10-QPeriod: Q3 FY2018

ILLINOIS TOOL WORKS INC Quarterly Report for Q3 Ended Sep 30, 2018

Filed November 1, 2018For Securities:ITW

Summary

Illinois Tool Works Inc. (ITW) reported stable operating revenue of $3.61 billion for the third quarter ending September 30, 2018, mirroring the prior year's performance. While overall revenue was flat, the company saw positive organic revenue growth of 1.5%, driven by gains in key segments like Welding and Test & Measurement and Electronics, partially offset by unfavorable foreign currency translations and softness in some international markets. The company's focus on its differentiated ITW Business Model, including its 80/20 process and customer-back innovation, continues to yield strong operating margins, although the reported operating income saw a decrease primarily due to a significant legal settlement benefit in the prior year. Despite a slight decline in operating income year-over-year, excluding the prior year's settlement, ITW demonstrated solid performance with EPS growth of 11.4% for the quarter. The company continued its strong commitment to capital allocation, repurchasing $500 million in stock and increasing its dividend. ITW's financial position remains robust, supported by significant free cash flow generation of $743 million for the quarter. Management highlighted continued execution of enterprise initiatives and a disciplined investment strategy, while also acknowledging global economic uncertainties and the potential impact of tariffs.

Financial Highlights

52 data points
Beta

Revenue

$3.61B

42.0% Gross Margin

Net Income

$638.00M

17.7% Net Margin

EPS (Diluted)

$1.90

Total Assets

$15.32B

Cash & Equivalents

$1.59B

Free Cash Flow

$743.00M

Financial Statements
Beta
Revenue$3.61B
Cost of Revenue$2.10B
Gross Profit$1.52B
Operating Income$889.00M
Interest Expense$64.00M
Net Income$638.00M
EPS (Basic)$1.91
EPS (Diluted)$1.90
Shares Outstanding (Basic)333.30M
Shares Outstanding (Diluted)335.30M

Key Highlights

  • 1Third-quarter operating revenue remained stable at $3.61 billion, with organic revenue growing by 1.5%.
  • 2Operating income decreased by 7.4% to $889 million, largely due to the absence of a $80 million legal settlement benefit recorded in the prior year's third quarter.
  • 3Diluted EPS increased by 2.7% to $1.90, or 11.4% excluding the prior year's settlement impact.
  • 4The company generated $743 million in free cash flow for the quarter, demonstrating strong cash generation capabilities.
  • 5ITW returned significant capital to shareholders, repurchasing $500 million of stock and increasing its quarterly dividend by 28.2%.
  • 6Operating margins across segments remained strong, with all segments above 21% in the third quarter.
  • 7The company's effective tax rate decreased to 23.7% from 29.3% in the prior year's quarter, benefiting from the lower U.S. corporate federal tax rate.

Frequently Asked Questions

The primary driver for the decrease in operating income was the absence of a significant $80 million favorable pre-tax impact from a confidential legal settlement that ITW received in the third quarter of 2017. Excluding this one-time item, operating income actually saw a modest increase.

Revenue performance varied by segment. The Welding and Test & Measurement and Electronics segments showed strong organic revenue growth. However, the Automotive OEM and Specialty Products segments experienced declines in revenue, influenced by factors such as foreign currency translations and softer demand in certain international markets. Overall, the company's diversified portfolio helped to offset localized weaknesses.

ITW maintains a disciplined approach to capital allocation. For the quarter, the company repurchased $500 million of its common stock, underscoring its commitment to returning capital to shareholders. Additionally, ITW announced a 28.2% increase in its quarterly dividend, signaling confidence in its financial performance and future cash generation.

While ITW generally reports solid performance, the company noted softening demand in various international end markets for the Specialty Products and Polymers & Fluids segments. Management also anticipates that the impact of tariffs and global trade policies will increase in the future and plans to evaluate pricing actions to mitigate potential raw material cost increases.