Illinois Tool Works (ITW) Q4 2006 earnings summary

Executive summary

• FY06 revenue $14.055B, up 9.9% YoY; operating income $2.421B, up 13.1%, with operating margin improving to 17.2% from 16.7%.

• Continuing income rose 14.9% to $1.718B; diluted EPS was $3.01 versus $2.60. Q4 revenue was $3.641B and net income $439.3M, versus $3.252B and $400.6M in Q4 2005.

Financial highlights

• Operating revenue increased 9.9%; base-business growth and acquisitions were key contributors. Operating income rose on base-business leverage, acquired earnings and lower restructuring expense.

• Net cash from operations was $2.066B; free operating cash flow was $1.765B after $301.0M of plant and equipment additions.

• Investment income fell to $78.6M from $126.3M, mainly reflecting the completed 1995 mortgage transaction and lower gains on the remaining mortgage sales.

• Goodwill and intangible impairment charges totaled $17.8M in FY06; amortization and impairment expense was $124.5M, including $106.8M of intangible amortization.

Outlook and guidance

• FY07 continuing-income guidance: diluted EPS $3.27–$3.39; assumptions include base-business revenue growth of 2.5%–4.5% and FX rates at year-end 2006 levels.

• Forecast assumptions include $800M–$1.2B annualized revenue from 2007 acquisitions, $500M–$700M share repurchases, and $30M–$50M restructuring costs.

• Other FY07 assumptions: nonoperating investment income $25M–$30M, $50M–$55M below FY06; impairment charges $15M–$25M; effective tax rate 29.75%.