What drove ITW's strong revenue and earnings growth in 1996?

Growth came from both acquisitions and organic volume gains. Acquisitions such as Hobart Brothers and Medalist Industries contributed about 75% of the increase in domestic Engineered Components revenue, while European automotive and packaging acquisitions drove most of the international growth. Management said most of the revenue increase reflected higher volume rather than price increases. Operating margins also improved, helped by cost reductions and a lower SG&A ratio, which fell to 17.5% of revenues from 18.6%.

What is the Leasing and Investments segment, and why does it matter to investors?

It is a segment that makes opportunistic investments using excess cash, including mortgage-related assets, commercial mortgage loans, equipment leases, real estate, and affordable housing. Its assets grew to about $1.16 billion in 1996, financed largely by $520 million in nonrecourse debt. The segment is a source of risk. Its recovery depends on a ten-year swap with a third party and on the disposition of mortgage assets, and the company acknowledges that full recovery of its $211.7 million net investment cannot be assured. Segment revenue was small, at $68 million, relative to the company's total.

How strong is ITW's balance sheet and liquidity position?

The balance sheet is solid. Stockholders' equity was $2.40 billion, long-term debt was $819 million, and cash and equivalents were $138 million. Short-term debt rose to $390 million, largely from the Australian cash advance facility used to fund Azon. The current ratio fell to 1.40 from 1.80, and net working capital dropped to $482 million. Management says internally generated funds are sufficient to service debt and fund growth, and that the company has capacity for larger acquisitions. Operating cash flow of $629 million was the main source of funding.

What are ITW's dividend and share-related actions?

Cash dividends paid rose 13% to $0.70 per share in 1996, up from $0.62, and dividends declared were $0.72 per share. The company's stated payout objective is 25-30% of average three-year net income. On February 14, 1997, the board approved a two-for-one stock split, subject to shareholder approval of an increase in authorized shares to 350 million and a par value change to $0.01. An additional share was to be distributed for each share held on May 20, 1997. Shares outstanding at year-end were 123.9 million, and the year-end stock price was $79.88.

ITW 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 1997. Cited figures are marked; the original filing is the authoritative source.

Illinois Tool Works (ITW) closed 1996 as a larger, more profitable industrial company.

Operating revenues rose 20% to $4.997 billion^a (from $4.178 billion), operating income rose 24% to $800.6 million, and net income rose 25.5% to $486.3 million, or $3.93 per share, versus $3.29 in 1995. Growth was driven substantially by acquisitions, including Hobart Brothers and Medalist Industries in the U.S. and a range of European automotive and packaging businesses, plus the late-1996 purchase of Australian strapping maker Azon Limited, which was funded by a short-term Australian cash advance facility. The Engineered Components segment (55% of revenues) earned a 14.9% operating margin, while Industrial Systems and Consumables (44%) improved its margin to 16.8%.

Management also attributed much of the revenue increase to higher volume rather than price. The balance sheet strengthened, with stockholders' equity reaching $2.40 billion^b and book value per share at $19.34. Cash generated from operations was $629 million.

Management said that excluding its Leasing and Investments segment, total debt to capitalization fell to 15.9%. That segment, however, is a notable risk area. It is a fast-growing portfolio of mortgage-related assets, commercial mortgage loans and leases, financed largely by nonrecourse notes of $520 million^c, and it is supported by a ten-year swap arrangement with a third party.

Investors should weigh its contribution to earnings and the recoverability of its $211.7 million^d net investment, which management believes is adequately protected but which carries no guarantee of full recovery. On February 14, 1997, the board approved a two-for-one stock split, with an additional share distributed to holders of record on May 20, 1997.

Dividends paid rose 13% to $0.70 per share, and the company's stated payout objective is 25-30% of average three-year net income. The effective tax rate fell to 36.9%, and the company recorded no valuation allowance against its $423.6 million of net deferred tax assets.

02—Key points

Key Highlights

Operating revenues increased 20% to $4.997 billion in 1996, up from $4.178 billion in 1995, with management attributing most of the growth to higher volume rather than pricing.
Net income rose 25.5% to $486.3 million ($3.93 per share) from $387.6 million ($3.29 per share) in 1995; operating income rose 24% to $800.6 million.
Acquisitions were a major growth driver, including Hobart Brothers and Medalist Industries in the U.S., European automotive and packaging businesses, and the late-1996 purchase of Azon Limited (Australia), which was financed with a short-term Australian cash advance facility.
Stockholders' equity reached $2.396 billion, and book value per share rose to $19.34. Excluding the Leasing and Investments segment, total debt to total capitalization fell to 15.9% from 16.2%.
The Leasing and Investments segment grew sharply, with $1.157 billion in assets, $520 million in nonrecourse notes payable, and a $211.7 million net investment protected by a ten-year swap arrangement; recovery is not assured.
The board approved a two-for-one stock split on February 14, 1997, with an additional share distribution scheduled for May 27, 1997. Dividends paid rose 13% to $0.70 per share.
International operations contributed about 36% of 1996 operating revenues, with roughly 76% of international revenue generated in Europe. Cash flow from operations was $629 million.

03—Questions

Frequently Asked Questions

What drove ITW's strong revenue and earnings growth in 1996?
Growth came from both acquisitions and organic volume gains. Acquisitions such as Hobart Brothers and Medalist Industries contributed about 75% of the increase in domestic Engineered Components revenue, while European automotive and packaging acquisitions drove most of the international growth. Management said most of the revenue increase reflected higher volume rather than price increases. Operating margins also improved, helped by cost reductions and a lower SG&A ratio, which fell to 17.5% of revenues from 18.6%.
What is the Leasing and Investments segment, and why does it matter to investors?
It is a segment that makes opportunistic investments using excess cash, including mortgage-related assets, commercial mortgage loans, equipment leases, real estate, and affordable housing. Its assets grew to about $1.16 billion in 1996, financed largely by $520 million in nonrecourse debt. The segment is a source of risk. Its recovery depends on a ten-year swap with a third party and on the disposition of mortgage assets, and the company acknowledges that full recovery of its $211.7 million net investment cannot be assured. Segment revenue was small, at $68 million, relative to the company's total.
How strong is ITW's balance sheet and liquidity position?
The balance sheet is solid. Stockholders' equity was $2.40 billion, long-term debt was $819 million, and cash and equivalents were $138 million. Short-term debt rose to $390 million, largely from the Australian cash advance facility used to fund Azon. The current ratio fell to 1.40 from 1.80, and net working capital dropped to $482 million. Management says internally generated funds are sufficient to service debt and fund growth, and that the company has capacity for larger acquisitions. Operating cash flow of $629 million was the main source of funding.
What are ITW's dividend and share-related actions?
Cash dividends paid rose 13% to $0.70 per share in 1996, up from $0.62, and dividends declared were $0.72 per share. The company's stated payout objective is 25-30% of average three-year net income. On February 14, 1997, the board approved a two-for-one stock split, subject to shareholder approval of an increase in authorized shares to 350 million and a par value change to $0.01. An additional share was to be distributed for each share held on May 20, 1997. Shares outstanding at year-end were 123.9 million, and the year-end stock price was $79.88.

04—Continue

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