Illinois Tool Works Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Figures are compared with Q1 2010 unless noted. Effective January 1, 2011, the company eliminated the one-month reporting lag for international operations and retrospectively adjusted prior periods, improving period comparability.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Operating revenue | $4.388 billion | $3.738 billion | Up 17.4%; base revenue rose 11.7% |
| Operating income | $682.6 million | $541.5 million | Up 26.0% |
| Operating margin | 15.6% | 14.5% | Up 1.1 percentage points |
| Net income | $623.1 million | $333.8 million | Up 86.7%; includes a large discrete tax benefit |
| Diluted EPS | $1.24 | $0.66 | Up from prior year |
| Operating cash flow | $144.6 million | $274.8 million | Down; working-capital outflows were significant |
| Free operating cash flow | $56.2 million | $215.6 million | Operating cash flow less capital expenditures, per company definition |
Revenue growth reflected stronger base demand across many markets, acquisitions and favorable currency translation. Management attributed improved operating margin principally to operating leverage, partly offset by selling-price versus material-cost pressures and higher overhead. Foreign currency increased Q1 revenue by approximately $56 million and diluted EPS by about $0.02.
Segment revenue and operating income increased year over year in all reported segments. Margin improved in Transportation, Power Systems & Electronics, Food Equipment, Construction Products, Decorative Surfaces and All Other; Industrial Packaging was approximately flat, while Polymers & Fluids declined from 16.7% to 14.7%. Construction Products and Polymers & Fluids faced selling-price/material-cost and overhead pressures.
Liquidity, balance sheet and capital
- At March 31, 2011, cash and equivalents were $1.084 billion; current assets were $6.596 billion and current liabilities $3.250 billion. The current ratio was 2.03 and net working capital was $3.347 billion.
- Total debt was $3.348 billion, up from $2.868 billion at December 31, 2010; debt-to-total-capitalization rose to 24.4% from 23.1%. Short-term debt included $413.0 million of commercial paper, versus none at year-end.
- Q1 acquisitions used $542.9 million; dividends paid were $169.2 million. Cash decreased $101.9 million during the quarter. Management said internally generated cash flow and credit facilities should be adequate for debt service, dividends, internal growth and small-to-medium acquisitions.
- The quarterly dividend was $0.34 per share. Approximately $871 million remained authorized under the share-repurchase program at quarter-end.
Material changes, outlook and risks
- Unusual tax item: A favorable Australian court decision produced a $165.9 million non-cash discrete tax benefit and reduced the reported effective tax rate to 3.3%, versus 33.5% in Q1 2010. The Australian Tax Office appealed the timing of certain deductions; management did not expect that issue to be material. The company also resolved a U.S. IRS issue, reducing related unrecognized tax benefits by approximately $179 million.
- Absent discrete items, estimated annual effective tax rates were 29.0% for 2011 and 29.1% for 2010. The prior-year rate included a $21.9 million discrete charge related to health-care legislation.
- Subsequent event: In April, ITW agreed to sell its finishing businesses to Graco for $650 million cash, subject to regulatory review and expected to close no earlier than June 2011. Those businesses generated approximately $305 million of 2010 revenue. ITW said it intended to use after-tax proceeds for share repurchases.
- No specific earnings or revenue guidance is provided in the filing. The company expected 2011 pension contributions of $59.3 million and other postretirement contributions of $39.5 million; $33.5 million and $8.6 million, respectively, had been contributed by March 31.
- Risks cited include a slowdown or deterioration in economic conditions, acquisition-related profitability and return risks, pension-market exposure, currency and raw-material cost volatility, reduced credit availability, tax-law or tax-authority outcomes, and product-development, regulatory and compliance risks.
Important facts for investors to verify
- Assess underlying earnings excluding the $165.9 million Australian tax benefit and compare operating performance on a consistent basis.
- Track conversion of earnings to cash, particularly receivables and inventory growth and the decline in operating and free operating cash flow.
- Monitor debt and commercial-paper levels following acquisition spending, and confirm financing and liquidity capacity.
- Confirm the timing, regulatory approval, after-tax proceeds and use of proceeds from the proposed $650 million finishing-business sale.
- Follow material tax-audit developments, including the Australian appeal, and the effect of currency and material costs on margins.