ITW Illinois Tool Works Inc

Second-quarter highlights:

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

Second-quarter GAAP earnings were $1.69 per share, an increase of 16% versus the second quarter of 2016. Revenue grew 4.9% to $3.6 billion. Organic revenue increased 2.6% while the 2016 acquisition of Engineered Fasteners & Components (EF&C) added 3.5% to revenue. Foreign currency translation reduced revenue by 1.2%.

Operating income of $874 million for the second quarter was up 10% and was the highest quarterly income total in the company’s history. Operating margin for the quarter was 24.3%, an increase of 120 basis points. Excluding the margin impact from EF&C, operating margin was 24.9%, an increase of 180 basis points year-on-year with 100 basis points of structural margin improvement from Enterprise Initiatives. After-tax return on invested capital was 24.8%, an improvement of 190 basis points. Second-quarter net income was $587 million.

“Our second quarter performance reflects continued progress in our focus on leveraging ITW’s differentiated business model and diversified high-quality business portfolio to full potential,” said E. Scott Santi, Chairman and Chief Executive Officer. “I once again thank the entire ITW team for the great job that they continue to do in serving our customers and executing our strategy with excellence. Due to their efforts, ITW is well-positioned to continue to deliver differentiated performance through the balance of 2017 and beyond.”

Organic revenue growth was positive in six of seven segments: 4% in Automotive OEM, 4% in Test & Measurement/Electronics, 4% in Specialty Products, 3% in Welding, 2% in Construction Products, and 1% in Food Equipment. Polymers & Fluids was down 1%.

During the second quarter, the company recorded an EPS benefit of $0.03 per share related to a legal settlement. Excluding this item, second quarter earnings were $1.66 per share, an increase of 14% versus the prior year.

Full-Year and Third Quarter 2017 GuidanceAs a result of the company’s strong second quarter results, ITW is raising its 2017 full-year EPS guidance by $0.12 at the mid-point. The company now expects earnings to be in the range of $6.32 to $6.52 per share, up from prior guidance of $6.20 to $6.40 per share, with organic revenue growth of 2 to 4%. ITW expects operating margin of approximately 24% and free cash flow to exceed 100% of net income. The company expects an effective tax rate of approximately 29%.

For the third quarter 2017, the company expects earnings to be in the range of $1.57 to $1.67 per share with organic growth of 1 to 3%.

The company’s third quarter and revised full-year EPS guidance does not include any EPS benefit from the previously disclosed legal settlement beyond the $0.03 per share recorded in the second quarter.

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								Six Months Ended
	June 30,								June 30,
In millions except per share amounts	2017				2016				2017				2016
Operating Revenue	$	3,599			$	3,431			$	7,070			$	6,705
Cost of revenue	2,087				1,967				4,091				3,863
Selling, administrative, and research and development expenses	586				617				1,191				1,214
Amortization and impairment of intangible assets	52				55				105				114
Operating Income	874				792				1,683				1,514
Interest expense	(65		)		(58		)		(129		)		(116		)
Other income (expense)	10				17				14				21
Income Before Taxes	819				751				1,568				1,419
Income taxes	232				226				445				426
Net Income	$	587			$	525			$	1,123			$	993
Net Income Per Share:
Basic	$	1.70			$	1.47			$	3.25			$	2.76
Diluted	$	1.69			$	1.46			$	3.23			$	2.75
Cash Dividends Per Share:
Paid	$	0.65			$	0.55			$	1.30			$	1.10
Declared	$	0.65			$	0.55			$	1.30			$	1.10
Shares of Common Stock Outstanding During the Period:
Average	344.7				356.6				345.4				359.3
Average assuming dilution	347.5				358.5				348.3				361.2

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSTATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millions	June 30, 2017				December 31, 2016
Assets
Current Assets:
Cash and equivalents	$	2,496			$	2,472
Trade receivables	2,629				2,357
Inventories	1,199				1,076
Prepaid expenses and other current assets	246				218
Total current assets	6,570				6,123
Net plant and equipment	1,726				1,652
Goodwill	4,675				4,558
Intangible assets	1,366				1,463
Deferred income taxes	488				449
Other assets	1,097				956
	$	15,922			$	15,201
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt	$	691			$	652
Accounts payable	582				511
Accrued expenses	1,172				1,202
Cash dividends payable	224				226
Income taxes payable	157				169
Total current liabilities	2,826				2,760
Noncurrent Liabilities:
Long-term debt	7,360				7,177
Deferred income taxes	121				134
Other liabilities	841				871
Total noncurrent liabilities	8,322				8,182
Stockholders’ Equity:
Common stock	6				6
Additional paid-in-capital	1,196				1,188
Retained earnings	20,180				19,505
Common stock held in treasury	(15,095		)		(14,638		)
Accumulated other comprehensive income (loss)	(1,516		)		(1,807		)
Noncontrolling interest	3				5
Total stockholders’ equity	4,774				4,259
	$	15,922			$	15,201

