Illinois Tool Works (ITW) 10-Q 6 May 16 2016 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information	3 Months Ended
	Mar. 31, 2016shares
Document and Entity Information [Abstract]
Entity Registrant Name	ILLINOIS TOOL WORKS INC
Entity Central Index Key	49,826
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Document Type	10-Q
Document Period End Date	Mar. 31, 2016
Document Fiscal Year Focus	2,016
Document Fiscal Period Focus	Q1
Amendment Flag	false
Entity Common Stock, Shares Outstanding	359,370,351

Statement of Income (Unaudited)

Statement of Income (Unaudited) - USD ($) shares in Millions, $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Income Statement [Abstract]
Operating Revenue	$ 3,274	$ 3,342
Cost of revenue	1,896	1,970
Selling, administrative, and research and development expenses	597	616
Amortization and impairment of intangible assets	59	59
Operating Income	722	697
Interest expense	(58)	(54)
Other income (expense)	4	21
Income Before Taxes	668	664
Income Taxes	200	206
Net Income	$ 468	$ 458
Net Income Per Share:
Basic (in dollars per share)	$ 1.29	$ 1.22
Diluted (in dollars per share)	1.29	1.21
Cash Dividends Per Share:
Paid (in dollars per share)	0.55	0.485
Declared (in dollars per share)	$ 0.55	$ 0.485
Shares of Common Stock Outstanding During the Period:
Average (in shares)	362	376.6
Average assuming dilution (in shares)	363.9	379.2

Statement of Comprehensive Inco

Statement of Comprehensive Income (Unaudited) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Statement of Comprehensive Income [Abstract]
Net Income	$ 468	$ 458
Other Comprehensive Income (Loss):
Foreign currency translation adjustments, net of tax	164	(577)
Pension and other postretirement benefit adjustments, net of tax	8	9
Comprehensive Income (Loss)	$ 640	$ (110)

Statement of Financial Position

Statement of Financial Position (Unaudited) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Current Assets:
Cash and equivalents	$ 2,448	$ 3,090
Trade receivables	2,394	2,203
Inventories	1,134	1,086
Prepaid expenses and other current assets	265	341
Total current assets	6,241	6,720
Net plant and equipment	1,598	1,577
Goodwill	4,504	4,439
Intangible assets	1,501	1,560
Deferred income taxes	505	346
Other assets	1,088	1,087
Total assets	15,437	15,729
Current Liabilities:
Short-term debt	650	526
Accounts payable	525	449
Accrued expenses	1,086	1,136
Cash dividends payable	198	200
Income taxes payable	257	57
Total current liabilities	2,716	2,368
Noncurrent Liabilities:
Long-term debt	6,353	6,896
Deferred income taxes	151	256
Other liabilities	995	981
Total noncurrent liabilities	7,499	8,133
Stockholders’ Equity:
Common stock	6	6
Additional paid-in-capital	1,141	1,135
Income reinvested in the business	18,586	18,316
Common stock held in treasury	(13,183)	(12,729)
Accumulated other comprehensive income (loss)	(1,332)	(1,504)
Noncontrolling interest	4	4
Total stockholders’ equity	5,222	5,228
Total liabilities and stockholders' equity	$ 15,437	$ 15,729

