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Text: I am joined with our Chairman and CEO, Scott Santi and Senior Vice President and CFO, Michael Larsen.
During today's call, we will discuss fourth quarter and full year 2019 financial results and provide guidance for full year 2020.
Finally, I'd like to remind folks, we have our Investor Day coming up six weeks from today on March 13 in Fort Worth, Texas.
The ITW team delivered another quarter of solid operational execution and strong financial performance in Q4.
Despite some broad-based macro challenges, we delivered GAAP earnings per share growth of 9%, operating margin of 23.7% and after-tax return on invested capital of 28.9% in the quarter.
For the full year, against the backdrop of an industrial demand environment that went from decelerating in the first half of the year to contracting in the second half of the year, we're continuing to execute well on the things within our control.
As a result, despite revenues that were down $700 million or 4.5% year-on-year, we delivered record GAAP earnings per share of $7.74, expanded operating margin to 24.4% excluding higher restructuring expenses and group free cash flow by 9%.
In addition, we were able to raise our dividend by 7% and returned $2.8 billion to shareholders in the form of dividends and share repurchases.
Equally important, in 2019, we continued to make solid progress on our path to ITW's full potential performance through the execution of our enterprise strategy.
Last year, we invested more than $600 million to support the execution of our strategy and further enhanced the growth and profitability performance of our core businesses.
In addition, each of our divisions continued to make progress in executing well-defined and focused plans to achieve full potential performance in their respective businesses.
We look forward to providing a full progress update on our enterprise strategy and our progress toward ITW's full potential performance at our Investor Day in March.
Looking ahead, ITW's powerful and proprietary 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 across a range of economic scenarios in 2020 and beyond.
In the fourth quarter, organic revenue declined 1.6% year-over-year in what remains a pretty challenging demand environment.
The strike at GM reduced our enterprise organic growth rate by approximately 50 basis points and Product Line Simplification was 60 basis points in the quarter.
By geography, North America was down 2% and international was down 1%.
Europe declined 1%, while Asia Pacific was flat.
Organic growth in China was broad-based across our portfolio and up 7% year-over-year.
As expected, our execution on the elements within our control remained strong in the fourth quarter.
Operating margin was 23.7%, including 40 basis points of unfavorable margin impact from higher restructuring expenses year-over-year.
Excluding those higher expenses, operating margin was up 10 basis points to 24.1%.
Enterprise initiatives contributed 130 basis points and price/cost was positive 30 basis points.
GAAP earnings per share was up 9% to $1.99 and included an $0.11 gain from three divestitures and $0.06 headwind from higher restructuring expenses year-over-year and foreign currency translation impact.
The effective tax rate in the quarter was 22.8%.
Free cash flow was 114% of net income.
And as planned, we repurchased $375 million of our own shares during the quarter.
Overall, Q4 was another quarter characterized by strong operational execution and resilient financial performance in a pretty challenging demand environment.
Let's move to Slide 4 and operating margin.
Overall, operating margin of 23.7% was down 30 basis points year-over-year, primarily due to higher restructuring expense.
Excluding those higher restructuring expenses, margin improved 10 basis points despite a 3% decline in revenues.
Enterprise initiatives were once again the highlight and key driver of our margin performance, contributing 130 basis points, the highest levels since the fourth quarter of 2017.
The enterprise initiative impact continues to be broad-based across all seven segments, ranging from 80 basis points to 200 basis points.
And the benefits of the restructuring activities that we initiated earlier in the year are being realized.
The majority of these restructuring projects are supporting enterprise initiative implementation, specifically our 80-20 front-to-back execution.
Price remained solid with price well ahead of raw material costs and price/cost contributed 30 basis points in the quarter.
Volume leverage was negative 30 basis points.
In Q4, as we always do, we updated our inventory standards to reflect current raw material costs.
As raw material cost in the aggregate have declined over the course of the year, the annual mark-to-market adjustments to the value of our inventory that we do every fourth quarter, this year had an unfavorable impact of 30 basis points versus last year.
We also had a favorable item last year that didn't repeat this year for 40 basis points.
