01—Abstract
Summary
Summary of the 10-K filed February 28, 2008. Cited figures are marked; the original filing is the authoritative source.
Illinois Tool Works (ITW) closed 2007 with record results: operating revenues rose 17.2% to $16.17 billiona, and income from continuing operations grew 8.7% to $1.83 billion ($3.28 per diluted share).
Operating margin slipped to 16.2% from 17.3%, mainly because acquired businesses carry lower margins and amortization of acquired intangibles rose sharply. Growth was driven by 52 acquisitions (about $995 millionb of annualized acquired revenue), a weaker U.S. dollar that added roughly $546 million to revenue, and a 1.8% increase in base business revenue. Base revenue in North America fell 1.2% amid residential construction weakness, while international base revenue rose 6.3%.
The balance sheet became more leveraged to fund growth and buybacks. Total debt rose to $2.30 billionc from $1.42 billion, driven by a €750 million 5.25% Euro note issued in October 2007. Total debt to total capitalization reached 19.7% versus 13.6% a year earlier.
ITW repurchased about $1.76 billiond of stock in 2007, completing its 35 million share program and starting a new $3.0 billion authorization, of which roughly $2.6 billion remained at year-end. Free operating cash flow reached $2.13 billion, comfortably covering dividends of $502 million paid and buybacks. Return on average invested capital was 18.0%, down slightly from 18.3%.
The company reorganized its reporting into eight reportable segments from 60 internal operating segments. Investors should note that the filing flags risks from a downturn in construction, general industrial, and automotive markets, rising raw material costs, and an unfavorable acquisition environment, which matters because growth increasingly depends on acquisitions. Note also that much of the financial detail is incorporated by reference from the 2007 Annual Report (Exhibit 13).
02—Key points
Key Highlights
- Operating revenues grew 17.2% to $16.17 billion, aided by acquisitions (+11.2%) and currency translation (+4.1%); base business revenue rose 1.8%.
- Income from continuing operations rose 8.7% to $1.83 billion, or $3.28 per diluted share, while operating margin declined to 16.2% from 17.3%.
- Completed 52 acquisitions in 2007 with roughly $995 million of annualized acquired revenue; cash spent on acquisitions was $813 million.
- Repurchased $1.76 billion of common stock in 2007 and authorized a new $3.0 billion program, with about $2.6 billion remaining at year-end.
- Total debt increased to $2.30 billion from $1.42 billion after a €750 million 5.25% Euro note issue; debt-to-capitalization rose to 19.7%.
- Free operating cash flow was $2.13 billion, up 21% from $1.77 billion in 2006, and the dividend rose to $0.98 per share from $0.75.
- International operations generated 49% of 2007 revenue, up from 43% in 2006, and the company operates about 825 businesses in 52 countries.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, Illinois Tool Works Inc kept $0.12.
- Revenue$16.11B100.0%
- Cost of revenue−$10.43B64.7%
- Gross profit$5.68B35.3%
- Operating costs−$3.05B18.9%
- Operating income$2.63B16.3%
- Interest, other & tax−$757.9M4.7%
- Net income$1.87B11.6%
Where FY2007 revenue went
$16.11B- Cost of revenue: $10.43B, 65% of revenue
- Operating costs: $3.05B, 19% of revenue
- Net income: $1.87B, 12% of revenue
- Interest, other & tax: $757.9M, 4.7% of revenue
Kept 12% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 28, 2008Financial Statements
05—Questions
Frequently Asked Questions
How much of ITW's 2007 revenue growth came from organic performance versus acquisitions and currency?
Of the 17.2% revenue increase, acquisitions contributed about 11.2 percentage points, currency translation about 4.1 points, and base business growth only about 1.8 points. Base revenue was weak in North America, which fell 1.2%, while international base revenue rose 6.3%. Growth therefore depended heavily on acquisitions and a weaker dollar, not on underlying demand.
Why did operating margin decline even though profits grew?
Operating margin fell to 16.2% from 17.3%, primarily because businesses acquired in 2007 earn lower margins and carry amortization of newly acquired intangibles, which rose by about $52 million. Amortization and impairment of intangibles totaled $161 million in 2007. Base business margins improved modestly, helped by restructuring savings and lower overhead.
Is ITW's balance sheet still strong after the increase in debt and share buybacks?
The company remains financially sound but is more leveraged. Total debt rose to $2.30 billion, debt-to-capitalization increased to 19.7%, and the covenant limit is 50%. ITW reports about $1.5 billion of unused U.S. debt capacity and $425 million of international capacity, and it generated $2.13 billion of free operating cash flow, which covered dividends and buybacks.
What are the main risks to ITW's future results according to the filing?
The filing cites a downturn in construction, general industrial, automotive, or food service markets; deterioration in international and domestic economic conditions; currency fluctuations and raw material costs; failure to introduce new products or protect intellectual property; a less favorable environment for acquisitions; unfavorable tax changes; and potential product liability and toxic tort claims. Because the company depends on acquisitions for growth, a slowdown in deal opportunities would also weigh on results.
How is ITW's business organized, and which segments matter most?
ITW aggregates its roughly 60 internal operating segments into eight reportable segments. By 2007 revenue, All Other was largest at $3.12 billion, followed by Industrial Packaging at $2.40 billion and Power Systems & Electronics at $2.25 billion. Power Systems & Electronics had the highest operating margin at 20.1%, while Decorative Surfaces had the lowest at 12.6%, reflecting weakness in residential and renovation construction.
06—Continue