01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Illinois Tool Works (ITW) closed 2008 with operating revenues of $15.87 billiona, up 6.7% year over year, but operating income fell 4.5% to $2.34 billion and operating margin contracted to 14.7% from 16.5%.
Growth came mainly from acquisitions (50 businesses bought for about $1.55 billionb) and favorable currency translation, while base business revenue declined 2.5%, with North American base revenue down 4.8%. Diluted income from continuing operations was $3.04 per share versus $3.08 in 2007, and net income fell to $1.52 billion ($2.91 per diluted share) after a $64 million loss from discontinued operations, which included a $132.6 million goodwill impairment tied to Click Commerce. Management guided that the global downturn would continue through 2009 with no recovery until at least 2010, and expects 2009 results to fall below 2008 levels.
The balance sheet weakened: total debt rose to $3.68 billionc, lifting debt-to-capitalization to 32.4% from 19.7%, largely because of commercial paper used to fund buybacks and acquisitions, and the current ratio dropped to 1.21. Despite this, the company repurchased $1.39 billion of stock in 2008 and still holds about $1.2 billion of authorization, while cash dividends declared rose 20% to $1.18 per share.
Return on average invested capital fell to 15.0% from 16.9%. For investors, the key tension is between a diversified, decentralized portfolio of roughly 875 operations and an 80/20 operating model that has historically supported margins, against a sharp cyclical slowdown in construction and automotive, a more leveraged balance sheet, and the need to refinance $500 milliond of notes due March 2009.
02—Key points
Key Highlights
- Operating revenues rose 6.7% to $15.87 billion, driven by acquisitions and currency translation, while base revenues declined 2.5%.
- Operating income fell 4.5% to $2.34 billion and operating margin compressed 180 basis points to 14.7%, reflecting weaker base-business leverage and higher restructuring costs.
- Net income dropped to $1.52 billion ($2.91 per diluted share) from $1.87 billion, including a $64.3 million loss from discontinued operations tied to a $132.6 million goodwill impairment.
- Total debt climbed to $3.68 billion, and debt-to-total-capitalization rose to 32.4% from 19.7%, with $2.43 billion of short-term debt including commercial paper.
- Management forecasts 2009 results below 2008 levels, with the downturn expected to persist through 2009 and recovery not expected until at least 2010.
- Shareholder returns continued: $1.39 billion of share repurchases in 2008 and dividends declared of $1.18 per share, up from $0.98, with roughly $1.2 billion of buyback authorization remaining.
- International operations generated about 59% of 2008 revenues, which adds currency exposure but also diversification away from North American construction and automotive weakness.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Illinois Tool Works Inc kept $0.09.
- Revenue$17.10B100.0%
- Cost of revenue−$11.19B65.4%
- Gross profit$5.91B34.6%
- Operating costs−$3.41B20.0%
- Operating income$2.50B14.6%
- Interest, other & tax−$982.3M5.7%
- Net income$1.52B8.9%
Where FY2008 revenue went
$17.10B- Cost of revenue: $11.19B, 65% of revenue
- Other operating costs: $3.20B, 19% of revenue
- Net income: $1.52B, 8.9% of revenue
- R&D: $212.7M, 1.2% of revenue
- Interest, other & tax: $982.3M, 5.7% of revenue
Kept 8.9% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $17.10B$16.11B | +6.1% |
| Cost of Revenue | $11.19B$10.43B | +7.2% |
| Gross Profit | $5.91B$5.68B | +4.1% |
| R&D Expenses | $212.66M— | — |
| Operating Income | $2.50B$2.63B | −4.8% |
| Interest Expense | $154.46M$102.09M | +51.3% |
| Net Income | $1.52B$1.87B | −18.8% |
| EPS (Basic) | $2.93$3.39 | −13.6% |
| EPS (Diluted) | $2.91$3.36 | −13.4% |
| Shares Outstanding (Basic) | 518.61M— | — |
| Shares Outstanding (Diluted) | 521.21M— | — |
05—Questions
Frequently Asked Questions
Why did ITW's revenue grow while profits declined in 2008?
Revenue growth came mostly from 50 acquisitions and a weaker U.S. dollar, which added about 6.5 and 2.8 percentage points respectively. Base business revenue fell 2.5%, mainly from North American construction and automotive weakness. Because fixed overhead does not shrink with volume, the base decline cut operating income, and acquired businesses carried lower margins and acquisition-related expenses, so operating income fell 4.5% and margin dropped to 14.7%.
How much debt does ITW carry and is the balance sheet a concern?
Total debt rose to $3.68 billion from $2.30 billion, and debt-to-capitalization reached 32.4%, above the company's 20% to 30% target range, partly because equity fell due to currency translation and pension losses. Most of the increase is short-term, including $1.8 billion of commercial paper and $500 million of 5.75% notes due March 2009. Management says it has sufficient cash flow and $3.0 billion of committed credit lines to cover the maturity, and no amounts were drawn under those lines at year-end.
What is management's outlook for 2009?
Management expects the global economic downturn to continue through 2009 and does not expect a recovery until at least 2010. It forecasts 2009 results below 2008 levels, with most key end markets expecting negative growth. It points to its strong balance sheet, decentralized model and 80/20 process as tools to respond to the weaker environment, and it has already implemented restructuring projects to align costs with lower demand.
What happened with the discontinued operations?
ITW's Board authorized the divestiture of the Decorative Surfaces segment and Click Commerce software business in August 2008, and both were classified as held for sale. Discontinued operations produced a $64.3 million loss in 2008, versus $157.9 million of income in 2007, driven by a $132.6 million goodwill impairment on Click Commerce and a $64.0 million loss reserve on assets held for sale. The company expects to dispose of these businesses, along with an automotive components unit, during 2009.
How is ITW returning capital to shareholders despite the weaker results?
ITW repurchased about 32.7 million shares for $1.39 billion in 2008 under an open-ended $3.0 billion authorization approved in 2007, leaving about $1.2 billion available. Dividends declared increased 20% to $1.18 per share, and cash dividends paid totaled $599 million. Buybacks were partly funded with commercial paper, which is a factor in the higher leverage, and the company's stated policy is to use excess liquidity for repurchases while keeping debt-to-capital within its target range.
06—Continue