ITW Illinois Tool Works Inc

First-quarter highlights:

Illinois Tool Works Inc. (NYSE:ITW) today reported its first-quarter 2017 results.

First-quarter GAAP earnings were $1.54 per share, an increase of 19% versus the first quarter of 2016. Excluding the impact of foreign currency translation, EPS grew 21% year-on-year.  Revenue grew 6.0% to $3.5 billion. Organic revenue increased 3.5% while the 2016 acquisition of Engineered Fasteners & Components (EF&C) added 3.8% to revenue. Foreign currency translation reduced revenue by 1.3%.

“Our record results in the first quarter reflect strong execution across the company and further progress in our efforts to leverage ITW’s highly differentiated and proprietary business model to drive solid growth with best-in-class margins and returns,” said E. Scott Santi, Chairman and Chief Executive Officer. “We are off to a strong start in 2017 and the company is well-positioned to deliver continued progress and differentiated performance through the balance of 2017 and beyond.”

Operating income was $809 million, an increase of 12%, and operating margin for the quarter was 23.3%, an increase of 120 basis points. Excluding the margin impact from the 2016 acquisition of EF&C, operating margin was 23.8%, an increase of 170 basis points year-on-year with 100 basis points of structural margin improvement from Enterprise Initiatives. After-tax return on invested capital was 23.8%, an improvement of 260 basis points. First-quarter net income was $536 million.

Organic revenue growth was positive in six of seven segments: 9% in Automotive OEM, 6% in Test & Measurement/Electronics, 3% in Construction Products, 2% in Food Equipment and Polymers & Fluids and 1% in Specialty Products. Welding was flat.

Effective January 1, 2017 the company adopted FASB guidance that requires that the income tax effects associated with the settlement of stock-based awards be recognized through income tax expense rather than equity. The first-quarter effective tax rate was 28.3%, in line with company expectations.

Full-Year and Second Quarter 2017 GuidanceAs a result of the company’s strong Q1 results, ITW is raising its 2017 full-year guidance. The company now expects earnings to be in the range of $6.20 to $6.40 per share, up from prior guidance of $6.00 to $6.20 per share, with organic growth of 2 to 4%, up from 1.5 to 3.5%. ITW expects operating margin to exceed 23.5% and free cash flow to exceed 100% of net income. The company now expects an effective tax rate of approximately 29%, down from prior guidance of 29 to 30%, resulting in an EPS benefit of $0.04 per share.

For the second quarter 2017, the company expects earnings to be in the range of $1.55 to $1.65 per share with organic growth of 2 to 4%.

Non-GAAP MeasuresThis 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 StatementThis 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 ITWITW (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 SUBSIDIARIESSTATEMENT OF INCOME (UNAUDITED)
	Three Months Ended
	March 31,
In millions except per share amounts	2017				2016
Operating Revenue	$	3,471			$	3,274
Cost of revenue	2,004				1,896
Selling, administrative, and research and development expenses	605				597
Amortization and impairment of intangible assets	53				59
Operating Income	809				722
Interest expense	(64		)		(58		)
Other income (expense)	4				4
Income Before Taxes	749				668
Income taxes	213				200
Net Income	$	536			$	468
Net Income Per Share:
Basic	$	1.55			$	1.29
Diluted	$	1.54			$	1.29
Cash Dividends Per Share:
Paid	$	0.65			$	0.55
Declared	$	0.65			$	0.55
Shares of Common Stock Outstanding During the Period:
Average	346.2				362.0
Average assuming dilution	349.0				363.9

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSTATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millions	March 31, 2017				December 31, 2016
Assets
Current Assets:
Cash and equivalents	$	2,493			$	2,472
Trade receivables	2,534				2,357
Inventories	1,158				1,076
Prepaid expenses and other current assets	245				218
Total current assets	6,430				6,123
Net plant and equipment	1,674				1,652
Goodwill	4,605				4,558
Intangible assets	1,411				1,463
Deferred income taxes	425				449
Other assets	984				956
	$	15,529			$	15,201
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt	$	671			$	652
Accounts payable	574				511
Accrued expenses	1,149				1,202
Cash dividends payable	225				226
Income taxes payable	256				169
Total current liabilities	2,875				2,760
Noncurrent Liabilities:
Long-term debt	7,205				7,177
Deferred income taxes	121				134
Other liabilities	830				871
Total noncurrent liabilities	8,156				8,182
Stockholders’ Equity:
Common stock	6				6
Additional paid-in-capital	1,184				1,188
Retained earnings	19,817				19,505
Common stock held in treasury	(14,871		)		(14,638		)
Accumulated other comprehensive income (loss)	(1,643		)		(1,807		)
Noncontrolling interest	5				5
Total stockholders’ equity	4,498				4,259
	$	15,529			$	15,201

