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Illinois Tool Works Inc. (ITW)

Analysis of Inventory

Difficulty: Advanced

Inventory Accounting Policy
Inventory Disclosure
Adjustment to Inventory: from LIFO to FIFO
Adjusted Ratios: LIFO vs. FIFO (Summary)
Adjusted Current Ratio
Adjusted Net Profit Margin
Adjusted Total Asset Turnover
Adjusted Financial Leverage
Adjusted Return on Equity (ROE)
Adjusted Return on Assets (ROA)

Inventory Accounting Policy

Inventories are stated at the lower of cost or net realizable value and include material, labor and factory overhead. The last-in, first-out ("LIFO") method is used to determine the cost of inventories at certain U.S. businesses. The first-in, first-out ("FIFO") method, which approximates current cost, is used for all other inventories. Inventories priced at LIFO were approximately 23% and 21% of total inventories as of December 31, 2018 and 2017, respectively. If the FIFO method was used for all inventories, total inventories would have been approximately $97 million and $89 million higher than reported at December 31, 2018 and 2017, respectively.

Source: 10-K (filing date: 2019-02-15).

Inventory Disclosure

Illinois Tool Works Inc., balance sheet: inventory

US$ in millions

		Dec 31, 2018		Dec 31, 2017		Dec 31, 2016		Dec 31, 2015		Dec 31, 2014
	Raw material
	Work-in-process
	Finished goods
	Less: LIFO reserve
	Inventories

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

Item	Description	The company
Inventories	Amount after valuation and LIFO reserves of inventory expected to be sold, or consumed within one year or operating cycle, if longer.	Illinois Tool Works Inc.’s inventories increased from 2016 to 2017 and from 2017 to 2018.

Adjustment to Inventory: from LIFO to FIFO

Adjusting LIFO Inventory to FIFO (Current) Cost

US$ in millions

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Adjustment to Inventories
	Inventories at LIFO (as reported)
	Add: Inventory LIFO reserve
	Inventories at FIFO (adjusted)
	Adjustment to Current Assets
	Current assets (as reported)
	Add: Inventory LIFO reserve
	Current assets (adjusted)
	Adjustment to Total Assets
	Total assets (as reported)
	Add: Inventory LIFO reserve
	Total assets (adjusted)
	Adjustment to Stockholders’ Equity Attributable To ITW
	Stockholders’ equity attributable to ITW (as reported)
	Add: Inventory LIFO reserve
	Stockholders’ equity attributable to ITW (adjusted)
	Adjustment to Net Income
	Net income (as reported)
	Add: Increase (decrease) in inventory LIFO reserve
	Net income (adjusted)

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

Illinois Tool Works Inc.’s inventory value on Dec 31, 2018 would be $1,415 (in millions) if the FIFO inventory method was used instead of LIFO. Illinois Tool Works Inc.’s inventories, valued on a LIFO basis, on Dec 31, 2018 were $1,318 . Illinois Tool Works Inc.’s inventories would have been $97 higher than reported on Dec 31, 2018 if the FIFO method had been used instead.

Illinois Tool Works Inc., Financial Data: Reported vs. Adjusted

Adjusted Ratios: LIFO vs. FIFO (Summary)

Illinois Tool Works Inc., adjusted ratios

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Current Ratio
	Reported current ratio (LIFO)
	Adjusted current ratio (FIFO)
	Net Profit Margin
	Reported net profit margin (LIFO)
	Adjusted net profit margin (FIFO)
	Total Asset Turnover
	Reported total asset turnover (LIFO)
	Adjusted total asset turnover (FIFO)
	Financial Leverage
	Reported financial leverage (LIFO)
	Adjusted financial leverage (FIFO)
	Return on Equity (ROE)
	Reported ROE (LIFO)
	Adjusted ROE (FIFO)
	Return on Assets (ROA)
	Reported ROA (LIFO)
	Adjusted ROA (FIFO)

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

Ratio	Description	The company
Adjusted current ratio	A liquidity ratio calculated as adjusted current assets divided by current liabilities.	Illinois Tool Works Inc.’s adjusted current ratio improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.
Adjusted net profit margin	An indicator of profitability, calculated as adjusted net income divided by revenue.	Illinois Tool Works Inc.’s adjusted net profit margin deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.
Adjusted total asset turnover	An activity ratio calculated as total revenue divided by adjusted total assets.	Illinois Tool Works Inc.’s adjusted total asset turnover deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.
Adjusted financial leverage	A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.	Illinois Tool Works Inc.’s adjusted financial leverage increased from 2016 to 2017 and from 2017 to 2018.
Adjusted ROE	A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity.	Illinois Tool Works Inc.’s adjusted ROE deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.
Adjusted ROA	A profitability ratio calculated as adjusted net income divided by adjusted total assets.	Illinois Tool Works Inc.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Illinois Tool Works Inc., Ratios: Reported vs. Adjusted

