01—Abstract
Summary
Summary of the 10-K filed February 14, 2014. Cited figures are marked; the original filing is the authoritative source.
Illinois Tool Works Inc. (ITW) reported its 2013 fiscal year-end results, showcasing a company actively managing its portfolio and operational structure.
Despite a reported decrease in total operating revenues primarily due to strategic divestitures, the company demonstrated resilience through its '80/20 Business Process' and ongoing 'Enterprise Strategy' initiatives focused on portfolio management, business structure simplification, and strategic sourcing. The company realigned its reporting segments into seven key areas, indicating a strategic focus on core competencies.
While 2013 saw a decline in income from continuing operations compared to the strong performance in 2012 (which was boosted by a significant gain from the sale of a majority interest in the Decorative Surfaces segment), the underlying operational improvements and the progress of its strategic initiatives suggest a forward-looking approach. Investors should note the planned divestiture of the Industrial Packaging segment, expected to close in mid-2014, and its potential impact on future financial performance and capital allocation strategies, including share repurchases.
02—Key points
Key Highlights
- The company is executing a significant 'Enterprise Strategy' comprising portfolio management, business structure simplification, and strategic sourcing, aimed at enhancing long-term profitability and growth.
- ITW reorganized its reporting structure into seven key segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.
- Strategic divestitures were a key theme, including the sale of a majority interest in Decorative Surfaces in late 2012 and a definitive agreement to sell the Industrial Packaging segment for $3.2 billion, expected to close in mid-2014.
- Operating revenues decreased by 4.4% in 2013 compared to 2012, largely attributed to divestitures, though base business revenues saw a slight increase of 0.2%.
- The company actively repurchased shares, with approximately $2.1 billion spent in 2013 under its newly authorized $6.0 billion repurchase program, aiming to offset dilution from divestitures.
- Free operating cash flow was strong, reaching $2.16 billion in 2013, demonstrating the company's ability to generate cash for dividends, share repurchases, and acquisitions.
- Adjusted Return on Average Invested Capital (ROIC) improved to 16.3% in 2013 from 14.5% in 2012, indicating improved capital efficiency.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Illinois Tool Works Inc kept $0.12.
- Revenue$14.13B100.0%
- Cost of revenue−$8.55B60.5%
- Gross profit$5.58B39.5%
- Operating costs−$3.07B21.7%
- Operating income$2.51B17.8%
- Interest, other & tax−$835.0M5.9%
- Net income$1.68B11.9%
Where FY2013 revenue went
$14.13B- Cost of revenue: $8.55B, 61% of revenue
- Other operating costs: $2.83B, 20% of revenue
- Net income: $1.68B, 12% of revenue
- R&D: $240.0M, 1.7% of revenue
- Interest, other & tax: $835.0M, 5.9% of revenue
Kept 12% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 14, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $14.13B$14.79B | −4.4% |
| Cost of Revenue | $8.55B$9.13B | −6.3% |
| Gross Profit | $5.58B$5.66B | −1.3% |
| R&D Expenses | $240.00M$240.00M | 0.0% |
| Operating Income | $2.51B$2.48B | +1.6% |
| Interest Expense | $239.00M$213.00M | +12.2% |
| Net Income | $1.68B$2.87B | −41.5% |
| EPS (Basic) | $3.76$6.11 | −38.5% |
| EPS (Diluted) | $3.74$6.06 | −38.3% |
| Shares Outstanding (Basic) | 446.20M469.80M | −5.0% |
| Shares Outstanding (Diluted) | 449.30M473.20M | −5.1% |
05—Questions
Frequently Asked Questions
What were the main strategic initiatives ITW was pursuing in 2013?
In 2013, ITW was actively pursuing its 'Enterprise Strategy,' which had three key initiatives: portfolio management (reviewing and divesting non-aligned businesses), business structure simplification (reducing operating divisions and increasing scale), and strategic sourcing (building sourcing capabilities to leverage purchasing power). The company also continued to apply its core '80/20 Business Process' to simplify operations and enhance profitability.
How did the divestitures affect ITW's financial performance in 2013?
Divestitures significantly impacted reported revenues, causing a 4.4% decrease in 2013 compared to 2012, primarily due to the deconsolidation of the Decorative Surfaces segment in late 2012 and the planned sale of the Industrial Packaging segment. However, the company's base business revenue grew slightly by 0.2%, and the ongoing strategic initiatives were aimed at improving underlying profitability and returns despite the revenue reduction from exits.
What is the significance of the planned sale of the Industrial Packaging segment?
The planned sale of the Industrial Packaging segment for $3.2 billion, announced in February 2014 and expected to close mid-2014, is a major part of ITW's portfolio management initiative. This divestiture aims to further align the company's portfolio with its long-term objectives and is expected to be funded, in part, by significant share repurchases designed to offset any dilution to earnings per share from continuing operations.
How did ITW manage its capital allocation in 2013?
ITW prioritized several capital allocation strategies in 2013. This included investing in existing businesses for growth, paying attractive dividends, executing a substantial share repurchase program (spending approximately $2.1 billion and having $5.7 billion remaining under the new $6.0 billion authorization), and pursuing strategic acquisitions, although acquisition spending was lower in 2013 ($369 million) compared to prior years.
06—Continue