8-K
ILLINOIS TOOL WORKS INC (ITW)
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): January 31, 2020
_________________________
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:
| ☐ | 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 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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 January 31, 2020, Illinois Tool Works Inc. (the “Company”) announced its 2019 fourth 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 third quarter discrete tax benefit of $21 million from the effective tax rate for the year ended December 31, 2019. Additionally, the Company 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 | |
| 99.1 | Press Release issued by Illinois Tool Works Inc. dated January 31, 2020 (furnished pursuant to Item 2.02). | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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: January 31, 2020 | By: /s/ Michael M. Larsen |
| Michael M. Larsen | |
| Senior Vice President & Chief Financial Officer |
Exhibit
Exhibit 99.1
ITW Reports Fourth Quarter and Full Year Results
Fourth-Quarter 2019 Highlights
| • | GAAP EPS $1.99, an increase of 9%, including $0.11 of divestiture gains |
|---|---|
| • | Total revenue declined 3.1%; organic revenue down 1.6% |
| --- | --- |
| • | Operating margin of 23.7%; 24.1% excluding 40 basis points of higher restructuring expenses |
| --- | --- |
| • | After-tax ROIC of 28.9%, an increase of 120 basis points |
| --- | --- |
| • | Free cash flow was 114% of net income |
| --- | --- |
| • | |
| --- |
Full-Year 2019 Highlights
| • | GAAP EPS $7.74, an increase of 2% |
|---|---|
| • | Total revenue declined 4.5%; organic revenue down 1.9% |
| --- | --- |
| • | Operating margin of 24.1%; 24.4% excluding 30 basis points of higher restructuring expenses |
| --- | --- |
| • | After-tax ROIC of 28.7%, an increase of 50 basis points |
| --- | --- |
| • | Free cash flow increased 9% and was 106% of net income |
| --- | --- |
GLENVIEW, IL., January 31, 2020 - Illinois Tool Works Inc. (NYSE: ITW) today reported its fourth-quarter and full-year 2019 results.
“The ITW team closed out 2019 with another quarter of strong execution and resilient financial performance,” said E. Scott Santi, chairman and chief executive officer. “Despite near-term macro challenges, we grew earnings per share nine percent, delivered 24.1 percent operating margin excluding higher restructuring expenses and improved after-tax return on invested capital 120 basis points to 28.9 percent.”
“For the year, in a contracting industrial demand environment including a six percent decline in global auto builds, ITW grew earnings per share five percent excluding the impact of foreign currency headwinds, higher restructuring expenses and divestiture gains. We expanded operating margin to 24.4 percent excluding higher restructuring expenses, improved after-tax return on invested capital to 28.7 percent, increased free cash flow nine percent and returned $2.8 billion to shareholders in the form of dividends and share repurchases. Throughout 2019, we executed very well on the things within our control and continued to make meaningful progress on our path to full-potential performance through the implementation of our ‘Finish the Job’ enterprise strategy agenda. ITW’s proprietary and powerful business model, diversified high-quality business portfolio and dedicated team of highly skilled ITW colleagues around the world position us well to continue to deliver differentiated performance in 2020 and beyond,” Santi concluded.
2019 Results
Fourth-quarter revenue of $3.5 billion declined 3.1 percent with organic revenue down 1.6 percent. Foreign currency translation and divestitures reduced revenues by 1.0 percent and 0.5 percent, respectively. Product Line Simplification (PLS) activities reduced organic revenue by 60 basis points. GAAP EPS increased nine percent to $1.99 including $0.11 divestiture gains from the sale of three businesses. Operating margin was 23.7 percent. Excluding 40 basis points impact from higher restructuring expenses, operating margin improved 10 basis points to 24.1 percent. Enterprise initiatives contributed 130 basis points and price/cost was positive 30 basis points. Free cash flow was $692 million with a 114 percent conversion rate. The effective tax rate for the fourth quarter was 22.8 percent.