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)
Three Months Ended June 30, 2017
Dollars in millions	TotalRevenue				OperatingIncome					OperatingMargin
Automotive OEM	$	820				$	182			22.3	%
Food Equipment	529				139					26.4	%
Test & Measurement and Electronics	519				114					21.9	%
Welding	385				105					27.2	%
Polymers & Fluids	437				94					21.4	%
Construction Products	425				102					24.0	%
Specialty Products	490				139					28.3	%
Intersegment	(6		)		—					—	%
Total Segments	3,599				875					24.3	%
Unallocated	—				(1			)		—	%
Total Company	$	3,599				$	874			24.3	%

Six Months Ended June 30, 2017
Dollars in millions	TotalRevenue				OperatingIncome				OperatingMargin
Automotive OEM	$	1,648			$	384			23.3	%
Food Equipment	1,026				264				25.8	%
Test & Measurement and Electronics	999				210				21.0	%
Welding	772				212				27.4	%
Polymers & Fluids	863				182				21.0	%
Construction Products	820				191				23.3	%
Specialty Products	953				263				27.6	%
Intersegment	(11		)		—				—	%
Total Segments	7,070				1,706				24.1	%
Unallocated	—				(23		)		—	%
Total Company	$	7,070			$	1,683			23.8	%

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)
Q2 2017 vs. Q2 2016 Favorable/(Unfavorable)
Operating Revenue	AutomotiveOEM			FoodEquipment			Test &Measurementand Electronics			Welding			Polymers &Fluids			ConstructionProducts			SpecialtyProducts			TotalITW
Organic	4.4	%		0.6	%		4.3	%		3.3	%		(1.0	)%		1.6	%		3.9	%		2.6	%
Acquisitions/Divestitures	19.0	%		—	%		—	%		—	%		—	%		—	%		(1.4	)%		3.5	%
Translation	(1.2	)%		(2.0	)%		(1.8	)%		(0.4	)%		(0.3	)%		(1.2	)%		(1.4	)%		(1.2	)%
Operating Revenue	22.2	%		(1.4	)%		2.5	%		2.9	%		(1.3	)%		0.4	%		1.1	%		4.9	%

Q2 2017 vs. Q2 2016 Favorable/(Unfavorable)

Change in Operating Margin

AutomotiveOEM

FoodEquipment

Test &Measurementand Electronics

Welding

Polymers &Fluids

ConstructionProducts

SpecialtyProducts

TotalITW

Operating Leverage

70 bps

10 bps

120 bps

60 bps

(20) bps

40 bps

80 bps

50 bps

Changes in Variable Margin & OH Costs

(70) bps

90 bps

200 bps

10 bps

100 bps

(140) bps

100 bps

110 bps

Total Organic

—

100 bps

320 bps

70 bps

80 bps

(100) bps

180 bps

160 bps

Acquisitions/Divestitures

(270) bps

—

—

—

—

—

30 bps

(60) bps

Restructuring/Other

(80) bps

40 bps

10 bps

160 bps

(30) bps

70 bps

20 bps

20 bps

Total Operating Margin Change

(350) bps

140 bps

330 bps

230 bps

50 bps

(30) bps

230 bps

120 bps

Total Operating Margin % *

22.3

%

26.4

%

21.9

%

27.2

%

21.4

%

24.0

%

28.3

%

24.3

%

*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets

50 bps

80 bps

320 bps

40 bps

400 bps

60 bps

120 bps

150 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.10) on GAAP net income diluted earnings per share for the second quarter of 2017.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSEGMENT DATA (UNAUDITED)
1H 2017 vs 1H 2016 Favorable/(Unfavorable)
Operating Revenue	AutomotiveOEM			FoodEquipment			Test &Measurementand Electronics			Welding			Polymers& Fluids			ConstructionProducts			SpecialtyProducts			TotalITW
Organic	6.7	%		1.3	%		4.9	%		1.5	%		0.2	%		2.2	%		2.4	%		3.0	%
Acquisitions/Divestitures	19.2	%		—	%		—	%		—	%		—	%		—	%		(1.1	)%		3.6	%
Translation	(1.7	)%		(2.2	)%		(2.0	)%		(0.4	)%		0.1	%		(0.7	)%		(1.3	)%		(1.2	)%
Operating Revenue	24.2	%		(0.9	)%		2.9	%		1.1	%		0.3	%		1.5	%		—	%		5.4	%

