Illinois Tool Works Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Amounts are in millions except per-share data. Prior-period segment results were recast for changes in management reporting; discontinued operations are presented separately.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenues | $4,547 | $4,272 | +6.4% |
| Operating income | $705 | $659 | +7.0% |
| Operating margin | 15.5% | 15.4% | +0.1 percentage point |
| Continuing-operations income | $471 | $606 | -22.3% |
| Net income | $486 | $623 | -22.0% |
| Diluted EPS, continuing operations | $0.97 | $1.21 | |
| Diluted EPS, total | $1.00 | $1.24 |
Revenue growth reflected 3.2% growth in base businesses and a 4.4% contribution from acquisitions, partly offset by a 1.3% currency headwind. North American base revenue rose 6.6%; international base revenue declined 0.1%. Operating income benefited from volume leverage and improved base margins, partly offset by increased restructuring costs, currency effects, and acquisition-related amortization.
The sharp decline in continuing-operations income primarily reflects the comparison with Q1 2011, which included a $166 million favorable, non-cash tax benefit. The effective tax rate was 29.0% in Q1 2012 versus 2.3% in Q1 2011; excluding that discrete benefit, the prior-year rate was 29.0%. Discontinued-operations income was $15 million versus $17 million.
Cash flow, liquidity and debt
- Operating cash flow was $323, versus $145; capital expenditures were $84, versus $89. Company-defined free operating cash flow was $239, versus $56.
- Cash and equivalents were $1,304 at quarter-end, up from $1,178 at December 31, 2011. Net working capital was $3,612, down from $3,872; the current ratio declined to 1.96 from 2.30.
- Total debt was $4,765, up from $3,990; short-term debt was $1,244, including $1.1 billion of commercial paper. Long-term debt was $3,521. Debt to capitalization rose to 32.0% from 28.5%; trailing-twelve-month debt/EBITDA was 1.4x versus 1.2x.
- Cash uses included $481 for acquisitions, $443 for share repurchases, and $174 in dividends. The company repurchased approximately 8.5 million shares at an average $56.03; about $3.4 billion remained authorized under its $4 billion repurchase program.
- Management said internally generated cash flow and credit facilities should be adequate for debt service, dividends, internal growth, and small-to-medium acquisitions. Most cash was held internationally and could be subject to taxes if repatriated.
Segment and other material changes
Power Systems & Electronics and Transportation recorded strong growth, supported by welding demand, automotive production, acquisitions, and operating leverage. Food Equipment revenue was essentially flat, but operating income rose 12.1% on lower costs and improved efficiency. Construction Products operating income fell 20.9% to $36, and margin fell to 7.7% from 9.8%, largely due to higher restructuring costs and operating expenses. All Other operating income was nearly flat despite revenue growth, with acquisition amortization and restructuring costs weighing on results.
Acquisitions contributed to revenue growth and increased intangible-asset amortization to $72 from $55. Total debt and short-term borrowing increased during the quarter. The company also changed certain segment assignments; prior-period segment data was recast, with no resulting first-quarter impairment charge.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management described North American conditions as strong, Europe as modestly negative, and Asia as slower-growing, and indicated expectations for continued North American and Asia-Pacific growth with slower European markets in 2012.
- The sale of the finishing businesses to Graco for $650 million cash closed on April 2, 2012, after quarter-end. ITW estimated a $450 million pre-tax gain to be reported in Q2 discontinued operations. The company also expected to divest its consumer packaging business in 2012.
- Expected 2012 contributions were approximately $165 to pension plans and $39 to other postretirement plans; $33 and $9, respectively, had been contributed through March 31.
- Risks cited include economic and market downturns, foreign-currency movements, raw-material costs or shortages, acquisition execution and returns, credit availability, tax rulings, pension-plan market risk, and legal proceedings. Management said remaining welding-exposure claims were not expected to materially affect results, financial position, or cash flows; substantially all manganese-related claims were settled for an immaterial amount.
- The Australian tax court’s March 2012 ruling on deduction timing did not have a material impact. Tax audits were ongoing in multiple jurisdictions. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether underlying revenue and margin trends persist, particularly in Europe, Asia, electronics, and construction-related businesses.
- How restructuring costs and acquisition-related amortization affect future operating margins and returns on invested capital.
- The completion and proceeds of the finishing-business sale, and realization of the estimated $450 million pre-tax gain in Q2.
- Whether higher short-term debt, commercial paper balances, and the 32.0% debt-to-capitalization ratio remain consistent with management’s liquidity plans and 20%–30% target range.
- Potential cash-tax consequences of repatriating overseas cash, and developments in tax audits and legal contingencies.