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Illinois Tool Works 10-Q 2011 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q
(Mark One)
Commission File Number: 1-4797
ILLINOIS TOOL WORKS INC.
(Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code) 847-724-7500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer ___
Non-accelerated filer ___ (Do not check if a smaller reporting company)Smaller reporting company ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of registrant’s common stock, $0.01 par value, outstanding at June 30, 2011: 491,414,518.
Part I – Financial Information
Item 1 – Financial Statements
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME (UNAUDITED)
The Notes to Financial Statements are an integral part of these statements.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
The Notes to Financial Statements are an integral part of these statements.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS (UNAUDITED)
The Notes to Financial Statements are an integral part of these statements.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company”). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company’s 2010 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting.
Prior to 2011, the Company’s international operations outside of North America had a fiscal reporting period that began on December 1 and ended on November 30. Effective January 1, 2011, the Company eliminated the one month lag for the reporting of its international operations outside of North America. As a result, the Company is now reporting both North American and international results on a calendar year basis. The Company determined that the elimination of the one month reporting lag was preferable because the same period-end reporting date improves overall financial reporting as the impact of current events, economic conditions and global trends are consistently reflected in the financial statements of the North American and international business units.
The Company has applied this change in accounting principle retrospectively to all prior financial statement periods presented. The elimination of the one month reporting lag for international operations outside of North America resulted in a decrease to operating revenues from continuing operations of $30,572,000, to income from continuing operations of $7,506,000, or $0.01 per diluted share, and to net income of $9,336,000, or $0.02 per diluted share, for the three months ended June 30, 2010; an increase to operating revenues from continuing operations of $93,363,000, to income from continuing operations of $26,961,000, or $0.06 per diluted share, and to net income of $30,138,000, or $0.06 per diluted share, for the six months ended June 30, 2010; and an increase to income reinvested in the business of $8,722,000 as of December 31, 2010.
(2) COMPREHENSIVE INCOME
The components of comprehensive income in the periods presented were:
(3) DISCONTINUED OPERATIONS
In April 2011, the Company entered into a definitive agreement to sell its finishing group of businesses to Graco Inc. in a $650,000,000 cash transaction. The sale is not expected to be completed prior to the fourth quarter of 2011, to accommodate regulatory reviews. The finishing businesses, which were included within the All Other segment, had revenues of approximately $305,000,000 for the year ended December 31, 2010. Additionally, in the second quarter of 2011, the Company’s Board of Directors approved plans to divest a consumer packaging business in the All Other segment and an electronics components business in the Power Systems & Electronics segment, which had combined 2010 revenues of approximately $100,000,000. The Company expects to dispose of both businesses within one year. These businesses are classified as held for sale as of June 30, 2011.
The held for sale finishing, consumer packaging, and electronics components businesses discussed above, along with a flooring business in the Decorative Surfaces segment that was exited in early 2011 and a security printing business in the All Other segment that was sold in the third quarter of 2010, are reported as discontinued operations in the statement of income. All related prior period income statement information has been restated to conform to the current year reporting of these businesses.
Results of the discontinued operations for the second quarter and year-to-date periods of 2011 and 2010 were as follows:
As of June 30, 2011, the assets and liabilities of the held for sale finishing, consumer packaging, and electronics components businesses discussed above were included in assets and liabilities held for sale in the statement of financial position, as follows:
(4) INCOME TAXES
The Company has been litigating its dispute with the Australian Tax Office over the tax treatment of an intercompany financing transaction between the U.S. and Australia. The case was heard before the Federal Court of Australia, Victoria, in September 2010. The proceedings resulted from the Company’s appeal of a decision by the Australian Tax Commissioner to disallow income tax deductions for the income tax years 2002 through 2005 and the assessment of withholding taxes for income tax year 2003. The Company also contested the Commissioner’s similar determination for income tax years 2006 and 2007; however, the parties agreed to follow the Court’s decision made on the earlier years. On February 4, 2011, the Federal Court of Australia, Victoria, decided in the Company’s favor with respect to a significant portion of the income tax deductions. The Court issued the final orders on February 18, 2011. Based on this decision, the Company decreased its unrecognized tax benefits related to this matter by approximately $197,000,000 and recorded a favorable discrete non-cash tax benefit to reduce tax expense by $165,927,000 in the first half of 2011. The Australian Tax Office has appealed the timing of certain of the deductions, the outcome of which is not expected to be material.
