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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): July 26, 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.)

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 (see General Instruction A.2. below):
[ ]
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) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2).

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 July 26, 2019, Illinois Tool Works Inc. (the “Company”) announced its 2019 second 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 2018 discrete tax benefit of $14 million related to foreign tax credits from the effective tax rate for the six months ended June 30, 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: July 26, 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 Reports Second Quarter 2019 Results


GLENVIEW, IL., July 26, 2019 - Illinois Tool Works Inc. (NYSE: ITW) today reported its second-quarter 2019 results including GAAP earnings per share (EPS) of $1.91 compared to $1.97 in the second quarter of 2018. Revenue of $3.6 billion was down 5.8 percent with organic revenue down 2.8 percent and unfavorable foreign currency translation impact of 2.7 percent. Operating margin was 24.1 percent.

“In the second quarter, we experienced a deceleration in demand across our portfolio relative to the demand levels we were seeing exiting the first quarter. On a sequential basis, second quarter organic revenue declined approximately two percentage points versus first quarter run rates,” said E. Scott Santi, Chairman and Chief Executive Officer.

“In this more challenging demand environment, the ITW team executed well on the elements within our own control and delivered solid financial results. Operating margin improved year-over-year to 24.4 percent, excluding higher restructuring impact of 30 basis points, as enterprise initiatives contributed 110 basis points. The combination of unfavorable foreign currency translation, higher restructuring expenses and a small loss on two divestitures reduced EPS by $0.09 year-over-year. Excluding these three items, EPS would have increased two percent to $2.00. Free cash flow increased 14 percent year-on-year.”

“We are updating our full year guidance to reflect current levels of demand. All other assumptions remain essentially unchanged. We continue to expect a stronger second half on a relative basis, as known headwinds from foreign currency and higher restructuring expenses dissipate. We expect continued strong contributions from enterprise initiatives, positive price/cost margin dynamics, and strong free cash flow as we progress through the balance of the year. While we will be prudent in making appropriate adjustments due to the near-term demand environment, we remain focused on managing and investing to maximize ITW’s performance over the long term. The highly differentiated nature of ITW’s core competitive advantages and the strength and resilience of our proprietary business model and diversified portfolio position us well for strong financial performance across a wide range of economic scenarios,” Santi concluded.

Revenue of $3.6 billion was down 5.8 percent with organic revenue down 2.8 percent, unfavorable foreign currency translation impact of 2.7 percent, and divestiture impact of 0.3 percent. As expected, the company’s ongoing Product Line Simplification (PLS) activities reduced organic growth by 70 basis points.

Operating margin was 24.1 percent. Excluding 30 basis points of unfavorable margin impact from higher year-over-year restructuring expenses, operating margin improved 10 basis points to 24.4 percent. Free Cash Flow increased 14 percent and the company repurchased $375 million of its own shares. After-tax return on invested capital was 28.6 percent.

2019 Full-Year Guidance
Current levels of demand, adjusted for normal seasonality, project full year organic revenue to be down one to three percent. As a result, the company is updating its full year GAAP EPS guidance to a range of $7.55 to $7.85, which includes approximately $0.25 of headwind from foreign currency translation and higher restructuring expenses. Operating margin is forecast to be flat to up 50 basis points, largely due to strong contributions from enterprise initiatives of 100 basis points, partially offset by 25 basis points of higher restructuring expenses. 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. The effective tax rate for the full year is expected to be in the range of 24 to 25 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
 
Six Months Ended
 
June 30,
 
June 30,
In millions except per share amounts
2019
 
2018
 
2019
 
2018
Operating Revenue
$
3,609

 
$
3,831

 
$
7,161

 
$
7,575

Cost of revenue
2,099

 
2,231

 
4,158

 
4,412

Selling, administrative, and research and development expenses
598

 
620

 
1,209

 
1,232

Amortization and impairment of intangible assets
41

 
48

 
84

 
96

Operating Income
871

 
932

 
1,710

 
1,835

Interest expense
(55
)
 
(64
)
 
(118
)
 
(130
)
Other income (expense)
9

 
26

 
23

 
38

Income Before Taxes
825

 
894

 
1,615

 
1,743

Income Taxes
202

 
228

 
395

 
425

Net Income
$
623

 
$
666

 
$
1,220

 
$
1,318

 
 
 
 
 
 
 
 
Net Income Per Share:
 
 
 
 
 
 
 
Basic
$
1.92

 
$
1.98

 
$
3.74

 
$
3.90

Diluted
$
1.91

 
$
1.97

 
$
3.72

 
$
3.87

 
 
 
 
 
 
 
 
Cash Dividends Per Share:
 
 
 
 
 
 
 
Paid
$
1.00

 
$
0.78

 
$
2.00

 
$
1.56

Declared
$
1.00

 
$
0.78

 
$
2.00

 
$
1.56

 
 
 
 
 
 
 
 
Shares of Common Stock Outstanding During the Period:
 
 
 
 
 
 
 
