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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): February 1, 2019
_________________________

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 February 1, 2019, Illinois Tool Works Inc. (the “Company”) announced its 2018 fourth quarter results of operations in the press release furnished as Exhibit 99.1.

Non-GAAP Financial Measures

The Company presents certain financial measures for 2017 excluding the impact of the "Tax Cuts and Jobs Act" 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. For comparability, 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. The Company also excluded the $658 million income tax charge from the effective tax rate for the three and twelve months ended December 31, 2017 and the $95 million confidential legal settlement from the calculation of ROIC for the year ended December 31, 2017. 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
 
 
 
 
 
 




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: February 1, 2019
 
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
Delivers Double Digit Earnings Growth in 2018

Fourth-Quarter Highlights
Total revenue $3.6 billion; organic growth +1%; North America +4%
Operating margin 24.0%, an increase of 70 bps
GAAP EPS $1.83 vs. 2017 GAAP EPS of $(0.22); Excluding one-time 2017 tax charge of $658 million, EPS increased 8%, +10% excluding $(0.04) currency impact

Full-Year Highlights
Total revenue $14.8 billion, an increase of 3%; organic growth +2%
Operating margin 24.3%, an increase of 60 bps excluding 2017 legal settlement of $95 million
After-tax ROIC 28.2%, an increase of 390 bps
GAAP EPS $7.60, up 56% vs. 2017 GAAP EPS of $4.86; Excluding one-time 2017 tax charge and legal settlement, EPS increased 15%

GLENVIEW, IL., February 1, 2019 - Illinois Tool Works Inc. (NYSE: ITW) today reported its fourth-quarter and full-year 2018 results.

“The fourth quarter closed out another year of strong execution and financial performance by the ITW team. For the quarter, the company delivered 10 percent EPS growth excluding currency impact and the 2017 tax charge, operating margin expansion of 70 basis points and after-tax return on invested capital of 27.7 percent,” said E. Scott Santi, Chairman and Chief Executive Officer.

“For the year, excluding the 2017 one-time items, we grew EPS by 15 percent, expanded operating margin by 60 basis points to a record 24.3 percent, grew Free Cash Flow 10 percent and returned $3 billion cash to shareholders in the form of dividends and share repurchases. The fact that we achieved these results despite significant raw material cost headwinds and a decline in auto builds in North America, Europe and China clearly demonstrates the power of ITW’s highly differentiated business model and the resilience of our high quality diversified business portfolio.”

“We enter 2019 well-positioned to deliver another year of differentiated performance and continued progress in executing our long-term strategy to leverage the power of the ITW Business Model to its full potential,” Santi concluded.

Fourth-quarter revenue was essentially flat at $3.6 billion as organic growth of one percent was more than offset by the impact of foreign currency translation. Organic revenue growth increased four percent in North America, offset by a two percent decline in International. As expected, Product Line Simplification (PLS) activities reduced organic revenue growth by 90 basis points. Excluding a tax charge in the prior year, fourth quarter EPS increased eight percent to $1.83. Excluding the unfavorable foreign currency translation impact of $(0.04) and one-time 2017 tax charge, EPS grew 10 percent. Operating margin was 24.0 percent, an increase of 70 basis points, with enterprise initiatives contributing 110 basis points and more than offsetting 40 basis points of price/cost headwind. Fourth quarter Free Cash Flow increased 18 percent to $727 million.

Full year revenue grew three percent to $14.8 billion, with organic growth of two percent. As previously disclosed, the company recorded a favorable legal settlement of $95 million in 2017. Excluding this settlement and the 2017 fourth quarter tax charge, 2018 full-year EPS increased 15 percent to $7.60. Operating margin was 24.3 percent, an increase of 60 basis points excluding the 2017 legal settlement, with enterprise initiatives contributing 110 basis points of margin improvement, more than offsetting 50 basis points of price/cost headwind. After-tax return on invested capital was 28.2 percent, an improvement of 390 basis points.

2018 Free Cash Flow increased 10 percent to $2.4 billion. The company repurchased $2 billion of its own shares and raised its dividend 28 percent in August 2018 to an annualized $4.00 per share.

2019 Guidance
The company re-affirmed its full-year EPS guidance in a range of $7.90 to $8.20 per share. Organic growth is expected to be in the range of one to three percent based on current run rates. Operating margin is expected to improve by approximately 100





basis points with enterprise initiatives contributing 100 basis points. Free cash flow is expected to be at or above 100 percent of net income. The company expects to repurchase approximately $1.5 billion of its shares in 2019.