During the first quarter of 2011, the Company resolved an issue with the Internal Revenue Service in the United States related to a deduction for foreign exchange losses on an intercompany loan that resulted in a decrease in unrecognized tax benefits of approximately $179,000,000.
In March 2010, the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act were signed into law. As a result, future tax deductions for retiree prescription drug coverage will be reduced by the amount of subsidies received starting in 2013. In the first quarter of 2010, the Company recorded a discrete tax charge of $21,881,000 for the impact of the health care reform legislation.
The components of the effective tax rate for the six month periods ended June 30, 2011 and 2010 were as follows:
The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions and a number of these audits are currently ongoing.
(5) INVENTORIES
Inventories at June 30, 2011 and December 31, 2010 were as follows:
(In thousands)
(6)RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
Pension and other postretirement benefit costs related to both continuing and discontinued operations for the periods ended June 30, 2011 and 2010 were as follows:
The Company expects to contribute approximately $129,100,000 to its pension plans and $39,500,000 to its other postretirement plans in 2011. As of June 30, 2011, contributions of $44,000,000 to pension plans and $16,300,000 to other postretirement plans have been made. (7) SHORT-TERM DEBT
The Company had outstanding commercial paper of $1,065,933,000 at June 30, 2011 and no outstanding commercial paper at December 31, 2010. Commercial paper is stated at cost, which approximates fair value.
(8) LONG-TERM DEBT
Based on rates for comparable instruments, the approximate fair value and related carrying value of the Company’s long-term debt, including current maturities, were as follows:
(In thousands)
In June 2010, the Company entered into a $1,000,000,000 Line of Credit Agreement with a termination date of June 10, 2011. This line of credit was replaced on June 10, 2011 by a $1,000,000,000 Line of Credit Agreement with a termination date of June 10, 2016. No amounts were outstanding under this facility at June 30, 2011.
(9) SEGMENT INFORMATION
See Management’s Discussion and Analysis for information regarding operating revenues and operating income for the Company’s segments.
Item 2 - Management’s Discussion and Analysis
INTERNATIONAL REPORTING CHANGE
Prior to 2011, the Company’s international operations outside of North America had a fiscal reporting period that began on December 1 and ended on November 30. Effective January 1, 2011, the Company eliminated the one month lag for the reporting of its international operations outside of North America. As a result, the Company is now reporting both North American and international results on a calendar year basis. The Company has applied this change in accounting principle retrospectively to all prior financial statement periods presented.
DISCONTINUED OPERATIONS
In April 2011, the Company entered into a definitive agreement to sell its finishing group of businesses to Graco Inc. in a $650 million cash transaction. The sale is not expected to be completed prior to the fourth quarter of 2011, to accommodate regulatory reviews. The finishing businesses, which were included within the All Other segment, had revenues of approximately $305 million for the year ended December 31, 2010. Additionally, in the second quarter of 2011, the Company’s Board of Directors approved plans to divest a consumer packaging business in the All Other segment and an electronics components business in the Power Systems & Electronics segment, which had combined 2010 revenues of approximately $100 million. The Company expects to dispose of both businesses within one year. These businesses are classified as held for sale as of June 30, 2011.
The held for sale finishing, consumer packaging, and electronics components businesses discussed above, along with a flooring business in the Decorative Surfaces segment that was exited in early 2011 and a security printing business in the All Other segment that was sold in the third quarter of 2010, are reported as discontinued operations in the statement of income. All related prior period income statement information has been restated to conform to the current year reporting of these businesses. See the Discontinued Operations Note in Item 1 – Financial Statements for further details regarding the Company’s discontinued operations.
CONSOLIDATED RESULTS OF OPERATIONS
The Company’s consolidated results of operations for the second quarter and year-to-date periods of 2011 and 2010 were as follows:
In the second quarter and year-to-date periods of 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Operating Revenues
Revenues increased 17.5% for both the second quarter and year-to-date periods of 2011 versus 2010 primarily due to higher base revenues, the favorable effect of currency translation and revenues from acquisitions. Base revenues increased 6.3% and 8.9% in the second quarter and year-to-date periods of 2011, respectively, versus 2010 amid economic conditions that have begun to show moderating growth in the second quarter of 2011. North American base revenues increased 7.4% and 9.8% in the second quarter and year-to-date periods, respectively, while international base revenues increased 5.1% and 8.0% in the same periods. End markets associated with the automotive, welding, and test and measurement businesses showed strength in the second quarter and year-to-date periods.
