Illinois Tool Works Inc. Q3 2010 Earnings Call Transcript

Illinois Tool Works Inc. Q3 2010 Earnings Call Transcript
Publish date:

Start Time: 11:30

End Time: 12:30

Illinois Tool Works Inc. (



Q3 2010 Earnings Call

October 19, 2010 11:30 am ET


John Brooklier - IR

David Speer - CEO

Ron Kropp - CFO


Meredith Taylor - Barclays Capital

John Inch- BofA Merrill Lynch

Terry Darling - Goldman Sachs

Mark Koznarek - Cleveland Research Company

Deane Dray - Citi

Ann Duignan - JPMorgan

Henry Kirn - UBS

Robert Wertheimer - Morgan Stanley



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» Illinois Tool Works Inc. Q2 2010 Earnings Call Transcript
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» Illinois Tool Works Inc. Q3 2009 Earnings Call Transcript.

Welcome to the Third Quarters Earnings Release Conference Call. All participants are in a listen-only until the question-and-answer session of today’s conference. (Operator Instructions). I would like to turn the call up here, host today Mr. John Brooklier, you may begin

John Brooklier

Welcome to all of who joined us for today’s ITW’s third quarter 2010 conference call. With me today is our CEO, David Speer, and our CFO, Ron Kropp. Despite today’s irrational market reaction to your third quarter results and Q4 forecast, we firmly believe we had a very strong set of third quarter financial results, while we talk about those today especially our organic growth rates on our operating margins.

I will now turn the call over to David Speer, who will talk more about what turned out to be a very, very good quarter for us.

David Speer

The third quarter generated strong total company operating results, which turned out better than we had expected as we provided our original third quarter guidance. Worldwide end markets in quarter three appeared to be relatively stable and demand levels were essentially even with our strong 2010 second quarter. Here are some of the highlights.

Our third quarter organic growth rate of 11.2% was largely driven by strong base revenue growth in our Power Systems and Electronics, Industrial Packaging, and Transportation segments. Our sorted welding electronics, industrial packaging and auto OEM businesses also took advantage in solid third quarter end-market demand, thanks to ITW strengths such as our ongoing product innovation and strong customer service.

Our very strong in third quarter operating margins of 15.9% were 240 basis points higher than the year ago period and only 10 basis points lower than the 2010 second quarter, which is generally our top performing operating margin quarter in the quarter. It’s clear that our past restructuring efforts have helped to improve our operating margins, and we thank all of our operating people around the world for job well done.

Finally, we have repurchased 8.1 million shares for $350 million in the quarter, as we said a number of times in the past we consider our share repurchase program to be an ongoing part of our capital allocation process and we remain committed to being opportunistic as to choose as you saw during the quarter.

Now back to you, John.

John Brooklier

Here is the agenda for today’s call. Ron will join us in a few moments to talk about the Q3 ‘10 financial highlights. I will then cover Q3 operating highlights for our reporting segments and then Ron will detail our Q4 and full year earnings forecast. Finally, we will take your questions as always we asked your cooperation for a first question and first follow-up question policy.

Next, let’s cover our mandatory housekeeping items. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including without limitation statements regarding operating performance, revenue growth, diluted net income per share from continuing ops, acquisition activity, restructuring expenses and related benefits, tax rates, end-market conditions, and the company’s 2010 related forecast.

Finally, one of the housekeeping items, telephone replay for this conference call is 402-220-9717. The telephone replay is available through midnight of November 2 and no pass code is necessary.

Now here is CFO, Ron Kropp, who will comment on our 2010 third quarter financial highlights. Ron?

Ron Kropp

Here are the highlights for the third quarter. Revenues increased 12% primarily due to higher base revenues, but this increase was sequentially lower than the second quarter revenue increase of 20%, as a result of tougher comparables.

Operating income was $641 million, which was higher than last year by $157 million. Margins of 15.9% were higher by 240 basis points. Diluted income per share was $0.83, which was higher than last year by $0.23. Finally free operating cash flow was strong at $412 million or 98% of net income.

Now let’s go to the components of our operating results. At 12.2% revenue increase was primarily due to three factors. First, base revenues were up 11.2%, which was unfavorable by 390 basis points versus the second quarter base increase of 15.1%. As David mentioned, we have seen solid revenues gains worldwide led by the Transportation, Industrial Packaging and Power Systems segments.

North American base revenues increased 11.5% and international base revenues increased 10.8%, which were lower than the second quarter increases of 15.8% and 14.2% respectively. Next currency translation decrease revenues by 2.4%, which was unfavorable by 470 basis points versus the second quarter currency benefit.

Lastly, acquisitions and divestitures added 3.5% revenue growth which was 60 basis points higher than the second quarter acquisition impact. Operating margins for the third quarter 15.9%, where higher than last year by 240 basis points and where essentially the same as second quarter margins.

The base business margins were higher by 160 basis points due to the favorable impact of the higher sales volume, partially offset, but the negative impact of non-volume items. Non-volume items reduced base margins by 130 basis points, which was unfavorable first and the second quarter non-volume impact by 190 basis points.

Including in the non-volume impact for the third quarter were lower costs as a result of past restructuring programs, which improved margins by 40 basis points offset by the unfavorable impact of price cost, which reduced margins by 90 basis points and miscellaneous corporate items, which reduced margins by 40 basis points.

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