For the first quarter 2019, the company expects EPS of $1.73 to $1.83. This incorporates higher estimated restructuring expense of $0.07 per share, foreign currency translation headwind of $0.07 per share and a tax rate in the range of 24.5 to 25.5 percent, which represents a $0.05 per share headwind year-over-year.

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 2017 and subsequently filed Form 10-Qs.

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
 
Twelve Months Ended
 
December 31,
 
December 31,
In millions except per share amounts
2018

2017(1)
 
2018
 
2017(1)
Operating Revenue
$
3,580

 
$
3,629

 
$
14,768

 
$
14,314

Cost of revenue
2,096

 
2,124

 
8,604

 
8,306

Selling, administrative, and research and development expenses
578

 
609

 
2,391

 
2,412

Legal settlement (income)

 

 

 
(95
)
Amortization and impairment of intangible assets
46

 
50

 
189

 
206

Operating Income
860

 
846

 
3,584

 
3,485

Interest expense
(63
)
 
(66
)
 
(257
)
 
(260
)
Other income (expense)
19

 
16

 
67

 
45

Income Before Taxes
816

 
796

 
3,394

 
3,270

Income taxes
209

 
872

 
831

 
1,583

Net Income (Loss)
$
607

 
$
(76
)
 
$
2,563

 
$
1,687

 
 
 
 
 
 
 
 
Net Income (Loss) Per Share:
 
 
 
 
 
 
 
Basic
$
1.84

 
$
(0.22
)
 
$
7.65

 
$
4.90

Diluted
$
1.83

 
$
(0.22
)
 
$
7.60

 
$
4.86

 
 
 
 
 
 
 
 
Cash Dividends Per Share:
 
 
 
 
 
 
 
Paid
$
1.00

 
$
0.78

 
$
3.34

 
$
2.73

Declared
$
1.00

 
$
0.78

 
$
3.56

 
$
2.86

 
 
 
 
 
 
 
 
Shares of Common Stock Outstanding During the Period:
 
 
 
 
 
 
 
Average
329.8

 
342.1

 
335.0

 
344.1

Average assuming dilution
331.6

 
342.1

 
337.1

 
346.8


(1) The three and twelve months ended December 31, 2017 have been restated to reflect the adoption of new accounting guidance in 2018 which resulted in the presentation of $4 million and $9 million, respectively, of other net periodic benefit income in Other income (expense) rather than in Operating Income, with no change in Net Income.







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

In millions
December 31, 2018
 
December 31, 2017
Assets
 
 
 
Current Assets:
 
 
 
Cash and equivalents
$
1,504

 
$
3,094

Trade receivables
2,622

 
2,628

Inventories
1,318

 
1,220

Prepaid expenses and other current assets
334

 
336

Total current assets
5,778

 
7,278

 
 
 
 
Net plant and equipment
1,791

 
1,778

Goodwill
4,633

 
4,752

Intangible assets
1,084

 
1,272

Deferred income taxes
554

 
505

Other assets
1,030

 
1,195

 
$
14,870

 
$
16,780

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Current Liabilities:
 

 
 

Short-term debt
$
1,351

 
$
850

Accounts payable
524

 
590

Accrued expenses
1,271

 
1,258

Cash dividends payable
328

 
266

Income taxes payable
68

 
89

Total current liabilities
3,542

 
3,053

 
 
 
 
Noncurrent Liabilities:
 

 
 

Long-term debt
6,029

 
7,478

Deferred income taxes
707

 
164

Noncurrent income taxes payable
495

 
614

Other liabilities
839

 
882

Total noncurrent liabilities
8,070

 
9,138

 
 
 
 
Stockholders’ Equity:
 

 
 

Common stock
6

 
6

Additional paid-in-capital
1,253

 
1,218

Retained earnings
21,217

 
20,210

Common stock held in treasury
(17,545
)
 
(15,562
)
Accumulated other comprehensive income (loss)
(1,677
)
 
(1,287
)
Noncontrolling interest
4

 
4

Total stockholders’ equity
3,258

 
4,589

 
$
14,870

 
$
16,780







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

Three Months Ended December 31, 2018
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
777

$
168

21.6
%
Food Equipment
567

151

26.6
%
Test & Measurement and Electronics
538

133

24.8
%
Welding
414

111

26.9
%
Polymers & Fluids
422

91

21.5
%
Construction Products
397

99

24.9
%
Specialty Products
469

118

25.4
%
Intersegment
(4
)

%
Total Segments
3,580

871

24.4
%
Unallocated

(11
)
%
Total Company
$
3,580

$
860

24.0
%

Twelve Months Ended December 31, 2018
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
3,338