Operating Income
Operating income increased 13.6% and 18.9% in the second quarter and year-to-date periods of 2011, respectively, versus 2010 primarily due to the increase in base revenues and the favorable effect of currency translation. Base margins increased 30 basis points and 60 basis points in the second quarter and year-to-date periods of 2011, respectively, primarily due to the positive leverage effect of the increase in base revenues, partially offset by the negative impact of selling price versus material cost comparisons. Acquisitions and divestitures diluted operating margins by 60 and 50 basis points in the second quarter and year-to-date periods, respectively.
Certain reclassifications of prior year segment data have been made to conform with current year reporting. The reconciliation of segment operating revenues to total operating revenues is as follows:
TRANSPORTATION
Businesses in this segment produce components, fasteners, fluids and polymers, as well as truck remanufacturing and related parts and service.
This segment primarily serves the automotive original equipment manufacturers and tiers, and the automotive aftermarket.
The results of operations for the Transportation segment for the second quarter and year-to-date periods of 2011 and 2010 were as follows:
In the second quarter and year-to-date periods of 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Operating Revenues
Revenues increased 22.7% and 23.1% in the second quarter and year-to-date periods of 2011, respectively, versus 2010 primarily due to the increase in base revenues, revenues from acquisitions and the favorable effect of currency translation. The increase in acquisition revenue is primarily due to the purchase of two North American automotive aftermarket businesses, one in the second quarter of 2010, and one in the first quarter of 2011. North American automotive base revenues increased 6.6% and 12.2% in the second quarter and year-to-date periods, respectively, due to an increase in North American auto builds of 1.0% and 8.4% in the second quarter and year-to-date periods, respectively. International automotive base revenues increased 8.2% and 10.9% in the second quarter and year-to-date periods, respectively, due to an increase in European auto builds of 3.8% and 7.6% for the respective periods, increased product penetration and gains in emerging markets. Both North American and international automotive vehicle production was modestly affected by the late first quarter 2011 natural disaster in Japan. The automotive aftermarket base business increased 1.3% and 3.5%, respectively, for the second quarter and year-to-date periods of 2011, and was modestly impacted by higher fuel costs which reduced miles driven and the need for service and maintenance. The truck remanufacturing and related parts and service business increased 16.7% and 20.9%, respectively, driven primarily by increased market demand in North America.
Operating Income
Operating income increased 15.1% and 22.3% in the second quarter and year-to-date periods of 2011, respectively, versus 2010 primarily due to the increase in base revenues and the favorable effect of currency translation. Base margins increased 40 and 90 basis points for the second quarter and year-to-date periods, respectively, primarily as a result of positive leverage from the increase in base revenues partially offset by the negative impact of selling price versus material cost comparisons and higher operating costs. Acquisitions diluted margins by 150 and 110 basis points in the second quarter and year-to-date periods, respectively.
INDUSTRIAL PACKAGING
Businesses in this segment produce steel, plastic and paper products and equipment used for bundling, shipping and protecting goods in transit.
This segment primarily serves the general industrial, primary metals, food and beverage, and construction markets.
The results of operations for the Industrial Packaging segment for the second quarter and year-to-date periods of 2011 and 2010 were as follows:
In the second quarter and year-to-date periods of 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Operating Revenues
Operating revenues increased 20.9% and 18.7 % in the second quarter and year-to-date periods of 2011, respectively, versus 2010 due to the increase in base revenues, the favorable effect of currency translation and revenues from acquisitions. The increase in acquisition revenue is primarily due to the purchase of a protective packaging business in the first quarter of 2011. Base revenues increased 12.9% and 13.2% for the North American strapping and equipment businesses in the second quarter and year-to-date periods, respectively, primarily due to higher equipment sales and higher steel and plastic strapping prices. Increased activity in capital equipment sales to the brick and forest product markets contributed to the higher revenue. Base revenues for the international strapping and equipment businesses increased 6.2% and 10.7% in the second quarter and year-to-date periods, respectively, primarily due to an increase in strap price as well as an increase in tool and equipment revenues, mainly in Europe and India. Worldwide protective packaging base revenues increased 11.3% and 9.0% in the second quarter and year-to-date periods, respectively, while worldwide stretch packaging base revenues increased 10.2% and 16.5% in the same periods.