Full year revenue of $14.1 billion declined 4.5 percent with organic revenue down 1.9 percent and unfavorable foreign currency translation impact of 2.3 percent. PLS reduced organic revenue by 60 basis points versus 70 basis points in 2018. 2019 GAAP EPS increased two percent to $7.74 including $0.09 of net gains from divestitures. Operating margin was 24.1 percent. Excluding 30 basis points impact from higher restructuring expenses, operating margin improved 10 bps to 24.4 percent. Enterprise initiatives contributed 120 basis points and price/cost was positive 10 basis points. After-tax return on invested capital was 28.7 percent. Free cash flow increased nine percent to $2.7 billion. The company repurchased $1.5 billion of its own shares and raised its dividend seven percent in August 2019 to an annualized $4.28 per share. The effective tax rate for the full year was 23.3 percent.
2020 Guidance
The company initiated full-year EPS guidance in a range of $7.65 to $8.05 per share. At current levels of demand, organic growth is forecast to be in the range of zero to two percent. Foreign currency translation and divestitures are projected to reduce revenues
by one percentage point each. PLS impact is forecast to moderate to approximately 50 basis points. Operating margin is expected to improve and be in a range of 24.5 to 25 percent, with enterprise initiatives contributing approximately 100 basis points. Free cash flow is expected to be greater than 100 percent of net income. The Company expects an effective tax rate in the range of 23.5 to 24.5 percent and plans to repurchase approximately $2 billion of its shares in 2020.
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 $14.1 billion in 2019. 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’s approximately 45,000 dedicated colleagues around the world thrive in the company’s decentralized and entrepreneurial culture. www.itw.com
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME (UNAUDITED)
| Three Months Ended | Twelve Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | |||||||||||
| In millions except per share amounts | 2019 | 2018 | 2019 | 2018 | ||||||||
| Operating Revenue | $ | 3,469 | $ | 3,580 | $ | 14,109 | $ | 14,768 | ||||
| Cost of revenue | 2,022 | 2,096 | 8,187 | 8,604 | ||||||||
| Selling, administrative, and research and development expenses | 586 | 578 | 2,361 | 2,391 | ||||||||
| Amortization and impairment of intangible assets | 37 | 46 | 159 | 189 | ||||||||
| Operating Income | 824 | 860 | 3,402 | 3,584 | ||||||||
| Interest expense | (51 | ) | (63 | ) | (221 | ) | (257 | ) | ||||
| Other income (expense) | 58 | 19 | 107 | 67 | ||||||||
| Income Before Taxes | 831 | 816 | 3,288 | 3,394 | ||||||||
| Income taxes | 190 | 209 | 767 | 831 | ||||||||
| Net Income | $ | 641 | $ | 607 | $ | 2,521 | $ | 2,563 | ||||
| Net Income Per Share: | ||||||||||||
| Basic | $ | 2.00 | $ | 1.84 | $ | 7.78 | $ | 7.65 | ||||
| Diluted | $ | 1.99 | $ | 1.83 | $ | 7.74 | $ | 7.60 | ||||
| Cash Dividends Per Share: | ||||||||||||
| Paid | $ | 1.07 | $ | 1.00 | $ | 4.07 | $ | 3.34 | ||||
| Declared | $ | 1.07 | $ | 1.00 | $ | 4.14 | $ | 3.56 | ||||
| Shares of Common Stock Outstanding During the Period: | ||||||||||||
| Average | 321.2 | 329.8 | 323.9 | 335.0 | ||||||||
| Average assuming dilution | 322.9 | 331.6 | 325.6 | 337.1 |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
| In millions | December 31, 2019 | December 31, 2018 | ||||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Current Assets: | ||||||
