Illinois Tool Works Inc. (ITW)

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Illinois Tool Works Inc. (ITW)

Q2 2010 Earnings Call Transcript

July 20, 2010 2:00 pm ET

Executives

John Brooklier – VP, IR

David Speer – Chairman and CEO

Ronald Kropp – SVP and CFO

Analysts

Walt Liptak – Barrington Research

Nicole [ph] – Deutsche Bank Securities

David Raso – ISI Group

Joel Tiss – Buckingham Research

Henry Kirn – UBS

Ajay Kejriwal – FBR Capital Markets

Ann Duignan – JPMorgan

Eli Lustgarten – Longbow Research

John Inch – BofA Merrill Lynch

Meredith Taylor – Barclays Capital

Andy Casey – Wells Fargo

Presentation

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today’s call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to Mr. John Brooklier, Vice President of Investor Relations. Sir, you may begin.

John Brooklier

Thank you, Barb. Good afternoon, everyone. Welcome to ITW’s second quarter 2010 conference call. With me today on today’s call is CEO, David Speer and CFO Ron Kropp. Thanks for joining us to discuss what turned out to be a very, very strong operating quarter and total revenues, base revenues, operating margins and acquisition activity.

I’ll now turn the call over to David who’ll talk more about these key Q2 categories. David?

David Speer

Thank you, John. I certainly agree we had a very robust quarter on a number of fronts. Our second quarter operating revenues grew 20% versus the year ago period and exceeded our forecasted expectations. Our base revenues increased 15% for the quarter, with North American base revenues increasing 16% and international base revenues growing 14%.

Clearly, a number of our end markets continued to improve during the quarter. It’s also important to note that despite all the headlines and chatter, our international business results have shown no discernible signs of slowing during the second quarter.

We will continue to closely monitor international results as the third quarter progresses, but so far things have proven to be quite strong. Operating margins were strong at 16% for the second quarter, that’s 610 basis points higher than our Q2 of 2009 and certainly underscores our unique decentralized approach to restructuring.

Remember, we leave restructuring decisions to our local general managers, those women and men who are closest to the end markets and customers and restructuring is never a one size fits all approach at ITW.

Acquisition activity notably picked up in the second quarter. We completed seven transactions in the second quarter for annualized revenues of about $253 million. That’s considerably higher than Q1 when we completed only four deals for $26 million of annualized revenues.

As important, our pipeline currently is approximately $600 million of prospective deals. Additionally, we’re optimistic that a number of acquisition conversations that we’re having that are not part of the pipeline with many different sources including private equity and privately owned companies will ultimately show up in our official deal pipeline as the year continues to progress.

Finally, a brief comment about our full year 2010 forecast. We believe our base revenues will grow in a range of 7% to 10% in the second half of the year versus the year ago period. Our view is these numbers will represent a solid operating environment for our worldwide businesses.

John, back to you.

John Brooklier

Thanks, David. Here’s the agenda for today’s call. Ron will join us shortly to talk about the Q2 financial highlights. I will then cover Q2 highlights for the eight reporting segments. We’ll then go into our Q3 and full year earnings forecasts, which I’m sure many of you are interested in, and finally we’ll take your questions. We continue to ask your cooperation as we always do for our one question, one follow-up question policy. We plan on finishing this call within an hour.

First, let’s cover our mandatory housekeeping items. Please note 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 net income per share from continuing ops, acquisition activity, restructuring expenses and related benefits, tax rates, end market conditions, and the company’s 2010 related forecast.

Finally, the telephone playback of this conference call is 203-369-1871. The replay is available through midnight of August 3. No passcode is necessary.

Now, here is Ron Kropp, who will comment on our 2010 second quarter financial highlights. Ron?

Ronald Kropp

Thanks, John. Good afternoon, everyone. Here are the highlights for the second quarter. Revenues increased 20% primarily due to higher base revenues and improved from the first quarter revenue increase of 15%.

Operating income was $653 million, which was higher than last year by $318 million. Margins of 16% were higher by 610 basis points.

Diluted income per share was $0.83, which was higher than last year by $0.47. Included in EPS for this quarter was a higher than expected tax rate of 31.6% which reduced EPS by $0.03 versus our forecast. Finally, free operating cash flow was $276 million.

Now, let’s go to the components of our operating results. Our 20.1% revenue increase was primarily due to three factors. First, base revenues were up 15.1%, which was favorable by 7.6 percentage points versus the first quarter base increase of 7.5%.

We have seen solid revenue gains worldwide, led by the Transportation, Industrial Packaging, Power Systems, and Polymers and Fluid segments.

North American base revenues increased 15.8% and international base revenues increased 14.2% in the second quarter, which showed a continued improvement from the first quarter increases of 7.1% and 8.0%, respectively. Next, currency translation increased revenues by 2.3%, which was unfavorable by 310 basis points versus the first quarter currency benefit.

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