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Jonathan Sheets

ITW AT A GLANCE

P/E ► 32.1 AVG EV/EBITDA ► 14.2 AVG ROA ► 5.2% AVG ROE ► 7.8% AVG Debt to Equity ► 0.808 AVG Current Ratio ► 2.14 AVG Interest Coverage Ratio ► 7.84 AVG

 

 

 

 

 

 

Illinois Tool Works (NYSE: ITW) manufactures engineered products for the industrial, construction, electronics and other markets. The company recorded nearly $16.2 billion in 2007 total revenues. Illinois Tool Works follows a strategy of growth by aqcuisition, like other multi-line manufacturers such as IDEX (IEX) and AMTEK (AME), and added fifty-two separate companies to its portfolio in 2007.^[1]

The company's strategy of growth by acquisition, which fail a little more than half of the time,^[2] leaves it vulnerable to the risk of a mismanaged or poorly selected acquisition. Likewise, residential construction spending decreased 20% in 2007.^[3] The decrease in residential construction led to -1% organic growth for Illinois Tool Works Construction Products segment.^[4] On the other hand, favorable exchange rates resulted in a $565.8 million boost to the company's international revenue in 2007.^[5] Illinois Tool Works competes with other industrial manufacturers such as Graco (GGG), IDEX (IEX), Dover (DOV) and Danaher (DHR).

Business Overview

Illinois Tool Works follows a business strategy in which the company chooses to focus on the few products that command the most sales.^[6] As a result of this strategy, Illinois Tool Works reported sales growth of 17% in 2007.^[7] The company's 17% sales growth in 2007 has been accompanied by operating margins above 16% in each of the last three years.^[7]

Segments

ITW 2007 Revenues by Segment Before Eliminations^[8]

• Industrial Packaging (15% of revenue) manufactures steel, plastic and paper products used to secure and protect goods while in transit.^[9] The segment sells 46% of its products to the general industrial and primary metals markets.^[10]
• Power Systems & Electronics (14% of revenue) manufactures equipment and consumables for welding, PC board manufacturing, microelectronics assembly and electronic component packaging.^[11] 56% of the segment's products are sold to the general industrial and electronics markets.^[10] The segment competes with other companies such as Dover (DOV).
• Transportation (14% of revenue) manufactures fasteners, components, fluids and polymers for the transportation industry.^[12] The segment sells 93% of its products to automotive OEMs and aftermarket customers.^[10] The segment competes with other companies such as Danaher (DHR).
• Construction Products (13% of revenue) manufactures tools, fasteners and packaged hardware.^[13] 96% of Illinois Tool Work's Construction Products are sold to the commercial and residential new construction and renovation markets.^[10] The segment competes with other companies such as Danaher (DHR).
• Food Equipment (12% of revenue) manufactures mixers, measuring devices, cooking equipment and refrigeration equipment.^[14] The segment sells 95% of its products to the food and beverage market.^[10] The segment competes with other companies such as IDEX (IEX).
• Decorative Surfaces (8% of revenue) manufactures high pressure laminates for counter tops, furniture and flooring as well as solid surfaces for countertops.^[15] The segment sells 52% of its products to the commercial construction market.^[10]
• Polymers & Fluids (6% of revenue) adhesives, sealants, lubricants, cutting fluids and janitorial supplies.^[16] 32% of the segment's products are sold to the general industrial market.^[10]
• Other (18% of revenue) manufactures plastic storage bags, paint spray equipment, clean room products, software test equipment and other products.^[17] The segment sold 43% of its products to the consumer durables and general industrial markets.^[10] The segment competes with other companies such as Graco (GGG) and IDEX (IEX).

Financials

ITW 2007 Revenues by Geography^[8]

Illinois Tool Works Total Revenues, Operating Income and Net Income^[7][8] ($ in millions)

Key Trends and Forces

Illinois Tool Works' strategy of growth by acquisition requires the continued ability to pick winning companies

According to Sayan Chatterjee a Batten Fellow at the University of Virginia Darden School of Business, acquisitions fail more times than they succeed due to overpayment for the acquisition and/or failure to quickly and effectively integrate the acquired company into the buyers corporate structure.^[18] The Clare Ross Organization supports this assertion by claiming that less than 50% of corporate acquisitions are successful.^[2] Because Illinois Tool Works made fifty-two acquisitions^[1] in 2007 that increased revenues by 11.2% when revenues grew by a total of 17.2%,^[5] the company is exposed to the risk of making a poorly selected or poorly managed acquisition. In 2006, the company's acquisitions resulted in 6.8% revenue growth when revenues grew by a total of 10%.^[5]

EUR to USD Exchange Rates^[19]

Favorable exchange rates gave Illinois Tool Works a $565.8 million dollar international revenue boost in 2007

Between June 18, 2007 and June 18, 2008, the U.S. dollar depreciated in relation to the euro, the Canadian dollar, the pound and the Chinese yuan.^[19][20][21] As a result of the weak dollar, Illinois Tool Works received a $565.8 million dollar boost to international revenues in 2007.^[5] In general, when foreign currencies depreciate relative to the U.S. dollar, the value of Illinois Tool Works' international sales decreases. On the other hand, exchange rates resulting in a weak U.S. dollar boost the value of Illinois Tool Works' international sales.

