Illinois Tool Works Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are for the three months ended December 31. ITW is a diversified industrial manufacturer operating in 58 countries across eight reportable segments. About 59% of 2011 revenue came from outside the United States.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $17.787 billion | $15.416 billion |
| Operating income / margin | $2.731 billion / 15.4% | $2.254 billion / 14.6% |
| Continuing-operations income | $2.017 billion | $1.452 billion |
| Diluted EPS from continuing operations | $4.08 | $2.89 |
| Net income | $2.071 billion | $1.503 billion |
| Operating cash flow | $1.956 billion | $1.488 billion |
| Capital expenditures | $353 million | $288 million |
| Free operating cash flow, company-defined | $1.603 billion | $1.201 billion |
Fourth-quarter revenue was $4.319 billion versus $3.914 billion a year earlier; operating income was $647 million versus $483 million, and continuing-operations income was $437 million versus $328 million.
Changes and balance sheet
- Annual revenue grew 15.4%; base-business revenue rose 7.5%, with acquisitions contributing 4.8 percentage points and currency translation 3.1 points. Operating income increased 21.2%, while the operating margin expanded 0.8 percentage point to 15.4%.
- Growth was broad across segments, led by Transportation, Power Systems & Electronics, and All Other. Food Equipment revenue was up 6.7%; Polymers & Fluids operating margin declined to 15.3% from 17.1%, reflecting cost and price-versus-material comparisons.
- Cash and equivalents were $1.178 billion. Net working capital was $3.873 billion and the current ratio was 2.30, up from 1.98.
- Total debt rose to $3.990 billion from $2.868 billion; debt to total capitalization increased to 28.5% from 23.1%, and debt/EBITDA was 1.2 versus 1.0. ITW remained within its stated 20%–30% debt-to-capital target range. Approximately $1.776 billion of long-term debt was scheduled to mature in 2014.
- ITW spent $1.308 billion on acquisitions, repurchased $950 million of stock, and paid $680 million of dividends. The declared annual dividend was $1.40 per share, versus $1.30 in 2010.
Outlook, commentary, risks, and unusual items
- Management expected continued growth in North American and Asia-Pacific markets in 2012, with European markets relatively flat versus 2011. This is qualitative outlook; the filing text does not provide a clear consolidated numerical revenue or EPS forecast.
- The 2011 effective tax rate was 22.2%, including a $165.9 million non-cash discrete tax benefit from a favorable Australian court decision. The benefit materially enhanced reported earnings; the 2010 rate was 30.5%.
- ITW issued $1.0 billion of notes in August 2011: $350 million at 3.375% due 2021 and $650 million at 4.875% due 2041. Proceeds were used to repay commercial paper.
- ITW agreed to sell its finishing businesses for $650 million, but the FTC challenged the buyer’s acquisition in December 2011. ITW intended to divest the businesses in 2012. A consumer packaging business was also classified as held for sale, with divestiture expected in 2012; an electronic components business was sold in fourth-quarter 2011.
- International reporting was changed to eliminate a one-month reporting lag, with prior periods retrospectively adjusted. Discontinued-operation results were also presented separately; 2011 income from discontinued operations was $54.4 million.
- Key risks include global economic weakness, particularly in Europe; foreign exchange movements; raw-material price increases or supply constraints; acquisition execution and goodwill impairment; pension-market exposure; tax uncertainties; and product-liability and toxic-tort claims. The filing says the company’s welding-related toxic-tort cases were not expected to have a material adverse effect and that no significant reserves had been recorded for those cases.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- How much of 2011 earnings growth is sustainable excluding the $165.9 million tax benefit, favorable currency translation, and acquisition contributions?
- Whether the FTC challenge changes the timing, terms, or proceeds of the planned finishing-business sale, and whether the other held-for-sale divestiture proceeds as expected.
- Debt maturities and refinancing plans, especially the 2014 maturities, alongside acquisition and share-repurchase spending.
- Whether European demand, input-cost pressures, and segment margin trends develop in line with management’s qualitative 2012 outlook.
- Potential cash-tax consequences of repatriating approximately $6.3 billion of undistributed foreign earnings, and developments in outstanding tax matters and contingencies.