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| ITW > SEC Filings for ITW > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
CONSOLIDATED RESULTS OF OPERATIONS
In 2007, the Company classified two consumer packaging businesses, an automotive machinery business and an automotive components business as discontinued operations. Additionally, in 2008, the Company's Board of Directors authorized the divestiture of the Click Commerce industrial software business which was previously reported in the All Other segment. The consolidated statements of income, statements of financial position, the notes to financial statements and management's discussion and analysis for all periods have been restated to present the results related to all of these businesses as discontinued operations. See the Discontinued Operations note for further information on the Company's discontinued operations.
In May 2009, the Company's Board of Directors rescinded a resolution from August 2008 to divest the Decorative Surfaces segment. The consolidated financial statements, the notes to financial statements and management's discussion and analysis for all periods have been restated to present the results related to the Decorative Surfaces segment as continuing operations.
The Company's consolidated results of operations for the second quarter and year-to-date periods of 2009 and 2008 were as follows:
(Dollars in thousands) Three Months Ended Six Months Ended
June 30 June 30
2009 2008 2009 2008
Operating revenues $ 3,392,906 $ 4,555,881 $ 6,539,285 $ 8,681,691
Operating income 334,835 757,159 426,129 1,375,790
Margin % 9.9 % 16.6 % 6.5 % 15.8 %
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In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Three Months Ended June 30 Six Months Ended June 30
% Point % Point
Increase Increase
% Increase (Decrease) (Decrease) % Increase (Decrease) (Decrease)
Operating Operating Operating Operating Operating Operating
Revenues Income Margins Revenues Income Margins
Base
manufacturing
business:
Revenue
change/Operating
leverage (22.2 )% (55.3 )% (7.1 )% (22.5 )% (59.0 )% (7.5 )%
Changes in
variable margins
and
overhead costs - 14.6 3.1 - 10.8 2.2
Total (22.2 ) (40.7 ) (4.0 ) (22.5 ) (48.2 ) (5.3 )
Acquisitions and 5.3 (0.2 (0.8 5.7 (0.8 (0.7
divestitures ) ) ) )
Restructuring - (5.9 (1.3 - (5.4 (1.1
costs ) ) ) )
Impairment of
goodwill and
intangibles - - - - (6.4 ) (1.3 )
Translation (8.8 ) (8.9 ) (0.7 ) (8.0 ) (8.2 ) (0.9 )
Other 0.2 (0.1 ) 0.1 0.1 - -
Total (25.5 )% (55.8 )% (6.7 )% (24.7 )% (69.0 )% (9.3 )%
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Operating Revenues
Revenues decreased 25.5% and 24.7% in the second quarter and year-to-date periods of 2009, respectively, versus 2008 primarily due to lower base revenues and the unfavorable effect of currency translation, mainly due to a weaker Euro versus the Dollar, partially offset by revenues from acquisitions. Total base revenues declined 22.2% and 22.5% in the second quarter and year-to-date periods, respectively. North American base revenue declined 26.8% and 26.5%, in the second quarter and year-to-date periods, respectively, while international base revenues declined 17.3% and 18.1% in the same periods. Both North American and international base revenues were adversely affected by on-going and significant declines in macroeconomic trends and related weak industrial production. The Company anticipates that the current global economic environment will continue through 2009 and as such, expects that key end markets will continue to be negatively impacted.
Operating Income
Operating income declined 55.8% and 69.0% in the second quarter and year-to-date periods of 2009, respectively, primarily due to the decline in base revenues, the negative effect of currency translation and increased restructuring expenses. In addition, in the first quarter of 2009 the Company recorded impairment charges of $78 million and $12 million against the goodwill and intangible assets, respectively. The goodwill impairments were primarily driven by the combination of lower forecasts and lower market multiples being paid for similar businesses. The higher restructuring expenses reflect the Company's efforts to reduce costs in response to current economic conditions. Improvements in base variable margins and lower overhead costs increased margins 3.1% and 2.2% in the second quarter and year-to-date periods, respectively, as the benefits of past restructuring projects began to be realized and price versus cost comparisons were favorable. Total margins declined by 6.7% and 9.3% in the second quarter and year-to-date periods of 2009, respectively, primarily due to the declines in base revenues, restructuring charges and the first quarter goodwill and intangible impairment charges.
