10-QPeriod: Q3 FY2010

ILLINOIS TOOL WORKS INC Quarterly Report for Q3 Ended Aug 6, 2010

Filed August 6, 2010For Securities:ITW

Summary

Illinois Tool Works Inc. (ITW) reported a substantial increase in financial performance for the six months ended June 30, 2010, compared to the same period in 2009. Operating revenues surged by 17.5% to $7.68 billion, driven by a broad-based recovery across its end markets, particularly in North America and internationally. This top-line growth, coupled with effective cost management and the benefits of prior restructuring, led to a significant rebound in operating income, which more than doubled from $426.1 million in the prior year to $1.14 billion. The company demonstrated strong execution in the current economic environment, with operating margins expanding significantly across most segments. The substantial increase in income from continuing operations to $715.1 million, or $1.41 per diluted share, reflects this improved operational efficiency and a strong recovery from the prior year's impact of goodwill and intangible asset impairments. ITW's financial health appears robust, supported by solid free operating cash flow generation and a manageable debt-to-capitalization ratio.

Financial Highlights

50 data points
Beta

Revenue

$3.94B

35.3% Gross Margin

Net Income

$422.03M

10.7% Net Margin

EPS (Diluted)

$0.84

Total Assets

$16.30B

Cash & Equivalents

$1.73B

Free Cash Flow

$447.63M

Financial Statements
Beta
Revenue$3.94B
Cost of Revenue$2.55B
Gross Profit$1.39B
Operating Income$619.73M
Interest Expense$43.49M
Net Income$422.03M
EPS (Basic)$0.84
EPS (Diluted)$0.84
Shares Outstanding (Basic)500.75M
Shares Outstanding (Diluted)503.15M

Key Highlights

  • 1Robust revenue growth of 17.5% year-over-year to $7.68 billion for the six months ended June 30, 2010, indicating a strong recovery in demand across ITW's diverse end markets.
  • 2Significant improvement in operating income, more than doubling to $1.14 billion from $426.1 million in the prior year, driven by revenue growth and operational efficiencies.
  • 3Diluted earnings per share from continuing operations grew substantially to $1.41 from $0.34, reflecting the strong recovery and improved profitability.
  • 4Operating margins saw considerable expansion, increasing from 6.5% in the first half of 2009 to 14.8% in the first half of 2010, demonstrating effective cost management and operating leverage.
  • 5Return on Invested Capital (ROIC) improved significantly to 15.0% for the year-to-date period of 2010, up from 6.8% in the prior year, showcasing enhanced capital efficiency.
  • 6Total debt decreased to $3.03 billion, and the debt-to-capitalization ratio improved slightly to 25.8% from 26.2%, indicating a healthy balance sheet.
  • 7Free operating cash flow remained strong at $494.5 million for the six months ended June 30, 2010, supporting the company's ability to fund operations, dividends, and potential acquisitions.

Frequently Asked Questions

ITW's revenue growth of 17.5% was primarily driven by a significant increase in 'base business' revenues, which grew 11.5% year-over-year. This was fueled by improvements in macroeconomic conditions across ITW's diverse end markets, including transportation, industrial packaging, food equipment, power systems & electronics, construction products, polymers & fluids, and decorative surfaces. Favorable currency translation effects and revenues from recent acquisitions also contributed to the top-line increase.

The substantial improvement in profitability was a result of several factors. Firstly, the significant increase in operating revenues provided strong operating leverage. Secondly, the company benefited from lower operating expenses and the cumulative effects of restructuring projects implemented in prior periods. Finally, the absence of significant goodwill and intangible asset impairment charges, which impacted the first half of 2009, also contributed to the dramatic rebound in net income and earnings per share.

ITW expects its internally generated cash flows and available credit facilities to be sufficient for servicing debt, paying dividends, funding internal growth, and pursuing acquisitions. The company maintains a target debt-to-capitalization ratio of 20% to 30% and has a stock repurchase program in place. Its strong free operating cash flow generation and manageable debt levels provide significant financial flexibility.

In the first half of 2009, ITW recorded significant goodwill and intangible asset impairment charges totaling $90.0 million, which negatively impacted profitability. For the first half of 2010, the company recorded a discrete tax charge of $21.9 million related to the Patient Protection and Affordable Care Act. These items are noted to ensure comparability when analyzing performance trends.