Operating Income
Operating income increased 22.3% and 18.8% in the second quarter and year-to-date periods of 2011, respectively, versus 2010 primarily due to the favorable effect of the increase in base revenues and the favorable effect of currency translation. Base operating margins increased 20 basis points in the second quarter and decreased 10 basis points for the year-to-date period of 2011, primarily due to the positive leverage effect of the increase in base revenues, offset by the negative impact of selling price versus material cost comparisons and increased operating expenses.
POWER SYSTEMS & ELECTRONICS
Businesses in this segment produce equipment and consumables associated with specialty power conversion, metallurgy and electronics.
This segment primarily serves the general industrial, electronics and construction markets.
The results of operations for the Power Systems & Electronics segment for the second quarter and year-to-date periods of 2011 and 2010 were as follows:
In the second quarter and year-to-date periods of 2011, the changes in operating revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Operating Revenues
Revenues increased 18.8% and 19.9% in the second quarter and year-to-date periods of 2011, respectively, versus 2010 due to growth in base business, the favorable effect of currency translation and revenues from acquisitions. The acquisition revenue was primarily due to the purchase of an ionization control and monitoring systems business and an automated welding systems business in 2010. North American welding base business revenues increased 19.9% and 23.5% in the second quarter and year-to-date periods, respectively, as a number of industrial-based end markets continued to have strong demand. In particular, increased sales to heavy equipment OEM’s and other manufacturers helped drive base revenues. Base business revenues for the international welding businesses increased 14.1% and 13.4% in the same periods, primarily due to strong growth in both Asia Pacific and Europe. Base revenues for the electronics businesses increased 4.1% and 6.3% for the second quarter and year-to-date periods, respectively, mainly due to strong growth in the PC fabrication businesses driven by solid demand for consumer electronics products.
Operating Income
Operating income increased 22.2% and 26.0% in the second quarter and year-to-date periods of 2011, respectively, versus 2010 mainly due to the increase in base revenues and the favorable effect of currency translation. Base margins increased 150 and 140 basis points in the second quarter and year-to-date periods, respectively, primarily due to the positive leverage effect of the growth in base business revenues, partially offset by the negative impact of selling price versus material cost comparisons and higher overhead expenses. Acquisitions diluted margins by 40 and 30 basis points in the second quarter and year-to-date periods, respectively.
FOOD EQUIPMENT
Businesses in this segment produce commercial food equipment and related service.
This segment primarily serves the food institutional/restaurant, service and food retail markets.
The results of operations for the Food Equipment segment for the second quarter and year-to-date periods of 2011 and 2010 were as follows:
In the second quarter and year-to-date periods of 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Operating Revenues
Revenues increased 10.0% and 9.4% in the second quarter and year-to-date periods of 2011, respectively, versus 2010 due to the favorable effect of currency translation, growth in base business and revenues from acquisitions. Acquisition revenue is attributable to a European food equipment business purchased in the third quarter of 2010. North American base revenues increased 4.2% and 5.3% in the second quarter and year-to-date periods, respectively, as equipment revenues increased 6.2% and 7.8%, respectively, and service revenues increased 3.0% and 1.8%, respectively. International base revenues decreased 0.4% in the second quarter as equipment revenues decreased 2.8%, partially offset by an increase in service revenues of 2.1%. Equipment sales were negatively impacted by a reduction in government institutional spending in France. For the year-to-date period, international base revenues increased 2.7% as equipment revenues increased 2.9% and service revenues increased 2.4%.
Operating Income
Operating income increased 8.1% and 13.4% in the second quarter and year-to-date periods of 2011, respectively, versus 2010 primarily due to the increase in base revenues, lower operating expenses and the favorable effect of currency translation, partially offset by higher restructuring expenses. Base margins increased 200 and 210 basis points in the second quarter and year-to-date periods, respectively, primarily due to the positive leverage effect of the increase in base revenues and adjustments related to a European business in 2010, partially offset by the negative impact of selling price versus material cost comparisons. Acquisitions diluted margins by 30 and 40 basis points in the second quarter and year-to-date periods, respectively.
CONSTRUCTION PRODUCTS
Businesses in this segment produce tools, fasteners and other products for construction applications.
This segment primarily serves the residential construction, commercial construction and renovation construction markets.
The results of operations for the Construction Products segment for the second quarter and year-to-date periods of 2011 and 2010 were as follows:
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