Average
324.8

 
336.7

 
326.0

 
338.5

Average assuming dilution
326.6

 
338.9

 
327.9

 
340.8







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

In millions
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current Assets:
 
 
 
Cash and equivalents
$
1,677

 
$
1,504

Trade receivables
2,629

 
2,622

Inventories
1,256

 
1,318

Prepaid expenses and other current assets
288

 
334

Assets held for sale
439

 

Total current assets
6,289

 
5,778

 
 
 
 
Net plant and equipment
1,717

 
1,791

Goodwill
4,503

 
4,633

Intangible assets
928

 
1,084

Deferred income taxes
516

 
554

Other assets
1,234

 
1,030

 
$
15,187

 
$
14,870

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

 
$
1,351

Accounts payable
512

 
524

Accrued expenses
1,207

 
1,271

Cash dividends payable
323

 
328

Income taxes payable
53

 
68

Liabilities held for sale
93

 

Total current liabilities
2,188

 
3,542

 
 
 
 
Noncurrent Liabilities:
 
 
 
Long-term debt
7,809

 
6,029

Deferred income taxes
683

 
707

Noncurrent income taxes payable
462

 
495

Other liabilities
950

 
839

Total noncurrent liabilities
9,904

 
8,070

 
 
 
 
Stockholders’ Equity:
 
 
 
Common stock
6

 
6

Additional paid-in-capital
1,270

 
1,253

Retained earnings
21,788

 
21,217

Common stock held in treasury
(18,276
)
 
(17,545
)
Accumulated other comprehensive income (loss)
(1,697
)
 
(1,677
)
Noncontrolling interest
4

 
4

Total stockholders’ equity
3,095

 
3,258

 
$
15,187

 
$
14,870







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


Three Months Ended June 30, 2019
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
788

$
174

22.1
%
Food Equipment
548

140

25.6
%
Test & Measurement and Electronics
533

131

24.5
%
Welding
422

122

28.8
%
Polymers & Fluids
427

97

22.8
%
Construction Products
424

106

25.0
%
Specialty Products
473

124

26.1
%
Intersegment
(6
)

%
Total Segments
3,609

894

24.8
%
Unallocated

(23
)
%
Total Company
$
3,609

$
871

24.1
%

Six Months Ended June 30, 2019
Dollars in millions
Total Revenue
Operating Income
Operating Margin
Automotive OEM
$
1,594

$
341

21.4
%
Food Equipment
1,066

269

25.3
%
Test & Measurement and Electronics
1,057

257

24.3
%
Welding
849

242

28.5
%
Polymers & Fluids
843

186

22.1
%
Construction Products
825

193

23.4
%
Specialty Products
938

247

26.3
%
Intersegment
(11
)

%
Total Segments
7,161

1,735

24.2
%
Unallocated

(25
)
%
Total Company
$
7,161

$
1,710

23.9
%







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

Q2 2019 vs. Q2 2018 Favorable/(Unfavorable)
Operating Revenue
Automotive OEM
Food Equipment
Test & Measurement and Electronics
Welding
Polymers & Fluids
Construction Products
Specialty Products
Total ITW
Organic
(7.1
)%
1.7
 %
(1.3
)%
(2.4
)%
0.1
 %
(0.7
)%
(6.4
)%
(2.8
)%
Acquisitions/Divestitures
 %
 %
 %
(0.8
)%
(0.8
)%
 %
(0.8
)%
(0.3
)%
Translation
(3.3
)%
(2.7
)%
(2.3
)%
(1.0
)%
(3.2
)%
(3.8
)%
(2.1
)%
(2.7
)%
Operating Revenue
(10.4
)%
(1.0
)%
(3.6
)%
(4.2
)%
(3.9
)%
(4.5
)%
(9.3
)%
(5.8
)%
Q2 2019 vs. Q2 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
 (120) bps
 40 bps
 (40) bps
 (40) bps
 10 bps
 (20) bps
 (130) bps
 (60) bps
Changes in Variable Margin & OH Costs
 90 bps
 90 bps
 10 bps
 170 bps
 60 bps
 (50) bps
 60 bps
Total Organic
 (30) bps
 40 bps
 50 bps
 (30) bps
 180 bps
 40 bps
 (180) bps
Acquisitions/Divestitures
 20 bps
 20 bps
 30 bps
 10 bps
Restructuring/Other
 (10) bps
 (20) bps
 50 bps
 (40) bps
 (40) bps
 10 bps
 (50) bps
 (30) bps
Total Operating Margin Change
 (40) bps
 20 bps
 100 bps
 (50) bps
 160 bps
 50 bps
 (200) bps
 (20) bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
22.1%
25.6%
24.5%
28.8%
22.8%
25.0%
26.1%
24.1%
 
 
 
 
 
 
 
 
 
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
 50 bps
 70 bps
 220 bps
 30 bps
 350 bps
 30 bps
 100 bps
 120 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.09) on GAAP earnings per share for the second quarter of 2019.
 