| Cash and equivalents | $ | 1,981 | $ | 1,504 | ||
| Trade receivables | 2,461 | 2,622 | ||||
| Inventories | 1,164 | 1,318 | ||||
| Prepaid expenses and other current assets | 296 | 334 | ||||
| Assets held for sale | 351 | — | ||||
| Total current assets | 6,253 | 5,778 | ||||
| Net plant and equipment | 1,729 | 1,791 | ||||
| Goodwill | 4,492 | 4,633 | ||||
| Intangible assets | 851 | 1,084 | ||||
| Deferred income taxes | 516 | 554 | ||||
| Other assets | 1,227 | 1,030 | ||||
| $ | 15,068 | $ | 14,870 | |||
| Liabilities and Stockholders’ Equity | ||||||
| Current Liabilities: | ||||||
| Short-term debt | $ | 4 | $ | 1,351 | ||
| Accounts payable | 472 | 524 | ||||
| Accrued expenses | 1,217 | 1,271 | ||||
| Cash dividends payable | 342 | 328 | ||||
| Income taxes payable | 48 | 68 | ||||
| Liabilities held for sale | 71 | — | ||||
| Total current liabilities | 2,154 | 3,542 | ||||
| Noncurrent Liabilities: | ||||||
| Long-term debt | 7,754 | 6,029 | ||||
| Deferred income taxes | 668 | 707 | ||||
| Noncurrent income taxes payable | 462 | 495 | ||||
| Other liabilities | 1,000 | 839 | ||||
| Total noncurrent liabilities | 9,884 | 8,070 | ||||
| Stockholders’ Equity: | ||||||
| Common stock | 6 | 6 | ||||
| Additional paid-in-capital | 1,304 | 1,253 | ||||
| Retained earnings | 22,403 | 21,217 | ||||
| Common stock held in treasury | (18,982 | ) | (17,545 | ) | ||
| Accumulated other comprehensive income (loss) | (1,705 | ) | (1,677 | ) | ||
| Noncontrolling interest | 4 | 4 | ||||
| Total stockholders’ equity | 3,030 | 3,258 | ||||
| $ | 15,068 | $ | 14,870 |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| Three Months Ended December 31, 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Dollars in millions | Total Revenue | Operating Income | Operating Margin | |||||
| Automotive OEM | $ | 725 | $ | 154 | 21.2 | % | ||
| Food Equipment | 571 | 157 | 27.5 | % | ||||
| Test & Measurement and Electronics | 552 | 155 | 28.1 | % | ||||
| Welding | 387 | 98 | 25.4 | % | ||||
| Polymers & Fluids | 408 | 94 | 23.0 | % | ||||
| Construction Products | 384 | 85 | 22.2 | % | ||||
| Specialty Products | 446 | 109 | 24.5 | % | ||||
| Intersegment | (4 | ) | — | — | % | |||
| Total Segments | 3,469 | 852 | 24.6 | % | ||||
| Unallocated | — | (28 | ) | — | % | |||
| Total Company | $ | 3,469 | $ | 824 | 23.7 | % | ||
| Twelve Months Ended December 31, 2019 | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Dollars in millions | Total Revenue | Operating Income | Operating Margin | |||||
| Automotive OEM | $ | 3,063 | $ | 659 | 21.5 | % | ||
| Food Equipment | 2,188 | 578 | 26.4 | % | ||||
| Test & Measurement and Electronics | 2,121 | 542 | 25.6 | % | ||||
| Welding | 1,638 | 453 | 27.7 | % | ||||
| Polymers & Fluids | 1,669 | 381 | 22.8 | % | ||||
| Construction Products | 1,625 | 383 | 23.6 | % | ||||
| Specialty Products | 1,825 | 472 | 25.9 | % | ||||
| Intersegment | (20 | ) | — | — | % | |||
| Total Segments | 14,109 | 3,468 | 24.6 | % | ||||
| Unallocated | — | (66 | ) | — | % | |||
| Total Company | $ | 14,109 | $ | 3,402 | 24.1 | % |
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| Q4 2019 vs. Q4 2018 Favorable/(Unfavorable) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
| Organic | (5.4 | )% | 1.7 | % | 4.0 | % | (3.7 | )% | (2.0 | )% | (1.2 | )% | (3.4 | )% | (1.6 | )% |
| Acquisitions/ Divestitures | — | % | — | % | (0.7 | )% | (2.5 | )% | — | % | — | % | (0.8 | )% | (0.5 | )% |
