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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): October 23, 2017
_________________________

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.)

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. [   ]

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))



Item 2.02    Results of Operations and Financial Condition

On October 23, 2017, Illinois Tool Works Inc. (the “Company”) announced its 2017 third 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. Adjusted 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, as well as the Company's equity investment in the Wilsonart business (formerly the Decorative Surfaces segment). 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
 
 
 
 
 
 




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: October 23, 2017
 
By: /s/ Michael M. Larsen
 
 
Michael M. Larsen
 
 
Senior Vice President & Chief Financial Officer


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Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit


Exhibit 99.1

ITW Reports Third Quarter 2017 Results
Delivers strong financial results and raises earnings guidance for 2017

Third-Quarter Highlights:
GAAP EPS of $1.85 includes $0.14 benefit from a favorable legal settlement; excluding this item EPS was $1.71, an increase of 14%
Total revenue of $3.6 billion, an increase of 4%
Operating margin of 26.6% includes 220 basis points benefit from the legal settlement; excluding this item operating margin was 24.4%, an increase of 130 bps
Updated 2017 full-year outlook: GAAP EPS of $6.62 to $6.72, an increase of $0.25 at the mid-point

GLENVIEW, Ill., Oct. 23, 2017 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its third-quarter 2017 results.

Third-quarter revenue grew 4% to $3.6 billion as organic revenue and foreign currency translation each increased revenue by 2% in the quarter. GAAP EPS of $1.85 includes a $0.14 benefit from a previously disclosed favorable legal settlement. Excluding this item, EPS increased 14% to $1.71. Operating margin was 26.6% and includes a 220 basis point benefit from the settlement. Excluding this item, operating margin was 24.4%, an increase of 130 basis points, with enterprise initiatives contributing 110 basis points of margin improvement.

“In the third quarter, the ITW team continued to execute at a high level and, as a result, delivered another quarter of strong financial results,” said E. Scott Santi, Chairman and Chief Executive Officer. “I continue to be very pleased with our progress in positioning the company to leverage ITW’s differentiated business model and high quality diversified business portfolio to deliver consistent top tier performance.”

Organic revenue growth was positive in six of seven segments led by Specialty Products (+5%), Welding (+4%) and Construction (+4%).

As previously disclosed, the company entered into a confidential legal settlement in 2017, resulting in a favorable pre-tax impact of $80 million on the third quarter 2017 results. The following schedule illustrates the impact of this item on the company’s reported third quarter 2017 financial performance.

$ Millions
Q3’16 As
Reported
Q3’17 As Reported
Legal Settlement
Q3’17 Ex Settlement
Change year-on-year
Total Revenue
$3,495
$3,615
-
-
+4%
Operating Income
$808
$961
+$80
$881
+9%
Operating Margin
23.1%
26.6%
+220 bps
24.4%
+130 bps
EPS
$1.50
$1.85
+$0.14
$1.71
+14%
After-tax ROIC
23.0%
26.3%
+220 bps
24.1%
+110 bps


Full-Year and Fourth Quarter 2017 Guidance
ITW is raising its 2017 full-year GAAP EPS guidance by $0.25 at the mid-point to a range of $6.62 to $6.72. The company expects full-year organic revenue growth of 2 to 3% and operating margin of approximately 24.5%.

For the fourth quarter 2017, the company expects GAAP EPS to be in the range of $1.55 to $1.65 and organic growth of 2 to 3%.

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, free cash flow, effective tax rate 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 (NYSE: ITW) is a Fortune 200 global multi-industrial manufacturing leader with revenues totaling $13.6 billion in 2016. 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 more than 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
 
Nine Months Ended
 
September 30,
 
September 30,
In millions except per share amounts
2017
 
2016
 
2017
 
2016
Operating Revenue
$
3,615

 
$
3,495

 
$
10,685

 
$
10,200

Cost of revenue
2,094

 
2,027

 
6,185

 
5,890

Selling, administrative, and research and development expenses
589

 
604

 
1,795

 
1,818

Legal settlement (income)
(80
)
 

 
(95
)
 

Amortization and impairment of intangible assets
51

 
56

 
156

 
170

Operating Income
961

 
808

 
2,644

 
2,322

Interest expense
(65
)
 
(58
)
 
(194
)
 
(174
)
Other income (expense)
10

 
13

 
24

 
34

Income Before Taxes
906

 
763

 
2,474

 
2,182

Income Taxes
266

 
228

 
711

 
654

Net Income
$
640

 
$
535

 
$
1,763

 
$
1,528

 
 
 
 
 
 
 
 
Net Income Per Share:
 
 
 
 
 
 
 
