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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): April 25, 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 April 25, 2019, Illinois Tool Works Inc. (the “Company”) announced its 2019 first 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 first quarter discrete tax benefit of $14 million related to foreign tax credits from the effective tax rate for the three months ended March 31, 2018. The Company also 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
 
 
 
 
 
 




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: April 25, 2019
 
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 Delivers $1.81 Earnings per Share
Reaffirms FY 2019 EPS Guidance of $7.90 to $8.20

GLENVIEW, IL., April 25, 2019 - Illinois Tool Works Inc. (NYSE: ITW) today reported its first-quarter 2019 results including earnings per share (EPS) of $1.81 compared to $1.90 in the first quarter of 2018. As expected, unfavorable foreign currency translation impact, higher restructuring costs and a higher effective tax rate reduced EPS by a combined $0.16 year-over-year.

“ITW had a solid start to 2019. We expanded operating margin to 24.3 percent, excluding the impact from accelerated restructuring, as enterprise initiatives contributed 100 basis points and price/cost was more favorable than expected. We grew Free Cash Flow 21 percent, with conversion of 90 percent, well above our seasonal average. After a slow start in January, sales trends improved across the board as the quarter progressed,” said E. Scott Santi, Chairman and Chief Executive Officer. “Looking ahead, our view that continued contributions from enterprise initiatives, improving price/cost dynamics, restructuring benefits, more favorable sales and foreign currency comparisons, and stabilizing auto production in Europe and China will all contribute to a stronger operating environment in the back half of the year is unchanged. As a result, we remain firmly on track to deliver on our full year EPS guidance. As the ITW team continues to execute on our ‘Finish the Job’ agenda, I am confident that we will continue to deliver differentiated financial performance in 2019 and beyond.”

Revenue of $3.6 billion was down five percent, with an unfavorable foreign currency translation impact of 3.4 percent and organic revenue down 1.5 percent. Excluding the impact of one less shipping day in the quarter, organic revenue was flat. Organic revenue growth by segment was as follows: Welding grew three percent, Food Equipment grew two percent; Test & Measurement/Electronics, Polymers & Fluids and Construction Products were down one percent, Specialty Products down two percent, and Automotive OEM down six percent. As expected, the company’s ongoing Product Line Simplification (PLS) activities reduced organic revenue growth by 70 basis points.

Operating margin was 23.6 percent, as compared to 24.1 percent in the prior year. Excluding 70 basis points of unfavorable margin impact due to higher restructuring expenses, operating margin improved 20 basis points to 24.3 percent. Strong execution on enterprise initiatives contributed 100 basis points of margin improvement and price/cost diluted margin by 10 basis points. Free Cash Flow increased 21 percent to $539 million, with 90 percent conversion, and the company repurchased $375 million of its own shares. After-tax return on invested capital was 27.7 percent.

2019 Guidance
The company is reaffirming its full-year EPS guidance of $7.90 to $8.20 per share, which represents four to eight percent growth year over year. Factoring in the slower start to the year, organic revenue growth is expected to be in the range of 0.5 to 2.5 percent. The company expects full-year operating margin to improve by approximately 100 basis points with enterprise initiatives contributing 100 basis points. Free cash flow is expected to be above 100 percent of net income, and the company is on pace to repurchase approximately $1.5 billion of its shares in 2019. The effective tax rate is expected to be 24.5 to 25.5 percent.

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
 
March 31,
In millions except per share amounts
2019
 
2018
Operating Revenue
$
3,552

 
$
3,744

Cost of revenue
2,059

 
2,181

Selling, administrative, and research and development expenses
611

 
612

Amortization and impairment of intangible assets
43

 
48

Operating Income
839

 
903

Interest expense
(63
)
 
(66
)
Other income (expense)
14

 
12

Income Before Taxes
790

 
849

Income Taxes
193

 
197

Net Income
$
597

 
$
652

 
 
 
 
Net Income Per Share:
 
 
 
Basic
$
1.82

 
$
1.92

Diluted
$
1.81

 
$
1.90

 
 
 
 
Cash Dividends Per Share:
 
 
 
Paid
$
1.00

 
$
0.78

Declared
$
1.00

 
$
0.78

 
 
 
 
Shares of Common Stock Outstanding During the Period:
 
 
 
Average
327.3

 
340.2

Average assuming dilution
329.6

 
342.8







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

In millions
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current Assets:
 
 
 
Cash and equivalents
$
1,755

 
$
1,504

Trade receivables
2,715

 
2,622

Inventories
1,346

 
1,318

Prepaid expenses and other current assets
259

 
334

Total current assets
6,075

 
5,778

 
 
 
 
Net plant and equipment
1,765

 
1,791

Goodwill
4,621

 
4,633

Intangible assets
1,044

 
1,084

Deferred income taxes
547

 
554

Other assets
1,274

 
1,030

 
$
15,326

 
$
14,870

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Short-term debt
$
1,760

 
$
1,351

Accounts payable
568

 
524

Accrued expenses
1,228

 
1,271

Cash dividends payable
326

 
328

Income taxes payable
79

 
68

Total current liabilities
3,961

 
3,542

 
 
