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Motley Fool  Aug 11  Comment 
The multi-industrial company is trying to grow in order to generate earnings and dividend growth for investors, but it's far from clear sailing.
Motley Fool  Jul 26  Comment 
The industrial company's run of good results continues, but its revenue growth rate could slow in the third quarter.
MarketWatch  Jul 24  Comment 
Illinois Tool Works Inc. said Monday it had net income of $587 million, or $1.69 a share, in the second quarter, up from $525 million, or $1.46 a share, in the year-earlier period. Excluding a 3 cents per share benefit from a legal settlement,...




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Illinois Tool Works (NYSE: ITW) manufactures engineered products for the industrial, construction, electronics and other markets. Illinois Tool Works follows a strategy of growth by aqcuisition, like other multi-line manufacturers such as IDEX (IEX) and AMTEK (AME). The company earned $13.9 billion in revenue and $969 million in net income in 2009.[1]

The company's strategy of growth by acquisition, which fail a little more than half of the time, leaves it vulnerable to the risk of a mismanaged or poorly selected acquisition. The decrease in residential construction huts the company's bottom line. Illinois Tool Works competes with other industrial manufacturers such as Graco (GGG), IDEX (IEX), Dover (DOV) and Danaher (DHR).

Company Overview

Illinois Tool Works follows a business strategy in which the company chooses to focus on the few products that command the most sales. The company has 840 operations in 57 countries. The company's 60 operating segments are aggregated into 8 external reportable segments.

Segments[2][3]

  • Industrial Packaging (14% of revenue) manufactures steel, plastic and paper products used to secure and protect goods while in transit. The segment sells 49% of its products to the general industrial and primary metals markets.
  • Power Systems & Electronics (12% of revenue) manufactures equipment and consumables for welding, PC board manufacturing, microelectronics assembly and electronic component packaging. 62% of the segment's products are sold to the general industrial and electronics markets. The segment competes with other companies such as Dover (DOV).
  • Transportation (15% of revenue) manufactures fasteners, components, fluids and polymers for the transportation industry. The segment sells 84% of its products to automotive OEMs and aftermarket customers. The segment competes with other companies such as Danaher (DHR).
  • Construction Products (11% of revenue) manufactures tools, fasteners and packaged hardware. 96% of Illinois Tool Work's Construction Products are sold to the commercial and residential new construction and renovation markets. The segment competes with other companies such as Danaher (DHR).
  • Food Equipment (13% of revenue) manufactures mixers, measuring devices, cooking equipment and refrigeration equipment. The segment sells 94% of its products to the food and beverage market. The segment competes with other companies such as IDEX (IEX).
  • Decorative Surfaces (7% of revenue) manufactures high pressure laminates for counter tops, furniture and flooring as well as solid surfaces for countertops. The segment sells 52% of its products to the commercial construction market.
  • Polymers & Fluids (8% of revenue) adhesives, sealants, lubricants, cutting fluids and janitorial supplies. 32% of the segment's products are sold to the general industrial market.
  • Other (20% of revenue) manufactures plastic storage bags, paint spray equipment, clean room products, software test equipment and other products. The segment sold 43% of its products to the consumer durables and general industrial markets. The segment competes with other companies such as Graco (GGG) and IDEX (IEX).

Business Growth

FY 2009 (ended December 31, 2009)[1]

  • Net revenue fell 19% to $13.9 billion due to lower base revenues and the unfavorable effect of currency translation, mainly due to the strengthening of the dollar. Revenue decreased by 21.6% and 14.9% in North America and for international operations respectively.
  • Net income fell 42% to $969 million.

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. The Clare Ross Organization supports this assertion by claiming that less than 50% of corporate acquisitions are successful.

Favorable exchange rates can give Illinois Tool Works a international revenue

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.

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.
  • 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.
  • 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.
  • 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.

References

  1. 1.0 1.1 ITW 2009 10-K "Selected Financial Data" pg. 14
  2. ITW 2009 10-K "General" pg. 2-4
  3. ITW 2009 10-K pg. 17-29
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