Adjusted Current Ratio

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in millions)
	Current assets
	Current liabilities
	Ratio
	Current ratio¹
	Adjusted: from LIFO to FIFO
	Selected Financial Data (US$ in millions)
	Adjusted current assets
	Current liabilities
	Ratio
	Adjusted current ratio²

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

¹ Current ratio = Current assets ÷ Current liabilities
= hidden ÷ hidden = hidden

² Adjusted current ratio = Adjusted current assets ÷ Current liabilities
= hidden ÷ hidden = hidden

Ratio	Description	The company
Adjusted current ratio	A liquidity ratio calculated as adjusted current assets divided by current liabilities.	Illinois Tool Works Inc.’s adjusted current ratio improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.

Adjusted Net Profit Margin

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in millions)
	Net income
	Operating revenue
	Ratio
	Net profit margin¹
	Adjusted: from LIFO to FIFO
	Selected Financial Data (US$ in millions)
	Adjusted net income
	Operating revenue
	Ratio
	Adjusted net profit margin²

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

¹ Net profit margin = 100 × Net income ÷ Operating revenue
= 100 × hidden ÷ hidden = hidden

² Adjusted net profit margin = 100 × Adjusted net income ÷ Operating revenue
= 100 × hidden ÷ hidden = hidden

Ratio	Description	The company
Adjusted net profit margin	An indicator of profitability, calculated as adjusted net income divided by revenue.	Illinois Tool Works Inc.’s adjusted net profit margin deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Adjusted Total Asset Turnover

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in millions)
	Operating revenue
	Total assets
	Ratio
	Total asset turnover¹
	Adjusted: from LIFO to FIFO
	Selected Financial Data (US$ in millions)
	Operating revenue
	Adjusted total assets
	Ratio
	Adjusted total asset turnover²

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

¹ Total asset turnover = Operating revenue ÷ Total assets
= hidden ÷ hidden = hidden

² Adjusted total asset turnover = Operating revenue ÷ Adjusted total assets
= hidden ÷ hidden = hidden

Ratio	Description	The company
Adjusted total asset turnover	An activity ratio calculated as total revenue divided by adjusted total assets.	Illinois Tool Works Inc.’s adjusted total asset turnover deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Adjusted Financial Leverage

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in millions)
	Total assets
	Stockholders’ equity attributable to ITW
	Ratio
	Financial leverage¹
	Adjusted: from LIFO to FIFO
	Selected Financial Data (US$ in millions)
	Adjusted total assets
	Adjusted stockholders’ equity attributable to ITW
	Ratio
	Adjusted financial leverage²

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

¹ Financial leverage = Total assets ÷ Stockholders’ equity attributable to ITW
= hidden ÷ hidden = hidden

² Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity attributable to ITW
= hidden ÷ hidden = hidden

Ratio	Description	The company
Adjusted financial leverage	A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.	Illinois Tool Works Inc.’s adjusted financial leverage increased from 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Equity (ROE)

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in millions)
	Net income
	Stockholders’ equity attributable to ITW
	Ratio
	ROE¹
	Adjusted: from LIFO to FIFO
	Selected Financial Data (US$ in millions)
	Adjusted net income
	Adjusted stockholders’ equity attributable to ITW
	Ratio
	Adjusted ROE²

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

¹ ROE = 100 × Net income ÷ Stockholders’ equity attributable to ITW
= 100 × hidden ÷ hidden = hidden

² Adjusted ROE = 100 × Adjusted net income ÷ Adjusted stockholders’ equity attributable to ITW
= 100 × hidden ÷ hidden = hidden

Ratio	Description	The company
Adjusted ROE	A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity.	Illinois Tool Works Inc.’s adjusted ROE deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Adjusted Return on Assets (ROA)

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in millions)
	Net income
	Total assets
	Ratio
	ROA¹
	Adjusted: from LIFO to FIFO
	Selected Financial Data (US$ in millions)
	Adjusted net income
	Adjusted total assets
	Ratio
	Adjusted ROA²

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

¹ ROA = 100 × Net income ÷ Total assets
= 100 × hidden ÷ hidden = hidden

² Adjusted ROA = 100 × Adjusted net income ÷ Adjusted total assets
= 100 × hidden ÷ hidden = hidden

Ratio	Description	The company
Adjusted ROA	A profitability ratio calculated as adjusted net income divided by adjusted total assets.	Illinois Tool Works Inc.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

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Ratios
Relative Valuation
Discounted Cash Flow (DCF) Valuation
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Long-term Trends
Analysis
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Financial Statements
Common-Size Financial Statements
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Relative Valuation
Discounted Cash Flow (DCF) Valuation
Economic Value Added (EVA)
Long-term Trends
Analysis
Financial Reporting Quality