Statement of Cash Flows (Unaudi

Statement of Cash Flows (Unaudited) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Cash Provided by (Used for) Operating Activities:
Net Income	$ 468	$ 458
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Depreciation	58	59
Amortization and impairment of intangible assets	59	59
Change in deferred income taxes	(213)	11
Provision for uncollectible accounts	3	2
(Income) loss from investments	(2)	1
(Gain) loss on sale of plant and equipment	1	0
(Gain) loss on sale of operations and affiliates	0	(16)
Stock-based compensation expense	9	14
Other non-cash items, net	4	15
(Increase) decrease in-
Trade receivables	(155)	(173)
Inventories	(29)	(58)
Prepaid expenses and other assets	(21)	17
Increase (decrease) in-
Accounts payable	45	62
Accrued expenses and other liabilities	(67)	(131)
Income taxes	318	123
Other, net	1	(1)
Net cash provided by (used for) operating activities	479	442
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates	(2)	(2)
Additions to plant and equipment	(57)	(83)
Proceeds from investments	6	1
Proceeds from sale of plant and equipment	2	8
Proceeds from sales of operations and affiliates	1	28
Other, net	0	(10)
Net cash provided by (used for) investing activities	(50)	(58)
Cash Provided by (Used for) Financing Activities:
Cash dividends paid	(200)	(186)
Issuance of common stock	39	31
Repurchases of common stock	(480)	(1,479)
Net proceeds from (repayments of) debt with original maturities of three months or less	(525)	233
Excess tax benefits from stock-based compensation	13	16
Other, net	(10)	(12)
Net cash provided by (used for) financing activities	(1,163)	(1,397)
Effect of Exchange Rate Changes on Cash and Equivalents	92	(305)
Cash and Equivalents:
Increase (decrease) during the period	(642)	(1,318)
Beginning of period	3,090	3,990
End of period	2,448	2,672
Supplementary Cash and Non-Cash Information:
Cash Paid During the Period for Interest	65	65
Cash Paid During the Period for Income Taxes, Net of Refunds	$ 70	$ 42

Financial Statements

Financial Statements	3 Months Ended
	Mar. 31, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Financial Statements	Financial Statements The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company”). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company’s 2015 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting. In May 2014, the Financial Accounting Standards Board ("FASB") issued authoritative guidance to change the criteria for revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, several new revenue recognition disclosures will be required. This guidance is effective for the Company beginning January 1, 2018. The Company is currently assessing the potential impact the guidance will have upon adoption. In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. Under the new guidance, a lessee will be required to recognize a lease liability and lease asset for all leases, including operating leases, with a lease term greater than twelve months in the statement of financial position. Subsequent measurement, including presentation of expenses and cash flows, will depend on the classification of the lease as either a financing or operating lease. In addition, several new disclosures will be required. This guidance is effective for the Company beginning January 1, 2019. The Company is currently assessing the potential impact the guidance will have upon adoption. In March 2016, the FASB issued authoritative guidance that includes several changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and cash flow statement classification. The new guidance will require recognition of the income tax effects associated with the vesting or settlement of stock-based awards in income tax expense rather than additional paid-in-capital. The income tax effects will also be presented as an operating cash flow in the statement of cash flows rather than a financing activity. This guidance is effective for the Company beginning January 1, 2017, with early adoption permitted. The Company is currently assessing the potential impact the guidance will have upon adoption.

Income Taxes

Income Taxes	3 Months Ended
	Mar. 31, 2016
Income Tax Disclosure [Abstract]
Income Taxes	Income Taxes The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions including the Internal Revenue Service ("IRS"), Her Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. Due to the ongoing audits, the Company believes it is reasonably possible that within the next twelve months the amount of the Company's unrecognized tax benefits may be decreased by approximately $122 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues. On February 18, 2014, the Company received a Notice of Deficiency (“NOD”) from the IRS asserting that a non-taxable return of capital received from a subsidiary was a taxable dividend distribution. The NOD assesses additional taxes of $70 million for the 2006 tax year, plus interest and penalties. In May 2014, the Company petitioned the United States Tax Court to challenge the NOD. The Company's petition was subsequently denied and the case will proceed to court with trial set for the third quarter of 2016. Although the outcome of this process cannot be predicted with certainty, the Company believes it will be successful in defending its positions. Accordingly, no reserve has been recorded related to this matter.

Inventories

Inventories	3 Months Ended
	Mar. 31, 2016
Inventory Disclosure [Abstract]
Inventories	Inventories Inventories as of March 31, 2016 and December 31, 2015 were as follows: In millions March 31, 2016 December 31, 2015 Raw material $ 418 $ 415 Work-in-process 145 130 Finished goods 653 622 LIFO reserve (82 ) (81 ) Total inventories $ 1,134 $ 1,086

