10-QPeriod: Q2 FY2009

ILLINOIS TOOL WORKS INC Quarterly Report for Q2 Ended Jun 30, 2009

Filed August 7, 2009For Securities:ITW

Summary

Illinois Tool Works Inc. (ITW) reported a significant decline in financial performance for the quarter and six months ended June 30, 2009, compared to the same periods in 2008. This was primarily driven by a sharp decrease in operating revenues, down 25.5% and 24.7% respectively, due to weak macroeconomic trends impacting key end markets, particularly in North America and Europe. Operating income also saw a substantial drop of 55.8% and 69.0% due to lower revenues, unfavorable currency translation effects, and increased restructuring costs. The company also recorded significant goodwill and intangible asset impairment charges totaling $89.997 million in the first six months of 2009, contributing to a much higher effective tax rate. Despite the challenging operating environment, ITW managed its liquidity effectively, with free operating cash flow of $949.7 million for the first six months of 2009, an increase from the prior year. The company also strengthened its balance sheet by reducing short-term debt significantly and issuing long-term notes. While the automotive sector faced considerable headwinds with major manufacturers entering bankruptcy, ITW anticipates these reorganizations will not have a significant long-term impact. Investors should note the substantial year-over-year revenue and profit declines, driven by broad economic weakness, but also consider the company's efforts to manage costs and maintain a solid liquidity position.

Financial Statements
Beta
Revenue$3.39B
Cost of Revenue$2.25B
Gross Profit$1.14B
Operating Income$334.83M
Interest Expense$43.89M
Net Income$176.56M
EPS (Basic)$0.35
EPS (Diluted)$0.35
Shares Outstanding (Basic)499.39M
Shares Outstanding (Diluted)500.88M

Key Highlights

  • 1Operating revenues decreased by 25.5% year-over-year for the quarter and 24.7% for the six-month period, reflecting a challenging economic environment impacting key end markets.
  • 2Operating income declined significantly by 55.8% for the quarter and 69.0% for the six-month period due to lower revenues, unfavorable currency translation, and increased restructuring expenses.
  • 3The company recorded substantial goodwill and intangible asset impairment charges of $89.997 million in the first six months of 2009, impacting profitability and increasing the effective tax rate.
  • 4Despite revenue and profit declines, free operating cash flow remained strong, totaling $949.7 million for the first six months of 2009.
  • 5Short-term debt was reduced substantially, from $2.43 billion at year-end 2008 to $180.5 million at June 30, 2009, supported by the issuance of long-term notes.
  • 6The company's Return on Average Invested Capital (ROIC) saw a significant decrease, reflecting the impact of the economic downturn on profitability.
  • 7The automotive segment experienced severe challenges, with major U.S. manufacturers filing for bankruptcy protection, though ITW believes this will not have a significant long-term impact.

Frequently Asked Questions

The primary reasons are the widespread macroeconomic downturn affecting global industrial production and construction, leading to a substantial decrease in base revenues across most segments. This was compounded by unfavorable currency translation effects (a stronger US dollar) and increased restructuring costs aimed at aligning expenses with lower demand.

In the first six months of 2009, ITW recorded $89.997 million in goodwill and intangible asset impairment charges, primarily in the Polymers & Fluids and Power Systems & Electronics segments. These charges significantly reduced net income and contributed to a higher effective tax rate for the period, as a portion of these impairments were non-deductible for tax purposes.

ITW demonstrated strong liquidity management. Free operating cash flow increased to $949.7 million for the first six months of 2009. The company significantly reduced its short-term debt, particularly commercial paper, by $2.25 billion, funded in part by issuing $1.5 billion in long-term notes in March 2009. The total debt to capitalization ratio also decreased to 27.7% from 32.4%.

The company anticipates that the current global economic environment will continue through 2009, with key end markets remaining negatively impacted. Management is focused on managing costs, optimizing operations, and maintaining strong cash flow generation amidst these challenging conditions.