The reconciliation of segment operating revenues to total operating revenues is as follows:
(In thousands) Three Months Ended Six Months Ended
June 30 June 30
2009 2008 2009 2008
Industrial Packaging $ 460,336 $ 717,986 $ 886,481 $ 1,347,736
Power Systems & Electronics 398,462 648,785 793,917 1,231,176
Transportation 502,266 630,427 936,900 1,224,517
Food Equipment 451,353 538,479 882,553 1,048,218
Construction Products 370,745 566,172 694,732 1,050,206
Polymers & Fluids 278,687 299,249 526,760 554,760
Decorative Surfaces 257,332 335,956 489,443 638,491
All Other 681,751 833,786 1,343,555 1,615,676
Intersegment revenues (8,026 ) (14,959 ) (15,056 ) (29,089 )
Total operating revenues $ 3,392,906 $ 4,555,881 $ 6,539,285 $ 8,681,691
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INDUSTRIAL PACKAGING
Businesses in this segment produce steel, plastic and paper products used for bundling, shipping and protecting goods in transit.
In the Industrial Packaging segment, products include:
• steel and plastic strapping and related tools and equipment;
• plastic stretch film and related equipment;
• paper and plastic products that protect goods in transit; and
• metal jacketing and other insulation products.
This segment primarily serves the primary metals, general industrial, construction, and food and beverage markets.
The results of operations for the Industrial Packaging segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:
(Dollars in thousands) Three Months Ended Six Months Ended
June 30 June 30
2009 2008 2009 2008
Operating revenues $ 460,336 $ 717,986 $ 886,481 $ 1,347,736
Operating income 16,273 94,496 13,663 163,700
Margin % 3.5 % 13.2 % 1.5 % 12.1 %
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In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Three Months Ended June 30 Six Months Ended June 30
% Point % Point
Increase Increase
% Increase (Decrease) (Decrease) % Increase (Decrease) (Decrease)
Operating Operating Operating Operating Operating Operating
Revenues Income Margins Revenues Income Margins
Base
manufacturing
business:
Revenue
change/Operating
leverage (26.1 )% (84.7 )% (10.5 )% (25.4 )% (88.1 )% (10.2 )%
Changes in
variable margins
and
overhead costs - 19.2 3.4 - 10.4 1.7
Total (26.1 ) (65.5 ) (7.1 ) (25.4 ) (77.7 ) (8.5 )
Acquisitions and 0.8 (0.8 (0.2 0.8 (0.9 (0.2
divestitures ) ) ) )
Restructuring - (5.1 (0.9 - (2.7 (0.5
costs ) ) ) )
Impairment of
goodwill and
intangibles - - - - (0.2 ) -
Translation (10.6 ) (11.4 ) (1.5 ) (9.6 ) (10.1 ) (1.4 )
Other - - - - (0.1 ) -
Total (35.9 )% (82.8 )% (9.7 )% (34.2 )% (91.7 )% (10.6 )%
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Operating Revenues
Revenues decreased 35.9% and 34.2% in the second quarter and year-to-date periods of 2009, respectively, versus 2008 primarily due to lower base revenues and the unfavorable impact of currency translation. Base revenues declined 43.1% and 40.6% for the North American strapping businesses in the second quarter and year-to-date periods, respectively, largely due to declines in consumable and equipment volume in key end markets such as primary metals, construction-related materials and manufacturing. The international strapping businesses declined 28.9% and 27.6%, respectively. Both were adversely affected by the continued global decline in industrial production and construction industries. The worldwide stretch packaging businesses experienced declines in base revenues of 22.9% and 21.2% in the second quarter and year-to-date periods, respectively, while the protective packaging business declined 6.8% and 11.4% for the same periods both due to continuing weakness in worldwide industrial-based end markets.
