Illinois Tool Works operating margins increased in Q3

Illinois Tool Works Inc. on October 20 reported diluted income per share from continuing operations of $0.60 in the 2009 third quarter as ongoing restructuring activities and modest revenue improvement in discrete end markets helped drive income and operating margins to significantly higher levels compared to the 2009 second quarter. In the 2009 third quarter, operating income of $483.6 million equated to operating margins of 13.5 percent vs. operating margins of 9.9 percent in the 2009 second quarter.

Third quarter 2009 operating revenues of $3.580 billion were 19.8 percent lower than the year ago period but better than the 2009 second quarter as worldwide end markets continued to stabilize, or in some cases, modestly improved. The company's base revenues declined 17.9 percent in the 2009 third quarter vs. a year ago, with North American base revenues decreasing 21.6 percent and international base revenues declining 13.8 percent. Acquisitions added 3.6 percent to revenues while translation negatively impacted revenues 5.6 percent in the third quarter. By comparison, total company base revenues decreased 22.2 percent in the 2009 second quarter vs. the year-ago period. While third quarter operating margins of 13.5 percent were 150 basis points lower than the year-ago quarter, base margins actually improved 20 basis points in the 2009 third quarter. Diluted income per share from continuing operations of $0.60 was 33 percent lower than the year-ago period.

Starting with this quarter, the company has moved its annual goodwill impairment testing from the first quarter to the third quarter of each year. As part of the third quarter impairment review, the company recorded $12 million of impairment, or a reduction of 2.5 cents of earnings. This impairment was related to a 2008 acquisition of a truck remanufacturing and parts/service business. In addition, the company's effective tax rate of 32.5 percent in the third quarter was higher than the previously forecasted third quarter tax rate of 28.0 percent, resulting in 3.5 cents of reduced earnings. The higher tax rate in the third quarter was due to the non-deductibility of the goodwill associated with impairment and several discrete tax adjustments.

The company's strong third quarter free operating cash flow of $516 million was largely driven by the strong improvement in margins and further reductions in working capital. In the quarter, the free operating cash flow to net income conversion rate was 171 percent. Year-to-date free operating cash flow totaled $1.466 billion, representing a conversion rate of 333 percent.

"We continue to be very pleased with the company's overall operating performance amid an environment of generally weak end markets," said David B. Speer, ITW's chairman and chief executive officer. "Our strong operating margins of 13.5 percent in the third quarter were largely achieved thanks to the focused response by our operating managers and right-sizing of our decentralized business units around the world. We incurred $31 million of restructuring expense in the quarter, bringing our year-to-date restructuring total to $128 million. Additionally, we expect to incur between $25 million and $40 million of restructuring in the 2009 fourth quarter. The cumulative benefits of these restructuring programs will continue to help us in the 2009 fourth quarter and in 2010."

Segment highlights for the 2009 third quarter include:

• Worldwide revenues for the Power Systems and Electronics segment declined 34.6 percent in the quarter, with base revenues decreasing 34.2 percent. Base revenues performance in the quarter was modestly better than the decrease of 36.5 percent in the 2009 second quarter. Total worldwide welding base revenues declined 36.2 percent as demand for capital equipment and consumables continued to mirror weak capital expenditure spending. In PC board fabrication, base revenues decreased 42.3 percent in the third quarter versus a base revenue decline of 59.2 percent in the second quarter. Even with the weak top line, operating margins of 17.2 percent in the quarter were 190 basis points higher than the 2009 second quarter.
• Worldwide revenues for the Transportation segment declined 7.0 percent in the quarter. Base revenues decreased 7.9 percent compared to a base revenue decline of 23.7 percent in the 2009 second quarter. The sequential improvement in base revenues was largely attributable to increased auto builds in North America. Thanks in large part to incentive programs, North American auto builds of 2.4 million in the third quarter were 600,000 units higher than the second quarter. Automotive aftermarket base revenues declined 4.5 percent in the quarter vs. a decrease of 12.7 percent in the second quarter. Notably, third quarter operating margins of 10.5 percent were 570 basis points higher than the 2009 second quarter.
• Worldwide revenues for the Food Equipment segment declined 10.2 percent in the quarter, with base revenues decreasing 6.3 percent. North American food equipment base revenues decreased 8.0 percent while international food equipment base revenues fell 4.9 percent. All revenue metrics in the quarter represented improvement vs. the 2009 second quarter. Operating margins of 17.2 percent in the quarter were 90 basis points higher than the prior year period and 430 basis points higher than the preceding quarter.

Looking ahead, the company is forecasting fourth quarter 2009 diluted income per share from continuing operations to be in a range of $0.54 to $0.66. The 2009 fourth quarter forecast assumes a total revenue range of -1 percent to +5 percent versus the 2009 third quarter.

With $17.1 billion in 2008 revenues, ITW is a multinational manufacturer of a diversified range of value-adding and short lead-time industrial products and equipment. The company consists of 895 business units in 54 countries and employs some 59,000 people.