$
751

22.5
%
Food Equipment
2,214

572

25.8
%
Test & Measurement and Electronics
2,171

523

24.1
%
Welding
1,691

474

28.0
%
Polymers & Fluids
1,724

369

21.4
%
Construction Products
1,700

414

24.3
%
Specialty Products
1,951

522

26.8
%
Intersegment
(21
)

%
Total Segments
14,768

3,625

24.5
%
Unallocated

(41
)
%
Total Company
$
14,768

$
3,584

24.3
%










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

Q4 2018 vs. Q4 2017 Favorable/(Unfavorable)
Operating Revenue
Automotive OEM
Food Equipment
Test & Measurement and Electronics
Welding
Polymers & Fluids
Construction Products
Specialty Products
Total ITW
Organic
(3.6
)%
5.2
 %
0.2
 %
7.6
 %
3.5
 %
(0.7
)%
(2.0
)%
0.9
 %
Acquisitions/ Divestitures
 %
 %
 %
 %
(1.0
)%
 %
 %
(0.1
)%
Translation
(2.5
)%
(1.7
)%
(1.5
)%
(0.9
)%
(3.4
)%
(3.1
)%
(1.6
)%
(2.2
)%
Operating Revenue
(6.1
)%
3.5
 %
(1.3
)%
6.7
 %
(0.9
)%
(3.8
)%
(3.6
)%
(1.4
)%

Q4 2018 vs. Q4 2017 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
 (70) bps
 110 bps
 130 bps
 80 bps
 (20) bps
 (30) bps
 20 bps
Changes in Variable Margin & OH Costs
 (90) bps
 (50) bps
 110 bps
 (130) bps
 20 bps
 100 bps
 (20) bps
 30 bps
Total Organic
 (160) bps
 60 bps
 110 bps
 100 bps
 80 bps
 (50) bps
 50 bps
Acquisitions/ Divestitures
 10 bps
Restructuring/Other
 10 bps
 20 bps
 30 bps
 50 bps
 50 bps
 70 bps
 20 bps
Total Operating Margin Change
 (150) bps
 80 bps
 140 bps
 50 bps
 160 bps
 150 bps
 (50) bps
 70 bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
21.6%
26.6%
24.8%
26.9%
21.5%
24.9%
25.4%
24.0%
 
 
 
 
 
 
 
 
 
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
 50 bps
 70 bps
 270 bps
 30 bps
 380 bps
 50 bps
 100 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 2018.






















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

Full Year 2018 vs Full Year 2017 Favorable/(Unfavorable)
Operating Revenue
Automotive OEM
Food Equipment
Test & Measurement and Electronics
Welding
Polymers & Fluids
Construction Products
Specialty Products
Total ITW
Organic
%
2.8
%
3.5
%
9.7
%
1.0
 %
1.2
%
(0.4
)%
2.2
 %
Acquisitions/ Divestitures
%
%
%
%
(0.4
)%
%
(0.1
)%
(0.1
)%
Translation
2.0
%
1.5
%
1.4
%
0.2
%
(0.6
)%
0.4
%
1.2
 %
1.1
 %
Operating Revenue
2.0
%
4.3
%
4.9
%
9.9
%
 %
1.6
%
0.7
 %
3.2
 %

Full Year 2018 vs Full Year 2017 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
 10 bps
 60 bps
 90 bps
 150 bps
 30 bps
 20 bps
 50 bps
Changes in Variable Margin & OH Costs
 (50) bps
 (110) bps
 80 bps
 (70) bps
 (10) bps
 20 bps
 (60) bps
 (70) bps (1)
Total Organic
 (40) bps
 (50) bps
 170 bps
 80 bps
 20 bps
 40 bps
 (60) bps
 (20) bps
Acquisitions/ Divestitures
Restructuring/Other
 10 bps
 10 bps
 20 bps
 50 bps
 20 bps
 20 bps
Total Operating Margin Change
 (30) bps
 (40) bps
 170 bps
 100 bps
 70 bps
 40 bps
 (40) bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
22.5%
25.8%
24.1%
28.0%
21.4%
24.3%
26.8%
24.3%
 
 
 
 
 
 
 
 
 
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
 50 bps
 70 bps
 280 bps
 30 bps
 380 bps
 50 bps
 110 bps
 130 bps**
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.42) on GAAP earnings per share for 2018.
(1)  Full year 2017 included 60 basis points of favorability from the confidential legal settlement.







