01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Illinois Tool Works (ITW) reported a sharply weaker 2009 as the global recession hit its industrial end markets.
Operating revenues fell 18.8% to $13.88 billiona from $17.10 billion, and operating income dropped 44.6% to $1.39 billion, with operating margin compressing from 14.6% to 10.0%. Base business revenues declined 18.4%, and the company absorbed $105.6 million of goodwill and intangible impairments (including $60.0 million in pressure-sensitive adhesives), along with higher restructuring charges. Diluted income from continuing operations was $1.93 per share, down from $3.24, though net income was supported by a $163.0 million favorable tax benefit in the fourth quarter tied to a global legal structure reorganization and a German tax settlement.
Return on average invested capital fell to 10.7% from 16.0%. Balance sheet and cash flow remained a relative strength. Free operating cash flow was $1.90 billionb, roughly flat with 2008, and the company used it to fund $619.7 million in dividends while repaying $553 million of net debt; total debt to capitalization fell to 26.2% from 32.4%.
Cash rose to $1.32 billionc, and current ratio improved to 2.00. Management repurchased no stock in 2009 and issued $1.5 billion of new 5.15% and 6.25% notes to refinance commercial paper and maturing debt. Management expects modest end-market expansion in 2010 but flags that the timing of recovery remains uncertain.
For investors, the key takeaways are the depth of the cyclical earnings decline, the quality of the cash generation that supported the dividend, and the company's decentralized 80/20 model, which management credits with cost flexibility. Risks include further downturns in its industrial and automotive end markets, currency exposure (57%d of revenue from outside the U.S.), and the potential for additional goodwill impairments tied to recent acquisitions.
02—Key points
Key Highlights
- Operating revenues fell 18.8% to $13.88 billion in 2009, with base revenues down 18.4% amid the global recession.
- Operating income declined 44.6% to $1.39 billion; operating margin dropped to 10.0% from 14.6%.
- Diluted EPS from continuing operations was $1.93 versus $3.24 in 2008, aided by roughly $163 million of discrete tax benefits in Q4 2009.
- Goodwill and intangible impairments totaled $105.6 million, led by $60.0 million for pressure-sensitive adhesives and $18.0 million for PC board fabrication.
- Free operating cash flow of $1.90 billion covered $619.7 million in dividends, and total debt fell $553 million to $3.13 billion.
- Debt-to-capitalization improved to 26.2% from 32.4%; cash rose to $1.32 billion and the current ratio reached 2.00.
- No share repurchases in 2009 after $1.39 billion in 2008; about $1.2 billion of authorization remains, and the dividend was held at $1.24 per share.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Illinois Tool Works Inc kept $0.07.
- Revenue$13.57B100.0%
- Cost of revenue−$8.95B66.0%
- Gross profit$4.62B34.0%
- Operating costs−$3.24B23.8%
- Operating income$1.38B10.2%
- Interest, other & tax−$410.3M3.0%
- Net income$972.7M7.2%
Where FY2009 revenue went
$13.57B- Cost of revenue: $8.95B, 66% of revenue
- Other operating costs: $3.04B, 22% of revenue
- Net income: $972.7M, 7.2% of revenue
- R&D: $191.9M, 1.4% of revenue
- Interest, other & tax: $410.3M, 3.0% of revenue
Kept 7.2% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $13.57B$17.10B | −20.6% |
| Cost of Revenue | $8.95B$11.19B | −20.0% |
| Gross Profit | $4.62B$5.91B | −21.9% |
| R&D Expenses | $191.86M$212.66M | −9.8% |
| Operating Income | $1.38B$2.50B | −44.7% |
| Interest Expense | $164.59M$154.46M | +6.6% |
| Net Income | $972.70M$1.52B | −36.0% |
| EPS (Basic) | $1.94$2.93 | −33.8% |
| EPS (Diluted) | $1.94$2.91 | −33.3% |
| Shares Outstanding (Basic) | 500.18M518.61M | −3.6% |
| Shares Outstanding (Diluted) | 501.92M521.21M | −3.7% |
05—Questions
Frequently Asked Questions
How much did ITW's earnings fall in 2009, and what drove the decline?
Income from continuing operations fell 42.7% to $969.5 million ($1.93 diluted EPS) from $1.69 billion ($3.24) in 2008. The decline was driven by an 18.4% drop in base revenues from the global recession, negative operating leverage, $105.6 million of impairment charges, and higher restructuring costs. Partly offsetting this were roughly $163 million of favorable discrete tax adjustments in Q4 2009.
Is ITW's dividend secure given the downturn?
The company kept its quarterly dividend at $0.31 per share throughout 2009, totaling $1.24 per share, and paid $619.7 million in cash dividends. Free operating cash flow of $1.90 billion covered the payout. Management's policy targets a payout of 25% to 35% of the average income from continuing operations over the last two years, and the 2009 payout was well above that range given the lower earnings.
Which segments were hit hardest in 2009?
Industrial Packaging (operating income down 68.4%, revenue down 27.6%), Power Systems & Electronics (operating income down 53.3%, revenue down 31.5%), and Construction Products (operating income down 60.0%, revenue down 23.2%) were hit hardest. Transportation's automotive exposure caused a 44.5% drop in operating income, and Polymers & Fluids fell 60.9% after a $60.0 million goodwill impairment. Food Equipment and Decorative Surfaces held up relatively better.
What is the company's balance sheet and liquidity position?
At year-end 2009, ITW had $1.32 billion of cash, $3.13 billion of total debt (down from $3.68 billion), and total debt to total capitalization of 26.2%, well inside its 20% to 30% target range. Net working capital increased to $2.84 billion, and the current ratio rose to 2.00. The company has $2.5 billion of committed U.S. credit lines, of which none was drawn at year-end.
What risks should investors watch going forward?
Key risks include a further downturn in the markets ITW serves, currency translation (about 57% of 2009 revenue came from outside the U.S.), raw material price swings in steel, resins, and chemicals, and the possibility of further goodwill impairments because goodwill and intangibles total $6.6 billion across 60 reporting units. Management also flags tax audit exposure, including an Australian tax dispute with up to $159 million of possible reduction in unrecognized tax benefits, and product liability claims.
06—Continue