Illinois Tool Works Inc. (ITW)

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Illinois Tool Works (ITW)

Q4 2011 Earnings Call

January 31, 2012 10:00 am ET

Executives

John L. Brooklier - Vice President of Investor Relations

David B. Speer - Chairman, Chief Executive officer and Member of Executive Committee

Ronald D. Kropp - Chief Financial officer and Senior Vice President

Analysts

John G. Inch - BofA Merrill Lynch, Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Eli S. Lustgarten - Longbow Research LLC

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Henry Kirn - UBS Investment Bank, Research Division

Robert Wertheimer - Vertical Research Partners Inc.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Presentation

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is also being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to Mr. John Brooklier. Thank you. Sir, you may begin.

John L. Brooklier

Thank you. Good morning, everyone, and welcome to ITW's Fourth Quarter 2011 Conference Call. As is our normal practice, our CEO, David Speer; and our CFO, Ron Kropp, had joined me to discuss our solid fourth quarter financial results, as well as our 2012 earnings forecast.

Here's the agenda for today's conference call. David will provide brief commentary on our fourth quarter highlights. Ron will then cover our Q4 financial results in more detail. I will then talk about our fourth quarter operating highlights based on our reporting segments, and then Ron will come back to talk about our full year '12 and Q1 forecast. Finally, we'll open the last 30, 40 minutes of the call to your questions. [Operator Instructions]

A couple of housekeeping items. Please let me remind you 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 income per share from continuing ops, diluted net income per share, restructuring expenses, free operating cash flow, acquisition activity, tax rates, end market conditions and the company's related forecast.

Please refer to our 2010 [ph] Form 10-K for more details on our forward-looking statement.

One other note. The telephone replay for this conference call is (800) 704-0516. No passcode is necessarily. The playback number will be available until 12 midnight on February 14.

Now let me introduce David Speer, who will highlight our Q4 accomplishments. David?

David B. Speer

Thank you, John. We're pleased with both our fourth quarter and full year operating results. Beginning with the 2011 fourth quarter, we had a solid total revenue and organic growth of approximately 10% and 6%, respectively. Our North American and Chinese businesses led the way, with organic revenue growing approximately 9% and 10%, respectively.

While European demand slowed, we still produced organic growth of nearly 3% in that geography. We delivered strong diluted EPS growth of 36%. We produced operating margins of 15%. That was substantially higher than the year-ago period.

7 of 8 reporting segments reported operating margin improvement in Q4.

We generated robust, strong free operating cash flow of $617 million, representing a strong free cash to net income conversion rate of 140%. It also represented a second consecutive quarter where our free cash flow conversion was well over 100%.

For the full year 2011, we delivered record revenues of $17.8 billion, with our organic revenues growing 7.5%. We generated $2 billion of income, which was a record from continuing operations. This represented a strong operating EPS growth of 41%. And we produced operating margins of 15.4%, which was 80 basis points higher than the full year 2010.

All in all, it was a very strong fourth quarter and 2011 for ITW. These results placed us at a solid starting point for 2012. Now let me turn the call back to Ronald Kropp, who will give you a more detailed analysis of our Q4 operating performance.

Ronald D. Kropp

Thanks, David. Good morning, everyone. Here are the highlights for the fourth quarter. Revenues increased 10% primarily due to higher base revenues and acquisitions. Operating income was $647 million, which was higher than last year by $165 million. Operating margins of 15% were higher by 270 basis points.

Diluted income per share from continuing operations was $0.90, which was higher than last year by $0.24 and was in the middle of our forecast range of $0.86 to $0.94.

Finally, free operating cash flow is very strong at $617 million or 140% of net income.

Now let's go to the components of our operating results. Our 10.4% revenue increase was primarily due to the following factors: First, base revenues were up 5.9% with North American base revenues increasing 8.7% and international base revenues up 3.0%. Within international, Europe was up 2.6%, China was up 9.8% and Australia and New Zealand was down 2.1%.

Next, acquisitions net of divestitures added 4.7% to revenue growth. Finally, currency translation decreased revenues by 0.4%.

Operating margins for the fourth quarter of 15% were higher than last year by 270 basis points. The base business margins were higher by 330 basis points with the higher sales volume contributing 160 basis points, and the positive impact of non-volume items increasing base margins by 170 basis points.

The increase in base margins from non-volume items was due to better variable margins, lower overhead costs and favorable corporate adjustments.

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