Illinois Tool Works Inc. (ITW) recently reported third quarter 2016 diluted earnings per share (EPS) of $1.50, an 8% increase compared to the year-ago period. Currency translation reduced EPS by $0.02 in the quarter. Operating margin increased 40 basis points to 23.1%, including 80 basis points of margin dilution from the third quarter 2016 acquisition of Engineered Fasteners & Components (EF&C). Excluding the EF&C dilution impact, third quarter operating margin was 23.9%. Operating income of $808 million was up 6%, and after-tax return on invested capital increased by 140 basis points to 23%. Organic revenue increased 2%, and the company’s ongoing product line simplification (PLS) activities reduced organic revenue growth by approximately 1 percentage point. 

“The ITW team delivered another quarter of quality execution and earnings growth marked by all-time record operating income and continued strong margin expansion driven by our Enterprise Strategy initiatives,” said E. Scott Santi, chairman and CEO. “In addition, continued progress in executing our pivot to growth in combination with our diversified portfolio of seven highly differentiated businesses allowed us to deliver positive organic growth in the third quarter despite a macro environment that remains challenging.”  

Total revenue was $3.5 billion, an increase of 4%. Organic revenue grew 2%, with 1% growth in North America and 3% in International. Free cash flow was solid at 101% of net income. Share repurchases totaled $500 million, and the company announced an 18% dividend increase on August 5, 2016. Six of seven segments achieved positive organic revenue growth as Automotive OEM and Test & Measurement/Electronics both grew 7%, Construction Products grew 2%, Polymers & Fluids and Food Equipment Group both grew 1% and Specialty Products grew 0.1%. Welding declined by 9%. All seven segments achieved operating margin at or above 21%, with Food Equipment at 27.4%, Welding at 26.5%, Specialty Products at 26.1%, Automotive OEM at 21.8% (25.5% excluding EF&C), Construction at 22.6%, and Test & Measurement/Electronics and Polymers & Fluids both at 21%. 

ITW is raising its 2016 full-year GAAP EPS guidance range to $5.56-$5.66, a year-over-year increase of 9% at the mid-point. Consistent with prior guidance, the full-year organic growth forecast is 1-2% and includes approximately 1 percentage point of PLS impact. Operating margin is forecast to exceed 22.5%. 

For the fourth quarter of 2016, the company expects GAAP EPS to be in a range of $1.31-$1.41, an increase of 11% at the mid-point. Organic revenue is forecast to be 0-2%, and operating margin to be approximately 21.5%. Guidance is based on current foreign exchange rates. 

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