Operating Income
Operating income decreased 82.8% and 91.7% in the second quarter and year-to-date periods of 2009, respectively, primarily due to the negative leverage effect of the decline in base revenues described above, the negative effect of currency translation and higher restructuring expenses. Improvements in base variable margins and overhead costs increased margins 3.4% and 1.7% in the second quarter and year-to-date periods, respectively, as price versus cost comparisons were favorable and benefits of past restructuring projects began to be realized. Total operating margins declined by 9.7% and 10.6% in the second quarter and year-to-date periods, respectively, mainly due to the declines in base revenues.
POWER SYSTEMS & ELECTRONICS
Businesses in this segment produce equipment and consumables associated with specialty power conversion, metallurgy and electronics.
In the Power Systems & Electronics segment, products include:
• arc welding equipment;
• metal arc welding consumables and related accessories;
• metal solder materials for PC board fabrication;
• equipment and services for microelectronics assembly;
• electronic components and component packaging; and
• airport ground support equipment.
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 2009 and 2008 were as follows:
(Dollars in thousands) Three Months Ended Six Months Ended
June 30 June 30
2009 2008 2009 2008
Operating revenues $ 398,462 $ 648,785 $ 793,917 $ 1,231,176
Operating income 61,155 142,124 86,520 266,887
Margin % 15.3 % 21.9 % 10.9 % 21.7 %
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In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Three Months Ended June 30 Six Months Ended June 30
% Point % Point
Increase Increase
% Increase (Decrease) (Decrease) % Increase (Decrease) (Decrease)
Operating Operating Operating Operating Operating Operating
Revenues Income Margins Revenues Income Margins
Base
manufacturing
business:
Revenue
change/Operating
leverage (36.5 )% (62.9 )% (9.1 )% (34.3 )% (60.5 )% (8.6 )%
Changes in
variable margins
and
overhead costs - 13.2 4.5 - 11.6 3.8
Total (36.5 ) (49.7 ) (4.6 ) (34.3 ) (48.9 ) (4.8 )
Acquisitions and 2.0 (0.6 (0.7 2.5 (2.1 (1.1
divestitures ) ) ) )
Restructuring - (3.6 (1.2 - (4.8 (1.6
costs ) ) ) )
Impairment of
goodwill and
intangibles - - - - (9.0 ) (3.0 )
Translation (4.1 ) (3.1 ) (0.1 ) (3.7 ) (2.9 ) (0.3 )
Other - - - - 0.1 -
Total (38.6 )% (57.0 )% (6.6 )% (35.5 )% (67.6 )% (10.8 )%
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Operating Revenues
Revenues declined 38.6% and 35.5% in the second quarter and year-to-date periods of 2009, respectively, over 2008 mainly due to declines in base revenues and the negative effect of currency translation. The revenue decrease was partially offset by 2008 acquisitions including a welding equipment business and a PC board fabrication business. Worldwide base welding revenues declined 37.0% in the second quarter and 34.2% year-to-date. North American welding businesses declined 41.3% and 38.7% while international base businesses declined 26.4% and 21.9%, in the respective periods. Revenues fell as end market demand continued to decline across the broad spectrum of industries that this segment serves. Base revenues for the electronics businesses fell 33.3% and 38.8% in the second quarter and year-to-date periods while base revenues in the PC board fabrication businesses fell 59.2% and 57.6% in the same periods both due to the decline in consumer demand for electronics. Revenues in the ground support businesses increased 4.0% and 9.4% in the second quarter and year-to-date period, respectively, due to commercial and military airport infrastructure projects.
Operating Income
Operating income decreased 57.0% and 67.6% in the second quarter and year-to-date periods of 2009, respectively, primarily due to the declines in base revenues described above, first quarter 2009 impairment charges, higher restructuring expenses and the negative effect of currency translation. Goodwill and intangible asset impairment charges of $18.0 million and $6.7 million, respectively, were incurred in the PC board fabrication and welding accessories businesses in the first quarter of 2009. Total operating margins declined by 6.6% and 10.8% in the second quarter and year-to-date periods, respectively, primarily due to the declines in base revenues, higher impairment charges and higher restructuring expense. Improvements in variable margins and overhead costs, including favorable price versus cost comparison, increased operating margins by 4.5% and 3.8% in the same periods.