 
 
Noncurrent Liabilities:
 
 
 
Long-term debt
5,981

 
6,029

Deferred income taxes
727

 
707

Noncurrent income taxes payable
495

 
495

Other liabilities
962

 
839

Total noncurrent liabilities
8,165

 
8,070

 
 
 
 
Stockholders’ Equity:
 
 
 
Common stock
6

 
6

Additional paid-in-capital
1,255

 
1,253

Retained earnings
21,488

 
21,217

Common stock held in treasury
(17,911
)
 
(17,545
)
Accumulated other comprehensive income (loss)
(1,642
)
 
(1,677
)
Noncontrolling interest
4

 
4

Total stockholders’ equity
3,200

 
3,258

 
$
15,326

 
$
14,870







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


Three Months Ended March 31, 2019
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
806

$
167

20.6
%
Food Equipment
518

129

24.9
%
Test & Measurement and Electronics
524

126

24.1
%
Welding
427

120

28.1
%
Polymers & Fluids
416

89

21.3
%
Construction Products
401

87

21.7
%
Specialty Products
465

123

26.5
%
Intersegment
(5
)

%
Total Segments
3,552

841

23.7
%
Unallocated

(2
)
%
Total Company
$
3,552

$
839

23.6
%







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

Q1 2019 vs. Q1 2018 Favorable/(Unfavorable)
Operating Revenue
Automotive OEM
Food Equipment
Test & Measurement and Electronics
Welding
Polymers & Fluids
Construction Products
Specialty Products
Total ITW
Organic
(6.4
)%
1.7
 %
(0.5
)%
2.8
 %
(0.8
)%
(1.4
)%
(1.5
)%
(1.5
)%
Acquisitions/Divestitures
 %
 %
 %
(0.5
)%
(0.9
)%
 %
 %
(0.2
)%
Translation
(4.1
)%
(3.4
)%
(3.1
)%
(1.3
)%
(4.3
)%
(4.9
)%
(2.8
)%
(3.4
)%
Operating Revenue
(10.5
)%
(1.7
)%
(3.6
)%
1.0
 %
(6.0
)%
(6.3
)%
(4.3
)%
(5.1
)%
Q1 2019 vs. Q1 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
 40 bps
 (10) bps
 60 bps
 (20) bps
 (40) bps
 (30) bps
 (30) bps
Changes in Variable Margin & OH Costs
 (60) bps
 70 bps
 100 bps
 (30) bps
 70 bps
 60 bps
 50 bps
Total Organic
 (160) bps
 110 bps
 90 bps
 30 bps
 50 bps
 20 bps
 (30) bps
 20 bps
Acquisitions/Divestitures
 10 bps
 10 bps
Restructuring/Other
 (190) bps
 (80) bps
 (20) bps
 (20) bps
 (70) bps
 10 bps
 (70) bps
Total Operating Margin Change
 (350) bps
 30 bps
 70 bps
 40 bps
 40 bps
 (50) bps
 (20) bps
 (50) bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
20.6%
24.9%
24.1%
28.1%
21.3%
21.7%
26.5%
23.6%
 
 
 
 
 
 
 
 
 
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
 50 bps
 70 bps
 260 bps
 30 bps
 360 bps
 40 bps
 110 bps
 130 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.10) on GAAP earnings per share for the first quarter 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

March 31,
Dollars in millions
2019
 
2018
Operating income
$
839

 
$
903

Tax rate
24.4
%
 
24.8
%
Income taxes
(205
)
 
(224
)
Operating income after taxes
$
634

 
$
679

 
 
 
 
Invested capital:
 
 
 

Trade receivables
$
2,715

 
$
2,874

Inventories
1,346

 
1,335

Net plant and equipment
1,765

 
1,829

Goodwill and intangible assets
5,665

 
6,021

Accounts payable and accrued expenses
(1,796
)
 
(1,905
)
Other, net
(509
)
 
(382
)
Total invested capital
$
9,186

 
$
9,772

 
 
 
 
Average invested capital
$
9,160

 
$
9,797

Adjusted return on average invested capital
27.7
%
 
27.7
%

A reconciliation of the first quarter 2018 effective tax rate excluding the first quarter discrete tax benefit related to foreign tax credits is as follows:
 
Three Months Ended
 
March 31, 2018
Dollars in millions
Income Taxes
 
Tax Rate
As reported
$
197

 
23.2
%
Discrete tax benefit
14

 
1.6
%
As adjusted
$
211

 
24.8
%









ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)


ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
In millions
Twelve Months Ended
December 31,
2018
Operating income
$
3,584

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 net discrete tax benefit is as follows:
 
Twelve Months Ended
 
December 31, 2018
In millions
Income Taxes
 
Tax Rate
As reported
$
831

 
24.5
%
Net discrete tax benefit
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
 
March 31,
In millions
2019
 
2018
Net cash provided by operating activities
$
616

 
$
538

Less: Additions to plant and equipment
(77
)
 
(94
)
Free cash flow
$
539

 
$
444

 
 
 
 
Net income
$
597

 
$
652

Free cash flow to net income conversion rate
90
%
 
68
%



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