Pension and Other Postretiremen

Pension and Other Postretirement Benefits	3 Months Ended
	Mar. 31, 2016
Compensation and Retirement Disclosure [Abstract]
Pension and Other Postretirement Benefits	Pension and Other Postretirement Benefits Pension and other postretirement benefit costs for the three months ended March 31, 2016 and 2015 , were as follows: Three Months Ended March 31, Pension Other Postretirement Benefits In millions 2016 2015 2016 2015 Components of net periodic benefit cost: Service cost $ 16 $ 18 $ 2 $ 3 Interest cost 23 23 6 6 Expected return on plan assets (37 ) (38 ) (6 ) (6 ) Amortization of actuarial (gain) loss 11 15 — — Net periodic benefit (income) cost $ 13 $ 18 $ 2 $ 3 The Company expects to contribute approximately $73 million to its pension plans and $5 million to its other postretirement plans in 2016 . As of March 31, 2016 , contributions of $5 million to pension plans and $1 million to other postretirement plans have been made.

Debt

Debt	3 Months Ended
	Mar. 31, 2016
Debt Disclosure [Abstract]
Debt	Debt Short-term debt as of December 31, 2015 included commercial paper of $498 million . There was no commercial paper outstanding as of March 31, 2016 . In addition, in the first quarter of 2016, the Company reclassified $649 million related to the 0.90% notes due February 25, 2017 from Long-term debt to Short-term debt. The approximate fair value and related carrying value of the Company's total long-term debt, including current maturities of long-term debt presented as short-term debt, as of March 31, 2016 and December 31, 2015 were as follows: In millions March 31, 2016 December 31, 2015 Fair value $ 7,603 $ 7,153 Carrying value 7,003 6,897 The approximate fair values of the Company's long-term debt, including current maturities, were based on a Level 2 valuation model, using observable inputs which included market rates for comparable instruments for the respective periods.

Accumulated Other Comprehensive

Accumulated Other Comprehensive Income (Loss)	3 Months Ended
	Mar. 31, 2016
Equity [Abstract]
Accumulated Other Comprehensive Income (Loss)	Accumulated Other Comprehensive Income (Loss) The following table summarizes changes in Accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and 2015 : Three Months Ended March 31, In millions 2016 2015 Beginning balance $ (1,504 ) $ (658 ) Foreign currency translation adjustments during the period 124 (527 ) Foreign currency translation adjustments reclassified to income 1 — Income taxes 39 (50 ) Foreign currency translation adjustments, net of tax 164 (577 ) Pension and other postretirement benefit adjustments during the period 1 (2 ) Pension and other postretirement benefit adjustments reclassified to income 11 15 Income taxes (4 ) (4 ) Pension and other postretirement benefit adjustments, net of tax 8 9 Ending balance $ (1,332 ) $ (1,226 ) The Company designated the € 1.0 billion of Euro notes issued in May 2015 and the € 1.0 billion of Euro notes issued in May 2014 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. The carrying values of the Euro notes were $1.1 billion and $1.1 billion , respectively, as of March 31, 2016 . Changes in the value of this debt resulting from fluctuations in the Euro to U.S. dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). The unrealized pre-tax gain recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was $204 million and $308 million as of March 31, 2016 and December 31, 2015 , respectively. The ending balance of Accumulated other comprehensive income (loss) as of March 31, 2016 and 2015 consisted of cumulative translation adjustment losses, net of tax, of $ 961 million and $ 842 million , respectively, and unrecognized pension and other postretirement benefits costs, net of tax, of $ 371 million and $ 384 million , respectively.

Segment Information

Segment Information	3 Months Ended
	Mar. 31, 2016
Segment Reporting [Abstract]
Segment Information	Segment Information The Company has seven reportable segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. See Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding operating revenue and operating income for the Company's segments.

