01—Abstract
Summary
Summary of the 10-K filed February 26, 2007. Cited figures are marked; the original filing is the authoritative source.
Illinois Tool Works (ITW) reported a strong 2006, with operating revenues up 9.9% to $14.06 billiona and income from continuing operations up 14.9% to $1.72 billion ($3.01 per diluted share).
Growth was driven by a combination of acquisitions (53 deals in 2006, roughly $1.7 billionb of annualized acquired revenue, with $1.38 billion of cash paid) and base business growth of about 3.8%, with operating margin improving to 17.2% from 16.7%. The company operates roughly 750 decentralized businesses in 49 countries across four segments (Engineered Products North America and International, Specialty Systems North America and International), and about 45% of 2006 revenue came from outside the United States. Return on average invested capital rose to 18.6% from 17.7%.
Cash generation remained robust, with operating cash flow of $2.07 billionc and free operating cash flow of $1.77 billion. ITW returned capital to shareholders through $447 million of buybacks (well below the $1.04 billion repurchased in 2005) and $399 million of dividends paid, while dividends declared rose to $0.75 per share from $0.61. Balance sheet leverage stayed moderate, with total debt at 13.6% of total capitalization and about $1.5 billion of available borrowing capacity.
Management guided to 2007 diluted EPS of $3.27 to $3.39d, assuming 2.5% to 4.5% base business growth and $800 million to $1.2 billion of acquired annualized revenue. Risk disclosures highlight exposure to construction, general industrial and automotive end markets, which showed weakness in the second half of 2006, along with currency, raw material and acquisition-execution risks.
02—Key points
Key Highlights
- Revenue of $14.06B (+9.9% YoY) and diluted EPS of $3.01 (+15.8%), with income from continuing operations up 14.9% to $1.72B
- Operating margin expanded to 17.2% from 16.7%, and ROIC improved to 18.6% from 17.7%
- Aggressive acquisition program: 53 acquisitions in 2006 for $1.38B in cash and $163M in stock, adding about $1.7B of annualized revenue
- Free operating cash flow of $1.77B (up 13% from $1.56B), comfortably covering $399M in dividends and $447M in buybacks
- Dividends declared increased 23% to $0.75 per share, and the Board authorized a repurchase program of up to 35M shares in August 2006
- Second-half 2006 weakness in North American construction and automotive markets was a notable headwind, though overall base business growth remained positive
- 2007 guidance of $3.27–$3.39 diluted EPS, assuming 2.5%–4.5% base growth and $0.8–$1.2B of acquired revenue
03—Questions
Frequently Asked Questions
What drove ITW's revenue growth in 2006?
Revenue rose 9.9% to $14.06 billion. Acquisitions contributed about 6.9 percentage points, and base business revenue growth contributed about 3.8 points, aided by strong international demand in Europe and Asia Pacific. North American base revenue grew 2.9% in the first half but weakened in the second half as construction and automotive end markets slowed.
How much of ITW's business is international, and what are the related risks?
About 45% of 2006 revenue was generated outside the United States, up from 44% in 2005. The company operates in 48 foreign countries and faces currency fluctuations, trade restrictions, tariffs, political instability, nationalization risk and limits on repatriating earnings. Management notes that about $2.9 billion of undistributed foreign earnings is considered permanently reinvested.
Is ITW's growth dependent on acquisitions, and what is the risk?
A significant share of growth comes from acquisitions, and the company completed 53 deals in 2006 and expects to continue. Goodwill and intangibles rose to $5.1 billion of invested capital, and amortization expense climbed to $107 million from $69 million. The 10-K flags the risk that an unfavorable acquisition environment (pricing, valuations or regulation) could slow future growth, and acquired businesses typically carry lower margins at first.
How is ITW returning capital to shareholders, and how strong is its balance sheet?
In 2006 ITW paid $399 million in dividends and repurchased $447 million of stock, far less than the $1.04 billion repurchased in 2005. Total debt was $1.42 billion, or 13.6% of total capitalization, and the company reported about $1.2 billion of unused U.S. debt capacity and about $300 million internationally. Management's dividend payout guideline is 25% to 35% of the average of the last two years' net income.
04—Continue