Basic
$
1.86

 
$
1.51

 
$
5.12

 
$
4.28

Diluted
$
1.85

 
$
1.50

 
$
5.07

 
$
4.25

 
 
 
 
 
 
 
 
Cash Dividends Per Share:
 
 
 
 
 
 
 
Paid
$
0.65

 
$
0.55

 
$
1.95

 
$
1.65

Declared
$
0.78

 
$
0.65

 
$
2.08

 
$
1.75

 
 
 
 
 
 
 
 
Shares of Common Stock Outstanding During the Period:
 
 
 
 
 
 
 
Average
343.4

 
353.5

 
344.7

 
357.3

Average assuming dilution
346.0

 
355.5

 
347.5

 
359.3











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

In millions
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Current Assets:
 
 
 
Cash and equivalents
$
2,785

 
$
2,472

Trade receivables
2,672

 
2,357

Inventories
1,225

 
1,076

Prepaid expenses and other current assets
230

 
218

Total current assets
6,912

 
6,123

 
 
 
 
Net plant and equipment
1,759

 
1,652

Goodwill
4,732

 
4,558

Intangible assets
1,319

 
1,463

Deferred income taxes
473

 
449

Other assets
1,119

 
956

 
$
16,314

 
$
15,201

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current Liabilities:
 

 
 

Short-term debt
$
698

 
$
652

Accounts payable
585

 
511

Accrued expenses
1,231

 
1,202

Cash dividends payable
267

 
226

Income taxes payable
86

 
169

Total current liabilities
2,867

 
2,760

 
 
 
 
Noncurrent Liabilities:
 

 
 

Long-term debt
7,439

 
7,177

Deferred income taxes
112

 
134

Other liabilities
870

 
871

Total noncurrent liabilities
8,421

 
8,182

 
 
 
 
Stockholders’ Equity:
 

 
 

Common stock
6

 
6

Additional paid-in-capital
1,207

 
1,188

Retained earnings
20,553

 
19,505

Common stock held in treasury
(15,336
)
 
(14,638
)
Accumulated other comprehensive income (loss)
(1,407
)
 
(1,807
)
Noncontrolling interest
3

 
5

Total stockholders’ equity
5,026

 
4,259

 
$
16,314

 
$
15,201







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

Three Months Ended September 30, 2017
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
795

$
172

21.6
%
Food Equipment
549

150

27.3
%
Test & Measurement and Electronics
525

127

24.1
%
Welding
378

100

26.6
%
Polymers & Fluids
434

90

21.0
%
Construction Products
440

112

25.4
%
Specialty Products
498

138

27.7
%
Intersegment
(4
)

%
Total Segments
3,615

889

24.6
%
Unallocated*

72

%
Total Company
$
3,615

$
961

26.6
%

Nine Months Ended September 30, 2017
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
2,443

$
556

22.7
%
Food Equipment
1,575

414

26.3
%
Test & Measurement and Electronics
1,524

337

22.1
%
Welding
1,150

312

27.2
%
Polymers & Fluids
1,297

272

21.0
%
Construction Products
1,260

303

24.0
%
Specialty Products
1,451

401

27.6
%
Intersegment
(15
)

%
Total Segments
10,685

2,595

24.3
%
Unallocated*

49

%
Total Company
$
10,685

$
2,644

24.7
%


* Unallocated includes the favorable impact from the legal settlement.




















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

Q3 2017 vs. Q3 2016 Favorable/(Unfavorable)
Operating Revenue
Automotive OEM
Food Equipment
Test & Measurement and Electronics
Welding
Polymers & Fluids
Construction Products
Specialty Products
Total ITW
Organic
1.3
%
(0.4
)%
0.8
%
3.9
%
1.0
%
3.5
%
4.5
 %
1.9
 %
Acquisitions/Divestitures
%
 %
%
%
%
%
(1.2
)%
(0.2
)%
Translation
2.8
%
1.5
 %
1.0
%
0.9
%
1.6
%
2.5
%
1.3
 %
1.8
 %
Operating Revenue
4.1
%
1.1
 %
1.8
%
4.8
%
2.6
%
6.0
%
4.6
 %
3.5
 %

Q3 2017 vs. Q3 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
 30 bps
 20 bps
 60 bps
 20 bps
 90 bps
 90 bps
 50 bps
Changes in Variable Margin & OH Costs
 (40) bps
 20 bps
 240 bps
 20 bps
 40 bps
 140 bps
 300 bps
Total Organic
 (10) bps
 20 bps
 260 bps
 80 bps
 20 bps
 130 bps
 230 bps
 350 bps
Acquisitions/Divestitures
 30 bps
Restructuring/Other
 (10) bps
 (30) bps
 50 bps
 (70) bps
 (20) bps
 150 bps
 (100) bps
Total Operating Margin Change
 (20) bps
 (10) bps
 310 bps
 10 bps
 280 bps
 160 bps
 350 bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
21.6%
27.3%
24.1%
26.6%
21.0%
25.4%
27.7%
26.6%
 
 
 
 
 
 
 
 
 
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
 50 bps
 70 bps
 300 bps
 40 bps
 400 bps
 50 bps
 120 bps
 150 bps**
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.10) on GAAP net income diluted earnings per share for the third quarter of 2017.




















