Illinois Tool Works (ITW)

Q3 2011 Earnings Call

October 25, 2011 10:00 am ET


Ronald D. Kropp - Chief Financial officer and Senior Vice President

David B. Speer - Chairman, Chief Executive officer and Member of Executive Committee

John L. Brooklier - Vice President of Investor Relations


Mark Edward Koznarek - Cleveland Research Company

Ingrid Aja - JP Morgan Chase & Co, Research Division

Eddie Szeto - Goldman Sachs Group Inc., Research Division

Peter Chang - Crédit Suisse AG, Research Division

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

John G. Inch - BofA Merrill Lynch, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Deane M. Dray - Citigroup Inc, Research Division



Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. I'd now like to turn the call over to John Brooklier, Vice President of Investor Relations.

John L. Brooklier

Thank you, Dory. Good morning, everyone, and welcome to all who've joined us for ITW's Third Quarter 2011 Conference Call. As usual, our CEO, David Speer; and our CFO, Ron Kropp have joined us to discuss our third quarter financial results.

Here is the agenda for today's call. David will join us shortly to focus on many of our third quarter highlights. Ron will then take you through our Q3 financial results. I will then cover our third quarter operating highlights for our reporting segments, and Ron will then detail our 2011 fourth quarter and full year forecasts. Finally, we will open the call to your questions. And as always, we ask for your cooperation for our "one question, one follow-up question" policy. We are targeting a one-hour completion time for today's call.

Please let me remind you that 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 income per share from continuing ops, diluted net income per share, restructuring expenses, free operating cash flow, acquisition activity, tax rates, end market conditions and the company's related 2011 earnings forecast. Please refer to our 2010 Form 10-K for more details on our forward-looking statements.

One other housekeeping item: The telephone replay for this conference call is (203) 369-0637. No passcode is necessary. And the replay is available through midnight of February -- I'm sorry, of November 8, 2011.

Now here's David Speer to talk about our third quarter highlights. David?

David B. Speer

Thank you, John. We are very pleased with our third quarter operating performance on a number of fronts. Both our total revenues and organic revenues were solid, coming in only modestly below our original expectations for the quarter. Total revenues grew 16.2% and organic revenues increased 6.2%. The vast majority of our diversified worldwide end markets were in reasonable shape.

Ron will detail our full quarter 3 financial results in just a few moments, but it's noteworthy to highlight that our diluted EPS grew 25% in the quarter.

We were especially happy to see the improvement in our free operating cash flow in the quarter. We generated more than $700 million of free operating cash in quarter 3. This represents a conversion ratio of 139% versus net income and gets us back on track to more traditional free cash flow generation metrics.

In terms of how we utilize our free cash, we continue to implement a well-balanced approach that target dividends, acquisitions and share buybacks.

Here's what we accomplished in these targeted categories in the third quarter. First, we raised our annual dividend payout 6% in August 2011. We acquired annualized revenues of nearly $300 million during the quarter, and year-to-date, we've acquired annualized revenues of approximately $800 million. And we executed $400 million of share repurchases in quarter 3. And notably, year-to-date, we have now repurchased over 18 million shares for just under $1 billion.

Finally, we took advantage of our strong financial profile and we issued $1 billion of long-term debt at very attractive rates. All in all, it was a very busy but a very productive quarter for ITW.

Now let me turn the call over to Ron for the financial details.

Ronald D. Kropp

Thanks, David. Good morning, everyone. Here are the highlights for the third quarter.

Revenues increased 16% primarily due to higher base revenues, acquisition and translation. Operating income was $714 million, which was higher than last year by $95 million. Operating margins of 15.6% were lower by 10 basis points versus last year.

Diluted income per share from continuing operations was $1, which was higher than last year by $0.20 and was on the higher end of our forecast range of $0.95 to $1.03. Finally, free operating cash flow is very strong at $704 million or 139% of net income.

Now let's go to the components of our operating results. Our 16.2% revenue increase was primarily due to 3 factors. First, base revenues were up 6.2%, with North American base revenues increasing 7.8% and international base revenues up 4.2%. Next, currency translation increased revenues by 4.7%. Lastly, acquisitions net of divestitures added 5.3% to revenue growth.

Operating margins for the third quarter of 15.6% were lower than last year by 10 basis points but higher than last quarter by 20 basis points. The base business margins were higher by 30 basis points versus last year primarily due to the favorable impact of the higher sales volume, partially offset by the negative impact of non-volume items. Non-volume items reduced base margins by 120 basis points. Included in the non-volume impact for the third quarter was the unfavorable impact of price/cost, which reduced margins by 50 basis points.

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