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)
Three Months Ended March 31, 2017
Dollars in millions	TotalRevenue				OperatingIncome				OperatingMargin
Automotive OEM	$	828			$	202			24.4%
Food Equipment	497				125				25.1%
Test & Measurement and Electronics	480				96				20.0%
Welding	387				107				27.7%
Polymers & Fluids	426				88				20.6%
Construction Products	395				89				22.5%
Specialty Products	463				124				26.9%
Intersegment	(5		)		—				—%
Total Segments	3,471				831				23.9%
Unallocated	—				(22		)		—%
Total Company	$	3,471			$	809			23.3%

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)
Q1 2017 vs. Q1 2016 Favorable/(Unfavorable)
Operating Revenue		AutomotiveOEM		FoodEquipment		Test &Measurementand Electronics		Welding		Polymers &Fluids		ConstructionProducts		SpecialtyProducts		TotalITW
Organic		9.0%		2.0%		5.5%		(0.3)%		1.5%		2.9%		0.8%		3.5%
Acquisitions/Divestitures		19.4%		—%		—%		—%		—%		—%		(0.7)%		3.8%
Translation		(2.1)%		(2.4)%		(2.0)%		(0.3)%		0.5%		(0.2)%		(1.3)%		(1.3)%
Operating Revenue		26.3%		(0.4)%		3.5%		(0.6)%		2.0%		2.7%		(1.2)%		6.0%

Q1 2017 vs. Q1 2016 Favorable/(Unfavorable)

Change in OperatingMargin

AutomotiveOEM

FoodEquipment

Test &Measurementand Electronics

Welding

Polymers &Fluids

ConstructionProducts

SpecialtyProducts

TotalITW

Operating Leverage

120 bps

50 bps

170 bps

—

40 bps

80 bps

10 bps

80 bps

Changes in VariableMargin & OH Costs

(30) bps

(30) bps

290 bps

220 bps

100 bps

120 bps

80 bps

90 bps

Total Organic

90 bps

20 bps

460 bps

220 bps

140 bps

200 bps

90 bps

170 bps

Acquisitions/Divestitures

(260) bps

—

—

—

—

—

40 bps

(50) bps

Restructuring/Other

(30) bps

40 bps

(10) bps

160 bps

(100) bps

(50) bps

(50) bps

—

Total OperatingMargin Change

(200) bps

60 bps

450 bps

380 bps

40 bps

150 bps

80 bps

120 bps

Total OperatingMargin % *

24.4%

25.1%

20.0%

27.7%

20.6%

22.5%

26.9%

23.3%

*Includes unfavorableoperating marginimpact ofamortization expensefrom acquisition-related intangibleassets

50 bps

80 bps

350 bps

50 bps

420 bps

60 bps

140 bps

160 bps

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESGAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
	Three Months Ended								TwelveMonths Ended
	March 31,								December 31,
Dollars in millions	2017				2016				2016
Operating income	$	809			$	722			$	3,064
Tax rate	28.3		%		30.0		%		30.0		%
Income taxes	(229		)		(216		)		(919		)
Operating income after taxes	$	580			$	506			$	2,145
Invested capital:
Trade receivables	$	2,534			$	2,394			$	2,357
Inventories	1,158				1,134				1,076
Net plant and equipment	1,674				1,598				1,652
Goodwill and intangible assets	6,016				6,005				6,021
Accounts payable and accrued expenses	(1,723		)		(1,611		)		(1,713		)
Other, net	222				257				223
Total invested capital	$	9,881			$	9,777			$	9,616
Average invested capital	$	9,748			$	9,668			$	9,780
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)	—				(111		)		(91		)
Adjusted average invested capital	$	9,748			$	9,557			$	9,689
Adjusted return on average invested capital	23.8		%		21.2		%		22.1		%

FREE CASH FLOW (UNAUDITED)
	Three Months Ended
	March 31,
Dollars in millions	2017				2016
Net cash provided by operating activities	$	463			$	479
Less: Additions to plant and equipment	(64		)		(57		)
Free cash flow	$	399			$	422
Net income	$	536			$	468
Free cash flow to net income conversion rate	74		%	*	90		%

*  Excluding $87 million related to the timing of payments for income taxes and pension contributions, the free cash flow to net income conversion rate for the three months ended March 31, 2017 would have been 91%.

Contact: Mike Drazin 224.661.7433 or mdrazin@itw.com