| Translation | (1.4 | )% | (1.1 | )% | (0.7 | )% | (0.2 | )% | (1.4 | )% | (1.9 | )% | (0.8 | )% | (1.0 | )% |
| Operating Revenue | (6.8 | )% | 0.6 | % | 2.6 | % | (6.4 | )% | (3.4 | )% | (3.1 | )% | (5.0 | )% | (3.1 | )% |
| Q4 2019 vs. Q4 2018 Favorable/(Unfavorable) | ||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |||||||||
| Change in Operating Margin | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | |||||||||
| Operating Leverage | 20 bps | 90 bps | (60) bps | (40) bps | (20) bps | (70) bps | (30) bps | |||||||||
| Changes in Variable Margin & OH Costs | 130 bps | 230 bps | (20) bps | 270 bps | (210) bps | (20) bps | 40 bps | |||||||||
| Total Organic | 150 bps | 320 bps | (80) bps | 230 bps | (230) bps | (90) bps | 10 bps | |||||||||
| Acquisitions/ Divestitures | — | 20 bps | 20 bps | — | — | 20 bps | 10 bps | |||||||||
| Restructuring/Other | (60) bps | (10) bps | (90) bps | (80) bps | (40) bps | (20) bps | (50) bps | |||||||||
| Total Operating Margin Change | 90 bps | 330 bps | (150) bps | 150 bps | (270) bps | (90) bps | (30) bps | |||||||||
| Total Operating Margin % * | 27.5% | 28.1% | 25.4% | 23.0% | 22.2% | 24.5% | 23.7% | |||||||||
| * Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets | 60 bps | 150 bps | 30 bps | 360 bps | 30 bps | 90 bps | 110 bps ** | |||||||||
| ** Amortization expense from acquisition-related intangible assets had an unfavorable impact of (0.09) on GAAP earnings per share for the fourth quarter of 2019. |
All values are in US Dollars.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
| Full Year 2019 vs Full Year 2018 Favorable/(Unfavorable) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Revenue | Automotive OEM | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | ||||||||
| Organic | (5.4 | )% | 1.1 | % | (0.3 | )% | (1.2 | )% | — | % | (1.0 | )% | (4.1 | )% | (1.9 | )% |
| Acquisitions/ Divestitures | — | % | — | % | (0.2 | )% | (1.1 | )% | (0.4 | )% | — | % | (0.6 | )% | (0.3 | )% |
| Translation | (2.8 | )% | (2.3 | )% | (1.8 | )% | (0.8 | )% | (2.8 | )% | (3.4 | )% | (1.8 | )% | (2.3 | )% |
| Operating Revenue | (8.2 | )% | (1.2 | )% | (2.3 | )% | (3.1 | )% | (3.2 | )% | (4.4 | )% | (6.5 | )% | (4.5 | )% |
| Full Year 2019 vs Full Year 2018 Favorable/(Unfavorable) | ||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |||||||||
| Change in Operating Margin | Food Equipment | Test & Measurement and Electronics | Welding | Polymers & Fluids | Construction Products | Specialty Products | Total ITW | |||||||||
| Operating Leverage | 30 bps | (10) bps | (20) bps | — | (10) bps | (90) bps | (50) bps | |||||||||
| Changes in Variable Margin & OH Costs | 60 bps | 150 bps | — | 170 bps | (40) bps | (10) bps | 60 bps | |||||||||
| Total Organic | 90 bps | 140 bps | (20) bps | 170 bps | (50) bps | (100) bps | 10 bps | |||||||||
| Acquisitions/ Divestitures | — | 10 bps | 20 bps | — | — | 20 bps | — | |||||||||
| Restructuring/Other | (30) bps | — | (30) bps | (30) bps | (20) bps | (10) bps | (30) bps | |||||||||
| Total Operating Margin Change | 60 bps | 150 bps | (30) bps | 140 bps | (70) bps | (90) bps | (20) bps | |||||||||
| Total Operating Margin % * | 26.4% | 25.6% | 27.7% | 22.8% | 23.6% | 25.9% | 24.1% | |||||||||
| * Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets | 70 bps | 200 bps | 20 bps | 360 bps | 30 bps | 90 bps | 120 bps ** | |||||||||