And finally, the other category, which includes typical wage and salary inflation was 50 basis points.
So overall, solid margin performance again for the quarter and the year.
Turning to Slide 5 for details on segment performance.
As you know, 2019 was challenging from an industrial demand standpoint.
And you can see that the organic growth rate in every one of our segments -- seven segments was lower in 2019 than in 2018.
At the enterprise level, the organic growth rate swung from positive 2% in 2018 to down 2% in 2019 with the biggest year-on-year swings in our capex-related equipment offerings and automotive.
Speaking of automotive, let's move to the individual segment results starting with Automotive OEM.
Organic revenue was down 5% as the GM strike reduced revenues by approximately two percentage points.
Taking a closer look at regional performance, North America was in line with D3 builds, down 13%, Europe was essentially flat versus builds that were down 6% and China organic growth was 11% compared to builds, up one.
Moving on to Slide 6, Food Equipment had a good quarter with organic growth up 2% year-over-year despite a tough comp of 5% organic growth last year.
The service business was solid, up 4% in the quarter.
Equipment growth of 1% reflects double-digit growth in retail and modest decline in institutional and restaurants, against tough year-over-year comps for both of those.
Operating margin expanded 90 basis points to 27.5% with enterprise initiatives the main contributor.
Test & Measurement and Electronics had a very strong quarter with Test & Measurement up 6% with 13% growth in our Instron business.
This segment also experienced a meaningful pickup in demand from semiconductor customers.
Electronics was up 2%.
Margin was the highlight as the team expanded operating margin 330 basis points to a record 28.1%, the highest in the company this quarter with strong contributions from enterprise initiatives and volume leverage.
Also in the quarter, we divested Electronics business with 2019 revenues of approximately $60 million.
Turning to Slide 7.
Welding organic revenue declined 4% against a tough comparison of 8% growth last year.
North America equipment was down 3% against a tough comparison of up 7% last year.
The lower demand is primarily in the industrial business, while commercial, which includes smaller business and personal users was pretty stable.
Oil and gas was down 2%.
Operating margin was 25.4%, down 150 basis points, primarily due to higher restructuring expenses.
In the quarter, we divested an installation business with 2019 revenues of approximately $60 million, which reduced Welding's organic -- which overall growth rate by 150 basis points in the quarter.
Polymers & Fluids' organic growth was down 2% versus a tough comp of plus 4% last year.
Polymers was flat, Automotive aftermarket was down 1%, Fluids was down 6%.
Operating margin was strong, up 150 basis points, driven primarily by enterprise initiatives.
Moving to Slide 8.
Construction organic revenue was down 1% with continued softness in Australia/New Zealand, which was down 4%.
Europe was down 3% with the U.K. down 14%.
North America was up 2% with residential remodel up 2% and commercial up 5%.
Operating margin was 22.2% down due to the inventory mark-to-market adjustments and higher restructuring expenses.
In Specialty, organic revenue was down 3%, which on a positive note, is an improvement from the past couple of quarters.
As in prior quarters, the main drivers are significant PLS and the relative performance of the businesses we have identified as potential divestitures.
Excluding these potential divestitures, core organic growth was down 1.7%.
By geography, North America was down 4% and international 3%.
We also divested a business in this segment with 2019 revenues of approximately $15 million.
And these divestitures reduced Specialty's growth rate by almost eight percentage points.
Now let's quickly review full year 2019 on Slide 9.
In a challenging industrial demand environment, organic revenue was down 1.9% with total revenues down 4.5% as foreign currency translation impact reduced revenues by 2.3% and divestitures by 30 basis points.
GAAP earnings per share was $7.74 and included $0.09 of divestiture gains, as well as $0.32 of headwinds from foreign currency and higher restructuring expenses year-over-year.
Operating margin was 24.1% -- 24.4% excluding higher year-on-year restructuring expense as enterprise initiatives contributed 120 basis points.
After-tax return on invested capital improved 50 basis points to 28.7%.
Our cash performance was very strong with free cash flow up 9% and a conversion rate of 106% of net income.
