Illinois Tool Works Inc. (ITW) - Get Report finished the year strong.

In a premarket announcement Wednesday, Jan. 24, the company reported fourth-quarter adjusted earnings of $1.70 a share, which easily topped analysts' expectations of $1.61. Earnings grew 17% from the same time last year.

For the full fiscal year, ITW tallied adjusted earnings of $6.59 a share, falling short of analysts' forecasts of $6.67. Full-year earnings grew 16% from last year, when the firm notched $5.70 in year-end EPS.

Taking into account a $658 million one-time tax charge related to recently passed tax reform, the company posted a loss of 22 cents in the fourth quarter on a GAAP basis.

Total revenue was $3.6 billion for the fourth quarter, up 7% from last year on 4% organic growth. Wall Street expected revenue of $3.54 billion in the fourth quarter. For the full year, revenue reached $14.3 billion, up 5% from a year earlier on 3% organic growth. Analysts predicted fiscal-year revenue of $14.23 billion.

Operating margin for the fourth quarter was 23.4%, up 160 basis points from last year. For the full year, operating margin was 24.4%, up 190 basis points from 2016.

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Illinois Tool Works said it expects first-quarter earnings in the range of $1.80 to $1.90 a share with organic growth between 3% and 4%. The FactSet consensus estimate for the first quarter of 2018 was $1.75 a share.

The company also raised adjusted earnings guidance for 2018 by 6% at the midpoint to between $7.45 and $7.65 a share. That's an acceleration from previously announced plans to increase the company's dividend payout ratio.

At an investor day in December, ITW CEO Scott Santi explained that since 2012 the company has steadily increased its payout ratio to an average of 43%. At the investor presentation, the company announced it will increase that dividend payout ratio to 50% by 2020.

"We are not a traditional innovator in the sense that we don't aspire to invest in or create new science. We're not what I would describe as an R&D-centered company," Santi said at an investor event Friday, Dec. 1, in New York. "What we do instead and what were really good at is taking and combining known technology to create clever and robust solutions for our biggest customers and our most challenging business segments."

"Customer-backed innovation enables our divisions to deliver a steady flow of differentiated new products and solutions," Santi noted. "And in every market in which we operate, our business has worked hard to position themselves as the go-to problem solver."

Illinois Tool Works operates under an 80/20 business model -- the company focuses the bulk of its client-facing interactions on the 20% of its customer base that gives it 80% of its business. By implementing direct input from the customers who matter most instead of creating a cure-all, the firm has shored up a constant stream of strong revenue. Per ITW's outlook, investing in R&D can work, but the best R&D comes from communicating directly with your bread-and-butter buyers.

"Our business model creates a competitive advantage for the company," Santi said.

Whatever it is appears to be working for the company's stock, too. Illinois Tool Works stock has rallied 34.6% in the past 12 months.

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