Illinois Tool Works Inc. — 2012 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. ITW is a diversified industrial manufacturer operating in 58 countries, with seven reportable segments in 2012. Approximately 57% of annual revenue came from customers outside the United States.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $17.924 billion | $17.787 billion |
| Operating income / margin | $2.847 billion / 15.9% | $2.731 billion / 15.4% |
| Income from continuing operations | $2.495 billion | $2.017 billion |
| Net income | $2.870 billion | $2.071 billion |
| Diluted EPS, continuing operations | $5.27 | $4.08 |
| Operating cash flow | $2.072 billion | $1.956 billion |
| Free operating cash flow (company-defined) | $1.690 billion | $1.603 billion |
| Cash and equivalents at year-end | $2.779 billion | $1.178 billion |
| Total debt at year-end | $5.048 billion | $3.990 billion |
| Current ratio | 3.00 | 2.30 |
Revenue rose 0.8%; operating income increased 4.2%, with margin improving 50 basis points. Net income included $375 million from discontinued operations. The company reported a $933 million pretax ($632 million after-tax) gain on selling a 51% interest in Decorative Surfaces; the continuing-operations increase therefore includes a material one-time gain. Fourth-quarter continuing income was $972 million, including that $632 million after-tax gain; quarterly revenue was $4.221 billion versus $4.320 billion a year earlier, and operating income was $609 million versus $647 million.
Free operating cash flow is defined by ITW as operating cash flow less capital expenditures. Cash dividends paid were $865 million and share repurchases were $2.020 billion in 2012. Year-end debt to capitalization was 32.3%, and debt to adjusted EBITDA was 1.5x, up from 1.2x. The company had $2.5 billion of committed U.S. credit facilities with no borrowings outstanding, alongside $408 million of commercial paper. Much of its cash was held by foreign subsidiaries and could incur tax costs if repatriated.
Material changes versus the prior year
- Base-business revenue increased 1.7%; North American base revenue rose 4.3%, while international base revenue fell 1.1%. Currency translation reduced revenue by 2.7% and operating income by 2.5%.
- Operating margin gains reflected improved variable margins and operating leverage, partly offset by higher restructuring costs and acquisition-related amortization.
- Continuing-operations income was affected by a higher effective tax rate of 30.7%, compared with 22.2% in 2011; the prior-year rate benefited from a $166 million Australian tax benefit.
- ITW divested a 51% majority interest in Decorative Surfaces on October 31, 2012, retained 49%, and began accounting for Wilsonart under the equity method. It also recorded a $372 million after-tax gain from selling the finishing business, reported in discontinued operations.
- Long-term debt increased by $1.101 billion, principally following the issuance of $1.1 billion of 3.9% notes due 2042. Repurchases totaled 35.5 million shares during 2012.
- Effective January 1, 2013, ITW reorganized reporting into eight segments. The company also announced a review of strategic alternatives for Industrial Packaging, potentially including a sale or spin-off, expected to continue through the remainder of 2013.
Outlook, management commentary, risks and unusual items
Management said internally generated cash flow should support debt service, internal growth, dividends, and small-to-medium acquisitions. It launched portfolio management, strategic sourcing, and business-structure simplification initiatives, alongside its established 80/20 operating process. The filing gives no specific 2013 revenue or earnings guidance.
Key risks include weak or uneven global markets (particularly European weakness and slower Asian growth), foreign-exchange movements, raw-material costs and supply, execution of restructuring and portfolio initiatives, acquisition and divestiture risks, tax audits and law changes, pension-market exposures, and product-liability and other legal claims. The company reported no material adverse effect expected from ordinary-course legal proceedings; it resolved substantially all manganese-related welding claims for an immaterial amount. David B. Speer, chairman and CEO, died in November 2012; E. Scott Santi became CEO.
Important facts for investors to verify
- Separate recurring operating performance from the Decorative Surfaces divestiture gain and discontinued-operation disposal gains.
- Review the Industrial Packaging strategic review and subsequent segment reporting for its effect on revenue, earnings, and capital allocation.
- Assess debt maturities, particularly $1.793 billion due in 2014, and the increase in leverage during 2012.
- Evaluate cash availability and potential tax costs: most year-end cash was held internationally, and undistributed foreign earnings were approximately $8.3 billion.
- Monitor progress of the enterprise initiatives, restructuring costs, pension funding, and the outcome of ongoing tax audits.