TRANSPORTATION
Businesses in this segment produce components, fasteners, fluids and polymers, as well as truck remanufacturing and related parts and service.
In the Transportation segment, products include:
• metal and plastic components, fasteners and assemblies for automobiles and
light trucks;
• fluids and polymers for auto aftermarkets maintenance and appearance;
• fillers and putties for auto body repair; and
• polyester coatings and patch and repair products for the marine industry.
This segment primarily serves the automotive original equipment manufacturers and tiers and automotive aftermarket markets.
The results of operations for the Transportation segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:
(Dollars in thousands) Three Months Ended Six Months Ended
June 30 June 30
2009 2008 2009 2008
Operating revenues $ 502,266 $ 630,427 $ 936,900 $ 1,224,517
Operating income 24,321 99,705 7,873 191,407
Margin % 4.8 % 15.8 % 0.8 % 15.6 %
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In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Three Months Ended June 30 Six Months Ended June 30
% Point % Point
Increase Increase
% Increase (Decrease) (Decrease) % Increase (Decrease) (Decrease)
Operating Operating Operating Operating Operating Operating
Revenues Income Margins Revenues Income Margins
Base
manufacturing
business:
Revenue
change/Operating
leverage (23.7 )% (55.9 )% (6.7 )% (29.4 )% (71.4 )% (9.3 )%
Changes in
variable margins
and
overhead costs - 0.2 - - (3.6 ) (0.8 )
Total (23.7 ) (55.7 ) (6.7 ) (29.4 ) (75.0 ) (10.1 )
Acquisitions 12.7 (1.8 ) (1.4 ) 14.1 - (0.5 )
Restructuring - (6.4 (1.3 - (9.5 (2.1
costs ) ) ) )
Impairment of
goodwill and
intangibles - - - - (1.3 ) (0.3 )
Translation (9.4 ) (11.7 ) (1.6 ) (8.2 ) (10.2 ) (1.8 )
Other 0.1 - - - 0.1 -
Total (20.3 )% (75.6 )% (11.0 )% (23.5 )% (95.9 )% (14.8 )%
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Operating Revenues
Revenues declined 20.3% and 23.5% in the second quarter and year-to-date periods, respectively, versus 2008 primarily due to declines in base revenues and the unfavorable effect of currency translation. Acquisition revenue partially mitigated the base revenue decrease and was primarily related to the purchase of a North American truck remanufacturing and parts business in the third quarter of 2008. Worldwide automotive base revenues declined 30.5% and 37.8% in the second quarter and year-to-date periods, respectively, as automotive production continued to be weak. Automotive aftermarket declined 12.7%, in the second quarter and 11.5% year-to-date as a result of a continued decline in discretionary consumer spending. North American base revenues declined 39.5% and 43.1% in the second quarter and year-to-date periods, respectively, on declines of 49% and 50% in North American auto builds in the same periods. International base revenues declined 22.5% and 32.8% for the second quarter and year-to-date, respectively, on declines in car builds of 23% and 28%.
Operating Income
Operating income decreased 75.6% and 95.9% in the second quarter and year-to-date periods of 2009, respectively, versus 2008 primarily due to the decline in base revenues described above, the unfavorable effect of currency translation and higher restructuring costs. The increase in restructuring expense is primarily due to continued efforts to reduce costs in response to current economic conditions and the decline in worldwide automotive production. Total operating margins declined by 11.0% and 14.8% in the second quarter and year-to-date periods, respectively, primarily due to the dramatic decline in revenues described above.
