Illinois Tool Works Inc. — 2010 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2010. ITW is a diversified industrial manufacturer operating in 57 countries through eight reportable segments. Approximately 58% of revenue came from customers outside the United States. The filing also reports fourth-quarter results; this summary primarily covers the full fiscal year.
Financial performance
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $15.87 billion | $13.88 billion |
| Operating income | $2.36 billion | $1.39 billion |
| Operating margin | 14.8% | 10.0% |
| Income from continuing operations | $1.53 billion | $969.5 million |
| Diluted continuing-operations EPS | $3.03 | $1.93 |
| Net cash from operating activities | $1.56 billion | $2.15 billion |
| Free operating cash flow, company-defined | $1.27 billion | $1.90 billion |
| Cash and equivalents, year-end | $1.19 billion | $1.32 billion |
| Total debt, year-end | $2.83 billion | $3.13 billion |
| Current ratio, year-end | 1.93 | 2.00 |
| Return on average invested capital | 15.3% | 10.7% |
Revenue rose 14.4% year over year, including 10.8% growth in base-business revenue; operating income rose 70.0%. The recovery in end markets drove higher volumes and operating leverage, while lower restructuring costs and the absence of most prior-year impairment charges also helped. The effective tax rate increased to 31.0% from 20.1%, partly reflecting a $21.9 million health-care-law-related charge in 2010 and favorable discrete tax adjustments in 2009.
Fourth-quarter 2010 revenue was $4.17 billion, operating income $579.5 million, and continuing-operations income $392.8 million. In fourth-quarter 2009, the corresponding figures were $3.76 billion, $476.3 million, and $495.6 million; the prior-year quarter included substantial favorable discrete tax adjustments.
Segments and material changes
| Segment | 2010 revenue | 2010 operating margin | Year-over-year context |
|---|---|---|---|
| Transportation | $2.53 billion | 14.8% | Revenue +22.5%; automotive recovery and acquisitions contributed. |
| Industrial Packaging | $2.28 billion | 10.3% | Revenue +18.1%; industrial production and packaging demand improved. |
| Power Systems & Electronics | $1.94 billion | 21.1% | Revenue +21.3%; welding and PC-board fabrication demand strengthened. |
| Food Equipment | $1.87 billion | 13.9% | Revenue +0.7%; largely stable, with modest growth. |
| Construction Products | $1.76 billion | 11.4% | Revenue +14.7%; recovery remained uneven, particularly in North America. |
| Polymers & Fluids | $1.36 billion | 14.7% | Revenue +13.7%; industrial-market recovery and acquisitions contributed. |
| Decorative Surfaces | $1.01 billion | 10.4% | Revenue +1.0%; operating income declined 8.0%, including flooring-business closure costs. |
| All Other | $3.22 billion | 17.7% | Revenue +16.5%; broad improvement across several businesses. |
Revenue growth was broad-based, but Food Equipment and Decorative Surfaces were comparatively subdued. Construction Products continued to face weak U.S. housing and commercial construction activity. Backlog increased to $1.35 billion from $1.10 billion, although management said backlog is generally not a significant business factor.
Cash, debt, and liquidity
Operating cash flow fell 27% and company-defined free operating cash flow fell 33%, despite stronger earnings; receivables and inventory increased and used cash. Capital expenditures were $286 million. ITW paid $636 million in dividends, spent $433 million on acquisitions, repurchased $350 million of shares, and reduced debt by approximately $185 million on a net cash-flow basis. Year-end total debt was $2.83 billion, or 23.2% of total capitalization. No commercial paper was outstanding; $2.5 billion of U.S. committed credit facilities and approximately $318 million of unused international facilities were available. Management stated internally generated cash was expected to support debt service, dividends, internal growth, and small-to-medium acquisitions.
Outlook, risks, and unusual items
- Outlook: Management anticipated continued macroeconomic improvement in 2011, but provided no quantified revenue or earnings guidance in the supplied filing text.
- Tax matter: In February 2011, an Australian court ruled for ITW on a significant portion of a tax dispute. The company expected to reduce related unrecognized tax benefits by about $186 million and tax expense by about $166 million in 2011; the tax authority could appeal.
- Impairments and restructuring: Goodwill and intangible-asset impairment charges were $1.0 million in 2010 versus $105.6 million in 2009. Restructuring costs also declined from 2009, when ITW responded to recession-driven weakness.
- Principal risks: A stalled economic recovery, foreign-exchange movements, raw-material cost increases or supply constraints, international political and regulatory risks, acquisition integration and goodwill impairment, tax uncertainty, pension-market exposure, and product-liability litigation.
- Contingencies: ITW disclosed welding-consumable toxic-tort claims alleging exposure to asbestos, manganese, or fumes. The company said it did not expect the proceedings, individually or collectively, to materially affect its financial position, liquidity, or future operations and had not recorded significant reserves for these cases. It also reported $181 million in standby letters of credit and $459 million of income taxes payable, including unrecognized tax benefits.
- Other watch item: Defined-benefit pension plans had a reported net liability of approximately $419 million, in addition to approximately $269 million for other postretirement benefits. The company expected 2011 contributions of approximately $59 million and $40 million, respectively.
Important facts for investors to verify
- Whether 2011 end-market recovery and revenue growth persisted, especially in automotive, industrial, and construction markets.
- Whether lower restructuring charges and operating leverage sustained margins as volumes changed, and whether raw-material cost increases could be passed through.
- Whether cash generation improved from 2010 and whether working-capital growth remained controlled.
- The outcome of the Australian tax appeal and other open tax examinations, including the potential timing and amount of tax benefits.
- Debt maturities, refinancing needs, pension funding assumptions, and any further impairment or product-liability developments.