Illinois Tool Works Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Comparative period is Q1 2009. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where indicated.
Business context and results
ITW is a diversified manufacturer reporting across eight segments. Management said end-market conditions improved across many worldwide markets, particularly transportation, polymers and fluids, industrial packaging, and PC board/electronics. Reported growth also included favorable currency translation and acquisitions.
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Operating revenue | $3,606.4 million | $3,146.4 million |
| Operating income | $483.9 million | $91.3 million |
| Operating margin | 13.4% | 2.9% |
| Income (loss) from continuing operations | $294.3 million | $(8.0) million |
| Net income (loss) | $294.3 million | $(39.4) million |
| Diluted earnings (loss) per share | $0.58 | $(0.08) |
Revenue, margins, cash flow, and liquidity
- Revenue rose 14.6% year over year; base-business revenue increased 7.5%. Management attributed the balance principally to currency translation (+5.4 percentage points) and acquisitions and divestitures (+2.0 points).
- Operating margin improved 10.5 percentage points. Management cited higher base revenue, improved variable margins, lower overhead, and the absence of the prior-year $90.0 million goodwill and intangible impairment charge. Restructuring benefits, inventory reserve comparisons, and selling-price versus material-cost comparisons also helped.
- Net cash from operations was $279.4 million, down from $447.0 million. Capital expenditures were $60.7 million, producing company-defined free operating cash flow of $218.7 million versus $383.1 million. Dividends paid were $155.7 million.
- Cash and equivalents were $1,417.6 million at March 31, up $98.8 million from year-end. Current assets were $5,792.4 million and current liabilities $2,840.6 million; working capital was $2,951.8 million and the current ratio was 2.04.
- Total debt was $3,131.6 million, little changed from $3,128.6 million at year-end. Short-term debt increased to $324.4 million from $213.7 million; long-term debt was $2,807.2 million. Debt to total capitalization was 26.4%, within the company’s stated 20%–30% target range. Commercial paper outstanding was $250.5 million.
- Cash dividends declared and paid were $0.31 per share, unchanged from Q1 2009. Approximately $1.2 billion remained authorized under the company’s open-ended $3.0 billion share repurchase program.
Material changes and segment performance
- The turnaround from Q1 2009’s loss was amplified by prior-period impairment and discontinued-operation charges: Q1 2009 included $90.0 million of goodwill and intangible impairments and a $31.4 million loss from discontinued operations, including a $30.0 million anticipated-sale loss on Click Commerce. There were no such impairment charges or discontinued-operation losses in Q1 2010.
- Revenue increased in seven of eight segments. Transportation revenue rose 35.6% and the segment returned to operating profit ($80.6 million versus a $19.0 million loss), supported by stronger automotive production. Industrial Packaging revenue rose 21.0% and also returned to profit ($51.4 million versus a $2.6 million loss).
- Power Systems & Electronics revenue rose 13.7%; operating income reached $92.5 million versus $25.0 million, reflecting stronger PC-board demand and the prior-year impairment comparison. Polymers & Fluids revenue rose 18.3%; operating income was $38.1 million versus a $48.1 million loss, also benefiting from no repeat of prior-year impairment.
- Food Equipment revenue declined 0.4%, while operating income improved to $50.6 million. Decorative Surfaces revenue rose 1.5%, but operating income declined to $22.4 million from $28.0 million, with restructuring costs cited as a factor.
- Foreign currency translation increased Q1 revenue by approximately $179 million and net income by approximately $0.03 per diluted share. It also contributed to a $237.3 million reduction in accumulated other comprehensive income from currency translation and lower reported equity.
Outlook, commentary, and risks
- The filing provides no specific quantitative revenue or earnings guidance. Management said internally generated cash flow should be adequate to service debt, pay dividends, finance internal growth, and fund small- to medium-sized acquisitions; it also stated that additional financing could be readily obtained if necessary.
- Management expected 2010 contributions of $52.7 million to pension plans and $37.9 million to other postretirement plans; $7.0 million and $9.4 million, respectively, had been contributed by March 31.
- Q1 2010 income taxes included a $21.9 million discrete charge related to U.S. health-care reform, contributing to a 33.9% effective tax rate. The filing estimates a 29.0% annual effective rate before discrete adjustments.
- ITW is disputing an Australian Tax Office assessment concerning an intercompany financing transaction. The company recorded its best estimate of exposure and said unrecognized tax benefits could decrease by approximately $159 million if the matter is resolved within 12 months; the outcome and timing are uncertain.
- Stated risks include weaker end markets or economic conditions, acquisition effects on profitability and return on invested capital, pension-plan financial-market risks, currency and raw-material cost movements, reduced credit availability, and adverse tax laws or rulings.
Important facts for investors to verify
- How much of revenue and earnings improvement reflects sustainable base-business recovery versus currency, acquisitions, restructuring, and the nonrecurrence of Q1 2009 impairments?
- Whether operating cash flow and free operating cash flow recover from the year-over-year decline, including the impact of working-capital investment.
- The status, potential financial effect, and timing of the Australian tax dispute and any change in unrecognized tax benefits.
- Whether weaker markets in food equipment, decorative surfaces, construction, and certain capital-goods businesses persist, and how they affect segment margins.
- Debt, commercial-paper funding, planned pension and postretirement contributions, and dividend and repurchase priorities relative to cash generation.