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

YTD 2017 vs YTD 2016 Favorable/(Unfavorable)
Operating Revenue
Automotive OEM
Food Equipment
Test & Measurement and Electronics
Welding
Polymers & Fluids
Construction Products
Specialty Products
Total ITW
Organic
4.7
%
0.7
 %
3.5
 %
2.2
%
0.5
%
2.7
%
3.1
 %
2.7
 %
Acquisitions/Divestitures
12.2
%
 %
 %
%
%
%
(1.1
)%
2.3
 %
Translation
%
(0.9
)%
(1.0
)%
0.1
%
0.5
%
0.3
%
(0.5
)%
(0.2
)%
Operating Revenue
16.9
%
(0.2
)%
2.5
 %
2.3
%
1.0
%
3.0
%
1.5
 %
4.8
 %


YTD 2017 vs.YTD 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
 80 bps
 20 bps
 110 bps
 40 bps
 10 bps
 70 bps
 70 bps
 50 bps
Changes in Variable Margin & OH Costs
 (50) bps
 20 bps
 230 bps
 80 bps
 70 bps
 100 bps
 180 bps
Total Organic
 30 bps
 40 bps
 340 bps
 120 bps
 80 bps
 70 bps
 170 bps
 230 bps
Acquisitions/Divestitures
 (160) bps
 30 bps
 (40) bps
Restructuring/Other
 (50) bps
 20 bps
 30 bps
 90 bps
 (50) bps
 60 bps
 (50) bps
Total Operating Margin Change
 (180) bps
 60 bps
 370 bps
 210 bps
 30 bps
 130 bps
 150 bps
 190 bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
22.7%
26.3%
22.1%
27.2%
21.0%
24.0%
27.6%
24.7%
 
 
 
 
 
 
 
 
 
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
 60 bps
 80 bps
 320 bps
 40 bps
 410 bps
 60 bps
 130 bps
 160 bps**
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.31) on GAAP net income diluted earnings per share for the first nine months of 2017.

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)


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

 
Three Months Ended
 
Twelve Months Ended

September 30,
 
December 31,
Dollars in millions
2017
 
2016
 
2016
Operating income
$
961

 
$
808

 
$
3,064

Tax rate
29.3
%
 
30.0
%
 
30.0
%
Income taxes
(282
)
 
(243
)
 
(919
)
Operating income after taxes
$
679

 
$
565

 
$
2,145

 
 
 
 
 
 
Invested capital:
 
 
 

 
 
Trade receivables
$
2,672

 
$
2,496

 
$
2,357

Inventories
1,225

 
1,167

 
1,076

Net plant and equipment
1,759

 
1,702

 
1,652

Goodwill and intangible assets
6,051

 
6,191

 
6,021

Accounts payable and accrued expenses
(1,816
)
 
(1,762
)
 
(1,713
)
Other, net
487

 
393

 
223

Total invested capital
$
10,378

 
$
10,187

 
$
9,616

 
 
 
 
 
 
Average invested capital
$
10,354

 
$
9,973

 
$
9,780

Adjustment for Wilsonart (formerly the Decorative Surfaces segment)

 
(116
)
 
(91
)
Adjusted average invested capital
$
10,354

 
$
9,857

 
$
9,689

Adjusted return on average invested capital
26.3
%
*
23.0
%
 
22.1
%


FREE CASH FLOW (UNAUDITED)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Dollars in millions
2017
 
2016
 
2017
 
2016
Net cash provided by operating activities
$
780

 
$
624

 
$
1,707

 
$
1,638

Less: Additions to plant and equipment
(78
)
 
(81
)
 
(219
)
 
(202
)
Free cash flow
$
702

*
$
543

 
$
1,488

 
$
1,436

 
 
 
 
 
 
 
 
Net income
$
640

 
$
535

 
$
1,763

 
$
1,528

Free cash flow to net income conversion rate
110
%
*
101
%
 
84
%
 
94
%







* Excluding the impact of the confidential legal settlement in 2017, ROIC would have been 24.1% and free cash flow would have been $637 million (or 108% of net income) for the three months ended September 30, 2017.


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