1H 2019 vs 1H 2018 Favorable/(Unfavorable)
Operating Revenue
Automotive OEM
Food Equipment
Test & Measurement and Electronics
Welding
Polymers & Fluids
Construction Products
Specialty Products
Total ITW
Organic
(6.7
)%
1.7
 %
(0.9
)%
0.2
 %
(0.4
)%
(1.0
)%
(4.1
)%
(2.2
)%
Acquisitions/Divestitures
 %
 %
 %
(0.7
)%
(0.9
)%
 %
(0.4
)%
(0.2
)%
Translation
(3.7
)%
(3.0
)%
(2.7
)%
(1.1
)%
(3.7
)%
(4.4
)%
(2.4
)%
(3.1
)%
Operating Revenue
(10.4
)%
(1.3
)%
(3.6
)%
(1.6
)%
(5.0
)%
(5.4
)%
(6.9
)%
(5.5
)%

1H 2019 vs. 1H 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
 (110) bps
 40 bps
 (30) bps
 10 bps
 (10) bps
 (10) bps
 (90) bps
 (40) bps
Changes in Variable Margin & OH Costs
 20 bps
 40 bps
 100 bps
 (10) bps
 120 bps
 50 bps
 (10) bps
 50 bps
Total Organic
 (90) bps
 80 bps
 70 bps
 110 bps
 40 bps
 (100) bps
 10 bps
Acquisitions/Divestitures
 20 bps
 20 bps
 20 bps
 10 bps
Restructuring/Other
 (100) bps
 (50) bps
 10 bps
 (20) bps
 (30) bps
 (30) bps
 (30) bps
 (50) bps
Total Operating Margin Change
 (190) bps
 30 bps
 80 bps
 100 bps
 10 bps
 (110) bps
 (30) bps
 
 
 
 
 
 
 
 
 
Total Operating Margin % *
21.4%
25.3%
24.3%
28.5%
22.1%
23.4%
26.3%
23.9%
 
 
 
 
 
 
 
 
 
*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets
 50 bps
 70 bps
 240 bps
 20 bps
 350 bps
 30 bps
 100 bps
 120 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.19) on GAAP earnings per share for the first half 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
 
Six Months Ended

June 30,
 
June 30,
Dollars in millions
2019
 
2018
 
2019
 
2018
Operating income
$
871

 
$
932

 
$
1,710

 
$
1,835

Tax rate
24.5
%
 
25.5
%
 
24.5
%
 
25.2
%
Income taxes
(213
)
 
(238
)
 
(418
)
 
(462
)
Operating income after taxes
$
658

 
$
694

 
$
1,292

 
$
1,373

 
 
 
 
 
 
 
 
Invested capital:
 
 
 

 
 
 
 

Trade receivables
$
2,629

 
$
2,878

 
$
2,629

 
$
2,878

Inventories
1,256

 
1,320

 
1,256

 
1,320

Net assets held for sale
346

 

 
346

 

Net plant and equipment
1,717

 
1,783

 
1,717

 
1,783

Goodwill and intangible assets
5,431

 
5,852

 
5,431

 
5,852

Accounts payable and accrued expenses
(1,719
)
 
(1,847
)
 
(1,719
)
 
(1,847
)
Other, net
(433
)
 
(407
)
 
(433
)
 
(407
)
Total invested capital
$
9,227

 
$
9,579

 
$
9,227

 
$
9,579

 
 
 
 
 
 
 
 
Average invested capital
$
9,206

 
$
9,675

 
$
9,182

 
$
9,724

Adjusted return on average invested capital
28.6
%
 
28.7
%
 
28.1
%
 
28.2
%

A reconciliation of the tax rate for the six month period ended June 30, 2018 excluding the first quarter 2018 discrete tax benefit related to foreign tax credits is as follows:
 
Six Months Ended
 
June 30, 2018
Dollars in millions
Income Taxes
 
Tax Rate
As reported
$
425

 
24.4
%
Discrete tax benefit
14

 
0.8
%
As adjusted
$
439

 
25.2
%





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


ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
Dollars 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
Dollars 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
 
Six Months Ended
 
June 30,
 
June 30,
Dollars in millions
2019

2018
 
2019
 
2018
Net cash provided by operating activities
$
685

 
$
620

 
$
1,301

 
$
1,158

Less: Additions to plant and equipment
(77
)
 
(87
)
 
(154
)
 
(181
)
Free cash flow
$
608

 
$
533

 
$
1,147

 
$
977

 
 
 
 
 
 
 
 
Net income
$
623

 
$
666

 
$
1,220

 
$
1,318

Free cash flow to net income conversion rate
98
%
 
80
%
 
94
%
 
74
%


ADJUSTED NET INCOME PER SHARE - DILUTED (UNAUDITED)

 
Three Months Ended
 
June 30, 2019
As reported
$
1.91

Foreign currency translation
0.06

Higher restructuring expenses
0.02

Loss on divestitures
0.01

As adjusted
$
2.00




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