| ** Amortization expense from acquisition-related intangible assets had an unfavorable impact of (0.37) on GAAP earnings per share for 2019. |
All values are in US Dollars.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
| Three Months Ended | Twelve Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | |||||||||||
| Dollars in millions | 2019 | 2018 | 2019 | 2018 | ||||||||
| Operating income | $ | 824 | $ | 860 | $ | 3,402 | $ | 3,584 | ||||
| Adjusted tax rate | 22.8 | % | 25.5 | % | 24.0 | % | 24.9 | % | ||||
| Income taxes | (188 | ) | (219 | ) | (815 | ) | (893 | ) | ||||
| Operating income after taxes | $ | 636 | $ | 641 | $ | 2,587 | $ | 2,691 | ||||
| Invested capital: | ||||||||||||
| Trade receivables | $ | 2,461 | $ | 2,622 | $ | 2,461 | $ | 2,622 | ||||
| Inventories | 1,164 | 1,318 | 1,164 | 1,318 | ||||||||
| Net assets held for sale | 280 | — | 280 | — | ||||||||
| Net plant and equipment | 1,729 | 1,791 | 1,729 | 1,791 | ||||||||
| Goodwill and intangible assets | 5,343 | 5,717 | 5,343 | 5,717 | ||||||||
| Accounts payable and accrued expenses | (1,689 | ) | (1,795 | ) | (1,689 | ) | (1,795 | ) | ||||
| Other, net | (481 | ) | (519 | ) | (481 | ) | (519 | ) | ||||
| Total invested capital | $ | 8,807 | $ | 9,134 | $ | 8,807 | $ | 9,134 | ||||
| Average invested capital | $ | 8,797 | $ | 9,247 | $ | 9,028 | $ | 9,533 | ||||
| Adjusted after-tax return on average invested capital | 28.9 | % | 27.7 | % | 28.7 | % | 28.2 | % |
A reconciliation of the 2019 effective tax rate excluding the third quarter discrete tax benefit of $21 million is as follows:
| Twelve Months Ended | ||||
|---|---|---|---|---|
| December 31, 2019 | ||||
| Income Taxes | Tax Rate | |||
| As reported | $ | 767 | 23.3 | % |
| Discrete tax benefit related to third quarter | 21 | 0.7 | % | |
| As adjusted | $ | 788 | 24.0 | % |
A reconciliation of the 2018 effective tax rate excluding the third quarter net discrete tax benefit of $15 million is as follows:
| Twelve Months Ended | ||||
|---|---|---|---|---|
| December 31, 2018 | ||||
| Income Taxes | Tax Rate | |||
| As reported | $ | 831 | 24.5 | % |
| Net discrete tax benefit related to third quarter | 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 | Twelve Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | ||||||||||||
| Dollars in millions | 2019 | 2018 | 2019 | 2018 | |||||||||
| Net cash provided by operating activities | $ | 774 | $ | 809 | $ | 2,995 | $ | 2,811 | |||||
| Less: Additions to plant and equipment | (82 | ) | (82 | ) | (326 | ) | (364 | ) | |||||
| Free cash flow | $ | 692 | $ | 727 | $ | 2,669 | $ | 2,447 | |||||
| Net income | $ | 641 | $ | 607 | $ | 2,521 | $ | 2,563 | |||||
| Free cash flow to net income conversion rate | 108 | % | * | 120 | % | 106 | % | 95 | % |
* Excluding the impact of the fourth quarter net after-tax gains on disposal of businesses of $35 million, net income would have been $606 million and the free cash flow to net income conversion rate for the three months ended December 31, 2019 would have been 114%.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NET INCOME PER SHARE - DILUTED, AS REPORTED (UNAUDITED)
| Twelve Months Ended | |||||
|---|---|---|---|---|---|
| December 31, | |||||
| 2019 | 2018 | ||||
| Net income per share - diluted, as reported | $ | 7.74 | * | $ | 7.60 |
* Diluted EPS for the twelve months ended December 31, 2019 includes the impact of $0.09 of divestiture gains, $(0.20) of foreign currency translation headwinds and $(0.12) of higher restructuring expenses.