10-QPeriod: Q3 FY2008

ILLINOIS TOOL WORKS INC Quarterly Report for Q3 Ended Sep 30, 2008

Filed November 5, 2008For Securities:ITW

Summary

Illinois Tool Works Inc. (ITW) reported its third-quarter and year-to-date results for 2008, a period marked by significant global economic uncertainty. The company demonstrated resilience with overall operating revenue growth driven by acquisitions and favorable currency translations, despite a decline in base revenues due to challenging market conditions, particularly in North America's construction and automotive sectors. Profitability metrics showed some pressure, with operating income declining slightly in the third quarter year-over-year, impacted by lower sales volumes and variable margins, though year-to-date performance was positive. Investors should note ITW's strategic acquisitions and divestitures, including the planned divestiture of its Decorative Surfaces segment and Click Commerce business. The company is actively managing its capital structure, with an increase in short-term debt to fund stock repurchases and a robust credit facility. While the overall financial performance shows mixed results due to macroeconomic headwinds, ITW's diversified business segments and strategic actions indicate a focus on navigating the current economic climate.

Financial Highlights

29 data points
Beta

Revenue

$4.46B

34.2% Gross Margin

Net Income

$453.52M

10.2% Net Margin

EPS (Diluted)

$0.87

Cash & Equivalents

$867.62M

Free Cash Flow

$599.45M

Financial Statements
Beta
Revenue$4.46B
Cost of Revenue$2.94B
Gross Profit$1.53B
Operating Income$671.00M
Interest Expense-$38.24M
Net Income$453.52M
EPS (Basic)$0.88
EPS (Diluted)$0.87
Shares Outstanding (Basic)517.91M
Shares Outstanding (Diluted)521.09M

Key Highlights

  • 1Overall operating revenues increased by 10.8% in Q3 2008 and 11.2% year-to-date, largely driven by acquisitions and favorable currency translation effects.
  • 2Base revenues experienced a slight decline (0.8% in Q3, 0.1% YTD) due to volume decreases, with North American revenues particularly impacted by slowdowns in construction and automotive sectors.
  • 3Operating income saw a 1.6% decrease in Q3 2008 but a 5.1% increase year-to-date, reflecting pressures from lower sales and margins, partially offset by currency and acquisition benefits.
  • 4The company is undergoing strategic divestitures, with plans to exit the Decorative Surfaces segment and Click Commerce industrial software business.
  • 5Short-term debt increased significantly, primarily due to commercial paper issuance to fund stock repurchases and the reclassification of redeemable notes.
  • 6Return on Average Invested Capital (ROIC) decreased by 230 basis points in Q3 2008 and 70 basis points year-to-date, mainly due to increased invested capital from acquisitions.
  • 7The company maintained its dividend payment, with cash dividends paid increasing from $0.21 in Q3 2007 to $0.28 in Q3 2008 on a per-share basis.

Frequently Asked Questions

The macroeconomic environment presented challenges, leading to a decline in base revenues due to lower sales volumes, particularly in the North American construction and automotive sectors. These factors, coupled with increased raw material costs and unfavorable product mix, pressured operating margins. However, the company benefited from acquisitions and favorable currency translations, which helped to offset some of these negative impacts and contributed to overall revenue growth.

ITW is actively managing its portfolio. The company completed acquisitions that contributed to revenue growth. Simultaneously, it is planning to divest the Decorative Surfaces segment and the Click Commerce industrial software business. This strategic approach indicates a focus on optimizing the business mix and divesting non-core or underperforming assets.

ITW's debt structure saw a significant increase in short-term debt, driven by commercial paper issuance to fund stock repurchases and the reclassification of redeemable notes. This led to an increase in the total debt-to-capitalization ratio. While the company highlighted its adequate liquidity from free operating cash flow and credit facilities, the higher debt levels warrant investor attention regarding financial leverage and flexibility in the current economic climate.

Performance varied across segments. While Power Systems & Electronics showed strong growth in operating income, segments like Transportation and Construction Products experienced declines in operating income due to market weakness. Industrial Packaging saw mixed results, and Food Equipment and Polymers & Fluids showed revenue growth driven by acquisitions and international demand, though margins faced pressure. The company continues to adapt to varying regional and sectoral economic conditions.