Illinois Tool Works Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual filing, not a standalone fourth-quarter report. ITW is a diversified manufacturer operating about 840 businesses in 57 countries across eight reportable segments; 57% of 2009 revenue came from customers outside the United States.
Financial performance
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Revenue | $13.88 billion | $17.10 billion | Down 18.8% |
| Operating income | $1.386 billion | $2.501 billion | Down 44.6% |
| Operating margin | 10.0% | 14.6% | Down 4.6 percentage points |
| Income from continuing operations | $969.5 million | $1.691 billion | Down 42.7% |
| Diluted continuing-operations EPS | $1.93 | $3.24 | Down 40.4% |
| Net income | $947.0 million | $1.519 billion | Down 37.7% |
| Operating cash flow | $2.147 billion | $2.222 billion | Down $75.6 million |
| Company-defined free operating cash flow | $1.899 billion | $1.860 billion | Up $39.6 million |
Free operating cash flow is ITW’s non-GAAP-style measure, defined here as operating cash flow less plant and equipment additions. Capital expenditures were $247.1 million in 2009. Cash dividends paid were $619.7 million; declared dividends were $1.24 per share, versus $1.18 in 2008.
In the fourth quarter, revenue was $3.757 billion versus $3.954 billion in the prior-year quarter. Operating income was $476.3 million versus $454.5 million, and income from continuing operations was $495.6 million versus $302.5 million. Fourth-quarter continuing income included $163.0 million of favorable discrete tax adjustments, so the year-over-year increase was materially affected by tax items.
Liquidity, debt and balance sheet
- Cash and equivalents were $1.319 billion at year-end, up from $743.0 million.
- Total debt was $3.129 billion, down from $3.682 billion; long-term debt rose to $2.915 billion as short-term debt fell. Debt to total capitalization was 26.2%, compared with 32.4%.
- Current assets were $5.675 billion and current liabilities $2.836 billion; the current ratio improved to 2.00 from 1.19, primarily reflecting repayment of commercial paper and maturing notes.
- ITW reported $135.5 million of commercial paper outstanding and $2.5 billion of committed U.S. credit facilities with no amounts drawn at year-end. One $2.0 billion facility was scheduled to terminate in June 2010; the other $500 million facility runs to June 2012.
- In 2009, ITW issued $800 million of 5.15% notes due 2014 and $700 million of 6.25% notes due 2019. The proceeds were used to reduce commercial paper.
Material changes and unusual items
- Revenue fell primarily because the global recession and weak industrial production reduced base-business sales; base revenue declined 18.4%. Currency translation reduced revenue by about $653 million and continuing-operations earnings by approximately $0.10 per diluted share.
- Operating income was pressured by lower volumes, restructuring costs, currency effects and $105.6 million of goodwill and intangible-asset impairment charges, versus $1.6 million in 2008. Major goodwill charges included $60 million in pressure-sensitive adhesives, $18 million in PC board fabrication and $12 million in truck remanufacturing.
- Most segments reported lower revenue and operating income. Particularly steep operating-income declines included Industrial Packaging (68.4%), Construction Products (60.0%), Polymers & Fluids (60.9%) and Power Systems & Electronics (53.3%). ITW said cost reductions and favorable price-versus-material-cost comparisons partly offset volume declines.
- The effective tax rate fell to 20.1% from 28.1%, including fourth-quarter benefits of $85.5 million from a global legal-structure reorganization and $77.5 million from a German tax settlement. These benefits should not be assumed to recur.
- Loss from discontinued operations was $22.5 million in 2009, compared with a $172.1 million loss in 2008. ITW sold the Click Commerce business and an automotive components business during 2009, and reversed its earlier decision to divest Decorative Surfaces, which was presented as a continuing operation in all periods.
- Acquisition spending fell to $281.7 million from $1.547 billion in 2008; ITW completed 20 acquisitions in 2009. It made no common-stock repurchases during 2009.
Outlook, risks and contingencies
Management anticipated modest expansion in a variety of worldwide end markets in 2010 but gave no specific revenue or earnings guidance in the provided filing text. Management said internally generated cash flow should be adequate to service debt, continue dividends, fund internal growth and support small-to-medium acquisitions. The company’s dividend payout guideline is 25%–35% of the prior two years’ average continuing-operations income.
- Principal risks include a renewed or prolonged downturn in served markets, foreign-currency movements, international political and regulatory risks, raw-material price increases or shortages, constrained credit, pension-market exposure, acquisition integration and impairment risk, tax uncertainty, and product-liability and other litigation.
- Unrecognized tax benefits were $725 million at year-end; ITW said the Australian tax dispute could resolve within 12 months and reduce those benefits by about $159 million. The timing of payments on noncurrent tax obligations was not reasonably estimable.
- ITW guaranteed $24 million of debt of unconsolidated affiliates and recorded $17 million of related liabilities. Standby letters of credit totaled $173 million, substantially all expiring in 2010.
- The company faced welding-related toxic-tort claims, among other ordinary-course matters. Management believed resolution would not materially affect financial position, liquidity or future operations and had recorded no significant reserves for those cases.
- Defined-benefit pension and postretirement obligations remain sensitive to discount rates, plan-asset returns and health-care cost assumptions. Management expected 2010 contributions of approximately $63.1 million to pension plans and $37.9 million to other postretirement plans.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor reported controls effective as of December 31, 2009.
Important facts for investors to verify
- Whether the anticipated 2010 end-market improvement materialized and how base-business volumes and margins recovered.
- How much of 2009 earnings depended on the $163 million of discrete tax benefits, and the outcome and cash impact of the Australian tax dispute and other open tax matters.
- Whether the reported improvement in liquidity and lower total debt persisted, including refinancing or repayment needs around the 2010 credit-facility termination and 2011–2014 debt maturities.
- Whether further goodwill or intangible impairments occurred, given $6.6 billion of goodwill and intangible assets and the 2009 impairments.
- Actual performance of pension assets, benefit obligations and required contributions, together with developments in litigation, guarantees and letters of credit.