Illinois Tool Works Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unless stated otherwise, amounts are in millions of dollars. ITW reports seven continuing operating segments; Industrial Packaging and certain other businesses are presented as discontinued operations.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenue | $3,569 | $3,420 |
| Operating income / margin | $667 / 18.7% | $578 / 16.9% |
| Continuing operations income | $428 | $401 |
| Discontinued operations income (loss) | $45 | $(47) |
| Net income | $473 | $354 |
| Diluted EPS, continuing / total | $1.01 / $1.11 | $0.88 / $0.78 |
| Operating cash flow | $314 | $366 |
| Free operating cash flow | $246 | $277 |
Revenue increased 4.4%, including 3.3% organic growth and a 1.5% contribution from acquisitions, partly offset by unfavorable currency translation. Operating income rose 15.5%; management attributed improved margins to organic volume and variable-margin/overhead improvements, including enterprise initiatives. The effective tax rate was 30.0%, versus 29.0%.
Balance sheet, liquidity and capital allocation
- At March 31, cash and equivalents were $3,547; total debt was $7,622, versus $6,344 at year-end 2013. Debt to capitalization increased to 47.0% from 39.5%; trailing-twelve-month debt/adjusted EBITDA was 2.4x versus 2.1x.
- Current assets were $10,028 and current liabilities $5,360; the current ratio was 1.9. Cash was primarily held by international subsidiaries and may be subject to tax if repatriated.
- Q1 financing included issuance of $2.0 billion of notes due 2017, 2019 and 2024, with proceeds used to repay commercial paper. The company also had $950 million of commercial paper outstanding and an undrawn $1.0 billion short-term credit line.
- Cash dividends paid were $181; the declared dividend was $0.42 per share. Share repurchases were $1,440 in cash flow, comprising approximately 18.5 million shares at an average $80.94. The company reported $4.2 billion remaining under its $6.0 billion repurchase authorization.
Comparative changes and segment trends
- Continuing-operations income increased to $428 from $401. Total net income also benefited from discontinued operations, which shifted from a $47 loss to $45 income; the prior-year loss included impairment and held-for-sale reserves.
- Automotive OEM and Food Equipment showed strong growth: revenue was $668 and $511, respectively, with operating income of $156 and $95. Construction Products and Specialty Products operating income rose to $61 and $109.
- Test & Measurement and Electronics operating income fell to $63 from $68, amid soft industrial capital spending and weak electronic assembly demand. Welding revenue and operating income declined to $463 and $119. Polymers & Fluids revenue fell to $479, although operating income increased to $80, partly reflecting product-line simplification and cost improvements.
- Operating cash flow and free operating cash flow declined year over year, despite higher net income. Receivables and inventory uses of cash contributed to the operating cash flow result.
Outlook, transactions, risks and contingencies
- The filing provides no specific consolidated earnings or revenue guidance. Management described its enterprise strategy—portfolio management, business-structure simplification and strategic sourcing—as initiatives intended to support organic growth, profitability and returns through 2017.
- The company said it expected to substantially complete its planned repurchase of approximately 50 million shares by the end of Q2 2014, to offset anticipated Industrial Packaging divestiture-related dilution. The Industrial Packaging sale to The Carlyle Group for $3.2 billion closed May 1, 2014, after quarter-end. A remaining construction distribution business was expected to be sold by mid-2014.
- The company received an IRS Notice of Deficiency asserting $70 million of additional tax for 2006; it intends to challenge the assessment in Tax Court and stated it believes its position will prevail. Ongoing tax audits could affect unrecognized tax benefits; management said approximately $52 million could reasonably be decreased within 12 months.
- Other stated risks include market and economic weakness, disruption from enterprise initiatives, divestiture-related dilution or impairment, currency fluctuations, raw-material costs and supply, financing availability, pension exposure, tax matters and legal proceedings. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether continuing-business growth and margin gains persisted after Q1, particularly in weaker industrial, electronics and welding markets.
- Cash conversion and working-capital trends, given lower operating/free cash flow despite higher earnings.
- Debt and leverage after the Industrial Packaging sale, planned share repurchases and repayment of near-term maturities.
- Actual sale proceeds and use of proceeds, and the effect of divestitures and repurchases on continuing-operations EPS.
- Resolution of the $70 million IRS assessment and other ongoing tax audits.