Illinois Tool Works Inc. (ITW)

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Illinois Tool Works Inc. (ITW)

Q3 2009 Earnings Call

October 20, 2009; 2:00 pm ET

Executives

Ron Kropp - Chief Financial Officer & Senior Vice President

David Speer - Chairman of the Board & Chief Executive Officer

John Brooklier - Vice President of Investor Relations

Analysts

Dean Dray - FBR Capital Markets

John Inch - Merrill Lynch

Eli Lustgarten - Longbow Research

Henry Kirn - UBS

David Raso – ISI

Jamie Cook - Credit Suisse

Andy Casey - Wells Fargo Securities

Daniel Dowd - Bernstein

Ann Duignan - J.P. Morgan

Walter Liptak - Barrington Research

Presentation

Operator

Welcome to the Illinois Tool Works third quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). This conference is being recorded. If you have any objections please disconnect at this time.

I’ll turn the call over to your first host today, Mr. John Brooklier, Vice President of Investor Relations. Sir, you may begin.

John Brooklier

Thank you Amy good afternoon everyone and welcome to our third quarter conference call. As noted I am John Brooklier, ITW’s Investor Relations Officer and with me today is our CEO, David Speer and our CFO, Ron Kropp. Thanks for joining us.

Let me now turn today’s call over to David who will make some brief introductory remarks on what turned out to be another strong operating performance for us. David.

David Speer

Thank you John. You are right, the third quarter did turn out to be better than expected on a number of fronts. Our total company base revenues improved sequentially as base revenues declined 17.9% in quarter three versus a decrease of 22.2% in quarter two. Some of this improvement our base revenues was due to a modest pickup of activity and several discrete end markets, such as North American Auto and the residential housing markets.

A very strong quarter three operating margins of 13.5% were 360 basis points higher than our second quarter operating margins and our quarter three margins were 770 basis points higher than our comparative Q1 operating margins. It’s clear that our ongoing restructuring activities have had a positive impact on our numbers.

I would like to thank and congratulate our Operating Managers around the world for stepping up to the plate and rightsizing their businesses based on the demands of their local customers and end markets.

Our third quarter free operating cash flow was a very strong $516 million, thanks in large part to our improved operating earnings, and working capital reductions. This represents a free cash flow to net income conversion rate of 171% for the quarter and for the year our pre-operating cash flow totaled nearly $1.5 billion or an impressive conversion rate of 333%. Let me now turn the call back over to John.

John Brooklier

Thanks David. Here is the agenda for today’s call. Ron will join us shortly to cover Q3 financial highlights, I’ll then cover operating highlights for our reporting segments and Ron will address our 2009 fourth quarter forecast.

Finally, we will take your questions and as always we ask for your cooperation for the one question one follow up question policy. We are targeting a one hour completion time for today’s call.

Let me cover a couple of the usual 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 limitations, statements regarding operating performance, revenue growth, diluted income per share from continuing operations, restructuring expenses and related benefits, tax rate and market conditions and the company’s related forecasts. Please consult our 10K for additional information on this forward-looking statements.

Finally, the telephone playback for this conference call is 203-369-1074. No pass code is necessary.

Now let me turn the call over to Ron who will comment on that Q3, 2009 financial highlights.

Ron Kropp

Good afternoon everybody. Here are the highlights for the third quarter. Revenues decreased 20% due to lower-base revenues, but showed improvement from the second quarter revenue decline of 26%. Operating income was down 28%, margins of 13.5% were lower than last year by a 150 basis points, but improved this from the second quarter margins by 360 basis points.

Diluted income per share were $0.60, which was lower than last year by $0.29, excluding the impact of a $12 million impairment charge and the higher than expected tax rate of 32.5% EPS would have been a $0.66. Our previously forecasted range was $0.48 to $0.56 per share. Free operating cash flow continue to be very strong at $516 million or a 171% of net income.

Now let’s go to the components of our operating results. Our 19.8% revenue decrease was primarily due to three factors. First, base revenues were down 17.9% which was favorable by 430 basis points versus the second quarter. As David mentioned, we have seen a modest pick up in certain end markets, such as, North American Auto and Housing. North American base revenues decreased 21.6% which was 520 basis points better than the second quarter.

International base revenues decreased 13.8% which was an improvement of 350 basis points from the second quarter. Next, currency translation decreased revenues by 5.6% which was favorable by 320 basis points versus the second quarter negative currency effect.

Lastly, acquisitions added 3.6% to revenue growth, which was a 170 basis points lower than the second quarter acquisition impact. Operating margins for the third quarter of 13.5% were lower than last year by 150 basis points. The base business margins were actually higher by 20 basis points as the unfavorable impact had a lower sales volume was more than offset by non-volume items. Non-volume items increased base margins by 580 basis points, which was favorable versus the second quarter non-volume effect by 270 basis points.

Included in the non-volume impact for the third quarter were the following items. We had a favorable price cost effect that improved margins by 260 basis points. Lower cost as a result of our restructuring programs had a favorable impact of 160 basis points. And that other miscellaneous favorable one time adjustments such as, items related to inventory reserves, life insurance investments and benefit accruals improved margins by 90 basis points.

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