10-QPeriod: Q1 FY2016

ILLINOIS TOOL WORKS INC Quarterly Report for Q1 Ended Mar 31, 2016

Filed May 6, 2016For Securities:ITW

Summary

Illinois Tool Works Inc. (ITW) reported solid first-quarter 2016 results, demonstrating resilience in challenging market conditions and headwinds from foreign currency translation. The company achieved an increased operating income of $722 million, up 3.7% year-over-year, and a record operating margin of 22.1%. Diluted EPS rose by 6.6% to $1.29. This performance was driven by the continued successful execution of ITW's enterprise strategy, focusing on organic growth and leveraging its differentiated business model, including the 80/20 management process and customer-back innovation. The company also highlighted strong free cash flow generation of $422 million and continued capital returns to shareholders through dividends and a significant share repurchase program. Despite a slight decrease in total operating revenue, down 2.0% to $3,274 million, the underlying organic revenue growth was positive at 0.7%, driven by consumer-facing businesses. The company is strategically shifting its growth engine towards organic expansion and enhancing profitability through its business model, with management expecting approximately 85% of its businesses to be ready to grow by the end of 2016.

Financial Highlights

50 data points
Beta

Revenue

$3.27B

42.1% Gross Margin

Net Income

$468.00M

14.3% Net Margin

EPS (Diluted)

$1.29

Total Assets

$15.44B

Cash & Equivalents

$2.45B

Free Cash Flow

$422.00M

Financial Statements
Beta
Revenue$3.27B
Cost of Revenue$1.90B
Gross Profit$1.38B
Operating Income$722.00M
Interest Expense$58.00M
Net Income$468.00M
EPS (Basic)$1.29
EPS (Diluted)$1.29
Shares Outstanding (Basic)362.00M
Shares Outstanding (Diluted)363.90M

Key Highlights

  • 1Consolidated operating revenue decreased by 2.0% to $3,274 million, largely due to unfavorable foreign currency translation, but organic revenue grew by 0.7%.
  • 2Operating income increased by 3.7% to $722 million, and the operating margin reached a record 22.1%, up 120 basis points, driven by enterprise initiatives and favorable price/cost.
  • 3Diluted Earnings Per Share (EPS) grew by 6.6% to $1.29, with organic EPS growth (excluding currency impacts) being 9.9%.
  • 4Free cash flow was strong at $422 million, a significant increase from $359 million in the prior year, supporting capital allocation priorities.
  • 5The company repurchased approximately $500 million of its common stock in the quarter, demonstrating a commitment to returning capital to shareholders.
  • 6Segment performance was mixed, with Automotive OEM, Food Equipment, Construction Products, and Specialty Products showing organic revenue growth, while Welding and Test & Measurement/Electronics faced headwinds.

Frequently Asked Questions

The primary driver for the decrease in total operating revenue was the unfavorable impact of foreign currency translation. While consolidated revenue declined by 2.0%, organic revenue, which excludes the effects of currency fluctuations and acquisitions/divestitures, actually grew by 0.7%.

ITW's enterprise initiatives were a significant contributor to the record operating margin of 22.1%. These initiatives, focused on leveraging the ITW Business Model and operational excellence, contributed 130 basis points to the margin improvement in the first quarter.

ITW's enterprise strategy focuses on shifting its primary growth engine to organic growth. The company is progressing by simplifying its business portfolio, scaling up its operating structure, and reapplying its 80/20 management process. Management expects approximately 85% of its businesses to be ready to grow by the end of 2016.

The company repurchased approximately $500 million of its common stock in the first quarter of 2016. This activity, along with other uses of cash, contributed to a decrease in cash and equivalents from $3.09 billion at the end of 2015 to $2.45 billion at the end of the first quarter of 2016. The company maintains strong access to credit facilities and believes its liquidity sources are sufficient.