
 
 
 
Trade receivables
$
2,461

 
$
2,622

 
$
2,461

 
$
2,622

Inventories
1,164

 
1,318

 
1,164

 
1,318

Net assets held for sale
280

 

 
280

 

Net plant and equipment
1,729

 
1,791

 
1,729

 
1,791

Goodwill and intangible assets
5,343

 
5,717

 
5,343

 
5,717

Accounts payable and accrued expenses
(1,689
)
 
(1,795
)
 
(1,689
)
 
(1,795
)
Other, net
(481
)
 
(519
)
 
(481
)
 
(519
)
Total invested capital
$
8,807

 
$
9,134

 
$
8,807

 
$
9,134

 
 
 
 
 
 
 
 
Average invested capital
$
8,797

 
$
9,247

 
$
9,028

 
$
9,533

Adjusted after-tax return on average invested capital
28.9
%
 
27.7
%
 
28.7
%
 
28.2
%

A reconciliation of the 2019 effective tax rate excluding the third quarter discrete tax benefit of $21 million is as follows:

 
Twelve Months Ended
 
December 31, 2019
 
Income Taxes
 
Tax Rate
As reported
$
767

 
23.3
%
Discrete tax benefit related to third quarter
21

 
0.7
%
As adjusted
$
788

 
24.0
%


A reconciliation of the 2018 effective tax rate excluding the third quarter net discrete tax benefit of $15 million 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)

FREE CASH FLOW (UNAUDITED)
 
Three Months Ended
 
Twelve Months Ended
 
December 31,
 
December 31,
Dollars in millions
2019
 
2018
 
2019
 
2018
Net cash provided by operating activities
$
774

 
$
809

 
$
2,995

 
$
2,811

Less: Additions to plant and equipment
(82
)
 
(82
)
 
(326
)
 
(364
)
Free cash flow
$
692

 
$
727

 
$
2,669

 
$
2,447

 
 
 
 
 
 
 
 
Net income
$
641

 
$
607

 
$
2,521

 
$
2,563

Free cash flow to net income conversion rate
108
%
*
120
%
 
106
%
 
95
%

* Excluding the impact of the fourth quarter net after-tax gains on disposal of businesses of $35 million, net income would have been $606 million and the free cash flow to net income conversion rate for the three months ended December 31, 2019 would have been 114%.


ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NET INCOME PER SHARE - DILUTED, AS REPORTED (UNAUDITED)
 
Twelve Months Ended
 
December 31,
 
2019
 
2018
Net income per share - diluted, as reported
$
7.74

*
$
7.60


* Diluted EPS for the twelve months ended December 31, 2019 includes the impact of $0.09 of divestiture gains, $(0.20) of foreign currency translation headwinds and $(0.12) of higher restructuring expenses.



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