Due to the severe deterioration in the North American automotive market, there is significant uncertainty about the ability of certain U.S. auto manufacturers and their suppliers to continue as going concerns. On April 30, 2009, Chrysler LLC filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Shortly thereafter, Chrysler LLC suspended production at most of its facilities while the company went through the bankruptcy process. Additionally, General Motors ("GM") filed for bankruptcy protection on June 1, 2009.
Both GM and Chrysler have subsequently emerged from bankruptcy reorganization and Chrysler has resumed production. Management continues to monitor conditions in the automotive industry, but currently believes these reorganizations will not have a significant long term impact on the Company.
FOOD EQUIPMENT
Businesses in this segment produce commercial food equipment and related service.
In the Food Equipment segment, products include:
• warewashing equipment;
• cooking equipment, including ovens, ranges and broilers;
• refrigeration equipment, including refrigerators, freezers and prep tables;
• food processing equipment, including slicers, mixers and scales; and
• kitchen exhaust, ventilation and pollution control systems.
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 2009 and 2008 were as follows:
(Dollars in thousands) Three Months Ended Six Months Ended
June 30 June 30
2009 2008 2009 2008
Operating revenues $ 451,353 $ 538,479 $ 882,553 $ 1,048,218
Operating income 58,428 73,675 102,831 143,991
Margin % 12.9 % 13.7 % 11.7 % 13.7 %
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In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
Three Months Ended June 30 Six Months Ended June 30
% Point % Point
Increase Increase
% Increase (Decrease) (Decrease) % Increase (Decrease) (Decrease)
Operating Operating Operating Operating Operating Operating
Revenues Income Margins Revenues Income Margins
Base
manufacturing
business:
Revenue
change/Operating
leverage (8.5 )% (25.5 )% (2.6 )% (8.8 )% (26.6 )% (2.7 )%
Changes in
variable margins
and
overhead costs - 18.5 2.8 - 9.8 1.5
Total (8.5 ) (7.0 ) 0.2 (8.8 ) (16.8 ) (1.2 )
Acquisitions 1.6 - (0.2 ) 1.4 (0.7 ) (0.3 )
Restructuring - (3.2 (0.5 - (1.9 (0.3
costs ) ) ) )
Translation (9.3 ) (10.5 ) (0.3 ) (8.4 ) (9.1 ) (0.3 )
Other - - - - (0.1 ) 0.1
Total (16.2 )% (20.7 )% (0.8 )% (15.8 )% (28.6 )% (2.0 )%
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Operating Revenues
Revenues decreased 16.2% and 15.8% in the second quarter and year-to-date periods of 2009, respectively, versus 2008 primarily due to the decline in base business and the unfavorable effect of currency translation slightly offset by revenues from acquisitions. The acquired revenues were attributable to the acquisition of a European food equipment business in 2008. North American base revenues declined 8.4% and 11.1%, respectively, for the second quarter and year-to-date periods while international base revenues declined 10.2% and 7.9% in the same periods. Base revenues for the North American institutional/restaurant businesses declined 13.2% and 15.6% in the second quarter and year-to-date periods, respectively, as customers delayed equipment purchases. North American service revenues declined a more modest 1.1% and 2.1% in the second quarter and year-to-date periods as customers continued to maintain existing equipment.
Operating Income
Operating income declined 20.7% and 28.6% in the second quarter and year-to-date periods, respectively, primarily due to the decrease in base revenues described above and the unfavorable effect of currency translation. Total operating margins declined by 0.8% and 2.0% in the second quarter and year-to-date, respectively, primarily due to the decline in base revenues partially offset by margin gains due to lower operating costs including lower fuel costs, favorable product mix, and reduced headcount.
CONSTRUCTION PRODUCTS
Businesses in this segment produce tools, fasteners and other products for construction applications.
In the Construction Products segment, products include:
• fasteners and related fastening tools for wood applications;
• anchors, fasteners and related tools for concrete applications;
• metal plate truss components and related equipment and software; and
• packaged hardware, fasteners, anchors and other products for retail.
This segment primarily serves the residential construction, renovation construction and commercial construction markets.
The results of operations for the Construction Products segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:
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