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
2018

2017
 
2018
 
2017
Operating income(1)
$
860

 
$
846

 
$
3,584

 
$
3,485

Less: Legal settlement income

 

 

 
(95
)
Adjusted operating income
860

 
846

 
3,584

 
3,390

Adjusted tax rate
25.5
%
 
26.9
%
 
24.9
%
 
28.3
%
Income taxes
(219
)
 
(227
)
 
(893
)
 
(958
)
Operating income after taxes
$
641

 
$
619

 
$
2,691

 
$
2,432

 
 
 
 
 
 
 
 
Invested capital:
 
 
 

 
 
 
 
Trade receivables
$
2,622

 
$
2,628

 
$
2,622

 
$
2,628

Inventories
1,318

 
1,220

 
1,318

 
1,220

Net plant and equipment
1,791

 
1,778

 
1,791

 
1,778

Goodwill and intangible assets
5,717

 
6,024

 
5,717

 
6,024

Accounts payable and accrued expenses
(1,795
)
 
(1,848
)
 
(1,795
)
 
(1,848
)
Other, net
(519
)
 
21

 
(519
)
 
21

Total invested capital
$
9,134

 
$
9,823

 
$
9,134

 
$
9,823

 
 
 
 
 
 
 
 
Average invested capital
$
9,247

 
$
10,101

 
$
9,533

 
$
10,005

Return on average invested capital
27.7
%
 
24.5
%
 
28.2
%
 
24.3
%

(1) The 2017 results have been restated to reflect the adoption of new accounting guidance in 2018 related to the presentation of net periodic benefit costs. The adoption of this guidance resulted in the presentation of $4 million and $9 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the fourth quarter 2017 and full year 2017, respectively, with no change in Net Income.

ROIC for the three months ended December 31, 2018 was 27.7%, an improvement of 320 basis points. ROIC for the twelve months ended December 31, 2018 was 28.2%, an improvement of 390 basis points. The improvement in both periods was primarily the result of the new U.S. tax rules and regulations.

A reconciliation of the 2018 effective tax rate to the adjusted tax rate excluding the third quarter 2018 net discrete tax benefit 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
%

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
2018
 
2017
 
2018
 
2017
 
Net cash provided by operating activities
$
809

 
$
695

 
$
2,811

 
$
2,402

 
Less: Additions to plant and equipment
(82
)
 
(78
)
 
(364
)
 
(297
)
 
Free cash flow
$
727

 
$
617

 
$
2,447

 
$
2,105

*
 
 
 
 
 
 
 
 
 
Net income (loss), as reported
$
607

 
$
(76
)
 
$
2,563

 
$
1,687

 
Discrete tax charge related to 2017 U.S. tax legislation

 
658

 

 
658

 
Adjusted net income
$
607

 
$
582

 
$
2,563

 
$
2,345

 

* Excluding $115 million related to an additional discretionary pension contribution, free cash flow would have been $2.2 billion for the twelve months ended December 31, 2017.






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 fourth quarter and full year 2017 financial results:

Fourth Quarter

Dollars in millions
Q4 '17 As
Reported(1)
Tax
Charge
Q4 '17 Excl. Item
Q4 '18 As Reported
Change Vs. Prior Year
Total Revenue
$3,629
$3,629
$3,580
(1)%
Operating Income
$846
$846
$860
+2%
Operating Margin
23.3%
23.3%
24.0%
+70 bps
Tax Rate
109.6%
+82.7%-pts
26.9%
25.5%
(1.4)%-pts
Net Income (Loss)
$(76)
$(658)
$582
$607
+4%
EPS
$(0.22)
$(1.92)
$1.70
$1.83
+8%

Full Year

Dollars in millions
2017 As
Reported(1)
Legal
Item
Tax
Charge
2017 Excl. Items
2018 As Reported
Change Vs. Prior Year
Total Revenue
$14,314
$14,314
$14,768
+3%
Operating Income
$3,485
+$95
$3,390
$3,584
+6%
Operating Margin
24.3%
+60 bps
23.7%
24.3%
+60 bps
Tax Rate
48.4%
+20.1%-pts
28.3%
24.5%
(3.8)%-pts
Net Income (Loss)
$1,687
+$59
$(658)
$2,286
$2,563
+12%
EPS
$4.86
+$0.17
$(1.90)
$6.59
$7.60
+15%

(1) The 2017 results have been restated to reflect the adoption of new accounting guidance in 2018 related to the presentation of net periodic benefit costs. The adoption of this guidance resulted in the presentation of $4 million and $9 million of other net periodic benefit income in Other income (expense) rather than in Operating Income for the fourth quarter 2017 and full year 2017, respectively, with no change in Net Income.



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