Decreased spending on new home construction decreases the demand for Illinois Tool Works' construction products

When spending on new home construction drops, so does spending on construction equipment and supplies resulting in slowed revenue growth for Illinois Tool Works. On the other hand, when spending on new home construction increases, spending on construction supplies increases resulting in faster revenue growth for Illinois Tool Works. Between April 2007 and April 2008, total construction spending fell 4%, with a 20% decrease in residential construction spending.^[3] As a result of the decrease in spending on new home construction, Illinois Tool Works' Construction Products had organic growth of -1%.^[4]

Key Competitors

• Graco (GGG) manufacturers paint sprayers for industrial, automotive and aerospace applications as well as lubrication systems. The company's paint sprayers compete with those produced by Illinois Tool Works' Other segment.^[22]
• IDEX (IEX) manufactures pumps, injectors and nozzles for industrial and medical applications as well as products used in food processing, paint mixing and spraying. The company's paint products and food processing products compete with Illinois Tool Works' Food Processing and Other segments.^[23]
• Dover (DOV) manufactures material handling and industrial vehicle products as well as refrigeration products, fluid management products and products used to manufacture electronics. The company's electronics manufacturing products compete with those produced by Illinois Tool Works' Power Systems & Electronics segment.^[24]
• Danaher (DHR) designs, manufactures and markets dental care products, mechanic's hand tools and bar code sensors as well as sensors and monitoring products for water treatment, aerospace and military applications. The company also manufactures standard and custom motors as well as tools and components for the automotive industry. The companies tools and automobile components compete with products made by Illinois Tool Works' Construction Products and Transportation segments.^[25]

Illinois Tool Works and Key Competitors 2007 ($ in millions)

References

1. ↑ ^{1.0 1.1} ITW 2007 10-K Item 1A: An unfavorable environment for making acquisitions may adversely affect the Company’s future growth, pg 10
2. ↑ ^{2.0 2.1} Clare Ross Organization: Ensuring Merger & Acquisition Success
3. ↑ ^{3.0 3.1} Value of Construction Put in Place - Seasonally Adjusted Annual Rate
4. ↑ ^{4.0 4.1} ITW 2007 10-K Exhibit 13: Construction Products, pg 35
5. ↑ ^{5.0 5.1 5.2 5.3} ITW 2007 10-K Exhibit 13: Consolidated Results of Operations, pg 31
6. ↑ ITW 2007 10-K Item 1: 80/20 Business Process, pg 4
7. ↑ ^{7.0 7.1 7.2} ITW 2007 10-K Exhibit 13: Statement of Income, pg 50
8. ↑ ^{8.0 8.1 8.2} ITW 2007 10-K Exhibit 13: Segment Information, pg 71
9. ↑ ITW 2007 10-K Item 1: Industrial Packaging, pg 1
10. ↑ ^{10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7} ITW 2007 10-K Item 1: Financial Information about Segments and Markets, pg 5
11. ↑ ITW 2007 10-K Item 1: Power Systems & Electronics, pg 1
12. ↑ ITW 2007 10-K Item 1: Transportation, pg 1
13. ↑ ITW 2007 10-K Item 1: Construction Products, pg 1
14. ↑ ITW 2007 10-K Item 1: Food Equipment, pg 1
15. ↑ ITW 2007 10-K Item 1: Decorative Surfaces, pg 1
16. ↑ ITW 2007 10-K Item 1: Polymers & Fluids, pg 1
17. ↑ ITW 2007 10-K Item 1: Other, pg 1
18. ↑ Sayan Chatterjee and L. J. Bourgeois, III: A Framework for Acquisition Success: Post-acquisition Resource Interactions, pg 2
19. ↑ ^{19.0 19.1} EUR to USD Exchange Rates
20. ↑ USD-CAD Exchange Rates
21. ↑ Historic Exchange Rates: USD-CNY Look up on 6/18/07 and 6/18/08
22. ↑ Google Finance: GGG
23. ↑ Google Finance: IEX
24. ↑ Google Finance: DOV
25. ↑ Google Finance: DHR