Illinois Tool Works Management Discusses Q2 2012 Results - Earnings Call Transcript

Illinois Tool Works (ITW)

Q2 2012 Earnings Call

July 24, 2012 10:00 am ET

Executives

John L. Brooklier - Vice President of Investor Relations

David B. Speer - Chairman and Chief Executive Officer

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

Analysts

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Robert Wertheimer - Vertical Research Partners Inc.

Jamie L. Cook - Crédit Suisse AG, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Walter S. Liptak - Barrington Research Associates, Inc., Research Division

Henry Kirn - UBS Investment Bank, Research Division

Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division

Nigel Coe - Morgan Stanley, Research Division

Eli S. Lustgarten - Longbow Research LLC

Presentation

Operator

Good morning, and thank you for standing by. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to John Brooklier. You may begin.

John L. Brooklier

Thank you, Kathy. Good morning, everyone, and welcome to ITW's second quarter 2012 conference call. As is our normal practice, our CEO, David Speer; and CFO, Ron Kropp, have joined me to discuss our Q2 financial results, as well as update us on our longer-term strategic initiatives.

Here's a quick agenda for today's call. David will shortly provide a brief update on our ongoing long-term initiatives, as well as second quarter highlights and commentary on our second half forecast. Ron will cover our Q2 financial results in more detail. I will then talk about our Q2 geographic performance and segment results. I will then come back and provide a detailed update on our Q3 and full year forecast. Finally, we will open the call to your questions. [Operator Instructions] As normal, we have scheduled 1 hour for today's call.

This presentation contains our financial forecast for the 2012 third quarter and full year, as well as other forward-looking statements identified on this slide. We refer you to the company's 10-K for 2011 for more detail about important risks that could cause actual results to differ materially from the company's expectations.

Moving to next slide. Let me remind everybody that our telephone replay for this conference call is (888) 566-0396. The playback number will be available through midnight of August 7. Now let me turn the call over to David, who has some brief introductory comments. David?

David B. Speer

Thank you, John. Before I comment on our strong second quarter results, let me update you on our 3 long-term initiatives that we introduced to you all last quarter. To remind you, our 3 key areas of focus going forward are: business structure simplification, strategic sourcing and portfolio management.

We continue to make good progress in all 3 categories. For business simplification, we've been actively developing and communicating our plans to key internal and external constituents. Internally, a host of businesses have been reviewed and are in the midst of announcing organizational changes to support our larger revenue base businesses, consolidated organizational structure where appropriate and focused on similar customers and end markets, while maintaining the intimate customer market interfaces critical to our innovation initiatives and business agility.

In strategic sourcing, we have made key decisions regarding the sourcing approach in organization, as well as identified the first and second phase of direct and indirect sourcing activities. As to portfolio management, part of our strategic planning process is the identification of noncore businesses that no longer fit our long-range plans, a number of which could likely be divested in the future as we have done been recently with the finishing businesses and 2 consumer packaging businesses. We will continue to develop and implement these plans as we move forward. As promised, we intend to provide some enterprise-wide data by December that will begin to quantify the financial impact of these initiatives over the next several years.

Now let's move to our second quarter results. We were very pleased with our strong second quarter operating performance despite end markets slowing in a variety of international end markets and the significant currency headwinds we faced in the quarter. Thanks our differentiated 80/20 operational focus, our business has produced very strong operating margin improvement in the second quarter due to excellent management of input and overhead costs. We also continued to return significant levels of cash our shareholders through our share repurchase program, as well as our strong dividend payout.

Looking ahead to the second half 2012. We lowered our EPS forecast range, given the ongoing negative impact of currency translation and the expected continuing sluggish demand in the international end markets, as well as additional restructuring expenditures that will now total over $100 million for the year. Ron will cover our forecast in detail later in the call.

Now let me hand it over to Ron, who will talk about the strong second quarter performance. Ron?

Ronald D. Kropp

Thank you, David, and good morning, everyone. Here are the highlights for the second quarter. Revenues increased 0.9% due to higher base in acquisition revenues offset by the unfavorable impact from currency. Operating income was $770 million, which was higher than last year by $59 million, representing income growth of 8%. Operating margins of 16.5% were 110 basis points higher compared to last year. Diluted income per share for continuing operations was $1.11, which was close to the midpoint of our range. Finally, free operating cash flow is $409 million for the quarter.

Now let's go to the components of our operating results. Our 0.9% revenue increase was primarily due to the following factors. Base revenues were up 2.3%, with North American base revenues increasing 5.3% and mixed international base revenues that overall were down slightly year-over-year. John will discuss the geographic mix in more detail later in the call. Acquisitions net of divestitures added 3% to revenue growth and currency translation decreased revenues by 4.5%, largely due to a weaker euro.

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