Financial Statements (Policies)

Financial Statements (Policies)	3 Months Ended
	Mar. 31, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]
New Accounting Pronouncements	In May 2014, the Financial Accounting Standards Board ("FASB") issued authoritative guidance to change the criteria for revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, several new revenue recognition disclosures will be required. This guidance is effective for the Company beginning January 1, 2018. The Company is currently assessing the potential impact the guidance will have upon adoption. In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. Under the new guidance, a lessee will be required to recognize a lease liability and lease asset for all leases, including operating leases, with a lease term greater than twelve months in the statement of financial position. Subsequent measurement, including presentation of expenses and cash flows, will depend on the classification of the lease as either a financing or operating lease. In addition, several new disclosures will be required. This guidance is effective for the Company beginning January 1, 2019. The Company is currently assessing the potential impact the guidance will have upon adoption. In March 2016, the FASB issued authoritative guidance that includes several changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and cash flow statement classification. The new guidance will require recognition of the income tax effects associated with the vesting or settlement of stock-based awards in income tax expense rather than additional paid-in-capital. The income tax effects will also be presented as an operating cash flow in the statement of cash flows rather than a financing activity. This guidance is effective for the Company beginning January 1, 2017, with early adoption permitted. The Company is currently assessing the potential impact the guidance will have upon adoption.

Inventories (Tables)

Inventories (Tables)	3 Months Ended
	Mar. 31, 2016
Inventory Disclosure [Abstract]
Inventories	Inventories as of March 31, 2016 and December 31, 2015 were as follows: In millions March 31, 2016 December 31, 2015 Raw material $ 418 $ 415 Work-in-process 145 130 Finished goods 653 622 LIFO reserve (82 ) (81 ) Total inventories $ 1,134 $ 1,086

Pension and Other Postretirem15

Pension and Other Postretirement Benefits (Tables)	3 Months Ended
	Mar. 31, 2016
Compensation and Retirement Disclosure [Abstract]
Pension and Other Postretirement Benefit Costs	Pension and other postretirement benefit costs for the three months ended March 31, 2016 and 2015 , were as follows: Three Months Ended March 31, Pension Other Postretirement Benefits In millions 2016 2015 2016 2015 Components of net periodic benefit cost: Service cost $ 16 $ 18 $ 2 $ 3 Interest cost 23 23 6 6 Expected return on plan assets (37 ) (38 ) (6 ) (6 ) Amortization of actuarial (gain) loss 11 15 — — Net periodic benefit (income) cost $ 13 $ 18 $ 2 $ 3

Debt (Tables)

Debt (Tables)	3 Months Ended
	Mar. 31, 2016
Debt Disclosure [Abstract]
Approximate Fair Value and Related Carrying Value of Long-term Debt, Including Current Maturities	The approximate fair value and related carrying value of the Company's total long-term debt, including current maturities of long-term debt presented as short-term debt, as of March 31, 2016 and December 31, 2015 were as follows: In millions March 31, 2016 December 31, 2015 Fair value $ 7,603 $ 7,153 Carrying value 7,003 6,897

Accumulated Other Comprehensi17

Accumulated Other Comprehensive Income (Loss) (Tables)	3 Months Ended
	Mar. 31, 2016
Equity [Abstract]
Schedule of Accumulated Other Comprehensive Income (Loss)	The following table summarizes changes in Accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and 2015 : Three Months Ended March 31, In millions 2016 2015 Beginning balance $ (1,504 ) $ (658 ) Foreign currency translation adjustments during the period 124 (527 ) Foreign currency translation adjustments reclassified to income 1 — Income taxes 39 (50 ) Foreign currency translation adjustments, net of tax 164 (577 ) Pension and other postretirement benefit adjustments during the period 1 (2 ) Pension and other postretirement benefit adjustments reclassified to income 11 15 Income taxes (4 ) (4 ) Pension and other postretirement benefit adjustments, net of tax 8 9 Ending balance $ (1,332 ) $ (1,226 )

Income Taxes (Details)

Income Taxes (Details) - USD ($) $ in Millions	Feb. 18, 2014	Mar. 31, 2016
Income Tax Examination [Line Items]
Period for unrecognized tax benefits to decrease		12 months
Decrease in unrecognized tax benefits related to intercompany transactions		$ 122
Internal Revenue Service (IRS) | Tax Year 2006
Income Tax Examination [Line Items]
IRS Notice of Deficiency tax assessment	$ 70

Inventories (Details)

Inventories (Details) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Inventory Disclosure [Abstract]
Raw material	$ 418	$ 415
Work-in-process	145	130
Finished goods	653	622
LIFO reserve	(82)	(81)
Total inventories	$ 1,134	$ 1,086

