What drove ITW's strong 1995 earnings growth?

Growth came from higher sales volume, particularly in automotive markets in both the U.S. and Europe, along with construction, welding (Miller Electric), and industrial packaging. Acquisitions and a weaker U.S. dollar (which added about $116 million to revenues and roughly $0.10 to EPS) also contributed. Cost reductions and productivity gains lifted margins.

Why did ITW's debt increase so much in 1995?

Long-term debt increased $343 million, mainly from a $256 million nonrecourse 6.28% note issued in December 1995 to acquire a pool of commercial mortgage-related assets, and $75 million of commercial paper used to fund investment purchases and acquisitions. Short-term debt also rose to $176 million from $67 million.

What are ITW's new investments, and what risks do they carry?

Investments rose to $505 million from $87 million. They include commercial mortgage loans and properties ($285 million), a net swap receivable ($71 million), leveraged and direct financing leases ($89 million), and mortgage-backed securities ($28 million). These assets carry real-estate and credit risk outside ITW's core manufacturing business. Management said the leasing and investments business may become a separate reporting segment in 1996.

Is ITW's dividend secure, and what is the payout policy?

ITW paid $0.62 per share in 1995 and declared $0.64, up from $0.56 declared in 1994. Management targets a payout of 25-30% of the average of the last three years' net income and says internally generated funds are adequate to service debt and fund growth, acquisitions and investments.

How exposed is ITW to foreign currency risk?

International operations contributed about 38% of 1995 operating revenues, with 77% of international revenues from Europe. The company stated it has no significant assets or liabilities denominated in non-functional currencies and did not enter into material hedging transactions in 1995, 1994 or 1993.

ITW 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed April 19, 1996. Cited figures are marked; the original filing is the authoritative source.

Illinois Tool Works (ITW) closed 1995 with a strong year: operating revenues rose 20% to $4.15 billion^a (from $3.46 billion) and net income climbed 39.5% to $387.6 million, or $3.29 per share, versus $2.45 in 1994.

Operating margin expanded to 15.1% from 13.7%, driven by volume growth in automotive and construction, cost reductions, and a falling cost-of-revenues ratio (65.4% vs. 66.2%). Roughly $116 million^b of the revenue increase came from a weaker U.S. dollar against European currencies, and acquisitions (including the Hobart Brothers pooling announced in early 1996) contributed meaningfully to growth. The balance sheet grew considerably more leveraged.

Total assets rose to $3.67 billion^c from $2.58 billion, largely because of a December 1995 investment in a pool of commercial mortgage-related assets financed with a $256 million nonrecourse 6.28% note and a $75 million commercial paper program. Total debt to total capitalization increased to 29.2% from 18.1%. Investments grew to $505 million, a category that now carries real-estate and credit risk outside ITW's core manufacturing business.

Management said the company expects its leasing and investments business may be reported as a separate segment in 1996. For investors, the key takeaways are robust core operating earnings and cash generation (operating cash flow of $437 million), a dividend that rose to $0.64^d declared per share, and a higher level of financial risk tied to the new investment portfolio.

The company stated it has no material capital expenditure commitments and its revolving credit facilities were undrawn at year end. This filing is a 10-K/A amendment that incorporates most financial information by reference to the 1995 Annual Report to Stockholders, which is included as Exhibit 13.

02—Key points

Key Highlights

Operating revenues increased 20% to $4.15 billion in 1995, with Engineered Components at $2.11 billion (51%) and Industrial Systems and Consumables at $2.05 billion (49%).
Net income rose 39.5% to $387.6 million ($3.29 per share), compared with $277.8 million ($2.45 per share) in 1994.
Operating margin improved to 15.1% from 13.7%, supported by a lower cost-of-revenues ratio (65.4% vs. 66.2%) and lower SG&A and R&D as a share of revenue (18.7% vs. 19.3%).
Total assets grew to $3.67 billion from $2.58 billion, mainly from a $256 million nonrecourse-financed commercial mortgage investment and acquisitions.
Total debt to total capitalization rose to 29.2% from 18.1%, with long-term debt of $616 million, up from $273 million.
Operating cash flow was $437 million, and dividends declared rose to $0.64 per share from $0.56.
Pending Hobart Brothers acquisition, accounted for as a pooling of interests, will be merged into ITW's historical results.

03—Questions

Frequently Asked Questions

What drove ITW's strong 1995 earnings growth?
Growth came from higher sales volume, particularly in automotive markets in both the U.S. and Europe, along with construction, welding (Miller Electric), and industrial packaging. Acquisitions and a weaker U.S. dollar (which added about $116 million to revenues and roughly $0.10 to EPS) also contributed. Cost reductions and productivity gains lifted margins.
Why did ITW's debt increase so much in 1995?
Long-term debt increased $343 million, mainly from a $256 million nonrecourse 6.28% note issued in December 1995 to acquire a pool of commercial mortgage-related assets, and $75 million of commercial paper used to fund investment purchases and acquisitions. Short-term debt also rose to $176 million from $67 million.
What are ITW's new investments, and what risks do they carry?
Investments rose to $505 million from $87 million. They include commercial mortgage loans and properties ($285 million), a net swap receivable ($71 million), leveraged and direct financing leases ($89 million), and mortgage-backed securities ($28 million). These assets carry real-estate and credit risk outside ITW's core manufacturing business. Management said the leasing and investments business may become a separate reporting segment in 1996.
Is ITW's dividend secure, and what is the payout policy?
ITW paid $0.62 per share in 1995 and declared $0.64, up from $0.56 declared in 1994. Management targets a payout of 25-30% of the average of the last three years' net income and says internally generated funds are adequate to service debt and fund growth, acquisitions and investments.
How exposed is ITW to foreign currency risk?
International operations contributed about 38% of 1995 operating revenues, with 77% of international revenues from Europe. The company stated it has no significant assets or liabilities denominated in non-functional currencies and did not enter into material hedging transactions in 1995, 1994 or 1993.

04—Continue

← View all 10-K filings