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Section 1: 8-K (8-K)

Document



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 24, 2018
_________________________

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 January 24, 2018, Illinois Tool Works Inc. (the “Company”) announced its 2017 fourth quarter results of operations in the press release furnished as Exhibit 99.1.

Non-GAAP Financial Measures

The Company presents certain financial measures excluding the impact of the "Tax Cuts and Jobs Act" in the fourth quarter of 2017
and the benefit of a legal settlement in fiscal year 2017. These non-GAAP measures are consistent with the way management analyzes
and assesses the Company’s operating performance. The Company believes these non-GAAP measures enhance investors’
understanding of the Company’s underlying financial performance, as well as their ability to compare the Company’s financial results
and overall performance to that of its peers. A reconciliation of the impact of the "Tax Cuts and Jobs Act" and legal settlement is included in the press release furnished as Exhibit 99.1.

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: January 24, 2018
 
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 2017 Results
Delivers strong 2017 results and raises guidance for 2018

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., January 24, 2018 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: 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 (NYSE: 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
 90 bps
Changes in Variable Margin & OH Costs
 50 bps
 130 bps
 140 bps
 130 bps
 40 bps
 60 bps
Total Organic
 40 bps
 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
 70 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.


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