We made significant internal investments to grow and support our highly profitable businesses, increased our annual dividend by 7% and utilized our share repurchase program to return surplus capital to our shareholders.
A quick update on our various divestiture processes that overall remained on track.
As a reminder, we're looking to potentially divest certain businesses with revenues totaling up to $1 billion and are targeted to complete the effort by year-end 2020.
The strategic objective with this phase of our portfolio management effort is to improve our overall organic growth rate by 50 basis points and improve margins by approximately 100 basis points.
Not counting potential gains on sales, the plan is to offset any earnings per share dilution with incremental share repurchases.
In the fourth quarter, we completed the sale of three businesses with combined 2019 revenues of approximately $135 million, generating a pre-tax gain on sale of $50 million or $0.11 a share.
In 2019, these businesses were a 20 basis points drag to our organic growth rate and 10 basis points to our margin rate.
On Slide 10, we wanted to give you a quick update on the progress that we're making on our organic growth initiatives.
We estimated the aggregate market growth rate or decline for each one of our segments and compared it to the segments actual organic growth rate in 2019.
We also included Product Line Simplification by segment.
As you know, full potential steady state PLS is expected to be about 30 basis points.
As you can see overall, we've made some good progress, as our segments are all outgrowing their underlying markets, except for Specialty Products.
At the enterprise level, we estimate that we outpaced our aggregate blended market growth rates by approximately one percentage point.
So overall good progress on our organic growth initiatives.
And by completing our Finish the Job agenda over the next several years, we expect to generate one to two percentage points of additional improvement in ITW's organic growth rate.
As Scott mentioned, we look forward to providing a full progress update at our Investor Day in March.
Now let's talk -- let's turn the page and talk about 2020, starting with Slide 11.
First, we expect GAAP earnings per share in the range of $7.65 to $8.05 for 2020.
Using current levels of demand adjusted for seasonality, organic growth at the enterprise level is forecast to be in the range of 0% to 2% for the year.
At current exchange rates, foreign currency translation impact and the revenue associated with our 2019 divestitures are each of -- one percentage point headwind to revenue.
PLS impact is expected to be approximately 50 basis points.
We expect to expand operating margin from 24.1% in 2019 to a range of 24.5% to 25% in 2020 with enterprise initiatives contributing approximately 100 basis points.
After-tax ROIC should improve to a range of 29% to 30%.
And as usual, we expect strong free cash flow with conversion greater than net income.
We have allocated $2 billion to share repurchases with core share repurchases of $1.5 billion, an additional $500 million to offset the earnings per share dilution from the three completed divestitures.
Additional items include an expected tax rate in the range of 23.5% to 24.5%, which represents a 10% -- $0.10 earnings per share headwind and foreign currency at today's rates is also unfavorable $0.10 of EPS.
Just a quick word as it relates to the Coronavirus situation in China and we're obviously in the same position as everyone else.
At this point, we've baked into our guidance a last week of production, assuming that we all return to work in China on February 10.
But obviously it's too early to tell and we'll continue to monitor the situation closely.
Overall, ITW is well positioned for differentiated financial performance across a wide range of scenarios as we continue to execute on the things within our control and make meaningful progress on our path to full potential performance through the implementation of our Finish the Job enterprise strategy agenda.
Finally, we're providing an organic growth outlook by segment for full year 2020 on Slide 12.
And as always, these are based on current run rates adjusted for seasonality and are obviously influenced by year-over-year comparisons as we go through the year.
It's important to note that there is no expectation of demand acceleration embedded in our guidance.
You can see that every segment is forecast to improve the organic growth rate in 2020 relative to 2019.
The same is true for margins, as every segment expects to improve the margin performance in 2020.
Julianne, we're ready to open up the lines for Q&A.

user
q4 gaap earnings per share $1.99.
sees fy earnings per share $7.65 to $8.05.
illinois tool works inc - plans to repurchase approximately $2 billion of its shares in 2020.
illinois tool works inc qtrly organic revenue down 1.6%.
illinois tool works inc - at current levels of demand, sees 2020 organic growth to be in range of 0% to 2%.

assistant