Pension and Other Postretirem20

Pension and Other Postretirement Benefits (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Pension
Components of net periodic benefit cost:
Service cost	$ 16	$ 18
Interest cost	23	23
Expected return on plan assets	(37)	(38)
Amortization of actuarial (gain) loss	11	15
Net periodic benefit (income) cost	13	18
Other Postretirement Benefits
Components of net periodic benefit cost:
Service cost	2	3
Interest cost	6	6
Expected return on plan assets	(6)	(6)
Amortization of actuarial (gain) loss	0	0
Net periodic benefit (income) cost	$ 2	$ 3

Pension and Other Postretirem21

Pension and Other Postretirement Benefits - Narrative (Details) $ in Millions	3 Months Ended
	Mar. 31, 2016USD ($)
Pension
Defined Benefit Plan Disclosure [Line Items]
Expected current year company contributions	$ 73
Contributions	5
Other Postretirement Benefits
Defined Benefit Plan Disclosure [Line Items]
Expected current year company contributions	5
Contributions	$ 1

Debt - Narrative (Details)

Debt - Narrative (Details) - USD ($)	3 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Debt Instrument [Line Items]
Outstanding commercial paper	$ 0	$ 498,000,000
Long-term debt reclassified to short-term debt	$ 649,000,000
Notes Payable, Other Payables | 0.90% Notes Due February 25, 2017
Debt Instrument [Line Items]
Stated interest rate on notes	0.90%

Debt - Fair Value and Related C

Debt - Fair Value and Related Carrying Values (Details) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Debt Disclosure [Abstract]
Fair value	$ 7,603	$ 7,153
Carrying value	$ 7,003	$ 6,897

Accumulated Other Comprehensi24

Accumulated Other Comprehensive Income (Loss) (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Changes in Accumulated Other Comprehensive Income [Roll Forward]
Beginning balance	$ 5,228
Ending balance	5,222
AOCI
Changes in Accumulated Other Comprehensive Income [Roll Forward]
Beginning balance	(1,504)	$ (658)
Ending balance	(1,332)	(1,226)
Accumulated Foreign Currency Translation Adjustment
Changes in Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss) adjustments during the period	124	(527)
Other comprehensive income (loss), adjustments reclassified to income	1	0
Income taxes	39	(50)
Other comprehensive income (loss), net of tax	164	(577)
Accumulated Pension and Other Postretirement Benefit Adjustments
Changes in Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss) adjustments during the period	1	(2)
Other comprehensive income (loss), adjustments reclassified to income	11	15
Income taxes	(4)	(4)
Other comprehensive income (loss), net of tax	$ 8	$ 9

Accumulated Other Comprehensi25

Accumulated Other Comprehensive Income (Loss) - Narrative (Details) $ in Millions	Mar. 31, 2016USD ($)	Dec. 31, 2015USD ($)	May. 31, 2015EUR (€)	Mar. 31, 2015USD ($)	May. 31, 2014EUR (€)
Accumulated Other Comprehensive Income (Loss) [Line Items]
Cumulative translation adjustment losses, net of tax	$ 961			$ 842
Unrecognized pension and other postretirement benefits costs, net of tax	371			$ 384
Net Investment Hedging | Euro Notes
Accumulated Other Comprehensive Income (Loss) [Line Items]
Accumulated other comprehensive income related to net investment hedge unrealized gain	204	$ 308
Euro Notes Issued May 2015 | Net Investment Hedging | Euro Notes
Accumulated Other Comprehensive Income (Loss) [Line Items]
Face value of notes | €			€ 1,000,000,000
Long-term debt	1,100
Euro Notes Issued May 2014 | Net Investment Hedging | Euro Notes
Accumulated Other Comprehensive Income (Loss) [Line Items]
Face value of notes | €					€ 1,000,000,000
Long-term debt	$ 1,100

Segment Information (Details)

Segment Information (Details)	3 Months Ended
	Mar. 31, 2016Segment
Segment Reporting [Abstract]
Number of reportable segments	7