1H 2017 vs. 1H 2016 Favorable/(Unfavorable)

Change in Operating Margin

AutomotiveOEM

FoodEquipment

Test &Measurementand Electronics

Welding

Polymers& Fluids

ConstructionProducts

SpecialtyProducts

TotalITW

Operating Leverage

90 bps

20 bps

140 bps

40 bps

—

50 bps

60 bps

60 bps

Changes in Variable Margin & OH Costs

(50) bps

40 bps

250 bps

110 bps

110 bps

(20) bps

90 bps

110 bps

Total Organic

40 bps

60 bps

390 bps

150 bps

110 bps

30 bps

150 bps

170 bps

Acquisitions/Divestitures

(270) bps

—

—

—

—

—

30 bps

(60) bps

Restructuring/Other

(50) bps

40 bps

—

150 bps

(70) bps

20 bps

(20) bps

10 bps

Total Operating Margin Change

(280) bps

100 bps

390 bps

300 bps

40 bps

50 bps

160 bps

120 bps

Total Operating Margin % *

23.3

%

25.8

%

21.0

%

27.4

%

21.0

%

23.3

%

27.6

%

23.8

%

*Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets

60 bps

80 bps

340 bps

50 bps

410 bps

60 bps

130 bps

150 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.21) on GAAP net income diluted earnings per share for the first half of 2017.

Full Year 2016 vs Full Year 2015 Favorable/(Unfavorable)
Operating Revenue	AutomotiveOEM			FoodEquipment			Test &Measurementand Electronics			Welding			Polymers& Fluids			ConstructionProducts			SpecialtyProducts			TotalITW
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 SUBSIDIARIESGAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
	Three Months Ended								Six Months Ended								Twelve Months Ended
	June 30,								June 30,								December 31,
Dollars in millions	2017				2016				2017				2016				2016
Operating income	$	874			$	792			$	1,683			$	1,514			$	3,064
Tax rate	28.4		%		30.0		%		28.4		%		30.0		%		30.0		%
Income taxes	(248		)		(238		)		(477		)		(454		)		(919		)
Operating income after taxes	$	626			$	554			$	1,206			$	1,060			$	2,145
Invested capital:
Trade receivables	$	2,629			$	2,413			$	2,629			$	2,413			$	2,357
Inventories	1,199				1,145				1,199				1,145				1,076
Net plant and equipment	1,726				1,580				1,726				1,580				1,652
Goodwill and intangible assets	6,041				5,907				6,041				5,907				6,021
Accounts payable and accrued expenses	(1,754		)		(1,635		)		(1,754		)		(1,635		)		(1,713		)
Other, net	488				349				488				349				223
Total invested capital	$	10,329			$	9,759			$	10,329			$	9,759			$	9,616
Average invested capital	$	10,105			$	9,768			$	9,942			$	9,698			$	9,780
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)	—				(112		)		—				(112		)		(91		)
Adjusted average invested capital	$	10,105			$	9,656			$	9,942			$	9,586			$	9,689
Adjusted return on average invested capital	24.8		%		22.9		%		24.3		%		22.1		%		22.1		%

ILLINOIS TOOL WORKS INC. and SUBSIDIARIESGAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
FREE CASH FLOW (UNAUDITED)
	Three Months Ended								Six Months Ended
	June 30,								June 30,
Dollars in millions	2017				2016				2017				2016
Net cash provided by operating activities	$	464			$	535			$	927			$	1,014
Less: Additions to plant and equipment	(77		)		(64		)		(141		)		(121		)
Free cash flow	$	387			$	471			$	786			$	893
Net income	$	587			$	525			$	1,123			$	993
Free cash flow to net income conversion rate	66		%	*	90		%		70		%	*	90		%
*  Excluding $115 million related to an additional discretionary pension contribution, the free cash flow to net income conversion rate for the three months ended June 30, 2017 would have been 85%. Excluding $160 million of discretionary pension contributions for the six months ended June 30, 2017 as compared to the prior year period, the free cash flow to net income conversion rate would have been 84%.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Dollars in millions	2017				2017
Free cash flow	$	387			$	786
Pension contribution adjustment	115				160
Adjusted free cash flow	$	502			$	946
Net income	$	587			$	1,123
Adjusted free cash flow to net income conversion rate	85		%		84		%

Contact: Mike Drazin 224.661.7433 or mdrazin@itw.com