Illinois Tool Works Inc. — 2009 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2009; comparisons are with the corresponding 2008 periods. ITW is a diversified manufacturer serving industrial, automotive, construction, food-service, electronics and related markets.
Key financial results
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenues | $3,392.9 | $4,555.9 | $6,539.3 | $8,681.7 |
| Operating income | $334.8 | $757.2 | $426.1 | $1,375.8 |
| Operating margin | 9.9% | 16.6% | 6.5% | 15.8% |
| Income from continuing operations | $178.9 | $528.7 | $170.9 | $924.0 |
| Net income | $176.6 | $528.1 | $137.2 | $831.7 |
| Diluted net income per share | $0.35 | $1.01 | $0.27 | $1.58 |
- Six-month cash from operations was $1,071.1 million, versus $944.0 million; capital spending was $121.3 million, versus $185.0 million. Management-defined free operating cash flow was $949.7 million, up from $759.0 million.
- Cash and equivalents were $616.4 million at June 30, 2009. Total debt was $3,036.3 million, down from $3,681.9 million at year-end 2008; debt-to-capitalization was 27.7%, compared with 32.4%.
- Current assets were $5,132.0 million and current liabilities $2,448.2 million; the current ratio was 2.10, versus 1.19 at December 31, 2008. The change chiefly reflects lower short-term debt.
- Cash dividends paid in the first half were $309.5 million. The quarterly dividend was $0.31 per share, versus $0.28 a year earlier.
Material changes and operating drivers
- Revenue fell 25.5% in Q2 and 24.7% year to date. Base manufacturing revenue declined 22.2% and 22.5%, respectively; unfavorable currency translation also reduced sales. Management attributed weakness to the global downturn and falling industrial production.
- Operating income fell 55.8% in Q2 and 69.0% year to date. Lower volume and unfavorable currency effects outweighed savings from restructuring, improved variable margins and lower overhead.
- All reported segments had lower revenue and operating income year to date. Particularly sharp pressure affected Transportation, Industrial Packaging, Power Systems & Electronics and Construction Products. Transportation’s first-half operating margin was 0.8%, compared with 15.6% a year earlier.
- First-half results included $90.0 million of goodwill and intangible-asset impairments, mainly in Polymers & Fluids and Power Systems & Electronics. Intangible amortization was $102.5 million, versus $82.4 million.
- The effective tax rate was 47.7% for the first half, versus 29.2% in 2008, reflecting largely nondeductible impairment charges and discrete tax adjustments. Other expense was $24.2 million, versus $3.2 million of other income, mainly due to investment and currency losses and lower interest income.
Liquidity, debt and unusual items
- In March 2009, ITW issued $800 million of 5.15% notes due 2014 and $700 million of 6.25% notes due 2019; proceeds were used to reduce commercial paper. Commercial paper outstanding was $122.0 million at June 30, compared with $1.8 billion at year-end. A $2.0 billion credit facility replaced the prior facility in June; none was drawn at quarter-end.
- First-half discontinued operations produced a $33.7 million loss, including a $29.8 million pretax loss on the sale of Click Commerce, completed in Q2. ITW also reclassified Decorative Surfaces as continuing operations after the board rescinded its planned divestiture.
- Foreign-currency movements reduced first-half revenue by approximately $565 million and continuing-operations earnings by approximately $0.07 per diluted share.
- The company expected 2009 contributions of $218.4 million to pension plans and $38.1 million to other postretirement plans; contributions made by June 30 were $41.1 million and $17.3 million, respectively.
Outlook, commentary and risks
Management expected the weak global economic environment and negative effects on key end markets to continue through 2009. The filing provides no specific earnings or revenue guidance. Management said it believed the GM and Chrysler reorganizations would not have a significant long-term impact on ITW, while noting continued monitoring of automotive conditions.
- Key risks include further deterioration in industrial, construction, automotive and food-service markets; foreign-currency and raw-material cost movements; reduced credit availability; and adverse tax changes or rulings.
- The IRS had proposed adjustments for 2001–2003, principally concerning leveraged leases and mortgage-backed securities. ITW had recorded its best estimate; management said unrecognized tax benefits could decrease by approximately $271 million if matters were resolved within the next twelve months.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and margins stabilize as industrial production and other end markets evolve, especially in automotive, construction and industrial packaging.
- How much cash generation reflects sustainable operations versus working-capital reductions, and whether planned pension contributions affect liquidity.
- Debt maturities, refinancing access and compliance with the company’s targeted 20%–30% debt-to-capital range.
- Potential additional impairment charges, restructuring costs and the eventual resolution and cash impact of the IRS matters.
- The final financial effects of divestitures and discontinued operations, including the automotive-components business sale reported after quarter-end.