01—Abstract
Summary
Summary of the 10-K filed February 28, 2011. Cited figures are marked; the original filing is the authoritative source.
Illinois Tool Works (ITW) closed 2010 with a sharp recovery from the 2009 recession.
Operating revenues rose 14.4% to $15.87 billiona, and operating income jumped 70.0% to $2.36 billion, lifting the operating margin to 14.8% from 10.0%. Base business revenue grew 10.8%, with strong operating leverage across most of the eight reportable segments. Income from continuing operations reached $1.53 billion ($3.03 per diluted share), up 57.5% from 2009.
The 2009 comparison was depressed by $105.6 millionb of goodwill and intangible impairments and elevated restructuring costs, so the year-over-year improvement is partly a base-effect story. Balance sheet and cash flow remained solid but softened. Operating cash flow fell to $1.56 billion from $2.15 billion, mainly due to a large tax payment and working capital build, and free operating cash flow declined to $1.27 billion from $1.90 billion.
ITW returned capital through $636 millionc in dividends and $350 million in share repurchases, while total debt fell to $2.83 billion and total debt-to-capitalization improved to 23.2%. Management guides to continued macroeconomic improvement in 2011.
Investors should note several items: a favorable Australian Federal Court decision expected to reduce tax expense by about $166 milliond in 2011, a return on average invested capital of 15.3% (up from 10.7%), and the elimination of the one-month reporting lag for international operations effective January 1, 2011. Key risks include a stalled economic recovery, currency swings (58% of revenue is non-U.S.), raw material cost volatility, and the $6.6 billion goodwill and intangible base, which carries impairment risk if forecasts weaken.
02—Key points
Key Highlights
- Operating revenues rose 14.4% to $15.87 billion in 2010, driven by 10.8% base business growth and acquisitions, with recovery across most end markets.
- Operating income increased 70.0% to $2.36 billion, and operating margin expanded to 14.8% from 10.0%, aided by operating leverage and absence of 2009 impairments.
- Income from continuing operations was $1.53 billion ($3.03 diluted EPS), up 57.5% from $969.5 million ($1.93) in 2009.
- Free operating cash flow declined to $1.27 billion from $1.90 billion, as operating cash flow fell to $1.56 billion from $2.15 billion.
- Return on average invested capital improved to 15.3% from 10.7%, reflecting higher after-tax operating income on a largely flat invested capital base.
- Total debt was reduced to $2.83 billion from $3.13 billion, with debt-to-capitalization at 23.2%, and the company returned $986 million through dividends and buybacks.
- Expected 2011 tax benefit of about $166 million from a favorable Australian Federal Court ruling, subject to a possible appeal by the Australian Tax Office.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Illinois Tool Works Inc kept $0.10.
- Revenue$15.42B100.0%
- Cost of revenue−$10.00B64.8%
- Gross profit$5.42B35.2%
- Operating costs−$3.17B20.5%
- Operating income$2.25B14.6%
- Interest, other & tax−$751.0M4.9%
- Net income$1.50B9.7%
Where FY2010 revenue went
$15.42B- Cost of revenue: $10.00B, 65% of revenue
- Other operating costs: $2.95B, 19% of revenue
- Net income: $1.50B, 9.7% of revenue
- R&D: $213.0M, 1.4% of revenue
- Interest, other & tax: $751.0M, 4.9% of revenue
Kept 9.7% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 28, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $15.42B$13.57B | +13.6% |
| Cost of Revenue | $10.00B$8.95B | +11.7% |
| Gross Profit | $5.42B$4.62B | +17.3% |
| R&D Expenses | $213.00M$191.86M | +11.0% |
| Operating Income | $2.25B$1.38B | +63.0% |
| Interest Expense | $175.00M$164.59M | +6.3% |
| Net Income | $1.50B$972.70M | +54.5% |
| EPS (Basic) | $3.00$1.94 | +54.6% |
| EPS (Diluted) | $2.99$1.94 | +54.1% |
| Shares Outstanding (Basic) | 500.80M500.18M | +0.1% |
| Shares Outstanding (Diluted) | 503.35M501.92M | +0.3% |
05—Questions
Frequently Asked Questions
How much of the 2010 earnings improvement was organic versus driven by the weak 2009 comparison?
Much of the improvement reflects recovery from a depressed 2009 base. Base business revenue grew 10.8% and base operating income rose about 50%, while 2009 included $105.6 million of goodwill and intangible impairments and elevated restructuring charges. Acquisitions contributed only about 3.0% to revenue growth. The underlying trend is positive, but investors should expect slower year-over-year gains as the comparison normalizes.
Why did free operating cash flow fall so sharply in 2010?
Operating cash flow dropped to $1.56 billion from $2.15 billion. The main drivers were higher income tax payments ($903 million paid in 2010 versus $364 million in 2009) and a build in trade receivables and inventories as volumes recovered. 2009 benefited from large working capital releases, so the decline partly reflects a timing comparison rather than weaker underlying cash generation.
What is the outlook for the Australian tax dispute, and how material is it?
On February 4, 2011, the Federal Court of Australia ruled largely in ITW's favor on income tax deductions for 2002 to 2005. ITW expects to reduce unrecognized tax benefits by about $186 million and tax expense by about $166 million in 2011. The Australian Tax Office has 21 days from the February 18, 2011 final orders to appeal, so the benefit is not yet certain.
How exposed is ITW to foreign currency and international risk?
About 58% of 2010 revenue came from customers outside the United States, with Europe as the largest foreign concentration. A weaker dollar increased 2010 revenue by about $153 million and EPS by about 6 cents, while a stronger dollar reduced 2009 revenue by about $653 million. Most foreign operations use local currency functional currencies, but the company's €750 million Euro notes and international cash flows create translation and earnings sensitivity.
What are the main risks that could affect future results and shareholder returns?
Key risks include a slowdown in the economic recovery across served end markets, raw material price spikes (steel, resins, chemicals, paper) that may not be passed through to customers, and political or currency risks in its 57-country footprint. The company also carries $6.6 billion of goodwill and intangibles, so weaker forecasts could trigger impairments as occurred in 2009. Dividend payout guidelines of 30% to 45% of average free operating cash flow and ongoing buybacks depend on continued cash generation.
06—Continue