Summary
Illinois Tool Works Inc. (ITW) has announced a significant favorable resolution in its tax dispute with the Australian Tax Office (ATO). The Federal Court of Australia ruled in favor of ITW regarding a substantial portion of claimed income tax deductions related to intercompany financing transactions for the tax years 2002-2005. This positive outcome is expected to result in a one-time discrete tax adjustment of approximately $166 million, which translates to an estimated $0.33 earnings per diluted share from continuing operations in the first quarter of 2011. While the ATO has a 21-day window to appeal the court's decision, which was finalized on February 18, 2011, the initial ruling represents a major victory for ITW in a protracted legal battle. Investors should note that this adjustment is a discrete item and primarily impacts the first quarter's earnings, rather than representing a change in ongoing operational performance. The company had previously agreed to defer the resolution of similar tax disputes for the 2006 and 2007 tax years until a decision was reached for the earlier periods.
Key Highlights
- 1Favorable ruling from the Federal Court of Australia in a tax dispute with the Australian Tax Office (ATO).
- 2The court ruled in favor of ITW on a significant portion of income tax deductions for tax years 2002-2005.
- 3ITW expects to record a discrete tax adjustment of $166 million.
- 4This adjustment is estimated to add $0.33 per diluted share to first quarter 2011 earnings.
- 5The ATO has a 21-day period to appeal the court's final orders issued on February 18, 2011.
- 6The dispute involved intercompany financing transactions between the U.S. and Australia.
- 7Resolution for tax years 2006 and 2007 was deferred pending the outcome of the earlier years' dispute.