Illinois Tool Works Inc. (ITW)

ITW 
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Illinois Tool Works (ITW)

Q2 2011 Earnings Call

July 26, 2011 10:00 am ET

Executives

David Speer - Chairman, Chief Executive Officer and Member of Executive Committee

Ronald Kropp - Chief Financial Officer and Senior Vice President

John Brooklier - Vice President of Investor Relations

Analysts

Walter Liptak - Barrington Research Associates, Inc.

John Inch - BofA Merrill Lynch

Henry Kirn - UBS Investment Bank

Ingrid Aja - JP Morgan Chase & Co

Holden Lewis - BB&T Capital Markets

Peter Chang - Crédit Suisse AG

Ajay Kejriwal - FBR Capital Markets & Co.

Robert McCarthy - Robert W. Baird & Co. Incorporated

Joel Tiss - Buckingham Research Group, Inc.

Mark Koznarek - Cleveland Research Company

Deane Dray - Citigroup Inc

Presentation

Operator

Welcome to the ITW Second Quarter 2011 Earnings Release Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. I would like to introduce your host, John Brooklier, Vice President of Investor Relations. Please begin.

John Brooklier

Thank you. Good morning, everyone. Welcome to all who've joined us for ITW's Second Quarter 2011 Conference Call. As usual, joining me this morning is our CEO, David Speer; and our CFO, Ron Kropp, to discuss our second quarter financial results.

David Speer will now make some introductory remarks. David?

David Speer

Thank you, John. Our second quarter revenues finished slightly lower than our original forecast, as we experienced some modest slowing in industrial markets. We had good activity in the acquisition front, and we also repurchased shares during the quarter.

Here are the highlights. Our total revenues grew 17.5% in the quarter, with contributions from organic revenues, acquired revenues and currency translation. However, our total revenue growth was 100 basis points lower than what we originally forecasted in April.

Organic revenues increased 6.3% versus the year-ago period, but underperformed our regional forecast to 7.5%. A combination of modest slowing in industrial production metrics in both Europe and the U.S., along with the Japanese crisis, translated into a bit slower growth in the second quarter. However, it's important to note that we firmly believe our overall end markets will continue to be in a long-term recovery mode.

Acquisitions net of divestitures added 4.8%, and currency translation contributed 6.3% to total revenue growth. While operating margins of 15.4% decreased 50 basis points, base operating margins increased 30 basis points, acquisitions and restructuring negatively impacted operating margins during the quarter by 90 basis points.

I remind everyone our net income per share was $0.99 before considering the $0.03 per share impact of discontinued operations that we highlighted in our June release. During the quarter, we also repurchased stock of $550 million or approximately 9.7 million shares. Finally, we acquired 7 companies in the second quarter, bringing our first half 2011 acquired revenues total to an annualized revenue of $485 million.

When you add the 3 additional companies we acquired thus far in July, including our acquisition of Despatch Industries that we announced yesterday, our current total of acquired revenues exceeds more than $700 million year-to-date. Remember, we had set an acquired revenue range for the year originally of $800 million to $1 billion earlier in our guidance.

We believe the acquisition environment continues to be promising, and we look forward to more results in the second half. Now, let me turn it back over to John.

John Brooklier

Thank you, David. Here is the agenda for today's call, Ron will join us shortly to discuss Q2 financial highlights. I will then cover Q2 operating highlights for our 8 reporting segments. Ron will then return to detail 2011 third quarter and full year forecast. Finally, we'll open the call to your questions. As always, we ask your cooperation for our one question, one follow-up question policy. We're targeting a completion time of one hour for today's call.

Moving along, let's cover the traditional housekeeping items. 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 income per share from continuing operations, diluted net income per share, restructuring expenses, acquisition activity, tax rates, end market conditions and the company's related 2011 earnings forecast.

Finally, the telephone replay for this conference call is (402) 220-9704. No passcode is necessary. The replay is available through midnight of August 9, 2011.

Now, let's move along and have Ron Kropp discuss our second quarter 2011 results. Ron?

Ronald Kropp

Thanks, John. Good morning, everyone. Before I run through the financial results for the second quarter, I'd like to remind you that as we announced in late June, we have reclassified certain businesses as discontinued operations.

All 2010 and 2011 data presented, including forecasts, reflect this reclassification. As part of this, I'd also like to remind you that we had revised our forecast range in our June release from $0.99 to $1.05 to $0.95 to $1.01. Now here are the highlights for the second quarter.

Revenues increased 18%, primarily due to higher base revenues, acquisitions and translation. Operating income was $711 million, which was higher than last year by $85 million. Operating margins of 15.4% were lower than last year by 50 basis points.

Diluted income per share for continuing operations was $0.96, which was higher than last year by $0.17. This EPS of $0.96 compares with our forecast range of $0.95 to $1.01. Finally, free operating cash flow is $225 million.

Now let's go to the components of our operating results. Our 17.5% revenue increase was primarily due to 3 factors. First, base revenues were up 6.3%, with North American base revenues increasing 7.4% and international base revenues up 5.1%. Next, currency translation increased revenues by 6.3%. Lastly, acquisition net of divestitures added 4.8% to revenue growth.

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