Illinois Tool Works Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. ITW is a diversified industrial manufacturer reporting eight segments. Dollar figures are in millions except per-share amounts.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Operating revenue | $4,009 | $4,358 | Down 8.0%; excluding Decorative Surfaces revenue included in the prior-year period, down 1.8%. Base revenue fell 2.7%. |
| Operating income | $660 | $694 | Down 4.9%; excluding Decorative Surfaces operating income in the prior-year period, up 1.2%. |
| Operating margin | 16.5% | 15.9% | Up 0.6 percentage points. |
| Continuing-operations income | $459 | $464 | Down 1.0%. |
| Net income | $354 | $486 | Includes a $105 loss from discontinued operations, versus $22 income in Q1 2012. |
| Diluted EPS | $0.78 | $1.00 | Continuing-operations diluted EPS was $1.01 versus $0.95. |
| Operating cash flow | $366 | $323 | Free operating cash flow, defined by the company as operating cash flow less capital expenditures, was $277 versus $239. |
The effective tax rate was 29.0%, compared with 28.9%. Interest expense rose to $60 from $50, including interest on notes issued in August 2012. Other income was $46 versus $8, primarily including a $30 pretax gain from gaining control of an existing equity-method investment and foreign currency gains.
Segments
Revenue and operating income were mixed across the eight segments. Revenue increased in Automotive OEM ($589, up 4.0%) and Specialty Products ($481, up 3.6%), while declining in most other segments. Welding revenue fell 4.8% and operating income fell 11.8%; its margin declined to 26.0% from 28.0%. Construction Products operating income increased 33.3% to $49 and margin rose to 11.7% from 8.5%, primarily reflecting lower restructuring and operating costs. The filing reports results under a reorganized segment structure and restates prior-year segment data for comparability.
Liquidity, debt and capital allocation
- Cash and equivalents were $2,662 at March 31, down from $2,779 at year-end. Current assets were $8,110 and current liabilities $2,802; the current ratio was 2.89, versus 3.00 at year-end.
- Total debt was $5,012, slightly below $5,048 at year-end; debt to capitalization was 32.8%, versus 32.3%. Trailing-twelve-month total debt to adjusted EBITDA was 1.5 times.
- Commercial paper outstanding was $418. The company cited $2.5 billion of long-term credit facilities backing its commercial paper program.
- ITW repurchased 5.8 million shares for approximately $366 during the quarter; about $1.5 billion remained authorized under its $4.0 billion repurchase program. No dividends were paid in the quarter; $0.38 per share was declared, compared with $0.36 paid and declared in Q1 2012.
- Cash balances were primarily held by international subsidiaries and may incur U.S. income and foreign withholding taxes if repatriated. Management said internally generated cash flow was expected to support debt service, internal growth, dividends and small-to-medium acquisitions.
Material changes, outlook and risks
- Discontinued operations: ITW classified several businesses as held for sale and expected to dispose of them within a year. The quarter’s discontinued-operations loss included $42 of goodwill impairment and $60 of loss reserves on assets held for sale. Held-for-sale assets were $316 and liabilities $84.
- Industrial Packaging review: Announced a strategic-alternatives review on February 19, potentially including a sale or spin-off, expected to continue through the remainder of 2013. The filing provides no decision or financial guidance on the outcome.
- Decorative Surfaces: Following the October 2012 sale of a 51% interest, ITW retained 49% and accounts for Wilsonart under the equity method; its Q1 share of Wilsonart results was a $2 loss.
- Operating environment: Management cited lower equipment sales and weak European conditions; worldwide base revenue declined 2.7%. European base revenue fell 5.8%, while Asia-Pacific base revenue grew 0.5%. Management attributed margin improvement mainly to lower overhead costs, simplification initiatives and favorable price-versus-material-cost comparisons.
- Risks and contingencies: Identified risks include economic and market weakness, foreign exchange, raw-material costs and supply, acquisitions, credit availability, pension-market exposure, tax matters and legal proceedings. Tax audits were ongoing; ITW said unrecognized tax benefits could decrease by approximately $40 within 12 months.
- Other: ITW expected 2013 contributions of approximately $132 to pension plans and $9 to other postretirement plans; $41 and $2, respectively, had been contributed by quarter-end. No specific earnings or revenue guidance was provided.
Investor verification points
- Check the discontinued-operations charges, asset valuations and timing/proceeds of the expected business disposals.
- Monitor the Industrial Packaging strategic review, including any separation costs, transaction terms and executive retention arrangements.
- Assess underlying revenue trends apart from divestitures, acquisitions and currency, and whether overhead-led margin gains persist amid lower volumes.
- Review cash availability and potential tax costs associated with repatriating overseas cash, alongside debt and capital-return plans.
- Track ongoing tax audits and the stated possible $40 reduction in unrecognized tax benefits.